MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND OF MLMSMST, 485BPOS, 1994-10-20

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND OF MLMSMST
485BPOS, 1994-10-20

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<PAGE> 1

As filed with the Securities and Exchange Commission on October 20, 1994
Securities Act File No. 33-54341
Investment Company Act File No. 811-4375
==========================================================================

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

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 1 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 88 /X/
(Check appropriate box or boxes)

----------

Merrill Lynch Arkansas Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
(exact name of registrant as specified in charter)

800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, including Area Code (609) 282-2800
ARTHUR ZEIKEL
Merrill Lynch Multi-State Municipal Series Trust
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
----------
Copies to:

Counsel for the Trust: Philip L. Kirstein, Esq.
Brown & Wood Fund Asset Management
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
Attention: Thomas R. Smith, Jr.,
Esq.
Brian M. Kaplowitz, Esq. ----------

It is proposed that this filing will become effective (check appropriate
box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) 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 its shares of
beneficial interest under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940. No shares of beneficial
interest were sold pursuant to such rule during the Registrant's most
recent fiscal year ended July 31, 1994 (prior to commencement of
operations). Therefore, pursuant to paragraph (b) (2) of Rule 24f-2, the
notice required by such rule need not be filed for such fiscal year.

==========================================================================

<PAGE> 2
MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

Registration Statement on Form N-1A

CROSS REFERENCE SHEET
<TABLE>
<CAPTION>

<S> <C>
N-1A Item No. Location
------------- ---------
Part A
Item 1. Cover Page......... ......... Cover Page
Item 2. Synopsis.......... .......... Fee Table
Item 3. Condensed Financial
Information......... ......... Not Applicable
Item 4. General Description of
Registrant.................... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund........ Fee Table; Management of the
Trust; Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance...... ...... Not Applicable
Item 6. Capital Stock and Other
Securities................... Cover Page; Additional Information

Item 7. Purchase of Securities Being
Offered....................... Cover Page; Fee Table; Merrill
Lynch Select Pricing(SM) System;
Purchase of Shares; Shareholder
Services; Additional Information;
Inside Back Cover Page
Item 8. Redemption of Repurchase...... Fee Table; Merrill Lynch Select
Pricing(SM) 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;
Investment Restrictions
Item 14. Management of the Fund........ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities........ Management of the Trust;
Additional Information
Item 16. Investment Advisory and Other
Services...................... Management of the Trust; Purchase
of Shares; General Information
Item 17. Brokerage Allocation and Other
Practices.................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities.................... General Information-Description of
Series and Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered........... ........... Purchase of Shares; Redemption of
Shares; Determination of Net
Asset Value; Shareholder Services
Item 20. Tax Status.................... Distributions and Taxes
Item 21. Underwriters.................. Purchase of Shares
Item 22. Calculation of Performance
Data............ ............ Performance Data
Item 23. Financial Statements.......... Statement of Assets and
Liabilities (audited); Financial
Statements (unaudited)
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.
</TABLE>

<PAGE> 3

PROSPECTUS
October 21, 1994

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

Merrill Lynch Arkansas Municipal Bond Fund (the "Fund") is a mutual fund
seeking to provide shareholders with as high a level of income exempt from
Federal and Arkansas income taxes as is consistent with prudent investment
management. The Fund invests primarily in a portfolio of long-term,
investment grade obligations, the interest on which, in the opinion of bond
counsel to the issuer, is exempt from Federal and Arkansas income taxes. The
Fund may invest in certain tax-exempt securities classified as "private
activity bonds" that may subject certain investors in the Fund to an
alternative minimum tax. At times, the Fund may seek to hedge its portfolio
through the use of futures transactions and options. There can be no
assurance that the investment objective of the Fund will be realized.

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
System" on page 3.

Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9011, Princeton, New Jersey
08543-9011 ((609) 282-2800), or from securities dealers which have entered
into dealer agreements with the Distributor, including Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The minimum
initial purchase is $1,000 and the minimum subsequent purchase is $50.
Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions
directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".

----------

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

This Prospectus is a concise statement of information about the Fund
that is relevant to making an investment in the Fund. This Prospectus
should be retained for future reference. A statement containing additional
information about the Fund, dated October 21, 1994 (the "Statement of
Additional Information"), has been filed with the Securities and Exchange
Commission and is available, without charge, by calling or by writing
Merrill Lynch Multi-State Municipal Series Trust (the "Trust") at the
above telephone number or address. The Statement of Additional Information
is hereby incorporated by reference into this Prospectus. The Fund is a
separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.

----------

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

<PAGE> 4

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(c) Class D(c)
---------- ---------- ---------- ----------

<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price)................... 4.00%(d) None None 4.00%(d)
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(e) 4.0% during the first 1% for one None(e)
year, decreasing 1.0% year
annually thereafter
to 0.0% after the
fourth year
Exchange Fee ..................................... None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)(f):
Management Fees(g) ............................... 0.55% 0.55% 0.55% 0.55%

12b-1 Fees(h):
Account Maintenance Fees........................ None 0.25% 0.25% 0.10%
Distribution Fees............................... None 0.25% 0.35% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees)
Other Expenses:
Custodial Fees.............................. 0.04% 0.04% 0.04% 0.04%
Shareholder Servicing Costs(i).............. 0.08% 0.08% 0.08% 0.08%
Miscellaneous .............................. 1.04% 1.04% 1.04% 1.04%
----- ----- ----- -----
Total Other Expenses....................... 1.16% 1.16% 1.16% 1.16%
----- ----- ----- -----
Total Fund Operating Expenses................... 1.71% 2.21% 2.31% 1.81%
===== ===== ===== =====

</TABLE>

----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, investment programs. See "Purchase of
Shares-Initial Sales Charge Alternatives-Class A and Class D Shares"-
page 19.
(b) Class B shares convert to Class D shares automatically approximately
10 years after initial purchase. See "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares"-page 21.
(c) Prior to the date of this Prospectus, the Trust has not offered its
Class C and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. 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"-page 19.
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
which may not be subject to an initial sales charge may instead be
subject to a CDSC if redeemed within the first year of purchase.
(f) Information under "Other Expenses" for each class of shares is
estimated for the fiscal year ending July 31, 1995.
(g) See "Management of the Trust-Management and Advisory Arrangements"-
page 16.
(h) See "Purchase of Shares-Distribution Plans"-page 24.
(i) See "Management of the Trust-Transfer Agency Services"-page 17.

<PAGE> 5

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 $40 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......................................................... $57 $92 $129 $234
Class B......................................................... $63 $87 $118 $254
Class C......................................................... $33 $72 $124 $265
Class D......................................................... $58 $95 $134 $244
An investor would pay the following expenses on the same $1,000
investment
assuming no redemption at the end of the period:
Class A......................................................... $52 $92 $129 $234
Class B......................................................... $22 $69 $118 $254
Class C......................................................... $23 $72 $124 $265
Class D......................................................... $58 $95 $134 $244
</TABLE>

The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The expenses set forth under "Other
Expenses" are based on estimated amounts through the end of the Fund's
first fiscal year on an annualized basis. The Example set forth above
assumes reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
("Commission") regulations. The Example should not be considered a
representation of past or future expenses or annual rate of return, and
actual expenses or annual rate of return may be more or less than those
assumed for purposes of the Example. Class B 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. ("NASD"). Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".

MERRILL LYNCH SELECT PRICING SM SYSTEM

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

<PAGE> 6

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,
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. Each class has different exchange privileges.
See "Shareholder Services-Exchange Privilege".

Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and Class D shares are
the same as those of the 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
Pricing SM System, followed by a more detailed description of each class
and a discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances. More detailed information as to each class of
shares is set forth under "Purchase of Shares".

<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge (2), (3)
B CDSC for a period of 4 0.25% 0.25% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% ten years (4)
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.00% initial sales 0.10% No No
charge (3)
</TABLE>

----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. Contingent deferred sales charges
("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".
(Footnotes continued on the following page)

<PAGE> 7

(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a CDSC if redeemed within one
year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired.

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 are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A
shares in that account. In addition, Class A shares will be offered
to Merrill Lynch & Co., Inc. and its subsidiaries (the term
"subsidiaries" when used herein with respect to Merrill Lynch & Co.,
Inc., includes MLAM, the Manager and certain other entities directly
or indirectly wholly-owned and controlled by Merrill Lynch & Co.,
Inc.), and their directors and employees, and to members of the
Boards of MLAM-advised mutual funds. The maximum initial sales
charge is 4.00%, which is reduced for purchases of $25,000 and over.
Purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived such
purchases may be subject to a CDSC 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 investors'
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%, an ongoing distribution fee of 0.25% and a CDSC if
they are redeemed within four years of purchase. Approximately
ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject
to a lower account maintenance fee of 0.10% and no distribution
fee; Class B shares of certain other MLAM-advised mutual funds
into which exchanges may be made convert into Class D shares
automatically after approximately eight years. If Class B shares
of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, as will the
Class D account maintenance fee of the acquired fund upon the
conversion, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares into Class D shares will
occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not
be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares.
The conversion period for dividend reinvestment shares is
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 average net assets and an ongoing distribution
fee of 0.35%. Class C shares are also 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

<PAGE> 8

Class C shares will be subject to distribution fees that will be
imposed on Class C shares for an indefinite period subject to
annual approval by the Fund's Board of Trustees and regulatory
limitations.

Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee
of 0.10% of average net assets. 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 Class D shares is the same as
the schedule for Class A shares. Class D shares also will be
issued upon conversion of Class B shares as described above under
"Class B". See "Purchase of Shares-Initial Sales Charge
Alternatives - Class A and Class D Shares".

The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing SM System that the investor believes is most
beneficial under his 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 of the account
maintenance fee imposed on Class D shares. Investors qualifying for
significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated
ongoing account maintenance and distribution fees on Class B or Class C
shares may exceed the initial sales 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
shares holdings, will count toward a right of accumulation which may
qualify the investor for reduced initial sales charges on new initial
sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower total return than
Class A Shares.

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

Certain investors may elect to purchase Class B shares if they
determine it to be most advantageous to have all their funds invested
initially and intend to hold their shares for an extended period of time.
Investors in Class B shares should take into account whether they intend
to redeem their shares within the CDSC period and, if not, whether they
intend to remain invested until the end of the conversion period and
thereby take advantage of

<PAGE> 9

the reduction in ongoing fees resulting from the conversion into Class D
shares. Other investors, however, may elect to purchase Class C shares if
they determine that it is advantageous to have all their assets invested
initially and they are uncertain as to the length of time they intend to
hold their assets in MLAM-advised mutual funds. Although Class C
shareholders are subject to a shorter CDSC period at a lower rate, they
are subject to higher distribution fees and forego the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while
both Class B and Class C distribution fees are subject to the limitations
on asset-based sales charges imposed by the NASD, the Class B distribution
fees are further limited under a voluntary waiver of asset-based sales
charges. See "Purchase of Shares-Limitations on the Payment of Deferred
Sales Charges".

INVESTMENT OBJECTIVE AND POLICIES

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

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

<PAGE> 10

Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions,
financial condition of the issuer and interest rates to determine whether
to continue to hold the obligation in the Fund's portfolio.

The Fund may invest up to 20% of its total assets in Municipal Bonds
that are rated below Baa by Moody's or below BBB by Standard & Poor's or
Fitch, or which in the Manager's judgment, possess similar credit
characteristics. Such securities, sometimes referred to as "high-yield"
or "junk" bonds, are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms
of the security and generally involve a greater volatility of price than
securities in higher rating categories. The market prices of
high-yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. In
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of the issuer
of such securities. The Manager will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective and
Policies" in the Statement of Additional Information for a more detailed
discussion of the pertinent risk factors involved in investing in "high
yield" or "junk" bonds and Appendix II-"Ratings of Municipal Bonds"-
in the Statement of Additional Information for additional information
regarding ratings of debt securities. The Fund does not intend to purchase
debt securities that are in default or which the Manager believes will be
in default.

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

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

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

<PAGE> 11

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

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

Potential Benefits

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

Special and Risk Considerations Relating to Arkansas Municipal Bonds

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

<PAGE> 12

Many different economic and social conditions may affect the financial
condition of Arkansas and its political subdivisions in the future.
Although the general economy of the State is presently improving, future
events which could negatively impact the State include: the effects of
inflation, decreases in tax collections due to recessionary trends such as
increased unemployment, slowdowns in business activity generally and the
cyclical nature of some manufacturing sectors. Standard & Poor's lowered
its rating of the Arkansas Development Finance Authority's Guaranty
Revenue Bond program from A+ to A- on June 24, 1994. The rating change
reflects a substantial drop in interest earnings on state treasury fund
balances since the program was originally rated in 1987. Treasury earnings
are a backup source of bond repayment in the event that the Guaranty
Revenue Fund is ever exhausted. The Manager does not believe that the
current economic conditions in Arkansas will have a significant adverse
effect on the Fund's ability to invest in high quality Arkansas Municipal
Bonds. See Appendix I, "Economic and Financial Conditions in Arkansas,"
in the Statement of Additional Information.

Description of Municipal Bonds

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

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

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

<PAGE> 13

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

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

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

<PAGE> 14

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

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

When-Issued Securities and Delayed Delivery Transactions

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

Call Rights

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

Financial Futures Transactions and Options

The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for
the purpose of hedging its investments in Municipal Bonds against declines
in

<PAGE> 15

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

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

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

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

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

<PAGE> 16

options and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments which have a disparate impact
on the respective markets for such securities.

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

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

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

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

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

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

<PAGE> 17

Repurchase Agreements

As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security
from the Fund at a mutually agreed upon time and price, thereby determining
the yield during the term of the agreement. This results in a fixed rate of
return insulated from market fluctuations during such period. The Fund may
not invest in repurchase agreements maturing in more than seven days if such
investments, together with all other illiquid investments, would exceed 15%
of the Fund's net assets. In the event of default by the seller under a
repurchase agreement; the Fund may suffer time delays and incur costs or
possible losses in connection with the disposition of the underlying
securities.

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
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. Among its
fundamental policies, the Fund may not: (i) invest more than 25% of its
assets, taken at market value, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies and
instrumentalities) (For purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be
part of any industry); and (ii) borrow money, except that (a) the Fund may
borrow from banks (as defined in the 1940 Act) in amounts up to 331/3% of
its total assets (including the amount borrowed), (b) the Fund may borrow
up to an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (d) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies
as set forth in the Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.

Among its non-fundamental policies, the Fund may not (i) purchase
securities of other investment companies, except to the extent such
purchases are permitted by applicable law; (ii) invest in securities which
cannot be readily resold because of legal or contractual restrictions or
which cannot otherwise be marketed, redeemed or put to the issuer or a
third party, if at the time of acquisition more than 15% of its total
assets would be invested in such securities (This restriction shall not
apply to securities which mature within seven days or securities which the
Board of Trustees of the Fund has otherwise determined to be liquid
pursuant to applicable law); and (iii) 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
mortgaged-backed securities, asset-backed securities or obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.

The Fund is classified as non-diversified within the meaning of the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in obligations of a single
issuer. However, the Fund's investments will be limited so as to qualify
as a "regulated investment company" for purposes of the Code. See
"Taxes". To qualify, among other requirements, the Trust will limit the
Fund's investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets
will be invested in the securities of a single issuer, and (ii) with
respect to 50% of the

<PAGE> 18

market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues
of a non-government entity then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole issuer.
These tax-related limitations may be changed by the Trustees of the Trust to
the extent necessary to comply with changes to the Federal tax requirements.
A fund which elects to be classified as "diversified" under the 1940 Act must
satisfy the foregoing 5% and 10% requirements with respect to 75% of its
total assets. To the extent that the Fund assumes large positions in the
obligations of a small number of issuers, the Fund's total return may
fluctuate to a greater extent than that of a diversified company as a result
of changes in the financial condition or in the market's assessment of the
issuers.

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

MANAGEMENT OF THE TRUST

Trustees

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

The Trustees are:

ARTHUR ZEIKEL*-President and Chief Investment Officer of the Manager
and MLAM; President and Director of Princeton Services, Inc.;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") and Executive Vice President of Merrill Lynch; Director of
the Distributor.

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

HERBERT I. LONDON-John M. Olin Professor of Humanities, New York
University.

ROBERT R. MARTIN-Chairman, WTC Industries, Inc. and former Chairman
and Chief Executive Officer, Kinnard Investments, Inc.

JOSEPH L. MAY-Attorney in private practice.

ANDRE F. PEROLD-Professor, Harvard Business School.

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

Management and Advisory Arrangements

The Manager, which is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company, acts as the manager for
the Fund and provides the Fund with management services. The Manager or
MLAM acts as the investment adviser for over 100 other registered
investment companies.

<PAGE> 19

MLAM also provides investment advisory services to individuals and
institutional accounts. As of August 31, 1994, the Manager and MLAM had a
total of approximately $165.7 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates
of the Manager.

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

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

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

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

Transfer Agency Services

Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant
to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Fund pays the Transfer Agent an annual fee of $11.00 per
Class A or Class D shareholder account and $14.00 per Class B or Class C
shareholder account, and the Transfer Agent is entitled to reimbursement
from the Fund for out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement.

PURCHASE OF SHARES

Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an
affiliate of the Manager, MLAM 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.

<PAGE> 20

The Fund is offering its shares in four classes at a public offering
price equal to the next determined net asset value per share plus sales
charges imposed either at the time of purchase or on a deferred basis
depending upon the class of shares selected by the investor under the Merrill
Lynch Select Pricing SM System, as described below. The applicable offering
price for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to 4:15 P.M., New York
time, which includes orders received after the determination of net asset
value on the previous day, the applicable offering price will be based on the
net asset value as of 4:15 P.M. on the day the orders are placed with the
Distributor, provided the orders are received by the Distributor prior to
4:30 P.M., New York time, on that day. If the purchase orders are not
received prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. The Trust or the Distributor may suspend
the continuous offering of the Fund's shares of any class at any time in
response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected
by the Distributor or the Trust. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a sale of shares to such customers. Purchases directly through the
Fund's Transfer Agent are not subject to the processing fee.

The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold
the shares and 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 contingent deferred
sales charge and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System is set forth under
"Merrill Lynch Select Pricing SM System" on page 3.

Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The 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" below. Each
class has different exchange privileges. See "Shareholder Services-
Exchange Privilege".

Investors should understand that the purpose and function of the
initial sales charges with respect to Class A and Class D shares are the
same as those of the 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

<PAGE> 21

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.

The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing SM System.

<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge(1) Fee Fee Feature
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at a rate 0.25% 0.25% B shares convert to
of 4.0% during the first year, D shares automatically after
decreasing 1.0% annually to 0.0% approximately ten years(4)
C 1.0% CDSC for one year 0.25% 0.35% No
D Maximum 4.00% initial sales charge(3) 0.10% No No
</TABLE>

----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the
redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.

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

(4) The conversion period for dividend reinvestment shares is modified.
Also, Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made have an eight year conversion period. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired.

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.

<PAGE> 22

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

<TABLE>
<CAPTION>
Sales Charge Sales Charge Discount to
and Percentage as Percentage* Selected Dealers
of Offering of the Net as Percentage of the
Amount of Purchase Price Amount Invested Offering Price
------------------ --------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
$25,000 but less than $50,000......... 3.75 3.90 3.50
$50,000 but less than $100,000........ 3.25 3.36 3.00
$100,000 but less than $250,000....... 2.50 2.56 2.25
$250,000 but less than $1,000,000 .... 1.50 1.52 1.25
$1,000,000 and over**................. 0.00 0.00 0.00
</TABLE>

----------
* 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 made on or after October 21,
1994. If the 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. Class A purchases made prior to October
21, 1994 may be subject to a CDSC if the shares are redeemed
within one year of purchase at the following annual rates:
0.75% on purchases of $1,000,000 to $2,500,000; 0.40% on
purchases of $2,500,001 to $3,500,000; 0.25% on purchases of
$3,500,001 to $5,000,000; and 0.20% on purchases of more than
$500,000,000 in lieu of paying an initial sales charge. The
charge will be assessed on an amount equal to the lesser of the
proceeds of the redemption or the cost of the shares being
redeemed.

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 of 1933, as amended.

Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares
in a shareholder account are entitled to purchase additional Class A
shares in that account. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by MLAM or any of
its affiliates. Class A shares are available 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. 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 TMA SM Managed Trusts to which
Merrill Lynch Trust Company provides discretionary trustee services and
certain purchases made in connection with the Merrill Lynch Mutual Fund
Adviser program. In addition, Class A shares will be offered at net asset
value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies,
including the Fund. Certain persons who acquire shares of MLAM-advised
closed-end funds 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. For example, 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 of Merrill Lynch Senior Floating Rate Fund,
Inc. in shares of such funds.

<PAGE> 23

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

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

Class D shares are offered at net asset value without 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.

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 ten years after Class B shares are issued,
such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and Class B and Class C shares are
subject to distribution fees of 0.25% and 0.35%, respectively, of net
assets as discussed below under "Distribution Plans". The proceeds from
the account maintenance fees are used to compensate Merrill Lynch for
providing continuing account maintenance activities.

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

Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray
the expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of
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
dealers' own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B
and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject
to a lower account maintenance fee and no distribution fee; Class B shares
of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately eight
years. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.

<PAGE> 24

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

Contingent Deferred Sales Charges-Class B Shares. Class B shares 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 CDSC:
<TABLE>
<CAPTION>
CDSC as a
Percentage of
Dollar Amount
Year Since Purchase Subject to
Payment Made Charge
------------------- --------------
<S> <C>
0-1..................................... 4.0%
1-2..................................... 3.0%
2-3..................................... 2.0%
3-4..................................... 1.0%
4 and thereafter........................ None
</TABLE>

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
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 charge because of
dividend reinvestment. With respect to the remaining 40 shares, the CDSC
is applied only to the original cost of $10 per share and not to the
increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 2.0% (the applicable
rates in the third year after purchase).

The Class B CDSC is waived on redemptions of shares following the
death or disability (as defined in the Internal Revenue Code of 1986, as
amended) of a shareholder. 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 equal to the lesser of the proceeds of redemption
or the cost of the shares being

<PAGE> 25

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.

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

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

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

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

The Conversion Period is modified for shareholders who purchased Class
B shares through certain retirement plans which qualified for a waiver of
the CDSC normally imposed on purchases of Class B shares ("Class B
Retirement Plans"). When the first share of any MLAM-advised mutual fund
purchased by a Class B Retirement Plan has been held for ten years (i.e.,
ten years from the date of 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.

<PAGE> 26

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 1940 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 rates of 0.25%, 0.25% and 0.10%, respectively, of
the average daily net assets of the Fund attributable to shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance
activities.

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 0.25% and 0.35%, respectively, of the average daily net
assets of the Fund attributable to the shares of the relevant class in
order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and
bearing certain distribution-related expenses of the Fund, including
payments to financial consultants for selling Class B and Class C shares
of the Fund. The Distribution Plans relating to Class B and Class C shares
are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this
regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and
Class C shares.

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

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 respective class, computed

<PAGE> 27

separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible
gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will
continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances,
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 Trustees of the Trust will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of
the Distribution Plans, the Trustees will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the
CDSCs received with respect to one class will not be used to subsidize the
sale of shares of another class. Payments of the distribution fee on Class
B shares will terminate upon conversion of those Class B shares into Class
D shares as set forth under "Deferred Sales Charge Alternatives-Class B
and Class C Shares-Conversion of Class B Shares to Class D Shares".

REDEMPTION OF SHARES

The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or
less than the shareholder's cost, depending on the market value of the
securities held by the Fund at such time.

Redemption

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data
Services, Inc., Transfer Agency Mutual Fund Operations Department, P.O.
Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations Department, 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the
case of shares deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Proper notice of redemption in the
case of shares for which certificates have been issued may be accomplished
by a written letter as noted above accompanied by certificates for the
shares to be redeemed. Redemption requests should not be sent to the
Trust.

<PAGE> 28

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

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

Repurchase

The Trust also will repurchase Fund shares through a shareholder's
listed securities dealer. The Trust normally will accept orders to
repurchase Fund shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the order
by the dealer, provided that the request for repurchase is received by the
dealer prior to the close of business on the New York Stock Exchange on
the day received, and such request is received by the Fund from such
dealer not later than 4:30 P.M., New York time, on the same day. Dealers
have the responsibility of submitting such repurchase requests to the
Trust not later than 4:30 P.M., New York time, in order to obtain that
day's closing price.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than any
applicable CDSC). 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 Trust.
Merrill Lynch may charge its customers a processing fee (presently $4.85)
to confirm a repurchase of shares of such customers. Redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee.
The Trust reserves the right to reject any order for repurchase, which
right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Trust may redeem Fund shares as set forth
above.

Reinstatement Privilege - Class A and Class D Shares

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

<PAGE> 29

SHAREHOLDER SERVICES

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

Investment Account. Each shareholder whose account is maintained at
the Transfer Agent has an Investment Account and will receive statements,
at least quarterly, from the Transfer Agent. These statements will serve
as transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. The statements will also show any other activity in the
account since the preceding statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. A shareholder may make
additions to his Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders may also maintain their
accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from Merrill
Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the
new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares
from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the
name of the brokerage firm for the benefit of the shareholder.

Exchange Privilege. Shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated at any time in accordance with the rules of the Commission.

Under the Select Pricing System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund
in his account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If
the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund.

Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales charge
previously paid on the Class A or Class D shares being exchanged and the
sales charge payable at the time of the exchange on the shares being
acquired.

<PAGE> 30

Class B, Class C and Class D shares will be exchangeable with shares
of the same class of other MLAM-advised mutual funds.

Shares of the Fund which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for
the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund.

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

Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.

Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. For further information, see "Shareholder Services-
Exchange Privilege" in the Statement of Additional Information.

The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser
("MFA") program. First, the initial allocation of assets is made under
the MFA program. Then, any subsequent exchange under the MFA program of
Class A or Class D shares of a MLAM-advised mutual fund for Class A or
Class D shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge
previously paid on the shares of the other MLAM-advised mutual fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.

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

Systematic Withdrawal. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account in the
form of payment by check or through automatic payment by direct deposit to
his bank account on either a monthly or quarterly basis. A Class A or
Class D shareholder whose shares are held within a CMA(Reg) or CBA(Reg)
Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program, subject to certain conditions.

<PAGE> 31

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 regular bank account. The
Fund's Automated Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch. Alternatively,
investors who maintain CMA(Reg) accounts may arrange to have periodic
investments made in the Fund in their CMA(Reg) account or in certain
related accounts in amounts of $100 or more through the CMA(Reg) Automated
Investment Program.

PORTFOLIO TRANSACTIONS

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

DISTRIBUTIONS AND TAXES

Distributions

The net investment income of the Fund is declared as dividends daily
following the normal close of trading on the New York Stock Exchange
(currently 4:00 P.M.) prior to the determination of the net asset value on
that day. The net investment income of the Fund for dividend purposes
consists of interest earned on portfolio securities, less expenses, in
each case computed since the most recent determination of the net asset
value. Expenses of the Fund, including the management fees and the account
maintenance and distribution fees, are accrued daily. Dividends of net
investment income are declared daily and reinvested monthly in the form of
additional full and fractional shares of the Fund at net asset value as of
the close of business on the "payment

<PAGE> 32

date" unless the shareholder elects to receive such dividends in cash.
Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding from the settlement date of a purchase
order to the day prior to settlement date of a redemption order.

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

The per share dividends and distributions on each class of shares will
be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable to that class.

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

Taxes

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

Arkansas has incorporated the special Federal tax provisions affecting
regulated investment companies into state income tax law. Consequently,
for Arkansas income tax purposes, the Fund will be treated as a RIC to the
extent it qualifies as such under the Code.

To the extent that the dividends distributed to the Fund's Class A,
Class B, Class C and Class D shareholders (together, the "shareholders")
are derived from interest income exempt from Federal income tax under Code
Section 103(a) and are properly designated as "exempt-interest
dividends" by the Trust, they will be excludable from a shareholder's
gross income for Federal income tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's
social security benefits and railroad retirement benefits subject to
Federal income taxes. The portion of such exempt-interest dividends paid
from interest received by the Fund from Arkansas Municipal Bonds will not
be subject to Arkansas income taxes. Shareholders subject to income
taxation by states other than Arkansas will realize a lower after-tax rate
of return than Arkansas shareholders since the dividends distributed by
the Fund generally will not be exempt, to any significant degree, from
income taxation by such other states. The Trust will inform shareholders
annually as to the portion of the Fund's distributions which constitutes
exempt-interest dividends and the portion which is exempt from Arkansas
income tax. Interest on indebtedness incurred or continued to purchase or
carry Fund shares is not deductible for Federal or Arkansas income tax
purposes to the extent attributable to exempt-interest dividends. Persons
who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by industrial development bonds or private
activity bonds held by the Fund should consult their tax advisers before
purchasing Fund shares.

<PAGE> 33

for the dividends received deduction for corporations. Distributions, if any,
of net long-term capital gains from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Fund's gain from the sale
or redemption of tax-exempt obligations purchased at a market discount will
be treated as ordinary income rather than capital gain. This rule may
increase the amount of ordinary income dividends received by shareholders.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received
by the shareholder. In addition, such loss will be disallowed to the extent
of any exempt-interest dividends received by the shareholder. If the Fund
pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being
paid by the Fund and received by its shareholders on December 31 of the year
in which such dividend was declared.

In 1991, Arkansas enacted legislation adopting certain sections of the
Code and related regulations in effect on January 1, 1991, which apply to
the computation of capital gains and losses. For individuals, net capital
gains are taxed at a maximum of 6% (as compared with the maximum rate of
7% for ordinary income). Special capital gains treatment is not available
in Arkansas for corporate taxpayers.

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

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

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

<PAGE> 34

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

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

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

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

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

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

PERFORMANCE DATA

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

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

<PAGE> 35

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 a longer period of time.
In advertisements distributed to investors whose purchases are subject to
waiver of the CDSC in the case of Class B shares or reduced sales charges in
the case of Class and Class D shares, the performance data may take into
account the reduced, and not the maximum, sales charge or may not take into
account the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges or waiver of the CDSC, a lower amount of expenses
is deducted. See "Purchase of Shares". The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.

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

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

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

ADDITIONAL INFORMATION

Determination of Net Asset Value

The net asset value of the shares of all classes of the Fund is
determined by the Manager once daily as of 4:15 P.M., New York time, on
each day during which the New York Stock Exchange is open for trading. The

<PAGE> 36

net asset value per share is computed by dividing the sum of the value of
the securities held by the Fund plus any cash or other assets minus all
liabilities by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.

The per share net asset value of the 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 immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.

Organization of the Trust

The Trust is an unincorporated business trust organized on August 2,
1985 under the laws of Massachusetts. On October 1, 1987, the Trust
changed its name from "Merrill Lynch Multi-State Tax-Exempt Series
Trust" to "Merrill Lynch Multi-State Municipal Bond Series Trust" and
on December 22, 1987 the Trust changed its name to "Merrill Lynch
Multi-State Municipal Series Trust". The Trust is an open-end management
investment company comprised of separate series ("Series"), each of
which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is to be managed independently in order to
provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, state and
local income taxes as is consistent with prudent investment management.
The Trustees are authorized to create an unlimited number of Series and,
with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest of $.10 par value of different
classes. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Prospectus, the shares of the Fund are divided into Class A, Class B,
Class C and Class D shares. Class A, Class B, Class C and Class D shares
represent interests in the same assets of the Fund and are identical in
all respects except that Class B, Class C and Class D shares bear certain
expenses 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 account maintenance and distribution
expenditures as applicable. See "Purchase of Shares". The Trust has
received an order from the Commission permitting the issuance and sale of
multiple classes of common stock. The Trustees of the Trust may classify
and reclassify the shares of the Trust into additional classes of common
stock at a future date.

Shareholders are entitled to one vote for each full share and to
fractional votes for fractional shares held in the election of Trustees
(to the extent hereinafter provided) and on other matters submitted to the
vote of shareholders. There normally will be no meeting of shareholders
for the purpose of electing Trustees unless and until such time as less
than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the terms of the Declaration of Trust, cause a meeting of
shareholders to be held for the purpose of voting on the removal of
Trustees. Also, the Trust will be required to call a special meeting of
shareholders of a Series in accordance with the requirements of the 1940
Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental

<PAGE> 37

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

Shareholder Reports

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

Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289

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

Shareholder Inquiries

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

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

<PAGE> 38

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 1)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Share Purchase Application

I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares

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

Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price
next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a
separate sheet of paper if necessary.)

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

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

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

Address......................................... Date.......................
................................................
(Zip Code)
Occupation Name and Address of Employer
.................................. ....................................
....................................
....................................

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

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

2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-term Capital Gains
Select One: Select One:
/ / Reinvest / / Reinvest
/ / Cash / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.

If cash, specify how you would like
your distributions paid to you: If direct deposit to bank
account is selected, please
/ / Check or / / Direct Deposit to complete below:
bank account
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 Arkansas Municipal
Bond Fund Authorization Form.

Specify type of account (check one) / / checking / / savings
Name on your account......................................................
Bank Name.................................................................
Bank Number........................ Account Number........................
Bank address..............................................................
I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor....................................................
Signature of Depositor....................... Date.......................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.

36
<PAGE> 39

3. Social Security Number or Taxpayer Identification Number

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

Instruction: You must strike out the language in (2) above if you have
been notified that you are subject to backup withholding due to
underreporting and if you have not received a notice from the IRS that
backup withholding has been terminated. The undersigned authorizes the
furnishing of this certification to other Merrill Lynch sponsored mutual
funds.

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

4. Letter of Intention-Class A and D shares only (See terms and conditions
in the Statement of Additional Information)

Dear Sir/Madam: ..............................., 19....
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of
Merrill Lynch Arkansas Municipal Bond Fund or any other investment
company with an initial sales charge or deferred sales charge for which
the Merrill Lynch Funds Distributor, Inc. acts as distributor over the
next 13 month period which will equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price
applicable to the amount checked above, as described in the Merrill Lynch
Arkansas Municipal Bond Fund Prospectus.
I agree to the terms and conditions of the Letter of Intention. I
hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor,
Inc., my attorney, with full power of substitution, to surrender for
redemption any or all shares of Merrill Lynch Arkansas Municipal Bond
Fund held as security.
By.................................. ......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name........................... (2) Name...........................
Account Number..................... Account Number.....................

5. For Dealer Only
Branch Office, Address, Stamp
----------------------------------------

----------------------------------------
This form, when completed, should be
mailed to:
Merrill Lynch Arkansas Municipal
Bond Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund
Operations
P.O. Box 45289
Jacksonville, FL 32232-5289

We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and
agree to notify the Distributor of any purchases made under a Letter of
Intention or Systematic Withdrawal Plan. We guarantee the shareholder's
sgnature.
..........................................................................
Dealer Name and Address
By........................................................................
Authorized Signature of Dealer
-------------------------------------------------------------------------
----------------------
Branch-Code F/C No.

-------------------------
Dealer's Customer Account No.

---------
F/C Last Name
37
<PAGE> 40

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND-AUTHORIZATION FORM (PART 2)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Note: This form is required to apply for Systematic Withdrawal or Automatic
Investment Plans only.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Account Registration

Name of Owner ...................... Social Security Number ...............
Name of Co-Owner (if any) .......... or Taxpayer Identification Number
Address ............................ Account Number .......................
............................ (if existing account)

2. Systematic Withdrawal Plan-Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Arkansas
Municipal Bond Fund at cost or current offering price. Withdrawals
to be made either (check one) / / Monthly on the 24th day of each month,
or / / Quarterly on the 24th day of March, June, September and December.
If the 24th falls on a weekend or holiday, the next succeeding business
day will be utilized. Begin systematic withdrawal on ----------or as soon
as possible thereafter.
(month)
Specify how you would like your withdrawal paid to you (check one): / /
$---------- or / /----------% of the current value of / / Class A or / /
Class D / / shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):

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

Draw checks payable (check one)
(a) I hereby authorize payment by
check
/ / as indicated in Item 1.
/ / to the order of..................
Mail to (check one)
/ / the address indicated in item 1.
/ / Name (please print)..............
Address...............................
Signature of Owner....................Date..................................
Signature of Co-Owner (if any)........
(b) I hereby authorize payment by direct deposit to my bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agreee that this authorization will remain in effect until I
provide written notification to Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one) / / checking / / savings
Name on your account .......................................................
Bank Name...................................................................
Bank Number . . . . . . . . . . . . . . . . . . . . . . . . . Account
Number. . . . . . . . . .
Bank Address................................................................
............................................................................
Signature of Depositor . . . . . . . . . . . . . . . . . . .Date . . . . . .
Signature of Depositor......................................................
...
(if joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
application.
38
<PAGE> 41

3. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase:
(choose one) / / Class A shares / / Class B shares / / Class C shares / /
Class D shares
of Merrill Lynch Arkansas Municipal Bond Fund subject to the terms set
forth below. In the event that I am not eligible to purchase Class A
shares, I understand that Class D shares will be purchased.
----------
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account
for investment in Merrill Lynch Arkansas Municipal Bond Fund as indicated
below:
Amount of each ACH debit $.................................................
Account number.............................................................
Please date and invest ACH debits on the 20th
of each month beginning .....................
(Month)
or as soon thereafter as possible.
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 credit my bank account. I further agree that if a
check or debit is not honored upon presentation, Financial Data Services,
Inc. is authorized to discontinue immediately the Automatic Investment Plan
and to liquidate sufficient shares held in my account to offset the purchase
made with the dishonored debit.
............ ........................
Date Signature of Depositor
........................
Signature of Depositor
(If joint account, both
must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To......................................................................Bank
(Investor's Bank)
Bank Address ...............................................................
City................... State................... Zip Code...................
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to 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 personally 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 Number Signature of Depositor
(If joint account, both must sign)

Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this Application.

39
<PAGE> 42

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

Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101

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

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

Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557

<PAGE> 43

No person has been authorized LOGO
to give any information or to make
any representations, other than Merrill Lynch
those contained in this Arkansas Municipal
Prospectus, in connection with the Bond Fund
offer contained in this
Prospectus, and, if given or made, Merrill Lynch Multi-State
such other information or Municipal Series Trust
representations must not be relied
upon as having been authorized by
the Trust, the Manager or the
Distributor. This Prospectus does
not constitute an offering in any
state in which such offering may
not lawfully be made.
----------
TABLE OF CONTENTS
Page
---- (Paste-up art)
Fee Table................................... 2
Merrill Lynch Select Pricing SM System...... 3
Investment Objective and Policies........... 7
Potential Benefits...................... 9
Special and Risk Considerations Relating
to Arkansas Municipal Bonds........... 9
Description of Municipal Bonds.......... 10
When-Issued Securities and Delayed
Delivery Transactions................. 12
Call Rights............................. 12
Financial Futures Transactions and
Options............................... 12
Repurchase Agreements .................. 15
Investment Restrictions................. 15 PROSPECTUS
Management of the Trust..................... 16
Trustees................................ 16 OCTOBER 21, 1994
Management and Advisory Arrangements.... 17
Transfer Agency Services................ 17 DISTRIBUTOR:
Purchase of Shares.......................... 17 MERRILL LYNCH
Initial Sales Charge Alternatives-Class A FUNDS DISTRIBUTOR, INC.
and Class D Shares...................... 19
Deferred Sales Charge Alternatives-Class B THIS PROSPECTUS SHOULD BE
and Class C Shares...................... 21 RETAINED FOR FUTURE REFERENCE.
Distribution Plans........................ 24
Limitations on the Payment of Deferred
Sales Charges........................... 24
Redemption of Shares........................ 25
Redemption.............................. 25
Repurchase.............................. 26
Reinstatement Privilege-Class A and
Class D Shares........................ 26
Shareholder Services........................ 27
Portfolio Transactions...................... 29
Distributions and Taxes..................... 29
Distributions........................... 29
Taxes................................... 30
Performance Data............................ 32
Additional Information...................... 33
Determination of Net Asset Value........ 33
Organization of the Trust............... 34
Shareholder Reports..................... 35
Shareholder Inquiries................... 35
Authorization Form.......................... 36

Code #18321-1094

==================================================== =================================================

</TABLE>

<PAGE> 44

STATEMENT OF ADDITIONAL INFORMATION

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

----------

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

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.

----------

The Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the prospectus of the
Fund, dated October 21, 1994 (the "Prospectus"), which has been filed
with the Securities and Exchange Commission and can be obtained, without
charge, by calling or by writing the Fund at the above telephone number or
address. This Statement of Additional Information has been incorporated by
reference into the Prospectus. Capitalized terms used but not defined
herein have the same meanings as in the Prospectus.

----------

FUND ASSET MANAGEMENT-MANAGER

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR

----------

The date of this Statement of Additional Information is October 21, 1994

<PAGE> 45

INVESTMENT OBJECTIVE AND POLICIES

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

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

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

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

<PAGE> 46

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

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

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

<PAGE> 47

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

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

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

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

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

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

<PAGE> 48

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

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

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

DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS

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

Description of Municipal Bonds

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

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

<PAGE> 49

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

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

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

Description of Temporary Investments

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

<PAGE> 50

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

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

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

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

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

<PAGE> 51

unless the bank or institution is organized and operating in the United
States, has total assets of at least one billion dollars and is a member
of the Federal Deposit Insurance Corporation ("FDIC"), except that up to
10% of total assets may be invested in certificates of deposit of small
institutions if such certificates are insured fully by the FDIC.

Repurchase Agreements

The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities or
an affiliate thereof. Under such agreements, seller agrees, upon entering
into the contract, to repurchase the security at a mutually agreed upon time
and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations
during such period. The Fund may not invest in repurchase agreements maturing
in more than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. In the event of
default by the seller under a repurchase agreement, the Fund may suffer time
delays and incur costs or possible losses in connection with the disposition
of the underlying securities.

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

Financial Futures Transactions and Options

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

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

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

The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the

<PAGE> 52

broker. This amount is known as "initial margin" and represents a "good
faith" deposit assuring the performance of both the purchaser and
seller under the futures contract.ubsequent payments to and from the
broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates making the long
and short positions in the futures contract more or less valuable,
a process known as "mark to the market". At any time prior to the
settlement date of the futures contract, the position may be closed
out by taking an opposite position which will operate to terminate
the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid
to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale
transaction.

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

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

As described in the Prospectus, the Fund may purchase and sell
financial futures contracts on U.S. Government securities as a hedge
against adverse changes in interest rates as described below. With respect
to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association ("GNMA") Certificates and
three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities in
connection with its hedging strategies.

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

Futures Strategies. The Fund may sell a financial futures contract
(i.e., assume a short position) in anticipation of a decline in the value
of its investments in Municipal Bonds resulting from an increase in
interest rates or otherwise. The risk of decline could be reduced without
employing futures as a hedge by selling such Municipal Bonds and either
reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. This strategy, however, entails increased
transaction costs in the form of dealer spreads and typically would reduce
the average yield of the Fund's portfolio securities as a result of the
shortening of maturities. The sale of futures contracts provides an
alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the
Fund's positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While the Fund
will incur commission expenses in selling and closing out futures
positions, commissions on futures transactions are lower than transaction
costs incurred in the purchase

<PAGE> 53

and sale of Municipal Bonds. In addition, the ability of the Fund to trade
in the standardized contracts available in the futures markets may offer a
more effective defensive position than a program to reduce the average
maturity of the portfolio securities due to the unique and varied credit
and technical characteristics of the municipal debt instruments available
to the Fund. Employing futures as a hedge also may permit the Fund to
assume a defensive posture without reducing the yield on its investments
beyond any amounts required to engage in futures trading.

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

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

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

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

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

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

----------

The Trust has received an order from the Securities and Exchange
Commission (the "Commission") exempting it from the provisions of
Section 17(f) and Section 18(f) of the Investment Company Act of 1940, as
amended (the "1940 Act"), in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities
and other assets of an investment company and may be deemed to prohibit
certain arrangements between the Trust and commodities brokers with
respect to initial and variation margin. Section

<PAGE> 54

18(f) of the 1940 Act prohibits an open-end investment company such as the
Trust from issuing a "senior security" other than a borrowing from a bank.
The staff of the Commission has in the past indicated that a futures
contract may be a "senior security" under the 1940 Act.

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

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

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

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

The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market
will exist for any particular futures contract at any specific time. Thus,
it may not be possible to close out a futures position. In the event of
adverse price movements, the Fund would continue to be required to make
daily cash

<PAGE> 55

payments of variation margin. In such situations, if the Fund
has insufficient cash, it may be required to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. The inability to close out futures positions
also could have an adverse impact on the Fund's ability to hedge
effectively its investments in Municipal Bonds. The Fund will enter into a
futures position only if, in the judgment of the Manager, there appears to
be an actively traded secondary market for such futures contracts.

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

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

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

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

<PAGE> 56

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions and policies relating
to the investment of its assets and its activities, which are fundamental
policies and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (which for this
purpose and under the 1940 Act means the lesser of (i) 67% of the Fund's
shares at a meeting at which more than 50% of the outstanding shares of
the Fund are represented or (ii) more than 50% of the Fund's outstanding
shares). The Fund may not:

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

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

3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by
companies which 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, short-term commercial paper, certificates of deposit,
bankers' acceptances and repurchase agreements 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 guidelines set
forth in the Fund's Prospectus and Statement of Additional Information, as
they may be amended from time to time.

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

6. Borrow money, except that (a) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 331/3% of its total assets
(including the amount borrowed), (b) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (d) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund
may not pledge its assets other than to secure such borrowings or, to the
extent permitted by the Fund's investment policies as set forth in the
Prospectus and Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies.

7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act 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 registering as a commodity pool
operator under the Commodity Exchange Act.

Additional non-fundamental investment restrictions adopted by the
Fund, which may be changed by the Trustees, provide that the Fund may not:

<PAGE> 57

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 only if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund, (ii) 5% of
the Fund's total assets, taken at market value, would be invested in any
one such company, (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.

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

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

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 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 Manager or any
subsidiary thereof each owning more than one-half of 1% 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 Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.

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

<PAGE> 58

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

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

MANAGEMENT OF THE TRUST

Trustees and Officers

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

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

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

Herbert I. London-Trustee(2)-113-115 University Place, New York, New York
10003. John M. Olin Professor of Humanities, New York University since
1993; Professor, New York University since 1973; Dean, Gallatin Division
of New York University from 1978 to 1993 and Director from 1975 to 1976;
Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to
1985; Trustee, Hudson Naval Institute since 1980; Director, Damon
Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to
1993.

<PAGE> 59

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

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

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

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

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

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

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

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

Jerry Weiss-Secretary(1)(2)-Vice President of MLAM since 1990; Attorney
in private practice from 1982 to 1990.

----------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.

At September 30, 1994, the Trustees and officers of the Trust as a
group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of Common Stock of ML & Co. and owned an aggregate of less than 1%
of the outstanding shares of the Fund.

The Trust pays each Trustee not affiliated with the Manager a fee of
$10,000 per year plus $1,000 per meeting attended, together with such
Trustee's actual out-of-pocket expenses relating to attendance at
meetings. The Trust also compensates members of its Audit and Nominating
Committee, which consists of all the non-affiliated Trustees an annual fee
of $2,000 plus $500 per committee meeting attended. ML & Co. or its
affiliates an annual fee for serving as a Trustee plus a fee for each
meeting of the Board attended. The Trust also pays

<PAGE> 60

each member of the Audit and Nominating Committee, which consists of the
unaffiliated Trustees, an annual fee. The Trust reimburses each
unaffiliated Trustee for his out-of-pocket expenses relating to attendance
at Board and Committee meetings. In addition, the Chairman of the
Committee receives an annual fee for serving as Chairman of the Committee.

Management and Advisory Arrangements

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

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

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

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

<PAGE> 61

agreements, the Distributor will pay the promotional expenses of the Fund
incurred in connection with the offering of shares of the Fund. Certain
expenses will be financed by the Fund pursuant to the Distribution Plans
in compliance with Rule 12b-1 under the 1940 Act. See "Purchase of
Shares-Distribution Plans".

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

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

PURCHASE OF SHARES

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

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

The Merrill Lynch Select Pricing SM System is used by more than 50
mutual funds advised by MLAM or its affiliate, the Manager. Funds advised
by MLAM or the Manager 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 prospective investors. The
Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same
renewal requirements and termination provisions as the Management
Agreement described above.

The boards of directors or trustees of each of the mutual funds
advised by the Manager or MLAM and presently offering two classes of
shares, including the Fund, approved in August, 1994 a new distribution
system for shares of the funds, which will be named the Merrill Lynch
Select Pricing SM System. Under the Merrill Lynch Select Pricing SM System,
eligible investors would be permitted to choose from different sales

<PAGE> 62

charge alternatives offered through four classes of shares. It is currently
anticipated that, subject to the approvals of the shareholders of the other
funds, the Merrill Lynch Select Pricing SM System will be implemented for
all of such mutual funds, including the Fund. The Merrill Lynch Select
Pricing SM System has been approved by the sole shareholder of the Fund.

Initial Sales Charge Alternatives-Class A and Class D Shares

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

Closed-End Fund Investment Option. Class A shares of the Fund and
other MLAM-advised mutual funds ("Eligible Class A Shares") are offered
at net asset value to shareholders of certain closed-end funds advised by
the Manager or MLAM who purchased such closed-end fund shares prior to
October 21, 1994 and wish to reinvest the net proceeds of a sale of their
closed-end fund shares of common stock in Eligibile Class A or Class D
shares, if the conditions set forth below are satisfied. Alternatively,
closed-end fund shareholders who purchased such shares on or after October
21, 1994 and wish to reinvest the net proceeds from a sale of their
closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D Shares"), if the following conditions
are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end
fund shares must either have been acquired in the initial public offering
or be shares representing dividends from shares of common stock acquired
in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option. 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 the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no
Early Withdrawal Charge (as defined in the Senior Floating Rate Fund
prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted
only on the day that the related Senior Floating Rate Fund tender offer
terminates and will be effected at the net asset value of the Fund at such
day.

<PAGE> 63

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 public offering price of
the shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of all classes of shares of the Fund and of other
MLAM-advised mutual funds. For any such right of accumulation to be made
available, the Distributor must be provided at the time of purchase, by
the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the
purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a
nominee or custodian under pension, profit-sharing or other employee
benefit plans may not be combined with other shares to qualify for the
right of accumulation.

Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund
or any other MLAM-advised mutual funds 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, record-keeping services.
The Letter of Intention is not a binding obligation to purchase any amount
of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90
days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. The value of Class A and Class D shares
of the Fund and of other MLAM-advised mutual funds presently held, at cost
or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
the completion of such Letter, but the reduced sales charge applicable to
the amount covered by such Letter will be applied only to new purchases.
If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,000), the investor will be notified
and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares
purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares
equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name
of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of
accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge, but
there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed
of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.

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

Purchase Privilege of Certain Persons. Trustees of the Trust and
directors or trustees of other MLAM-advised investment companies,
ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with

<PAGE> 64

respect to ML & Co., includes MLAM, the Manager and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.), and their
directors and employees, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class A shares of the Fund at net
asset value.

Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor, if the
following conditions are satisfied. First, the investor must advise Merril
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. Second, the investor also must
establish that such redemption had been made within 60 days prior to the
investment in the Fund, and the proceeds from the redemption had been
maintained in the interim in cash or a money market fund.

Class D shares of the Fund are also offered at net asset value,
without 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 such fund was subject to 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 will be 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 the redemption of such shares of other mutual funds and that
such shares have been outstanding for a period of no less than six months.
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.

Acquisition of Certain Investment Companies. The public offering price
of Class D shares may be reduced to the net asset value per Class D share
in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a
tax-free transaction may be adjusted in appropriate cases to reduce
possible adverse tax consequences to the Fund 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 shall at all times remain
within its control); and (iii) are liquid securities, the value of which
is readily ascertainable, which are not restricted as to transfer either
by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund
does not exceed the applicable limits on acquisition of such securities
set forth under ("Investment Objective and Policies" herein).

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

<PAGE> 65

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 1940 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 1940 Act. Among other
things, each Distribution Plan provides that the Distributor shall provide
and the Trustees shall review quarterly reports of the disbursement of the
account maintenance and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Trustees must consider
all factors they deem relevant, including information as to the benefits
of the Distribution Plan to the Fund and 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
Trustees who are not "interested persons" of the Trust, as defined in
the 1940 Act (the "Independent Trustees"), shall be committed to the
discretion of the Independent Trustees then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is reasonable likelihood that each Distribution Plan
will benefit the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Trustees or by the vote of the
holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to
be approved by the vote of Trustees, including a majority of the
Independent Trustees who have no direct or indirect financial interest in
such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Trust 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. ("NASD") imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the contingent deferred sales charge ("CDSC") borne by the Class
B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for
the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In connection with
the Class B shares, the Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B
shares is 6.75% of eligible gross sales. The Distributor retains the right
to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further
payments of the distribution fee with respect to Class B shares, and any
CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD
formula will not be made.

<PAGE> 66

REDEMPTION OF SHARES

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

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

Deferred Sales Charges-Class B Shares

As discussed in the Prospectus under "Purchase of Shares-Deferred
Sales Charges 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
following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one
year of the death or initial determination of disability.

PORTFOLIO TRANSACTIONS

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

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

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

<PAGE> 67

The Fund does not expect to use any particular dealer in the execution
of transactions but, subject to obtaining the best net results, dealers
who provide supplemental investment research (such as information
concerning tax-exempt securities, economic data and market forecasts) to
the Manager may receive orders for transactions by the Fund. Information
so received will be in addition to and not in lieu of the services
required to be performed by the Manager under its Management Agreement and
the expenses of the Manager will not necessarily be reduced as a result of
the receipt of such supplemental information.

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

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

Section 11(a) of the Securities Exchange Act of 1934, as amended,
generally prohibits members of the U.S. national securities exchanges from
executing exchange transactions for their affiliates and institutional
accounts which they manage unless the member (i) has obtained prior
express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with a statement setting forth the
aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To
the extent Section 11(a) would apply to Merrill Lynch acting as a broker
for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have
been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.

DETERMINATION OF NET ASSET VALUE

The net asset value of the Fund is determined by the Manager once
daily, Monday through Friday, as of 4:15 P.M., New York City time, on each
day during which the New York Stock Exchange is open for trading. The New
York Stock Exchange is not open on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value per share is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of shares outstanding at
such time, rounded to the nearest cent. Expenses, including the fees
payable to the Manager and Distributor, are accrued daily. The per share
net asset value of Class B, Class C and Class D shares generally will be
lower than the per share net asset value of the Class A shares, reflecting
the higher 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 B and Class C shares generally will be lower than
the per share net asset value of Class D shares, reflecting the daily
expense accruals

<PAGE> 68

of the distribution fees and higher transfer agency fees applicable with
respect to Class B and Class C shares of the Fund. Even under those
circumstances, the per share net asset value of the four classes will tend
to converge immediately after the payment of dividends, which will differ
by approximately the amount of the expense accrual differential between
the classes.

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

SHAREHOLDER SERVICES

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

Investment Account

Each shareholder whose account is maintained at the Transfer Agent has
an Investment Account and will receive statements, at least quarterly,
from the Transfer Agent showing any reinvestment of dividends and capital
gains distributions activity in the account since the previous statement.
Shareholders also will receive separate confirmations for each purchase or
sale transaction other than reinvestment of dividends and capital gains
distributions. 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 new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder. If the new brokerage firm is
willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares, and then must
turn the certificates over to the new firm for re-registration as
described in the preceding sentence. A shareholder may make additions to
his Investment Account at any time by mailing a check directly to the
Transfer Agent.

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

<PAGE> 69

Automatic Investment Plans

A shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor
as described in the Prospectus) or Class B, Class C or Class D shares at
the applicable public offering price either through the shareholder's
securities dealer, or by mail directly to the Transfer Agent, acting as
agent for such securities dealers. Voluntary accumulation also can be made
through a service known as the Automatic Investment Plan whereby the Fund
is authorized through pre-authorized checks 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. The Fund's Automated Investment
Program is not available to shareholders whose shares are held in
brokerage account with Merrill Lynch. Alternatively, investors who
maintain CMA(Reg) accounts may arrange to have periodic investments made
in the Fund in their CMA(Reg) account or in certain related accounts in
amounts of $100 or more ($1 for retirement accounts) through the CMA(Reg)
Automated Investment Program.

Automatic Reinvestment of Dividends and Capital Gains Distributions

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

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

Systematic Withdrawal Plans-Class A and Class D Shares

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

At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The
shareholder may specify either a dollar amount or a percentage of the
value of his Class A or Class D shares. Redemptions will be made at net
asset value as determined at the normal close of business on the New York
Stock Exchange (currently 4:00 P.M., New York City time) on the 24th day
of each month or the 24th day of the last month of each quarter, whichever
is applicable. If the Exchange is not open for business on such date, the
Class A or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be
mailed, or the direct deposit for the withdrawal payment will be made, on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in
the Fund's Class A or Class D shares, respectively. A shareholder's
Systematic Withdrawal Plan may be

<PAGE> 70

terminated at any time, without charge or penalty, by the shareholder, the
Trust, the Transfer Agent or the Distributor. Withdrawal payments should
not be considered as dividends, yield or income. Each withdrawal is a
taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Trust will
not knowingly accept purchase orders for Class A or Class D shares of the
Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.

A Class A or Class D shareholder whose shares are held within a
CMA(Reg) or CBA(Reg) Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program. The minimum fixed dollar amount redeemable
is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value
on the first Monday of each month, bimonthly systematic redemption will be
made at net asset value on the first Monday of every other month, and
quarterly, semiannual or annual redemptions are made at net asset value on
the first Monday of months selected at the shareholder's option. If the
first Monday of the month is a holiday, the redemption will be processed
at net asset value on the next business day. The Systematic Redemption
Program is not available if Company shares are being purchased within the
account pursuant to the Automatic Investment Program. For more information
on the Systematic Redemption Program, eligible shareholders should contact
their Financial Consultant.

Exchange Privilege

Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select Pricing System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund
in his account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If
the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time
of exchange, the shareholders holds Class A shares of the second fund in
the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D
shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned shares of the Fund is "tacked"
to the holding period of the newly acquired shares of the other Fund as
more fully described below. Class A, Class B, Class C and Class D shares
also will be exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders
of Class A, Class B, Class C and Class D shares. Shares with a net asset
value of at least $100 are required to qualify for the exchange privilege,
and any shares utilized in an exchange must have been held by the
shareholder for 15 days. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.

<PAGE> 71

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

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

Shareholders also may exchange shares of the Fund into shares of a
money market fund advised by the Manager or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to the Class B shares,
towards satisfaction of the conversion period. However, shares of a money
market fund which were acquired as a result of an exchange for Class B or
Class C shares of the Fund may, in turn, be exchanged back into Class B or
Class C shares, respectively, of any fund offering such shares, in which
event the holding period for Class B or Class C shares of the fund will be
aggregated with previous holding periods for purposes of reducing the
CDSC. Thus, for example, an investor may exchange Class B shares of the
Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Class B shares for two and a half years and
three years later decide to redeem the shares of Institutional Fund for
cash. At the time of this redemption, the 2% CDSC that would have been due
had the Class B shares of the Fund been

<PAGE> 72

redeemed for cash rather than exchanged for shares of Institutional Fund
will be payable. If, instead of such redemption the shareholder exchanged
such shares for Class B shares of a fund which the shareholder continued
to hold for an additional two and a half years, any subsequent redemption
will not incur a CDSC.

Set forth below is a description of the investment objectives of the
other funds into which exchanges can be made:

Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ...............High current income consistent with
a policy of limiting the degree of
fluctuation in net asset value of
fund shares resulting from
movements in interest rates
through investment primarily in a
portfolio of adjustable rate
securities, consisting principally
of mortgage-backed and
asset-backed securities.

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

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

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

Merrill Lynch Asset Growth Fund, Inc. High total investment return,
consistent with prudent risk, from
investment in United States and
foreign equity, debt and money
market securities the combination
of which will be varied both with
respect to types of securities and
markets in response to changing
market and economic trends.

Merrill Lynch Asset Income Fund, Inc. A high level of current income
through investment primarily in
United States fixed income
securities.

<PAGE> 73

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

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

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

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

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

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

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

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

<PAGE> 74

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

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

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

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

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

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

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

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

<PAGE> 75

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

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

Merrill Lynch Global Bond Fund for
Investment and Retirement ........ High total investment return from
investment in government and
corporate debt instruments
denominated in various currencies
and multi-national currency units.

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

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

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

Merrill Lynch Global
SmallCap Fund, Inc. .............. Long-term growth of capital by
investing primarily in equity
securities of companies with
relatively small market
capitalizations located in various
foreign countries and in the
United States.

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

<PAGE> 76

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

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

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

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

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

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

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

<PAGE> 77

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

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

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

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

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

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

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

<PAGE> 78

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

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

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

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

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

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

Merrill Lynch Pacific Fund, Inc..... Capital appreciation by investing
in equity securities of
corporations domiciled in Far
Eastern and Western Pacific
countries, including Japan,
Australia, Hong Kong and
Singapore.

<PAGE> 79

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

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

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

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

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

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

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

<PAGE> 80

Merrill Lynch Texas Municipal Bond
Fund ............................. A portfolio of Merrill Lynch
Multi-State Municipal Series
Trust, a series fund, whose
objective is to provide as high a
level of income exempt from
Federal income taxes as is
consistent with prudent investment
management by investing primarily
in a portfolio of long-term,
investment grade obligations
issued by the State of Texas, its
political subdivisions, agencies
and instrumentalities.

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

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

Class A Share Money Market Funds:

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

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

Merrill Lynch U.S.A. Government
Reserves ......................... Preservation of capital, current
income and liquidity available
from investing in direct
obligations of the U.S. Government
and repurchase agreements relating
to such securities.

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

<PAGE> 81

Class B, Class C and Class D Share Money Market Funds:

Merrill Lynch Government Fund....... A portfolio of Merrill Lynch Funds
For Institutions Series, a series
fund, whose objective is to
provide current income consistent
with liquidity and security of
principal from investment in
securities issued or guaranteed by
the U.S. Government, its agencies
and instrumentalities and in
repurchase agreements secured by
such obligations.

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

Merrill Lynch Institutional
Tax-Exempt Fund................... A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to
provide current income exempt from
Federal income taxes, preservation
of capital and liquidity available
from investing in a diversified
portfolio of short-term, high
quality municipal bonds.

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

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

To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the
exchange. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities
dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or
terminated at any time in accordance with the rules of the Commission. The
Fund reserves the right to limit the number of times an investor may
exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to
U.S. shareholders in states where the exchange legally may be made.

<PAGE> 82

DISTRIBUTIONS AND TAXES

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

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

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

The Trust intends to qualify the Fund to pay "exempt-interest
dividends" as defined in Section 852(b)(5) of the Code. Under such
section if, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
exempt from Federal income tax ("tax-exempt obligations") under Section
103(a) of the Code (relating generally to obligations of a state or local
governmental unit), the Fund shall be qualified to pay exempt-interest
dividends to its Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). Exempt-interest dividends are dividends
or any part thereof paid by the Fund which are attributable to interest on
tax-exempt obligations and designated by the Trust as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60
days after the close of the Fund's taxable year. For this purpose, the
Fund will allocate interest from tax-exempt obligations among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission's exemptive order permitting
the issuance and sale of multiple classes of shares) 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. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income
exempt from Federal income tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the
portion, if any, of a person's social security benefits and railroad
retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal or Arkansas income tax purchases to the extent
attributable to exempt-interest dividends. Shareholders are advised to
consult their tax advisers with respect to whether exempt-interest
dividends retain the

<PAGE> 83

exclusion under Code Section 103(a) if a shareholder would be treated as
a "substantial user" or "related person" under Code Section 147(a) with
respect to property financed with the proceeds of an issue of "industrial
development bonds" or "private activity bonds," if any, held by the Fund.

The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from Arkansas Municipal Bonds will also be exempt
from Arkansas income tax. Shareholders subject to income taxation in
states other than Arkansas will realize a lower after-tax rate of return
than Arkansas shareholders since the dividends distributed by the Fund
generally will not be exempt, to any significant degree, from income
taxation by such other states. The Trust will inform shareholders annually
regarding the portion of the Fund's distributions which constitutes
exempt-interest dividends and the portion which is exempt from Arkansas
income taxes. The Trust will allocate exempt-interest dividends among
Class A, Class B, Class C and Class D shareholders for Arkansas income tax
purposes based on a method similar to that described above for Federal
income tax purposes.

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

The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax
applies to interest received on "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds which, although
tax-exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g.,
bonds used for industrial development or housing purposes). Income
received on such bonds is classified as an item of "tax preference,"
which could subject investors in such bonds, including shareholders of the
Fund, to an alternative minimum tax. The Fund will purchase such "private
activity bonds," and the Trust will report to shareholders within 60 days
after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides

<PAGE> 84

that corporations are subject to an alternative minimum tax based, in
part, on certain differences between taxable income as adjusted for other
tax preferences and the corporation's "adjusted current earnings," which
more closely reflect a corporation's economic income. Because an
exempt-interest dividend paid by the Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay
alternative minimum tax on exempt-interest dividends paid by the Fund.

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

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

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

Environmental Tax

The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed
without regard to the alternative tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%)
of alternative minimum taxable

<PAGE> 85

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

Tax Treatment of Options and Futures Transactions

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

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

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

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

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

PERFORMANCE DATA

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

<PAGE> 86

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based
on net investment income and any realized and unrealized capital gains or
losses on portfolio investments over such periods) that would equate the
initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return is computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum
sales charge in the case of Class A and Class D shares and the CDSC that
would be applicable to a complete redemption of the investment at the end
of the specified period in the case of the 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 shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the CDSC
and therefore may reflect greater total return since, due to the reduced
sales charge or the waiver of sales charges, a lower amount of expenses is
deducted.

GENERAL INFORMATION

Description of Shares

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

<PAGE> 87

Information, the shares of the Fund are divided into Class A, Class B,
Class C and Class D shares. Class A, Class B, Class C and Class D shares
represent interests in the same assets of the Fund and are identical in
all respects except that the Class B, Class C and Class D shares bear
certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters
relating to such account maintenance and/or distribution expenditures. The
Trust has received an order ("the Order") from the Commission permitting
the issuance and sale of multiple classes of shares. The Order permits the
Trust to issue additional classes of shares of any Series if the Board of
Trustees deems such issuance to be in the best interest of the Trust.

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

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

The Manager provided the initial capital for the Fund by purchasing
10,000 shares of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $49,600) will be paid by
the Fund and amortized over a period not exceeding five years. The
proceeds realized by the Manager (or any subsequent holder) upon the
redemption of any of the shares initially purchased by it will be reduced
by the proportionate amount of unamortized organizational expenses which
the number of shares redeemed bears to the number of shares initially
purchased. Such organizational expenses include certain of the initial
organizational expenses of the Trust which have been allocated to the Fund
by the Trustees. If additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a manner
deemed equitable by the Trustees.

<PAGE> 88

Computation of Offering Price Per Share

An illustration of the computation of the offering price for Class A
and Class B shares of the Fund based on the value of the Fund's net assets
and number of shares outstanding on September 30, 1994 is calculated as set
forth below. Information is not provided for Class C and Class D shares since
no Class C or Class D shares were publicly offered prior to the date of this
Statement of Additional Information.

<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Net Assets ........................... $2,138,089 $5,546,058
---------- ----------
Number of Shares Outstanding ......... 213,447 553,667
========== ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................ 10.02 10.02
Sales Charge (for Class A shares:
4.00% of offering price (4.17% of
net asset value per share))* ....... .42 **
---------- ----------
Offering Price ....................... $ 10.44 $ 10.02
========== ==========

</TABLE>

----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.

** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares-Deferred Sales Charge Alternatives-Class B and Class C Shares" in
the Prospectus.

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 ratification by the shareholders of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.

Custodian

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

Transfer Agent

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

Legal Counsel

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

<PAGE> 89

Reports to Shareholders

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

Additional Information

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

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

To the knowledge of the Trust, no person or entity owned beneficially
5% or more of the Fund's shares on September 30, 1994.

<PAGE> 90

APPENDIX I

ECONOMIC AND FINANCIAL CONDITIONS IN ARKANSAS

The information set forth below is derived from official statements of
the State of Arkansas and other sources that generally are available to
investors. Such information constitutes only a brief summary of the
complex factors affecting the financial situation in Arkansas and does not
purport to be complete. The Trust has not independently verified this
information.

Economic Information

During the past two decades, Arkansas' (the "State" or "Arkansas")
economic base has shifted from agriculture to light manufacturing. The
State is now moving toward a heavier manufacturing base involving more
sophisticated processes and products such as electrical machinery,
transportation equipment, fabricated metals, and electronics.
Resource-related industries dominate and the largest employers are the
food products, lumber and paper goods industries. The agricultural sector,
though much diminished in importance, remains a significant contributor to
state income. Chief products are broilers, rice and soybeans. The
diversification of economic interests has lessened the State's cyclical
sensitivity to the impact of any single sector.

Despite significant economic changes, Arkansas remains among the
poorest of the States. Arkansas' personal income per capita in 1993 was
$15,994, or 76.96% of the national average. While low, Arkansas' figure
reflects strong gains and relative improvement in recent decades.
Population losses in the 1940's and 1950's resulted from farm
mechanization and the migration of farm laborers. More recent gains are
attributed to employment provided by manufacturing growth and the State's
attraction to retirees. The State's unemployment rate in 1993 equalled or
was below the national average in each month.

General and Revenue Obligations

The Constitution of the State of Arkansas does not limit the amount of
general obligation bonds which may be issued by the State; however, no
such bonds may be issued unless approved by the voters of the State at a
general election or a special election held for that purpose.

There is no constitutional limitation on the aggregate principal
amount of revenue bonds that may be issued by the State and its agencies.
All revenue bonds and notes are secured only by specific revenue streams
and neither the general revenues of the State nor its full faith and
credit are pledged to repayment.

On November 2, 1982, the voters of the State approved the issuance of
general obligation bonds pursuant to the Arkansas Water Resources
Development Act of 1981 (Act 496 of 1981), which authorized the issuance
of general obligation bonds, with the approval of the Governor, in a total
principal amount not to exceed $100,000,000. Act 496 of 1981 further
provides that no more than $15,000,000 of bonds may be issued during any
fiscal biennium unless the General Assembly shall, by law, have authorized
a greater principal amount thereof to be issued during any fiscal
biennium.

On November 8, 1988, the voters of the State approved the issuance of
general obligation bonds pursuant to the Arkansas Waste Disposal and
Pollution Abatement Facilities Financing Act of 1987 (Act 686 of 1987),
which authorized the issuance of General Obligation Bonds, with the
approval of the Governor, in a total principal amount not to exceed
$250,000,000. Act 686 of 1987 provides that no more than $50,000,000 of
bonds may be issued during any fiscal biennium unless the General Assembly
shall, by law, have authorized a greater principal amount to be issued.

<PAGE> 91

On November 6, 1990, the voters of the State approved the issuance of
College Savings General Obligation Bonds pursuant to the Arkansas College
Savings Bond Act of 1989. The Bonds are issued in series not to exceed
$300,000,000 in the aggregate and not to exceed $100,000,000 in any fiscal
biennium.

As of June 30, 1993, the State's outstanding General Obligation Bonds
from the three authorized programs totalled $148,035,000. The State has no
other outstanding general obligation debt. There is no legislation pending
calling for the issuance of any further general obligation of the State.
From 1972 through 1984, the State had no general obligation debt
outstanding.

In addition to the State's General Obligation Bonds, the State had
outstanding at June 30, 1993, $1,785,779,000 in revenue bonds and notes
issued by various state agencies, authorities and institutions of higher
education.

Lease Obligation

Numerous state agencies presently lease equipment and/or occupy leased
office space. These lease commitments are cancelable, without penalty,
upon the failure of the State to appropriate sufficient funds at each
biennial legislative session. Capital lease obligations at June 30, 1993,
aggregated approximately $24,948,000.

Arkansas Development Finance Authority

The Arkansas Development Finance Authority ("Authority") is the
largest issuer of tax exempt debt in the State. The Authority was created
by the Arkansas General Assembly in 1985 as a multipurpose finance
authority. After its creation, it assumed the functions, powers and duties
of the Arkansas Housing Development Agency and that agency was abolished.
In addition to providing financing for residential housing, the Authority
is permitted to issue revenue bonds for the purpose of financing
agricultural business enterprise, capital improvements for State agencies
and local governments, educational facilities, health care facilities,
industrial enterprises and short-term advance funding of local government
obligations. The Authority had $1,397,708,000 principal amount of bonds
outstanding as of June 30, 1993.

Bonds Issued By Political Subdivisions and Other Constitutional
Authorities

Cities, counties, public facilities boards, improvement districts,
utilities commissions, water districts and other constitutional
authorities are authorized to issue general obligation and revenue bonds.
The majority of these bonds are special revenue obligations which are
unrated absent credit enhancement.

Financial Organizations and Management

The following State organizations share responsibility for statewide
financial management: the General Assembly, the Office of Budget and the
Office of Accounting of the Department of Finance and Administration, the
Governor, the Treasurer and the Division of Legislative Audit. The State
is prohibited by its Constitution from deficit spending. Accordingly,
spending is limited to actual revenues received by the State.

The General Assembly has responsibility for legislating the level of
State services and appropriating the funds for operations of State
agencies. The Office of Budget prepares the Executive Budget with the
advice and consent of the Governor. The Office of Budget also monitors the
level and type of State expenditures. The Accounting Division has the
responsibility for maintaining fund and appropriation control and, through
the Pre-Audit Section and in conjunction with the Auditor of State, has
responsibility for the disbursement process.

<PAGE> 92

The Treasurer has responsibilities for disbursement, bank reconciliation,
and investment of State funds (with the advice of the State Board of
Finance). The Division of Legislative Audit has responsibility for
performing financial post-audits of State agencies.

Budget of State Agencies

State agencies submit biennial budget requests to the Office of Budget
of the Department of Finance and Administration. The Office of Budget
prepares the Executive Budget and an estimate of general revenues. The
Executive Budget contains the budget amount recommended by the Governor.

The General Assembly appropriates money after consideration of both
the Executive Budget and the revenue estimate. The appropriation process
begins in the joint House-Senate Budget Committee and then proceeds
through both houses of the General Assembly. Legislative appropriations
are subject to the Governor's approval or veto, including the authority of
line-item veto.

The General Assembly also must enact legislation pursuant to the
Revenue Stabilization Act to provide for an allotment process of funding
appropriations in order to comply with state law prohibiting deficit
spending. The Governor may restrict spending to a level below the level of
appropriations.

Revenue Stabilization Act

Act 750 of 1973, codified at Arkansas Code Annotated Section Section
19-5-101 et seq., establishes the State's revenue stabilization law (the
"Stabilization Act"). The Stabilization Act and related legislation
govern the administration and distribution of State revenues.

Pursuant to the Stabilization Act, all general and special revenues
are deposited into the General Revenue Allotment Account and the Special
Revenue Allotment Account according to the type of revenue being
deposited. From the General Revenue Fund, 3% of all general revenues are
distributed to the Constitutional Officers Fund and the Central Services
Fund to provide support for the State's elected officials (legislators,
constitutional officers, judges), their staffs, and the Department of
Finance and Administration. The balance is then distributed to separate
funds proportionately as established by the Stabilization Act. From the
Special Revenue Fund, 3% of special revenues collected by the Department
of Finance and Administration and 1-11/2% of all special revenues
collected by other agencies are first distributed to provide support for
the State's elected officials, their staffs and the Department of Finance
and Administration. The balance is then distributed to the funds for which
the special revenues were collected as provided by law.

Special revenues, which are primarily user taxes, are generally
earmarked for the program or agency providing the related service.

General revenues are transferred into funds established and maintained
by the Treasurer for major programs and agencies of the State in
accordance with funding priorities established by the General Assembly.

Pursuant to the Stabilization Act, the General Assembly establishes
three levels of priority for general revenue spending, levels "A,"
"B," and "C." Successive levels of appropriations are funded only in
the event sufficient revenues have been generated to fully fund any prior
level. Accordingly, appropriations made to programs and agencies are only
maximum authorizations to spend. Actual expenditures are limited to the
lesser of (i) special revenues earmarked for a program or agencies' fund
maintained by the Treasurer or (ii) the maximum appropriation by the
General Assembly.

<PAGE> 93

Since State revenues are not collected throughout the year in a
pattern consistent with program and agency expenditures, the Budget
Stabilization Trust Fund, which receives one-half of the interest earnings
from State fund investments, has been established and is utilized to
assure proper cash flow during any period. Other interest earnings are
pledged to special revenue obligations or used to supplement the State's
capital construction program.

Auditing Procedures

The accounts of the State are subject to post-audit by the Division of
Legislative Audit. Audits are performed as a series of audits which
include agencies and funds. Copies of audit reports are made available for
each fiscal year and may be obtained from the Division of Legislative
Audit, State Capitol Mall, Little Rock, Arkansas 72201.

Revenue Structure of the State

The Department of Finance and Administration prepares a Comprehensive
Annual Financial Report after the close of each fiscal year. The Report is
not independently audited and is compiled by the Department of Finance and
Administration from information provided by the various State agencies.
The State maintains its accounting records for budgeted governmental
operations on a cash basis. A separate accounting system is maintained to
convert the cash basis accounting to the modified accrual or accrual
basis, as applicable; and the Comprehensive Annual Financial Report is
based on the modified accrual/accrual system of accounting. The State is
in the process of a multi-year conversion to GAAP accounting, and
financial reporting is becoming more comprehensive.

Bond Ratings

Currently, Arkansas' general obligation bonds are rated Aa by Moody's
and A+ by Standard & Poor's. The Arkansas Development Finance Authority's
$65,000,000 principal amount of Guaranty Revenue Bonds are rated A|m- with a
stable outlook by Standard & Poor's. The rating of the Guaranty Revenue
Bonds was lowered to A|m- from A+ on June 24, 1994. The rating change
reflects a substantial drop in treasury earnings on state fund balances
since the program was originally rated in 1987. Treasury earnings are a
backup source of bond repayment in the event that the Guaranty Revenue
Fund (currently $14 million) is ever exhausted. Standard & Poor's found,
however, that the loan program financed by the Guaranty Bond Program
exhibited strict lending criteria, good portfolio performance, strong
program loan oversight and rapid debt amortization by 2009. The City of
Little Rock's General Obligation Bonds are currently rated Aa by Moody's
and AA+ by Standard & Poor's. In the absence of credit enhancement from
bond insurance, letter of credit or other credit facilities, the bonds of
state agencies, colleges and universities, other local political
subdivisions and other boards and commissions are generally unrated.

<PAGE> 94

APPENDIX II

RATINGS OF MUNICIPAL BONDS

Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal
Bond Ratings

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

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

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

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

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

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

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

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

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

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

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

<PAGE> 95

Description of Moody's Corporate Bond Ratings

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

Description of Moody's Commercial Paper Ratings

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

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

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

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

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

Description of Standard & Poor's Corporation's ("Standard & Poor's")
Municipal Debt Ratings

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

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

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

<PAGE> 96

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

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

II. Nature of and provisions of the obligations;

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

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

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

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

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

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

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

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

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

Description of Standard & Poor's Corporate Bond Ratings

A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to specific obligation.
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. Debt
rated "AA" has a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse

<PAGE> 97

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

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

Description of Standard & Poor's Commercial Paper Ratings

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

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

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

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

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

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

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

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

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

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

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

<PAGE> 98

Note rating sysmbols are as follows:

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

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

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

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

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

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

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

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

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

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

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

Description of Fitch Investors Service, Inc.'s ("Fitch") Investment
Grade Bond Ratings

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

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

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

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

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

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

<PAGE> 99

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

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

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

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

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

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

Improving
Stable
Declining
Uncertain

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

NR indicates that Fitch does not rate the
specific issue.

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

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

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

<PAGE> 100

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

Description of Fitch Speculative Grade Bond Ratings

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

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

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

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

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

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

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

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

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

Description of Fitch Investment Grade Short-Term Ratings

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

<PAGE> 101

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

Fitch short-term ratings are as follows:

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

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

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

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

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

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

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

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

<PAGE> 102

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities of
Merrill Lynch Arkansas Municipal Bond Fund of Merrill Lynch Multi-State
Municipal Series Trust as of July 28, 1994. This financial statement is
the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement based on our audit.

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

In our opinion, such statement of assets and liabilities presents fairly,
in all material respects, the financial position of Merrill Lynch Arkansas
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as
of July 28, 1994, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
Princeton, New Jersey
August 1, 1994

<PAGE> 103

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

STATEMENT OF ASSETS AND LIABILITIES

JULY 28, 1994

Assets:

Cash in bank.......................................... $100,000
Prepaid registration fees (Note 3).................... 19,700
Deferred organization expenses (Note 4)............... 49,600
--------
Total Assets............................................ 169,300
Liabilities - Accrued expenses.......................... 69,300
--------
Net Assets (equivalent to $10.00 per share on 5,000
Class A Shares of beneficial interest (par value
$0.10) and 5,000 of Class B Shares of beneficial
interest (par value $0.10) outstanding with an
unlimited number of shares authorized) (Note 1) ...... $100,000
========

----------
Notes to Statement of Assets and Liabilities:

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

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

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

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

<PAGE> 104

The following financial statements for the Fund for the period ended
September 30, 1994 are unaudited.

These unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are of a
normal recurring nature.

SCHEDULE OF INVESTMENTS (unaudited)
(In Thousands)

<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
------- ------- ----- ----- ---------
<S> <C> <C> <C> <C>
Arkansas-70.6%
AAA NR $1,500 Arkansas State Development Finance Authority, S/F Mortgage
Revenue Bonds, Series A, AMT, 7.30% due 3/01/2013 $1,532
NR VMIG1 300 Arkansas State Student Loan Authority Revenue Bonds, VRDN,
AMT, Series B-4, 3.75% due 6/01/2010(a) 300
AA- A1 350 Blytheville, Arkansas, Solid Waste Recycling and Sewer
Treatment Revenue Bonds (Nucor Corporation Project), AMT,
6.375% due 1/01/2023 344
NR P1 350 Crosset, Arkansas Revenue Bonds, (Georgia-Pacific),
3.40% due 10/01/2007 350
NR NR 350 Hot Springs, Arkansas, Water Revenue Refunding Bonds, 5.60%
due 3/01/2008 335
AAA Aaa 375 Little Rock, Arkansas, Municipal Airport Revenue Refunding Bonds,
6.00% due 11/01/2014 366
AAA Aaa 1,500 North Little Rock, Arkansas, Electric Revenue Refunding Bonds,
Series A, 6.50% due 7/01/2015 1,547
AAA Aaa 350 Fort Smith, Arkansas, Water and Sewer Revenue Refunding Bonds,
6.00% due 10/01/2012 344
AAA Aaa 350 Pulaski County, Arkansas, Special School District, Revenue
Refunding Bonds, 5.25% due 2/01/2019 304

Puerto Rico-12.9%
A Baa1 325 Puerto Rico Commonwealth GO, UT, 6.50% due 7/01/2023 326
A Baa1 320 Puerto Rico, Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, Series T, 6.625% due 7/01/2018 324
BBB- NR 425 Puerto Rico, Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority, Higher
Education Revenue Bonds (PolyTechnic University of Puerto Rico
Project), Series A, 5.50% due 8/01/2024 347
------
Total Investments (Cost $6,406*) - 83.5% 6,419
Other Assets Less Liabilities - 16.5% 1,265
------

Net Assets- 100.0% $7,684
======

</TABLE>

----------
(a) The interest rate is subject to change periodically based on certain
indexes. The interest rate shown is the rate in effect at September
30, 1994.

* Cost for Federal Income tax purposes.

See Notes to Financial Statements.

Portfolio Abbreviations for ML Arkansas Municipal Bond Fund

AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes

<PAGE> 105

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND

FINANCIAL INFORMATION

September 30, 1994

Statement of Assets and Liabilities as of September 30, 1994 (unaudited)

Assets:
Investments, at value (identified cost
$6,405,783) (Note 1a)............... $ 6,418,790
Cash.................................. 100,000
Receivables:
Beneficial interest sold............ $7,571,140
Interest............................ 71,873
Investment adviser (Note 2)......... 1,257 7,644,270
----------
Deferred organization expenses (Note
1e)................................. 49,600
Total assets.......................... 14,212,660
-----------

Liabilities:
Payables:
Securities purchased................ 6,474,749
Dividends to shareholders (Note 1f). 2,679
Distributor (Note 2)................ 228 6,477,656
----------
Accrued expenses and other liabilities 50,857
-----------
Total liabilities..................... 6,528,513
-----------

Net Assets:
Net assets............................ $ 7,684,147

Net Assets Consist of:
Class A Shares of beneficial interest,
$.10 par value, unlimited number of
shares authorized................... $ 21,345
Class B Shares of beneficial interest,
$.10 par value, unlimited number of
shares authorized................... 55,367
Paid-in capital in excess of par...... 7,594,428
Unrealized depreciation on investments
- net............................... 13,007
-----------
Net assets............................ $ 7,684,147
===========

Net Asset Value:
Class A - Based on net assets of
$2,138,089 and 213,447 shares of
beneficial interest outstanding..... $ 10.02
===========
Class B - Based on net assets of
$5,546,058 and 553,667 shares of
beneficial interest outstanding..... $ 10.02
===========

See Notes to Financial Statements.

<PAGE> 106

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND

NOTES TO FINANCIAL STATEMENTS (unaudited)
as of September 30, 1994

1. Significant Accounting Policies:

Merrill Lynch Arkansas Municipal Bond Fund (the "Fund") is part of the
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end investment management company. Prior to commencement of operations
on September 30, 1994 the Fund had no operations other than those relating to
organizational matters and the issue of 10,000 shares of beneficial interest
of the Fund to Fund Asset Management, L.P. ("FAM") for $100,000. The Fund
offers both Class A and Class B Shares. Class A shares are sold with a
front-end sales charge. Class B Shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions,
except that Class B Shares bear certain expenses related to the distribution
of such shares and have exclusive voting rights with respect to matters
relating to such distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.

(a) Valuation of investments - Municipal bonds and other portfolio
securities are traded primarily in the over-the-counter municipal bond and
money markets and are valued at the last available bid price or yield
equivalents as obtained by the Fund's pricing service from one or more
dealers that make markets in such securities. Financial futures contracts
which are traded on exchanges are valued at their last sale price as of
the close of such exchanges. Options which are traded on exchanges are
valued at their last sale price as of the close of such exchanges or,
lacking any sales, at the last available bid price. Short-term
investments with a remaining maturity of sixty days or less are valued
on an amortized cost basis, which approximates market value. Securities
and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the
direction of the Board of Trustees of the Trust.

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

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

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

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

<PAGE> 107

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND

NOTES TO FINANCIAL STATEMENTS (unaudited)-(Continued)
as of September 30, 1994

1. Significant Accounting Policies (continued):

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

(g) Non-income producing investments - Written and purchased options
are non-income producing investments.

2. Investment Advisory Agreement and Transactions with Affiliates:

The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management L.P. ("FAM"). Ultimate control of FAM is vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of ML & Co. The
limited partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"), which
is also an indirect wholly-owned subsidiary of ML & Co.

FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the
Fund pays a monthly fee based upon the average daily value of the Fund's
net assets at the following annual rates: 0.55% of the Fund's average
daily net assets not exceeding $500 million; 0.525% of average daily net
assets in excess of $500 million but not exceeding $1 billion; and 0.50%
of average daily net assets in excess of $1 billion.

Pursuant to a distribution plan (the "Distribution Plan") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940,
the Fund pays Merrill Lynch Funds Distributor, Inc. ("MLFD" or the
"Distributor") an ongoing account maintenance and a distribution fee, which
are accrued daily and paid monthly, at the annual rates of 0.25% and 0.25%,
respectively, of the average daily net assets of the Class B Shares of the
Fund. Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner, and 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 Shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution services and bearing certain
distribution-related expenses of the Fund.

For the period ended September 30, 1994, MLFD earned underwriting
discounts of $529, and MLPF&S earned dealer concessions of $68,249 on sales
of the Fund's Class A Shares of beneficial interest.

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

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

Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, FAMI, PSI, MLFD, FDS, MLPF&S, and/or ML & Co.

<PAGE> 108

MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND

NOTES TO FINANCIAL STATEMENTS (unaudited)-(Continued)
as of September 30, 1994
3. Investments:

Purchases, excluding short-term securities, for the period ended
September 30, 1994, were $5,755,783.

Net unrealized gains as of September 30, 1994 were as follows:

Unrealized
Gains
-------
Long-term investments. $13,007
-------
Total............... $13,007
=======

As of September 30, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $13,007, of which $13,247 related to
appreciated securities and $240 related to depreciated securities.The
aggregate cost of investments at September 30, 1994 for Federal income tax
purposes was $6,405,783.

4. Beneficial Interest Transactions:

Net increase in net assets derived from beneficial interest
transactions was $7,571,140 for the period ended September 30, 1994.

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

Class A Shares for the Period Dollar
Ended September 30, 1994+ Shares Amount
----------------------------- ------ ------
Shares sold....................... 208,447 $2,084,470
------- ----------
Net increase...................... 208,447 $2,084,470
======= ==========
----------
+ Prior to September 30, 1994 (commencement of operations), the Fund
issued 5,000 shares to FAM for $50,000.

Class B Shares for the Period Dollar
Ended September 30, 1994+ Shares Amount
----------------------------- ------ -------
Shares sold....................... 548,667 $5,486,670
------- ----------
Net increase...................... 548,667 $5,486,670
======= ==========
----------
+ Prior to September 30, 1994 (commencement of operations), the Fund
issued 5,000 shares to FAM for $50,000.

5. General:

As of September 30, 1994, the Fund had only one day of investment
operations and had not yet declared dividends (whereas it will ordinarily
do so on a monthly basis). As a result, the Fund believes that more
extensive interim financial statements would not be indicative of the
Fund's current and ongoing operations. The Fund believes that such
financial statements may be misleading to potential investors and,
accordingly, believes that inclusion of such financial statements would be
inappropriate.

<PAGE> 109

TABLE OF CONTENTS

LOGO
Page
----
Investment Objective and Policies........... 2 Merrill Lynch Arkansas
Description of Municipal Bonds and Temporary Municipal Bond Fund
Investments............................... 5 Merrill Lynch Multi-State
Description of Municipal Bonds.......... 5 Municipal Series Trust
Description of Temporary Investments.... 6
Repurchase Agreements .................. 8
Financial Futures Transactions and
Options............................... 8
Investment Restrictions..................... 13
Management of the Trust..................... 15
Trustees and Officers................... 15
Management and Advisory Arrangements.... 17
Purchase of Shares.......................... 18
Initial Sales Charge Alternatives-Class
A and Class D Shares.................. 19 (Art to come)
Reduced Initial Sales Charges........... 20
Distribution Plans...................... 22
Limitation on the Payment of Deferred
Sales Charges......................... 22
Redemption of Shares........................ 23
Deferred Sales Charges-Class B Shares... 23
Portfolio Transactions...................... 23
Determination of Net Asset Value............ 24
Shareholder Services........................ 25
Investment Account...................... 25
Automatic Investment Plan............... 26
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 26 STATEMENT OF
Systematic Withdrawal Plans-Class A and ADDITIONAL
Class D Shares........................ 26 INFORMATION
Exchange Privilege...................... 27
Distributions and Taxes..................... 39 OCTOBER 21, 1994
Environmental Tax....................... 41
Tax Treatment of Options and Futures DISTRIBUTOR:
Transactions.......................... 42 MERRILL LYNCH
Performance Data............................ 42 FUNDS DISTRIBUTOR, INC.
General Information......................... 43
Description of Shares................... 43
Computation of Offering Price Per Share. 45
Independent Auditors.................... 45
Custodian............................... 45
Transfer Agent.......................... 45
Legal Counsel........................... 45
Reports to Shareholders................. 46
Additional Information.................. 46
Appendix I-Economic and Financial Conditions
In Arkansas............................... 47
Appendix II-Ratings of Municipal Bonds...... 51
Independent Auditors' Report................ 59
Statement of Assets and Liabilities
(audited)................................. 60
Financial Statements (unaudited)............ 61
Code #18320-1094
======================================================== ====================================================
</TABLE>

<PAGE> 110

PART C. OTHER INFORMATION

Item 24. Financial Statements and Exhibits.

(a) Financial Statements

Contained in Part B:

Statement of Assets and Liabilities as of July 28, 1994 (unaudited).
Schedule of Investments as of September 30, 1994 (unaudited).
Statement of Assets and Liabilities as of Sepotember 30, 1994
(unaudited).
Statement of Operations for the period ended September 30, 1994
(unaudited).

(b) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
1(a) -Declaration of Trust of the Registrant, dated August 2,
1985. (a)
(b) -Amendment to Declaration of Trust, dated October 3, 1988.
(b)
(c) -Instrument establishing Merrill Lynch Arkansas Municipal
Bond Fund (the "Fund") as a series of Registrant. (e)
(d) -Instrument establishing Class A and Class B shares of
beneficial interest of the Fund. (e)
2 -By-Laws of Registrant. (a)
3 -None.
4(a) -Portions of the Declaration of Trust, Establishment and
Designation and By-Laws of the Registrant defining the
rights of holders of the Fund as a series of the
Registrant. (c)
(b) -Specimen share certificates for Class A and Class B
shares. (e)
5 -Management Agreement between Registrant and Fund Asset
Management, L.P. (e)
6(a)(1) -Class A Shares Distribution Agreement between Registrant
and Merrill Lynch Funds
Distributor, Inc. (e)
(a)(2) -Form of Revised Class A Shares Distribution Agreement
between Registrant and Merrill Lynch Funds Distributor,
Inc.
(b) -Class B Shares Distribution Agreement between Registrant
and Merrill Lynch Funds
Distributor, Inc. (e)
(c) -Form of Class C Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(d) -Form of Class D Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
7 -None.
8 -Form of Custody Agreement between Registrant and State Street
Bank and Trust Company.(d)
9 -Form of Letter Amendment to the Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services,
Inc. (e)
10 -Opinion of Brown & Wood, counsel for the Registrant. (e)

</TABLE>

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<PAGE> 111

<S> <C>
11 -Consent of Deloitte & Touche LLP, independent auditors
for the Registrant.
12 -None.
13 -Certificate of Fund Asset Management, L.P. (e)
14 -None.
15(a) -Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant. (e)
(b) -Form of Class C Shares Distribution Plan and Class C
Shares Distribution Plan Sub-Agreement of the Registrant.
(c) -Form of Class D Shares Distribution Plan and Class D
Shares Distribution Plan Sub-Agreement of the Registrant.
16 -None.
17(a) -Financial Data Schedule for Class A Shares.
(b) -Financial Data Schedule for Class B Shares.
</TABLE>

----------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on
Form N-1A (File No. 2-99473) under the Securities Act of 1933 of
Merrill Lynch New York Municipal Bond Fund, a series of the
Registrant.

(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment
No. 4 to the Registration Statement on Form N-1A (File No. 2-99473)
under the Securities Act of 1933 of Merrill Lynch New York Municipal
Bond Fund, a series of the Registrant.

(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII,
IX, X and XI of the Registrant's Declaration of Trust, previously
filed as Exhibit 1(a) to the Registration Statement referred to in
paragraph (a) above; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the
Fund, which will be filed as Exhibits 1(c) and 1(d), respectively, to
the Registration Statement; and to Articles I, V and VI of the
Registrant's By-Laws, previously filed as Exhibit 2 to the
Registration Statement referred to in paragraph (a) above.

(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment
No. 3 to Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933 relating to shares of the Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant
(File No. 33-44734).

(e) Filed on August 2, 1994 as an Exhibit to the Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 33-54341)
under the Securities Act of 1933 of Merrill Lynch Arkansas Municipal
Bond Fund.

Item 25. Persons Controlled by or under Common Control with Registrant.

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

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<PAGE> 112
Item 26. Number of Holders of Securities.

<TABLE>
<CAPTION>
Number of
Record Holders at
Title of Class September 30, 1994
-------------- ------------------
<S> <C>
Class A shares of beneficial interest par value
$0.10 per share................................... 1
Class B shares of beneficial interest par value
$0.10 per share .................................. 1
Class C shares of beneficial interest par value
$0.10 per share .................................. 0
Class D shares of beneficial interest par value
$0.10 per share .................................. 0
</TABLE>

Item 27. Indemnification.

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

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

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

C-3

<PAGE> 113

an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the
recipient of the advance ultimately will be found entitled to
indemnification.

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

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

Item 28. Business and Other Connections of Investment Adviser.

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

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<PAGE> 114

Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For
Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Institutional
Intermediate Fund, Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc.
and Merrill Lynch Variable Series Funds, Inc. The address of each of
these investment companies 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, MLAM, Merrill Lynch Funds Distributor, Inc. ("MLFD"),
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, 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 Financial Data Services,
Inc. is 4800 Deerlake 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 January 1, 1992 for his or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is
President and Director, Mr. Richard is Treasurer and Mr. Glenn is
Executive Vice President of substantially all of the investment companies
described in the preceding paragraph and Messrs. Durnin, Giordano, Harvey,
Hewitt, Kirstein, Monagle and Ms. Griffin are directors or officers of one
or more of such companies.

Officers and Partners of FAM are set forth as follows:

<TABLE>
<CAPTION>
Other Substantial
Position(s) with Business, Profession,
Name the Manager Vocation or Employment
----- ----------------- -----------------------
<S> <C> <C>
ML & Co....................... Limited Partner Financial Services Holding Company
Fund Asset Management,
Inc. ....................... Limited Partner Investment Advisory Services
Princeton Services ........... General Partner General Partner of MLAM
Arthur Zeikel................. President President of MLAM; President and Director of
Princeton Services; Director of MLFD; Executive
Vice President of ML & Co.; Executive Vice
President of Merrill Lynch
</TABLE>

C-5

<PAGE> 115

<TABLE>
<CAPTION>
Other Substantial
Position(s) with Business, Profession,
Name the Manager Vocation or Employment
---- ----------------- ----------------------
<S> <C> <C>
Terry K. Glenn................ Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President and Director of MLFD; Director of
Financial Data Services, Inc.; President of
Princeton Administrators, L.P.
Bernard J. Durnin............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of MLAM
Norman R. Harvey.............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
N. John Hewitt................ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President, General
Secretary Counsel and Director of Princeton Services;
Director of MLFD
Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller of MLAM;
Controller Senior Vice President and Controller of Princeton
Services
Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer of MLAM;
Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of MLFD
Richard L. Rufener............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice President of
MLFD
Ronald L. Welburn............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Anthony Wiseman............... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

Item 29. Principal Underwriters.

(a) MLFD acts as the principal underwriter for the Registrant and, for
each of the open-end investment companies referred to in the first
paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible
Holdings, Inc., The Corporate Fund Accumulation Program,

C-6

<PAGE> 116

Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New
York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured
Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High
Income Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.

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

<TABLE>
<CAPTION>
Position(s) and Offices Position(s) and Offices
Name with MLFD with Registrant
---- ----------------------- ------------------------
<S> <C> <C>
Terry K. Glenn................ President and Director Executive Vice President
Arthur Zeikel................. Director President and Trustee
Philip L. Kirstein............ Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Kevin P. Bowman............... Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Sharon Creveling.............. Vice President and Assistant Treasurer None
Mark A. DeSario............... Vice President None
James T. Fatseas.............. Vice President None
Stanley Graczyk............... Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Richard L. Rufener............ Vice President None
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary None
</TABLE>

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<PAGE> 117

Item 30. Location of Accounts and Records.

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended and the
Rules thereunder are maintained at the offices of the Registrant and
Financial Data Services, Inc.

Item 31. Management Services.

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

Item 32. Undertakings.

(a) Not Applicable.

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

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

C-8

<PAGE> 118

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 Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey, on the 18th day of
October, 1994.

MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST
(Registrant)

/s/ ARTHUR ZEIKEL
By: -------------------------------
(Arthur Zeikel, President)

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities indicated and on the dates indicated.

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Trustee October 18, 1994
-------------------------------------- (Principal Executive Officer)
(Arthur Zeikel)

/s/ GERALD M. RICHARD Treasurer (Principal October 18, 1994
-------------------------------------- Financial and Accounting Officer)
(Gerald M. Richard)

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

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

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

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

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

/s/ ARTHUR ZEIKEL*
By: ---------------------------------- October 18, 1994
(Arthur Zeikel, Attorney-in-Fact)

</TABLE>

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<PAGE> 119

APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

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

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

<PAGE> 120

EXHIBIT INDEX

Exhibit
Number Description Page
------- ------------ -----
6(a)(2) -Form of Revised Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(c) -Form of Class C Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(d) -Form of Class D Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
11 -Consent of Deloitte & Touche LLP, independent auditors
for the Registrant.
15(b) -Form of Class C Shares Distribution Plan and Class C
Shares Distribution Plan Sub-Agreement of the
Registrant.
(c) -Form of Class D Shares Distribution Plan and Class D
Shares Distribution Plan Sub-Agreement of the
Registrant.
17(a) -Financial Data Schedule for Class A Shares.
(b) -Financial Data Schedule for Class B Shares.

CLASS A SHARES

DISTRIBUTION AGREEMENT

AGREEMENT made as of the ____ day of October, 1994, between MERRILL LYNCH
MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").

W I T N E S S E T H :

WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Trust to offer its shares for
sale continuously; and

WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and

WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and

WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and

<PAGE>

WHEREAS, the Trust and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Class A shares of
beneficial interest in the Fund.

NOW, THEREFORE, the parties agree as follows:

Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and distributor of
the Trust to sell Class A shares of beneficial interest in the Fund (sometimes
herein referred to as "Class A shares") to eligible investors (as defined below)
and hereby agrees during the term of this Agreement to sell Class A shares of
the Fund to the Distributor upon the terms and conditions herein set forth.

Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Trust to act as
principal underwriter and distributor, except that:

(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class A shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.

<PAGE>

(b) The exclusive right granted to the Distributor to purchase Class A
shares from the Trust shall not apply to Class A shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class A shares of any
such company by the Trust.

(c) Such exclusive right also shall not apply to Class A shares issued
pursuant to reinvestment of dividends or capital gains distributions.

(d) Such exclusive right also shall not apply to Class A shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class A shares as shall be agreed between
the Trust and the Distributor from time to time.

Section 3. Purchase of Class A shares from the Trust.

(a) The Distributor shall have the right to buy from the
Trust the Class A shares needed, but not more than the Class A shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class A shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class A shares shall be those
persons so identified in the currently effective prospectus and statement of
additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"),

<PAGE>

relating to such Class A shares ("eligible investors"). The price which the
Distributor shall pay for the Class A shares so purchased from the Trust shall
be the net asset value, determined as set forth in Section 3(d) hereof, used in
determining the public offering price on which such orders were based.

(b) The Class A shares are to be resold by the Distributor to eligible
investors at the public offering price, as set forth in Section 3(c) hereof, or
to securities dealers having agreements with the Distributor upon the terms and
conditions set forth in Section 7 hereof.

(c) The public offering price(s) of the Class A shares, i.e., the price
per share at which the Distributor or selected dealers may sell Class A shares
to eligible investors, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class A shares, plus a sales charge not to exceed 4.00% of the
public offering price (4.17% of the net amount invested), subject to reductions
for volume purchases. Class A shares may be sold to certain Trustees, officers
and employees of the Trust, directors and employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and to certain other persons described in the prospectus
and statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the

<PAGE>

public offering price does not equal an even cent, the public offering price may
be adjusted to the nearest cent. All payments to the Trust hereunder shall be
made in the manner set forth in Section 3(f).

(d) The net asset value of Class A shares shall be determined by the Trust
or any agent of the Trust in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Trustees.

(e) The Trust shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend the
sale of its Class A shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Trust, makes it impracticable or inadvisable to sell the
Class A shares.

(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares from eligible
investors. The Trust (or its agent) will confirm orders upon their receipt, will
make appropriate book entries and, upon

<PAGE>

receipt by the Trust (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Class A shares pursuant to the instructions of
the Distributor. Payment shall be made to the Trust in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Trust (or its agent).

Section 4. Repurchase or Redemption of Class A shares by the Trust.

(a) Any of the outstanding Class A shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class A shares so
tendered in accordance with its obligations as set forth in Article VIII of its
Declaration of Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement of additional
information. The price to be paid to redeem or repurchase the Class A shares
shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Trust
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Trust of any of the Class A shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class A
shares are tendered for redemption or repur-

<PAGE>

chase within seven business days after the date of the confirmation of the
original purchase, the right to the sales charge shall be forfeited by the
Distributor and the selected dealer which sold such Class A shares.

The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor in New York
Clearing House funds on or before the seventh business day subsequent to its
having received the notice of redemption in proper form. The proceeds of any
redemption of shares shall be paid by the Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.

(b) Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other period
when the Securities and Exchange Commission, by order, so permits.

Section 5. Duties of the Trust.

(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the

<PAGE>

Distributor may reasonably request for use in connection with the distribution
of Class A shares of the Fund, and this shall include, upon request by the
Distributor, one certified copy of all financial statements prepared for the
Trust by independent public accountants. The Trust shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information relating to the Fund as the Distributor shall reasonably request.

(b) The Trust shall take, from time to time, but subject to any necessary
approval of the Class A shareholders, all necessary action to fix the number of
authorized Class A shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class A shares as the Distributor may reasonably be expected to
sell.

(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A shares for sale under the
securities laws of such states as the Distributor and the Trust may approve. Any
such qualification may be withheld, terminated or withdrawn by the Trust at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Trust. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Trust in connection with such
qualification.

<PAGE>

(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.

Section 6. Duties of the Distributor.

(a) The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.

(b) In selling the Class A shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Trust.

(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to eligible investors and
selected dealers, the collection of amounts payable by eligible investors and
selected dealers on

<PAGE>

such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.

Section 7. Selected Dealers Agreements.

(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice ("selected
dealers") for the sale of Class A shares and fix therein the portion of the
sales charge which may be allocated to the selected dealers; provided that the
Trust shall approve the forms of agreements with dealers and the dealer
compensation set forth therein. Class A shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s) set forth in the
prospectus and statement of additional information. The form of agreement with
selected dealers to be used during the continuous offering of the Class A shares
is attached hereto as Exhibit A.

(b) Within the United States, the Distributor shall offer and sell Class A
shares only to such selected dealers as are members in good standing of the
NASD.

Section 8. Payment of Expenses.

<PAGE>

Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class A
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).

(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class A shares to selected dealers or eligible investors
pursuant to this Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Class A shares for sale to eligible investors and any
expenses of advertising incurred by the Distributor in connection with such
offering.

(c) The Trust shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the

<PAGE>

Trust and the Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5(c)
hereof.

Section 9. Indemnification.

(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class A shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information relating
to the Fund, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Trust in favor of the Distributor and any such controlling persons to be deemed
to protect such Distributor or any such controlling persons thereof against any

<PAGE>

liability to the Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Trust of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Trust elects to assume the defense of any such suit
and retain

<PAGE>

such counsel, the Distributor or such controlling person or persons, defendant
or defendants in the suit shall bear the fees and expenses of any additional
counsel retained by them, but in case the Trust does not elect to assume the
defense of any such suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the reasonable fees
and expenses of any counsel retained by them. The Trust shall promptly notify
the Distributor of the commencement of any litigation or proceedings against it
or any of its officers or Trustees in connection with the issuance or sale of
any of the Class A shares.

(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Trust in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to Class A shareholders. In case any action shall be brought
against the Trust or any person so indemnified, in respect of which indemnity
may be sought against the Distributor, the Distributor shall have the rights and
duties given to the Trust, and the Trust and each person so indemnified

<PAGE>

shall have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.

Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection with
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.

Section 11. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class A voting securities of the Fund
and (ii) by the vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.

This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class A
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other

<PAGE>

party. This Agreement shall automatically terminate in the event
of its assignment.

The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.

Section 12. Amendments of this Agreement. This Agreement may be amended by
the parties only if such amendment is specifically approved by (i) the Trustees
or by the vote of a majority of outstanding Class A voting securities of the
Fund and (ii) by the vote of a majority of those Trustees of the Trust who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.

Section 13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.

Section 14. This Agreement supersedes the prior Distribution Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.

Section 15. Personal Liability. The Declaration of Trust
establishing Merrill Lynch Multi-State Municipal Series Trust,

<PAGE>

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

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST

By_____________________________________
Title:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By_____________________________________
Title:

<PAGE>

EXHIBIT A

MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

CLASS A SHARES OF BENEFICIAL INTEREST

SELECTED DEALERS AGREEMENT
--------------------------

Gentlemen:

Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class A shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class A shares"), of the Trust relating to Merrill Lynch [State]
Municipal Bond Fund (the "Fund"), and as such has the right to distribute Class
A shares of the Fund for resale. The Trust is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and the Fund's
Class A shares are registered under the Securities Act of 1933, as amended. You
have received a copy of the Class A shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and reference is made
herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used herein refer to the
prospectus and statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class A shares of the Fund for resale to investors identified in the Prospectus
and Statement of Additional Information as eligible to purchase Class A shares
("eligible investors") upon the following terms and conditions:

1. In all sales of these Class A shares to eligible investors, you shall
act as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Trust, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Trust, to participants in such program.

<PAGE>

2. Orders received from you will be accepted through us only at the public
offering price applicable to each order, as set forth in the current Prospectus
and Statement of Additional Information of the Fund. The procedure relating to
the handling of orders shall be subject to Section 5 hereof and instructions
which we or the Trust shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Trust in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.

3. The sales charges for sales to eligible investors, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:

Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested Offering Price
- ------------------ -------------- -------- --------------
Less than
$25,000 .................. 4.00% 4.17% 3.75%
$25,000 but less
than $50,000 ............ 3.75% 3.90% 3.50%
$50,000 but less
than $100,000 ........... 3.25% 3.36% 3.00%
$100,000 but less
than $250,000 ........... 2.50% 2.56% 2.25%
$250,000 but less
than $1,000,000 ......... 1.50% 1.52% 1.25%

$1,000,000 and over** .... 0.00% 0.00% 0.00%

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

* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as
set forth in the current Prospectus and Statement of Additional Information
of the Fund. Such purchase may be subject to a contingent deferred sales

A-2

<PAGE>

charge as set forth in the current Prospectus and Statement of Additional
Information.

The term "purchase" refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class A 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 of 1940, as
amended, 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 Class A shares of the Fund or Class A 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.

The reduced sales charges are applicable through a right of accumulation
under which certain eligible investors are permitted to purchase Class A shares
of the Fund at the offering price applicable to the total of (a) the public
offering price of the shares then being purchased plus (b) an amount equal to
the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of Class A, Class B, Class C and Class D shares of
the Fund and of any other investment company with an initial sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation.

The reduced sales charges are applicable to purchases aggregating $25,000
or more of Class A shares or of Class D shares of any other investment company
with an initial sales charge for which the Distributor acts as the distributor
made through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the

A-3

<PAGE>

intended amount of shares is not purchased within the thirteen-month period, an
appropriate price adjustment will be made pursuant to the terms of the Letter of
Intention.

You agree to advise us promptly at our request as to amounts of any sales
made by you to eligible investors qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.

4. You shall not place orders for any of the Class A shares unless you
have already received purchase orders for such Class A shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class A shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class A shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class A shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Trust.

5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class A shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class A shares
directly to the Trust or its agent for redemption subject to the applicable
terms and conditions set forth in Section 4 of the Distribution Agreement.

6. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such with- holding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.

7. If any Class A shares sold to you under the terms of
this Agreement are repurchased by the Trust or by us for the
account of the Trust or are tendered for redemption within seven

A-4

<PAGE>

business days after the date of the confirmation of the original purchase by
you, it is agreed that you shall forfeit your right to, and refund to us, any
discount received by you on such Class A shares.

8. No person is authorized to make any representations concerning Class A
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Trust as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class A shares
through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Trust, and you agree that the Trust shall have no
liability or responsibility to you in these respects unless expressly assumed in
connection therewith.

9. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.

10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class A shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this agreement upon notice to the other party.

11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as

A-5

<PAGE>

amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.

12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.

13. Upon application to us, we will inform you as to the states in which
we believe the Class A shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class A shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class A shares, if necessary.

14. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.

15. Your first order placed pursuant to this Agreement for the purchase of
Class A shares of the Fund will represent your acceptance of this Agreement.

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By_______________________________
(Authorized Signature)

A-6

<PAGE>

Please return one signed copy of this agreement to:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011

Accepted:

Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.

By:__________________________________________________

Address: 800 Scudders Mill Road
Plainsboro, New Jersey 08536

Date: _______________, 1994

A-7

CLASS C SHARES

DISTRIBUTION AGREEMENT

AGREEMENT made as of the ______ day of October, 1994, between MERRILL
LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").

W I T N E S S E T H :

WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and

<PAGE>

WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and

WHEREAS, the Trust and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Fund's Class C
shares in order to promote the growth of the Fund and facilitate the
distribution of its Class C shares.

NOW, THEREFORE, the parties agree as follows:

Section 1. Appointment of the Distributor. The Trust here-
by appoints the Distributor as the principal underwriter and distributor of the
Trust to sell Class C shares of beneficial interest in the Fund (sometimes
herein referred to as "Class C shares") to the public and hereby agrees during
the term of this Agreement to sell shares of the Fund to the Distributor upon
the terms and conditions herein set forth.

Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Trust to act as principal underwriter and
distributor of the Class C shares of the Fund, except that:

(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class C shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this

<PAGE>

Agreement to sell Class C shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.

(b) The exclusive right granted to the Distributor to purchase Class C
shares from the Trust shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class C
shares of any such company by the Trust.

(c) Such exclusive right also shall not apply to Class C shares issued
pursuant to reinvestment of dividends or capital gains distributions.

(d) Such exclusive right also shall not apply to Class C shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class C shares as shall be agreed between
the Trust and the Distributor from time to time.

Section 3. Purchase of Class C Shares from the Trust.

(a) The Distributor shall have the right to buy from the
Trust the Class C shares needed, but not more than the Class C shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by eligible investors or
securities dealers.

<PAGE>

Investors eligible to purchase Class C shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"), relating to such Class C shares. The price which the
Distributor shall pay for the Class C shares so purchased from the Trust shall
be the net asset value, determined as set forth in Section 3(c) hereof.

(b) The Class C shares are to be resold by the Distributor to investors at
net asset value, as set forth in Section 3(c) hereof, or to securities dealers
having agreements with the Distributor upon the terms and conditions set forth
in Section 7 hereof.

(c) The net asset value of Class C shares of the Fund shall be determined
by the Trust or any agent of the Trust in accordance with the method set forth
in the prospectus and statement of additional information and guidelines
established by the Board of Trustees.

(d) The Trust shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend the
sale of its Class C shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by

<PAGE>

Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Trust, makes it impracticable or inadvisable to
sell the Class C shares.

(e) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Trust (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Trust (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class C shares pursuant to the
instructions of the Distributor. Payment shall be made to the Trust in New York
Clearing House funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Trust (or its agent).

Section 4. Repurchase or Redemption of Class C Shares by the Trust.

(a) Any of the outstanding Class C shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class C shares so
tendered in accordance with its obligations as set forth in Article VIII of its
Declaration of Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement

<PAGE>

of additional information of the Fund. The price to be paid to redeem or
repurchase the Class C shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(c) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund. All
payments by the Trust hereunder shall be made in the manner set forth below.

The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor on or before
the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Trust as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.

(b) Redemption of Class C shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the

<PAGE>

Fund, or during any other period when the Securities and Exchange Commission, by
order, so permits.

Section 5. Duties of the Trust.

(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor such number of
copies of the prospectus and statement of additional information relating to the
Fund as the Distributor shall reasonably request.

(b) The Trust shall take, from time to time, but subject to any necessary
approval of the shareholders, all necessary action to fix the number of
authorized shares and such steps as may be necessary to register the same under
the Securities Act to the end that there will be available for sale such number
of Class C shares as the Distributor reasonably may be expected to sell.

(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class C shares for sale under the
securities laws of such states as the Distributor and the Trust may approve. Any
such qualification may be withheld, terminated or withdrawn by the Trust at any
time in its discretion. As provided in Section 8(c) hereof, the

<PAGE>

expense of qualification and maintenance of qualification shall be borne by the
Trust. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Trust in
connection with such qualification.

(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.

Section 6. Duties of the Distributor.

(a) The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.

(b) In selling the Class C shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of

<PAGE>

additional information and any sales literature specifically
approved by the Trust.

(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.

Section 7. Selected Dealer Agreements.

(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice ("selected
dealers") for the sale of Class C shares; provided, that the Trust shall approve
the forms of agreements with dealers. Class C shares sold to selected dealers
shall be for resale by such dealers only at net asset value determined as set
forth in Section 3(c) hereof. The form of agreement with selected dealers to be
used during the continuous offering of the shares is attached hereto as Exhibit
A.

(b) Within the United States, the Distributor shall offer and sell Class C
shares only to such selected dealers that are members in good standing of the
NASD.

Section 8. Payment of Expenses.

<PAGE>

(a) The Trust shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class C
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).

(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class C shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class C shares for sale to the public and any expenses of advertising
incurred by the Dis-

<PAGE>

tributor in connection with such offering. It is understood and agreed that so
long as the Fund's Class C Shares Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act remains in effect, any expenses incurred by the
Distributor hereunder may be paid from amounts recovered by it from the Fund
under such Plan.

(c) The Trust shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Trust and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing qualification therein
until the Trust decides to discontinue such qualification pursuant to Section
5(c) hereof.

Section 9. Indemnification.

<PAGE>

related prospectus and statement of additional information relating to the Fund,
as from time to time amended and supplemented, or an annual or interim report to
Class C shareholders of the Fund, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Trust in favor of the Distributor and any such controlling persons to be deemed
to protect such Distributor or any such controlling persons thereof against any
liability to the Trust or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of the reckless disregard of their obligations and duties under this
Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the

<PAGE>

Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Trust of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Trust will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Trust elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Trust elects to assume the defense of any such suit
and retain such counsel, the Distributor or such controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case the Trust does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses, as incurred, of any counsel
retained by them. The Trust shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Trustees in connection with the issuance or sale of any of the Class C
shares.

<PAGE>

(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense, as incurred, described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Trust or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Trust, and the Trust and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.

<PAGE>

expenses and indemnification obligations of the Fund and the
Distributor.

Section 11. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class C voting securities of the Fund
and (ii) by the vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.

This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class C
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.

Section 12. Amendments of this Agreement. This Agreement may be amended by
the parties only if such amendment is specifi- cally approved by (i) the
Trustees or by the vote of a majority

<PAGE>

of outstanding Class C voting securities of the Fund and (ii) by the vote of a
majority of those Trustees of the Trust who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.

Section 14. Personal Liability. The Declaration of Trust establishing
Merrill Lynch Multi-State Municipal Series Trust, dated August 2, 1985, a copy
of which, together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of said
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Trust, but the "Trust Property" only shall
be liable.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST

By _____________________________________
Title:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By _____________________________________
Title:

<PAGE>

EXHIBIT A

MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

CLASS C SHARES OF BENEFICIAL INTEREST

SELECTED DEALER AGREEMENT

Gentlemen:

Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class C shares of beneficial interest, par value $0.10 per share (herein
referred to as the "Class C shares"), of the Trust relating to Merrill Lynch
[State] Municipal Bond Fund (the "Fund") and as such has the right to distribute
Class C shares of the Fund for resale. The Trust is an open-end investment
company registered under the Investment Company Act of 1940, as amended, and the
Fund's Class C shares being offered to the public are registered under the
Securities Act of 1933, as amended. You have received a copy of the Class C
Shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Trust and reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of Additional
Information" as used herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and Exchange Commission
which is part of the most recent effective registration statement pursuant to
the Securities Act of 1933, as amended. We offer to sell to you, as a member of
the Selected Dealers Group, Class C shares of the Fund upon the following terms
and conditions:

1. In all sales of these Class C shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Trust, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Trust,
to participants in such program.

<PAGE>

which we or the Trust shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Trust in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.

3. You shall not place orders for any of the Class C shares unless you
have already received purchase orders for such Class C shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class C shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class C shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class C shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Trust.

4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class C shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Trust or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.

5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such with- holding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.

6. No person is authorized to make any representations concerning Class C
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Trust as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C shares
through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and

A-2

<PAGE>

proxy solicitation material is our sole responsibility and not the
responsibility of the Trust, and you agree that the Trust shall have no
liability or responsibility to you in these respects unless expressly assumed in
connection therewith.

7. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.

8. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class C shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this Agreement upon notice to the other party.

9. We shall have full authority to take such action as we may deem advisable
in respect of all matters pertaining to the continuous offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us herein. Nothing contained in this paragraph is intended
to operate as, and the provisions of this paragraph shall not in any way
whatsoever constitute, a waiver by you of compliance with any provision of the
Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.

10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.

11. Upon application to us, we will inform you as to the states in which we
believe the Class C shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class C shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class C shares, if necessary.

A-3

<PAGE>

12. All communications to us should be sent to the address below. Any notice
to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.

13. Your first order placed pursuant to this Agreement for the purchase of
Class C shares of the Fund will represent your acceptance of this Agreement.

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By ____________________________________
(Authorized Signature)

Please return one signed copy of this Agreement to:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011

Accepted:

Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.

By: _________________________________________________

Address: 800 Scudders Mill Road
Plainsboro, New Jersey 08536

Date: ___________, 1994

A-4

CLASS D SHARES

DISTRIBUTION AGREEMENT

W I T N E S S E T H :

WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and

WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and

<PAGE>

WHEREAS, the Trust and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Class D shares of
beneficial interest in the Fund.

NOW, THEREFORE, the parties agree as follows:

Section 1. Appointment of the Distributor. The Trust
hereby appoints the Distributor as the principal underwriter and distributor of
the Trust to sell Class D shares of beneficial interest in the Fund (sometimes
herein referred to as "Class D shares") to the public and hereby agrees during
the term of this Agreement to sell Class D shares of the Fund to the Distributor
upon the terms and conditions herein set forth.

Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Trust to act as principal underwriter and
distributor of the Class D shares of the Fund, except that:

(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class D shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.

<PAGE>

(b) The exclusive right granted to the Distributor to purchase Class D
shares from the Trust shall not apply to Class D shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class D shares of any
such company by the Trust.

(c) Such exclusive right also shall not apply to Class D shares issued
pursuant to reinvestment of dividends or capital gains distributions.

(d) Such exclusive right also shall not apply to Class D shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class D shares as shall be agreed between
the Trust and the Distributor from time to time.

Section 3. Purchase of Class D Shares from the Trust.

(a) The Distributor shall have the right to buy from the
Trust the Class D shares needed, but not more than the Class D shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class D shares shall be those
persons so identified in the currently effective prospectus and statement of
additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"),

<PAGE>

relating to such Class D shares. The price which the Distributor shall pay for
the Class D shares so purchased from the Trust shall be the net asset value,
determined as set forth in Section 3(d) hereof, used in determining the public
offering price on which such orders were based.

(b) The Class D shares are to be resold by the Distributor to investors at
the public offering price, as set forth in Section 3(c) hereof, or to securities
dealers having agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.

(c) The public offering price(s) of the Class D shares, i.e., the price
per share at which the Distributor or selected dealers may sell Class D shares
to the public, shall be the public offering price as set forth in the prospectus
and statement of additional information relating to such Class D shares, but not
to exceed the net asset value at which the Distributor is to purchase the Class
D shares, plus a sales charge not to exceed 4.00% of the public offering price
(4.17% of the net amount invested), subject to reductions for volume purchases.
Class D shares may be sold to certain Trustees, officers and employees of the
Trust, directors and employees of Merrill Lynch & Co., Inc. and its
subsidiaries, and to certain other persons described in the prospectus and
statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the

<PAGE>

(d) The net asset value of Class D shares shall be determined by the Trust
or any agent of the Trust in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Trustees.

(e) The Trust shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend the
sale of its Class D shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Trust, makes it impracticable or inadvisable to sell the
Class D shares.

(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class D shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class D shares. The Trust (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Trust (or its

<PAGE>

agent) of payment therefor, will deliver deposit receipts or certificates for
such Class D shares pursuant to the instructions of the Distributor. Payment
shall be made to the Trust in New York Clearing House funds. The Distributor
agrees to cause such payment and such instructions to be delivered promptly to
the Trust (or its agent).

Section 4. Repurchase or Redemption of Class D Shares by the Trust.

(a) Any of the outstanding Class D shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class D shares so
tendered in accordance with its obligations as set forth in Article VIII of its
Declaration of Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement of additional
information. The price to be paid to redeem or repurchase the Class D shares
shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Trust
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Trust of any of the Class D shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class D
shares are tendered for redemption or repur-

<PAGE>

(b) Redemption of Class D shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other period
when the Securities and Exchange Commission, by order, so permits.

Section 5. Duties of the Trust.

(a) The Trust shall furnish to the Distributor copies of
all information, financial statements and other papers which the

<PAGE>

Distributor may reasonably request for use in connection with the distribution
of Class D shares of the Fund, and this shall include, upon request by the
Distributor, one certified copy of all financial statements prepared for the
Trust by independent public accountants. The Trust shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information relating to the Fund as the Distributor shall reasonably request.

(b) The Trust shall take, from time to time, but subject to any necessary
approval of the Class D shareholders, all necessary action to fix the number of
authorized Class D shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class D shares as the Distributor may reasonably be expected to
sell.

(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class D shares for sale under the
securities laws of such states as the Distributor and the Trust may approve. Any
such qualification may be withheld, terminated or withdrawn by the Trust at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Trust. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Trust in connection with such
qualification.

<PAGE>

(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.

Section 6. Duties of the Distributor.

(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.

(b) In selling the Class D shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Trust.

<PAGE>

and the cancellation of unsettled transactions, as may be necessary to comply
with the requirements of the National Association of Securities Dealers, Inc.
(the "NASD"), as such requirements may from time to time exist.

Section 7. Selected Dealers Agreements.

(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice ("selected
dealers") for the sale of Class D shares and fix therein the portion of the
sales charge which may be allocated to the selected dealers; provided that the
Trust shall approve the forms of agreements with dealers and the dealer
compensation set forth therein. Class D shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s) set forth in the
prospectus and statement of additional information. The form of agreement with
selected dealers to be used during the continuous offering of the Class D shares
is attached hereto as Exhibit A.

(b) Within the United States, the Distributor shall offer and sell Class D
shares only to such selected dealers as are members in good standing of the
NASD.

Section 8. Payment of Expenses.

<PAGE>

Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class D
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).

(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class D shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class D shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder in connection with account maintenance
activities may

<PAGE>

be paid from amounts recovered by it from the Fund under such
plan.

(c) The Trust shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Trust and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing qualification therein
until the Trust decides to discontinue such qualification pursuant to Section
5(c) hereof.

Section 9. Indemnification.

<PAGE>

the statements therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information furnished to the
Trust in connection therewith by or on behalf of the Distributor; provided,
however, that in no case (i) is the indemnity of the Trust in favor of the
Distributor and any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any liability to the
Trust or its security holders to which the Distributor or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this Agreement; or (ii)
is the Trust to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Distributor or any such
controlling persons, unless the Distributor or such controlling persons, as the
case may be, shall have notified the Trust in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Distributor or such controlling
persons (or after the Distributor or such controlling persons shall have
received notice of such service on any designated agent), but failure to notify
the Trust of any such claim shall not relieve it from any liability which it may
have to the person against whom such action is brought otherwise than on account
of its indemnity agreement contained in this paragraph. The Trust will be

<PAGE>

entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but if
the Trust elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or such controlling
person or persons, defendant or defendants in the suit. In the event the Trust
elects to assume the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them, but in case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Trust shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Trustees in connection with the issuance or sale of any of the Class D
shares.

<PAGE>

registration statement or related prospectus and statement of additional
information, as from time to time amended, or the annual or interim reports to
Class D shareholders. In case any action shall be brought against the Trust or
any person so indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties given to the
Trust, and the Trust and each person so indemnified shall have the rights and
duties given to the Distributor by the provisions of subsection (a) of this
Section 9.

Section 11. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding Class D voting securities of the Fund
and (ii) by the vote of a majority of

<PAGE>

those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.

This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class D
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.

Section 12. Amendments of this Agreement. This Agreement may be amended by
the parties only if such amendment is specifically approved by (i) the Trustees
or by the vote of a majority of outstanding Class C voting securities of the
Fund and (ii) by the vote of a majority of those Trustees of the Trust who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.

Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any

<PAGE>

of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

By _____________________________________
Title:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By _____________________________________
Title:

<PAGE>

EXHIBIT A

MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

CLASS D SHARES OF BENEFICIAL INTEREST

SELECTED DEALERS AGREEMENT

Gentlemen:

Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class D shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class D shares"), of the Trust relating to Merrill Lynch [State]
Municipal Bond Fund (the "Fund"), and as such has the right to distribute Class
D shares of the Fund for resale. The Trust is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and the Fund's
Class D shares being offered to the public are registered under the Securities
Act of 1933, as amended. You have received a copy of the Class D Shares
Distribution Agreement (the "Distribution Agreement") between ourself and the
Trust and reference is made herein to certain provisions of such Distribution
Agreement. The terms "Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission which is part
of the most recent effective registration statement pursuant to the Securities
Act of 1933, as amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class D shares of the Fund upon the following terms and
conditions:

1. In all sales of these Class D shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Trust, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Trust,
to participants in such program.

A-1

<PAGE>

of orders shall be subject to Section 5 hereof and instructions which we or the
Trust shall forward from time to time to you. All orders are subject to
acceptance or rejection by the Distributor or the Trust in the sole discretion
of either. The minimum initial and subsequent purchase requirements are as
set forth in the current Prospectus and Statement of Additional Information of
the Fund.

3. The sales charges for sales to the public, computed as percentages of
the public offering price and the amount invested, and the related discount to
Selected Dealers are as follows:

$1,000,000 and over** .... 0.00% 0.00% 0.00%

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

* Rounded to the nearest one-hundredth percent.

** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchase may be subject to a contingent deferred sales charge as set
forth in the current Prospectus and Statement of Additional Information.

The term "purchase" 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

A-2

<PAGE>

spouse and their children under the age of 21 years purchasing Class D shares
for his or their own account and to single purchases by a trustee or other
fiduciary purchasing Class D 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 of 1940, as amended, 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 Class D shares of the Fund or
Class D 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.

The reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase Class D shares of the
Fund at the offering price applicable to the total of (a) the dollar amount then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of Class A,
Class B, Class C and Class D shares of the Fund and of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or you,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation.

You agree to advise us promptly at our request as to amounts of any sales
made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of

A-3

<PAGE>

Intention is set forth in the Prospectus and Statement of Additional
Information.

4. You shall not place orders for any of the Class D shares unless you
have already received purchase orders for such Class D shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class D shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class D shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Trust.

5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class D shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class D shares
directly to the Trust or its agent for redemption subject to the applicable
terms and conditions set forth in Section 4 of the Distribution Agreement.

7. If any Class D shares sold to you under the terms of this Agreement are
repurchased by the Trust or by us for the account of the Trust or are tendered
for redemption within seven business days after the date of the confirmation of
the original purchase by you, it is agreed that you shall forfeit your right to,
and refund to us, any discount received by you on such Class D shares.

8. No person is authorized to make any representations concerning Class D
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Trust as information supplemental to such
Prospectus and

A-4

<PAGE>

Statement of Additional Information. In purchasing Class D shares through us you
shall rely solely on the representations contained in the Prospectus and
Statement of Additional Information and supplemental information above
mentioned. Any printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports and proxy
solicitation material is our sole responsibility and not the responsibility of
the Trust, and you agree that the Trust shall have no liability or
responsibility to you in these respects unless expressly assumed in connection
therewith.

10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class D shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this agreement upon notice to the other party.

13. Upon application to us, we will inform you as to the states in which
we believe the Class D shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class D

A-5

<PAGE>

shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class D shares, if necessary.

14. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.

15. Your first order placed pursuant to this Agreement for the purchase of
Class D shares of the Fund will represent your acceptance of this Agreement.

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By _____________________________
(Authorized Signature)

Please return one signed copy of this agreement to:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011

Accepted:

Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.

By: _________________________________________________

Address: 800 Scudders Mill Road
Plainsboro, New Jersey 08536

Date: ________________, 1994

A-6

<PAGE>

Exhibit 11

INDEPENDENT AUDITORS' CONSENT

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

We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-54341 of our report dated August 1, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 14, 1994

CLASS C DISTRIBUTION PLAN

MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

PURSUANT TO RULE 12b-1

DISTRIBUTION PLAN made as of the __ day of October, 1994, by and between
Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business trust
(the "Trust"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").

W I T N E S S E T H:

WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and

WHEREAS, the Trust is authorized to establish separate ("Series") each of
which will offer separate classes of shares of beneficial interest par value
$0.10 per share (the "Shares") to selected groups of purchasers; and

WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and

WHEREAS, the Trust proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Trust in the offer and sale of Class C
shares of beneficial interest, par value $0.10 per share (the "Class C shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and

WHEREAS, the Trust desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Trust will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and

WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.

NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1

<PAGE>

under the Investment Company Act on the following terms and
conditions:

1. The Trust shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof
("Sub-Agreements") for providing account maintenance activities with respect to
Class C shareholders of the Fund. Expenditures under the Plan may consist of
payments to financial consultants for maintaining accounts in connection with
Class C shares of the Fund and payment of expenses incurred in connection with
such account maintenance activities including the costs of making services
available to shareholders including assistance in connection with inquiries
related to shareholder accounts.

2. The Trust shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of 0.35% of average daily net assets of the
Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and services will relate to
the sale, promotion and marketing of the Class C shares of the Fund. Such
expenditures may consist of sales commissions to financial consultants for
selling Class C shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.

3. The Trust hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.

<PAGE>

4. MLFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.

5. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class C voting securities of the Fund.

6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees cast in person at a meeting or meetings
called for the purpose of voting on the Plan and such related agreements.

7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.

8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding Class C voting
securities of the Fund.

9. The Plan may not be amended to increase materially the rate of payments
provided for herein unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class C voting
securities of the Fund, and by the Trustees of the Trust in the manner provided
for in Paragraph 6 hereof, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
Paragraph 6 hereof.

10. While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons, as defined in the Investment Company Act, of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons.

11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.

<PAGE>

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

IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST

By_____________________________________
Title:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By_____________________________________
Title:

<PAGE>

CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT

AGREEMENT made as of the __ day of October, 1994, by and between Merrill
Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").

W I T N E S S E T H :

WHEREAS, MLFD has entered into an agreement with Merrill Lynch Multi-State
Municipal Series Trust, a Massachusetts business trust (the "Trust"), pursuant
to which it acts as the exclusive distributor for the sale of Class C shares of
beneficial interest, par value $0.10 per share (the "Class C shares"), of the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the Trust; and

WHEREAS, MLFD and the Trust have entered into a Class C Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a distribution fee from the
Fund at the annual rate of 0.35% of average daily net assets of the Fund
relating to Class C shares for providing sales and promotional activities and
services related to the distribution of Class C shares of the Fund; and

WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class C shareholders and the Securities Firm is willing to perform such
activities and services;

NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:

1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class C shares of the Fund and incur expenditures
in connection with such activities and services of the types referred to in
Paragraph 1 of the Plan.

2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class C shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.

<PAGE>

3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end of each calendar month in an amount agreed upon by
the parties hereto.

4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.

5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Trustees of the Trust and (b) those Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
Act, and have no direct or indirect financial interest in the operation of the
Plan, this Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Agreement.

6. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.

7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By_____________________________________
Title:

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By_____________________________________
Title:

CLASS D DISTRIBUTION PLAN

MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

PURSUANT TO RULE 12b-1

W I T N E S S E T H :

WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and

WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and

WHEREAS, the Trust proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Trust in the offer and sale of Class D
shares of beneficial interest, par value $0.10 per share (the "Class D shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and

WHEREAS, the Trust desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Trust will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and

WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.

NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1

<PAGE>

under the Investment Company Act on the following terms and
conditions:

1. The Trust shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.10% of average daily net assets of
the Fund relating to Class D shares to compensate MLFD and securities firms with
which MLFD enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities with respect to
Class D shareholders of the Fund. Expenditures under the Plan may consist of
payments to financial consultants for maintaining accounts in connection with
Class D shares of the Fund and payment of expenses incurred in connection with
such account maintenance activities including the costs of making services
available to shareholders including assistance in connection with inquiries
related to shareholder accounts.

2. The Trust hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.

3. MLFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.

4. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.

5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.

<PAGE>

6. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 5.

7. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding Class D voting
securities of the Fund.

8. The Plan may not be amended to increase materially the rate of payments
provided for in Paragraph 1 hereof unless such amendment is approved by at least
a majority, as defined in the Investment Company Act, of the outstanding Class D
voting securities of the Fund, and by the Trustees of the Trust in the manner
provided for in Paragraph 5 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 5 hereof.

9. While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons, as defined in the Investment Company Act, of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons.

10. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 3 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.

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

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES
TRUST

By_____________________________________
Title:

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By_____________________________________
Title:

<PAGE>

CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT

AGREEMENT made as of the __ day of October, 1994, by and between Merrill
Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").

W I T N E S S E T H :

WHEREAS, MLFD has entered into an agreement with Merrill Lynch Multi-State
Municipal Series Trust, a Massachusetts business trust (the "Trust"), pursuant
to which it acts as the exclusive distributor for the sale of Class D shares of
beneficial interest, par value $0.10 per share (the "Class D shares"), of the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the Trust; and

WHEREAS, MLFD and the Trust have entered into a Class D Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.10% of average
daily net assets of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D shares; and

WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;

NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:

1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class D shares of the Fund and incur expenditures
in connection with such activities and services, of the types referred to in
Paragraph 1 of the Plan.

2. As compensation for its services performed under this Agreement, MLFD
shall pay the Securities Firm a fee at the end of each calendar month in an
amount agreed upon by the parties hereto.

3. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule

<PAGE>

12b-1 regarding the disbursement of the fee during such period referred to in
Paragraph 3 of the Plan.

4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Trustees of the Trust and (b) those Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
Act, and have no direct or indirect financial interest in the operation of the
Plan, this Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Agreement.

5. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 5.

6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.

By_____________________________________
Title:

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By_____________________________________
Title:

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

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<NAME> MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
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<NUMBER> 19
<NAME> MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND

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