As filed with the Securities and Exchange Commission on January 28, 2005


                                                 Securities Act File No. 2-99473
                                        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. 24                   [X]
                             AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940   [X]
                       AMENDMENT NO. 248                          [X]
                (CHECK APPROPRIATE BOX OR BOXES)



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

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

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

              800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536

                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)


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


                               ROBERT C. DOLL, JR.
    MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE
                             MUNICIPAL SERIES TRUST

                             800 SCUDDERS MILL ROAD
                          PLAINSBORO, NEW JERSEY 08536
        MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY, 08543-9011
                     (NAME AND ADDRESS OF AGENT FOR SERVICE)
                                ----------------
                                   COPIES TO:




        COUNSEL FOR THE FUND:               ANDREW J. DONOHUE, ESQ.
     SIDLEY AUSTIN BROWN & WOOD LLP        FUND ASSET MANAGEMENT, L.P.
          787 SEVENTH AVENUE                      P.O. BOX 9011
      NEW YORK, NEW YORK 10019-6018     PRINCETON, NEW JERSEY 08543-9011
 ATTENTION: THOMAS R. SMITH, JR., ESQ.




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




 IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):

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

IF APPROPRIATE, CHECK THE FOLLOWING BOX:

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

                               ----------------
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par value
$.10 per share.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------









Prospectus


January 31, 2005


MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.



                                Table of Contents


                                                                            PAGE



     KEY FACTS
[GRAPHIC OMITTED]
     --------------------------------------------------------------------------

     Merrill Lynch New York Municipal Bond Fund at a Glance ............... 3

     Risk/Return Bar Chart ................................................ 5

     Fees and Expenses .................................................... 7



     DETAILS ABOUT THE FUND
[GRAPHIC OMITTED]
     --------------------------------------------------------------------------

     How the Fund Invests ................................................. 9

     Investment Risks .................................................... 10



     YOUR ACCOUNT
[GRAPHIC OMITTED]
     --------------------------------------------------------------------------

     Pricing of Shares ................................................... 18

     How to Buy, Sell, Transfer and Exchange Shares ...................... 25

     Participation in Fee-Based Programs ................................. 32


     MANAGEMENT OF THE FUND
[GRAPHIC OMITTED]
     --------------------------------------------------------------------------

     Fund Asset Management, L.P. ......................................... 35

     Financial Highlights ................................................ 37



     FOR MORE INFORMATION
[GRAPHIC OMITTED]
     --------------------------------------------------------------------------

     Shareholder Reports ......................................... Back Cover


     Statement of Additional Information ......................... Back Cover


                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND





MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND AT A GLANCE
--------------------------------------------------------------------------------


WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal income tax and New York State and New York City personal
income taxes.


WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?


The Fund invests primarily in a portfolio of long term INVESTMENT GRADE NEW YORK
MUNICIPAL BONDS . These may be obligations of a variety of issuers including
governmental entities in New York and issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam. Under normal circumstances, the Fund will invest at
least 80% of its assets in New York municipal bonds. When choosing investments,
Fund management considers various factors, including the credit quality of
issuers, yield analysis, maturity analysis and the call features of the
obligations. Under normal conditions, the Fund's weighted average maturity will
be more than ten years.



WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

The Fund cannot guarantee that it will achieve its objective.

As with any fund, the value of the Fund's investments -- and, therefore, the
value of Fund shares -- may fluctuate. These changes may occur in response to
interest rate changes or other factors that may affect the municipal bond
market generally or a particular issuer or obligation. Generally, when interest
rates go up, the value of debt instruments like municipal bonds goes down.
Also, Fund management may select securities that underperform the municipal
bond markets, the relevant indices or other funds with similar investment
objectives and investment strategies. Prices of longer term securities
generally change more in response to interest rate changes than prices of
shorter term securities. If the value of the Fund's investments goes down, you
may lose money.



The Fund's investments in municipal bonds are also subject to CREDIT RISK
and CALL AND REDEMPTION RISK.



[SIDEBAR]
                                    Key Facts

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

INVESTMENT GRADE -- securities rated in the four highest rating categories by
recognized rating agencies, including Moody's Investor Services, Inc., Standard
& Poor's and Fitch Rating.

NEW YORK MUNICIPAL BOND -- a debt obligation issued by or on behalf of a
governmental entity in New York State or New York City or other qualifying
issuer that, in the opinion of bond counsel to the issuer, pays interest that
is excludable from gross income for Federal income tax purposes and is exempt
from New York State and New York City personal income taxes.

CREDIT RISK -- the risk that the issuer of a bond or other fixed-income
security will be unable to pay the interest or principal when due.

CALL AND REDEMPTION RISK -- the risk that a bond's issuer may call a bond held
by the Fund for redemption before it matures.

[END SIDEBAR]


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                               3



Key Facts
[GRAPHIC OMITTED]


In addition, since the Fund invests at least 80% of its assets in New York
municipal bonds, it is more exposed to negative political or economic factors in
New York than a fund that invests more widely.


WHO SHOULD INVEST?


Investors should consider their own investment goals, time horizon and risk
tolerance before investing in the Fund. An investment in the Fund may not be
appropriate for all investors and is not intended to be a complete investment
program. The Fund may be an appropriate investment for you if you:


     o    Are looking for income that is excludable from gross income for
          Federal income tax purposes and exempt from New York State and New
          York City personal income taxes


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

     o    Are looking for liquidity

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




                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
4



RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class B shares for each of the past ten calendar years. Sales charges are not
reflected in the bar chart. If these amounts were reflected, returns would be
less than those shown. The table compares the average annual total returns for
each class of the Fund's shares with those of the Lehman Brothers Municipal Bond
Index, a broad measure of market performance. How the Fund performed in the past
(before and after taxes) is not necessarily an indication of how the Fund will
perform in the future.


[GRAPHIC OMITTED]




20%
--------------------------------------------------------------------------------------------


          15.67%
                                                    13.20%

10%
                            8.96
                                                                      8.02
                                     5.36%                                            4.01%
                   2.85%                                     3.41%           3.40%
0%


                                            -7.79%

-10%
          1995     1996     1997     1998    1999   2000     2001     2002   2003     2004



During the period shown in the bar chart, the highest return for a quarter was
6.38% (quarter ended March 31, 1995) and the lowest return for a quarter was
-3.16% (quarter ended June 30, 1999). The year-to-date return as of December
31, 2004 was 4.01%.



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                               5


Key Facts
[GRAPHIC OMITTED]



After-tax returns are shown only for Class B shares and will vary for other
classes. The after-tax returns are calculated using the historical highest
applicable marginal Federal individual income tax rates in effect during the
periods measured and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor's tax situation and may differ from
those shown. The after-tax returns shown are not relevant to investors who hold
their Fund shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts or through tax advantaged education savings
accounts.






AVERAGE ANNUAL TOTAL RETURNS                                          ONE         FIVE
(FOR THE PERIODS ENDED DECEMBER 31, 2004)                             YEAR       YEARS      TEN YEARS
----------------------------------------------------------------- ----------- ----------- ------------

 Merrill Lynch New York Municipal Bond Fund -- Class A:#
 Return Before Taxes##                                                 0.26%       5.91%        5.53%
-----------------------------------------------------------------     -----       -----       ------
 Merrill Lynch New York Municipal Bond Fund -- Class B:
 Return Before Taxes##                                                 0.03%       6.03%        5.53%
 Return After Taxes on Distributions##                                 0.03%       6.02%        5.46%
 Return After Taxes on Distributions and Sales of Fund Shares##        1.57%       5.83%        5.40%
-----------------------------------------------------------------     -----       -----       ------
 Merrill Lynch New York Municipal Bond Fund -- Class C:
 Return Before Taxes##                                                 2.91%       6.24%        5.42%
-----------------------------------------------------------------     -----       -----       ------
 Merrill Lynch New York Municipal Bond Fund -- Class I:#
 Return Before Taxes##                                                 0.27%       5.99%        5.62%
-----------------------------------------------------------------     -----       -----       ------
 Lehman Brothers Municipal Bond Index*                                 4.48%       7.20%        7.06%
-----------------------------------------------------------------     -----       -----       ------




 # Prior to April 14, 2003, Class A shares were designated Class D and Class I
  shares were designated Class A.
## Includes all applicable fees and sales charges.
 * This unmanaged index consists of long term revenue bonds, prerefunded bonds,
  general obligation bonds and insured bonds. Performance of the index does
  not reflect the deduction of fees, expenses or taxes. Past performance is
  not predictive of future performance.





                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
6


FEES AND EXPENSES
--------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are


differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your financial
adviser or other financial intermediary can help you with this decision.



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






SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT):(A)                                   CLASS A         CLASS B(B)       CLASS C          CLASS I
------------------------------------------------- ----------------- --------------- --------------- -----------------

  Maximum Sales Charge (load) imposed on
  purchases (as a percentage of offering price)       4.00%(c)        None            None              4.00%(c)
-------------------------------------------------   --------------- ----            ----              ---------------
  Maximum deferred sales charge (load) (as
  a percentage of original purchase price or
  redemption proceeds, whichever is lower)        None(d)             4.00%(c)        1.00%(c)      None(d)
------------------------------------------------- ----------------- ------          ------          -----------------
  Maximum sales charge (load) imposed on
  dividend reinvestments                            None              None            None            None
------------------------------------------------- ----------------- ------          ------          -----------------
  Redemption Fee                                  None              None            None            None
------------------------------------------------- ----------------- ------          ------          -----------------
  Exchange Fee                                      None              None            None            None
------------------------------------------------- ----------------- ------          ------          -----------------







                          ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
                                     DEDUCTED FROM FUND ASSETS):
-----------------------------------------------------------------------------------------------------

  MANAGEMENT FEE(E)                                     0.55%        0.55%        0.55%        0.55%
-------------------------------------------------     ------       ------       ------       ------
  DISTRIBUTION AND/OR SERVICE (12B-1) FEES(f)           0.10%        0.50%        0.60%      None
-------------------------------------------------     ------       ------       ------    ----------
  Other expenses (including transfer agency
  fees)(g)                                              0.20%        0.20%        0.20%        0.20%
-------------------------------------------------     ------       ------       ------   ----------
  Total Annual Fund Operating Expenses                  0.85%        1.25%        1.35%        0.75%
-------------------------------------------------     ------       ------       ------   ----------




(a)        In addition, certain selected securities dealers or other financial
           intermediaries may charge clients a processing fee when a client
           buys or redeems shares. See "Your Account -- How to Buy, Sell,
           Transfer and Exchange Shares."

(b)        Class B shares automatically convert to Class A shares approximately
           ten years after you buy them and will no longer be subject to
           distribution fees.

(c)        Some investors may qualify for reduction in or waivers of the sales
           charge (load). See "Your Account -- Pricing of Shares."

(d)        You may pay a deferred sales charge if you purchase $1 million or
           more and you redeem within one year.

(e)        The Manager may reimburse a portion of the Fund's management fee in
           connection with the Fund's investment in an affiliated money market
           fund. Taking this reimbursement into account, the Total Annual Fund
           Operating Expense ratios would be 0.84%, 1.25%, 1.35% and 0.74% for
           Classes A, B, C and I, respectively.


[SIDEBAR]
UNDERSTANDING EXPENSES

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

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

SHAREHOLDER FEES -- these fees include sales charges that you may pay when you
buy or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating
the Fund.


MANAGEMENT FEE -- a fee paid to the manager for managing the Fund.


DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial advisers and other financial
intermediaries, advertising and promotion.

SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities
dealers and other financial intermediaries for account maintenance activities.
[END SIDEBAR]


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                               7


Key Facts
[GRAPHIC OMITTED]


(continued from previous page)


(f)        The Fund calls the "Service Fee" an "Account Maintenance Fee."
           Account Maintenance Fee is the term used elsewhere in this
           Prospectus and in all other Fund materials. If you hold Class B or
           Class C shares over time, it may cost you more in distribution and
           account maintenance (12b-1) fees than the maximum sales charge that
           you would have paid if you had bought one of the other classes.
(g)        Financial Data Services, Inc., an affiliate of the Manager, provides
           transfer agency services to the Fund. The Fund pays a fee for these
           services. The Manager or its affiliates also provide certain
           accounting services to the Fund and the Fund reimburses the Manager
           or its affiliates for these services.



EXAMPLES:


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


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


EXPENSES IF YOU DID REDEEM YOUR SHARES:






            1 YEAR   3 YEARS   5 YEARS   10 YEARS
           -------- --------- --------- ---------

 Class A   $  483   $  660    $  853    $ 1,407
---------- ------   ------    ------    -------
 Class B   $  527   $  697    $  886    $ 1,511
---------- ------   ------    ------    -------
 Class C   $  237   $  428    $  739    $ 1,624
---------- ------   ------    ------    -------
 Class I   $  474   $  630    $  800    $ 1,293
---------- ------   ------    ------    -------



EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:






            1 YEAR   3 YEARS   5 YEARS   10 YEARS
           -------- --------- --------- ---------

 Class A   $  483   $  660    $  853    $ 1,407
---------- ------   ------    ------    -------
 Class B   $  127   $  397    $  686    $ 1,511
---------- ------   ------    ------    -------
 Class C   $  137   $  428    $  739    $ 1,624
---------- ------   ------    ------    -------
 Class I   $  474   $  630    $  800    $ 1,293
---------- ------   ------    ------    -------




                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
8


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

The Fund's investment objective is to provide shareholders with income that is
exempt from Federal income tax and New York State and New York City personal
income taxes.



Outlined below are the main strategies the Fund uses in seeking to achieve its
investment objective.


The Fund invests primarily in long term, investment grade New York municipal
bonds. These may be obligations of a variety of issuers including governmental
entities or other qualifying issuers. Issuers may be located in New York or in
other qualifying jurisdictions such as Puerto Rico, the U.S. Virgin Islands and
Guam.


Under normal circumstances, the Fund will invest at least 80% of its assets in
New York municipal bonds. The Fund may invest in either fixed rate or


variable rate obligations. At least 80% of the Fund's assets will be invested
in investment grade securities.


Under normal conditions, the Fund's weighted average maturity will be more than
ten years.


New York's economy is influenced by numerous factors including developments in
the banking, finance, insurance, transportation, communications and service
employment industries. New York's economy relies less on manufacturing than
does the nation as a whole. Fund management does not believe that current
economic conditions in New York will have a significant adverse effect on the
Fund's ability to continue to invest in high quality New York municipal bonds.


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

     o    CREDIT QUALITY OF ISSUERS -- based on bond ratings and other factors
          including economic and financial conditions.

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


[SIDEBAR]
Details About the Fund
[GRAPHIC OMITTED]


ABOUT THE PORTFOLIO MANAGER
Timothy T. Browse, CFA, is the Fund's portfolio manager and has been primarily
responsible for the day-to-day management of the Fund's portfolio since 2004.
Mr. Browse is a Vice President (Tax-Exempt Fixed Income) and portfolio manager
with the Tax-Exempt Fixed Income group of Merrill Lynch Investment Managers,
L.P. He was a Vice President, portfolio manager and team leader of the
Municipal Investments Team with Lord Abbett & Co. from 2000 to 2003. Mr. Browse
was a Vice President and portfolio manager in the municipal fund management
group of Eaton Vance Management, Inc. from 1992 to 2000.
[END SIDEBAR]


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                               9


Details About the Fund
[GRAPHIC OMITTED]


[SIDEBAR]
ABOUT THE MANAGER
The Fund is managed by Fund Asset Management, L.P.
[END SIDEBAR]


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


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


Other Strategies. In addition to the main strategies discussed above, the Fund
may use certain other investment strategies:



The Fund may invest up to 20% of its assets in high yield bonds (also known as
"junk" bonds); however, the Fund will not invest in bonds that at the time of
purchase are in default or that Fund management believes will be in default.



For temporary periods, the Fund may invest up to 35% of its assets in short
term tax exempt or taxable money market obligations, although the Fund will
generally not invest more than 20% of its net assets in taxable money market
obligations. As a temporary measure for defensive purposes, the Fund may invest
without limitation in short term tax exempt or taxable money market
obligations. These short term investments may limit the potential for the Fund
to achieve its objective.



The Fund may use derivatives for hedging purposes or to seek to enhance
returns. Derivatives are financial instruments whose value is derived from
another security or an index such as the Lehman Brothers Municipal Bond Index.
Derivatives may be volatile and subject to liquidity, leverage and credit
risks.



The Fund may also invest uninvested cash balances in affiliated money market
funds. The Fund's investments may include private activity bonds that may
subject certain shareholders to a Federal alternative minimum tax.



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


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
10


Set forth below are the main risks of investing in the Fund:



MARKET RISK AND SELECTION RISK -- Market risk is the risk that one or more
markets in which the Fund invests will go down in value, including the
possibility that a market will go down sharply and unpredictably. Selection
risk is the risk that the securities that Fund management selects will
underperform the markets, the relevant indices or other funds with similar
investment objectives and investment strategies.


CREDIT RISK -- Credit risk is the risk that the issuer of a fixed-income
security will be unable to pay the interest or repay the principal when due.
Changes in an issuer's credit rating or the market's perception of an issuer's
creditworthiness may also affect the value of the Fund's investment in that
issuer. The degree of credit risk depends on both the financial condition of
the issuer and the terms of the obligation.


INTEREST RATE RISK -- Interest rate risk is the risk that prices of fixed
income securities generally increase when interest rates decline and decrease
when interest rates increase. Prices of longer term securities generally change
more in response to interest rate changes than prices of shorter term
securities. The Fund may lose money if short term or long term interest rates
rise sharply or otherwise change in a manner not anticipated by Fund
management.


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


STATE SPECIFIC RISK -- The Fund invests primarily in New York municipal bonds.
As a result, the Fund is more exposed to risks affecting issuers of New York
municipal bonds than is a municipal bond fund that invests more widely. New
York State, New York City and other New York public bodies have sometimes
encountered financial difficulties of a type that could have an adverse effect
on the performance of the Fund. Historically, declines in the stock market are
followed by declines in personal income tax payments as tax liability
associated with market transactions declines.



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


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              11


Details About the Fund
[GRAPHIC OMITTED]



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



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


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



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



MUNICIPAL LEASE OBLIGATIONS -- In a municipal lease obligation, the issuer
agrees to make payments when due on the lease obligation. The issuer will
generally appropriate municipal funds for that purpose, but is not obligated to
do so. Although the issuer does not pledge its unlimited taxing power for
payment of the lease obligation, the lease obligation is secured by the leased
property. However, it may be difficult to sell the property and the proceeds of
a sale may not cover the Fund's loss.



The Fund may also be subject to certain other risks associated with its
investments and investment strategies, including:


BORROWING AND LEVERAGE RISK -- The Fund may borrow for temporary or emergency
purposes, including to meet redemptions, for the payment of dividends, for
share repurchases or for the clearance of transactions. Borrowing



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
12



may exaggerate changes in the net asset value of Fund shares and in the yield
on the Fund's portfolio. Borrowing will cost the Fund interest expense and
other fees. The cost of borrowing may reduce the Fund's return. Certain
securities that the Fund may buy or other techniques that the Fund may use may
create leverage, including, but not limited to, when issued securities, forward
commitments and futures contracts and options.


DERIVATIVES -- The Fund may use derivative instruments to hedge its investments
or to seek to enhance returns. Derivatives allow the Fund to increase or
decrease its risk exposure more quickly and efficiently than other types of
instruments. Derivatives are volatile and involve significant risks, including:




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


        LEVERAGE RISK -- the risk associated with certain types of investments
        or trading strategies that relatively small market movements may result
        in large changes in the value of an investment. Certain investments or
        trading strategies that involve leverage can result in losses that
        greatly exceed the amount originally invested.


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



The Fund may use derivatives for hedging purposes, including anticipatory
hedges, or to seek to enhance returns. Hedging is a strategy in which the Fund
uses a derivative to offset the risks associated with other Fund holdings.
While hedging can reduce losses, it can also reduce or eliminate gains or cause
losses if the market moves in a different manner than anticipated by the Fund
or if the cost of the derivative outweighs the benefit of the hedge. Hedging
also involves the risk that changes in the value of the derivative will not
match those of the holdings being hedged as expected by the Fund, in which case
any losses on the holdings being hedged may not be reduced and may be
increased. There can be no assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be either available or cost
effective. The Fund is not required to use hedging and may choose not to do so.




                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              13


Details About the Fund
[GRAPHIC OMITTED]



Because the Fund may use derivatives to seek to enhance returns, its investments
will expose the Fund to the risks outlined above to a greater extent than if the
Fund used derivatives solely for hedging purposes. Use of derivatives to seek to
enhance returns may be considered speculative.


ILLIQUID SECURITIES -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot sell within seven days at approximately
current value. If the Fund buys illiquid securities it may be unable to quickly
sell them or may be able to sell them only at a price below current value.


RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They may include private placement securities
that have not been registered under the applicable securities laws. Private
placement and other restricted securities may not be listed on an exchange and
may have no active trading market.


Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund may not be able to
sell the securities.


INSURED MUNICIPAL BONDS -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal
on maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insurance does not protect the
Fund or its shareholders from losses caused by declines in a bond's market
value.


JUNK BONDS -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher
rated debt securities. Issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
14



priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.


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


TAXABILITY RISK -- The Fund intends to minimize the payment of taxable income
to shareholders by investing in tax-exempt or municipal securities in reliance
on an opinion of bond counsel to the issuer that the interest paid on those
securities will be excludable from gross income for Federal income tax
purposes. Such securities, however, may be determined to pay, or have paid,
taxable income subsequent to the Fund's acquisition of the securities. In that
event, the Internal Revenue Service may demand that the Fund pay Federal income
taxes on the affected interest income, and, if the Fund agrees to do so, the
Fund's yield could be adversely affected. If the interest paid on any
tax-exempt or municipal security held by the Fund is subsequently determined to
be taxable, the Fund will dispose of that security as soon as reasonably
practicable.


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


WHEN ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS -- The Fund
may purchase or sell securities that it is entitled to receive on a when issued
basis. The Fund may also purchase or sell securities on a delayed



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              15


Details About the Fund
[GRAPHIC OMITTED]



delivery basis or through a forward commitment. When issued and delayed delivery
securities and forward commitments involve the risk that the security the Fund
buys will lose value prior to its delivery. There also is the risk that the
security will not be issued or that the other party will not meet its
obligation. If this occurs, the Fund loses both the investment opportunity for
the assets it set aside to pay for the security and any gain in the security's
price.


STANDBY COMMITMENT AGREEMENTS -- Standby commitment agreements commit the Fund,
for a stated period of time, to purchase a stated amount of securities that may
be issued and sold to the Fund at the option of the issuer. Standby commitment
agreements involve the risk that the security the Fund buys will lose value
prior to its delivery to the Fund. These agreements also involve the risk that
if the security goes up in value, the counterparty will decide not to issue the
security. In this case, the Fund loses both the investment opportunity for the
assets it set aside to pay for the security and any gain in the security's
price.


REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. The Fund
may invest in repurchase agreements involving the money market securities
described above or U.S. Government and agency securities with longer
maturities. Under a repurchase agreement, the seller agrees to repurchase a
security at a mutually agreed-upon time and price. A purchase and sale contract
is similar to a repurchase agreement, but purchase and sale contracts provide
that the purchaser receives any interest on the security paid during the
period. If the other party to a repurchase agreement or purchase and sale
contract defaults on its obligation under the agreement, the Fund may suffer
delays and incur costs or lose money in exercising its rights under the
agreement. If the seller fails to repurchase the security in either situation
and the market value declines, the Fund may lose money.


SWAP AGREEMENTS -- Swap agreements involve the risk that the party with whom
the Fund has entered into the swap will default on its obligation to pay the
Fund and the risk that the Fund will not be able to meet its obligations to pay
the other party to the agreement.



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
16


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



For a discussion of the Fund's policies and procedures regarding the selective
disclosure of its portfolio holdings, please see the Statement of Additional
Information. The Fund makes its top ten holdings available on a monthly basis
on our web site at www.mutualfunds.ml.com generally within 12 business days
after the end of the month to which the information applies.



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              17


Your Account
[GRAPHIC OMITTED]


PRICING OF SHARES
--------------------------------------------------------------------------------

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


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


Certain financial intermediaries may charge additional fees in connection with
transactions in Fund shares. The Manager, the Distributor or their affiliates
intend to make payments out of their own resources to selected securities
dealers and other financial intermediaries for providing services intended to
result in the sale of Fund shares, for shareholder servicing activities or for
sub-transfer agency services provided to individual shareholders where a
financial intermediary maintains omnibus accounts with the Fund's Transfer
Agent.



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



The Fund's shares are distributed by FAM Distributors Inc., an affiliate of the
Manager.


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
18


The table below summarizes key features of the Select PricingSM System.





                          CLASS A
---------------------------------------------------

 Availability             Generally available
                          through selected
                          securities dealers and
                          other financial
                          intermediaries.
---------------------------------------------------
 Initial Sales Charge?    Yes. Payable at time of
                          purchase. Lower sales
                          charges available for
                          larger investments.
---------------------------------------------------
 Deferred Sales Charge?   No. (May be charged for
                          purchases over $1
                          million that are
                          redeemed within one
                          year).
---------------------------------------------------
 Account Maintenance      0.10% Annual Account
 and Distribution Fees?   Maintenance Fee.
                          No Distribution Fee.
---------------------------------------------------
 Conversion to Class A    N/A
 shares?
---------------------------------------------------




                          CLASS B                     CLASS C                     CLASS I
----------------------------------------------------------------------------------------------------------

 Availability             Limited availability        Limited availability        Limited to certain
                          through Merrill Lynch.      through Merrill Lynch.      eligible investors
                          Generally available         Generally available         including:
                          through selected            through selected            o Current Class I
                          security dealers and        security dealers and          shareholders
                          other financial             other financial             o Participants in
                          intermediaries.             intermediaries.               certain programs
                                                                                    sponsored by the
                                                                                    Manager or its
                                                                                    affiliates, or selected
                                                                                    securities dealers or
                                                                                    other financial
                                                                                    intermediaries
                                                                                  o Certain employees
                                                                                    and affiliates of the
                                                                                    Manager or its
                                                                                    affiliates, or of
                                                                                    selected securities
                                                                                    dealers and other
                                                                                    financial
                                                                                    intermediaries.
----------------------------------------------------------------------------------------------------------
 Initial Sales Charge?    No. Entire purchase price   No. Entire purchase price   Yes. Payable at time of
                          is invested in shares of    is invested in shares of    purchase. Lower sales
                          the Fund.                   the Fund.                   charges available for
                                                                                  larger investments.
----------------------------------------------------------------------------------------------------------
 Deferred Sales Charge?    Yes. Payable if you         Yes. Payable if you         No. (May be charged
                          redeem within six years     redeem within one year      for purchases over $1
                          of purchase.                of purchase.                million that are
                                                                                  redeemed within one
                                                                                  year.)
----------------------------------------------------------------------------------------------------------
 Account Maintenance      0.25% Annual Account        0.25% Annual Account        No.
 and Distribution Fees?   Maintenance Fee.            Maintenance Fee.
                          0.25% Annual                0.35% Annual
                          Distribution Fee.           Distribution Fee.
----------------------------------------------------------------------------------------------------------
 Conversion to Class A     Yes, automatically after    No.                         No.
 shares?                  approximately ten years.
----------------------------------------------------------------------------------------------------------




                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              19


Your Account
[GRAPHIC OMITTED]


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


If you select Class A or Class I shares, you will pay a sales charge at the
time of purchase as shown in the following table.




                                                                  DEALER
                                                               COMPENSATION
                             AS A % OF         AS A % OF        AS A % OF
YOUR INVESTMENT           OFFERING PRICE   YOUR INVESTMENT#   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##        None              None              None
------------------------    --------          ---------         --------




 # Rounded to the nearest one-hundredth percent.
## If you invest $1,000,000 or more in Class A or Class I shares, you may not
   pay an initial sales charge. In that case, the Manager compensates the
   selling dealer or other financial intermediary from its own funds. However,
   if you redeem your shares within one year after purchase, you may be charged
   a deferred sales charge. This charge is 1.00% of the lesser of the original
   cost of the shares being redeemed or your redemption proceeds. A sales
   charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
   A or Class I shares by certain employer-sponsored retirement or saving
   plans.


The table above shows the reduced sales charges for which you may qualify when
you purchase Class A or Class I shares of the Fund. You may qualify for
these reductions through a single purchase or under a RIGHT OF ACCUMULATION
or LETTER OF INTENT. These reductions will apply to the value of all
qualifying holdings in Class A, Class B, Class C or Class I shares of the Fund
or other Select PricingSM System mutual funds advised by the Manager or its
affiliates ("Select Pricing Funds") owned by you, your spouse and/or your
children under the age of twenty one. For this purpose, the value of your
holdings means the offering price of the newly purchased shares (including any
applicable sales charge) plus the higher of the current net asset value or
original cost (including any sales charges paid) of all shares you already hold
taken together. For purposes of the right of accumulation, you may not combine
with your other holdings shares held in pension, profit sharing or other
employee benefit plans if those shares are held in the name of a nominee or
custodian.


[SIDEBAR]

RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all qualifying Class A, Class B,
Class C and Class I shares taken together that you own in Select Pricing Funds.


LETTER OF INTENT -- permits you to pay the sales charge that would apply if you
add up all qualifying Class A, Class B, Class C and Class I shares of Select
Pricing Funds that you agree to buy within a 13-month period. Certain
restrictions apply.

[END SIDEBAR]

                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
20



In order to receive a reduced sales charge, at the time you purchase shares of
the Fund or any other Select Pricing Fund, you should inform your financial
adviser or other financial intermediary of any other Class A, Class B, Class C
and/or Class I shares of the Fund or any other Select PricingSM Fund owned by
you, your spouse and/or your children under the age of twenty one. These may
include shares held in accounts held at a selected securities dealer, or
another broker-dealer or other financial intermediary, including personal
accounts, certain retirement accounts, employee benefit plan accounts,
UGMA/UTMA accounts, Joint Tenancy accounts, Trust accounts and Transfer on
Death accounts, as well as shares purchased by a trust of which you are a
beneficiary. Your financial adviser or other financial intermediary may request
documentation -- including account statements and records of the original cost
of the shares owned by you, your spouse and/or your children under the age of
twenty one -- from you to show that you qualify for a reduced sales charge. You
should retain these records because -- depending on where an account is held or
the type of account -- the Fund, its Transfer Agent, and/or your financial
adviser or other financial intermediary may not be able to maintain this
information.



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



A sales charge waiver on a purchase of Class A or Class I shares may also apply
for:



     o    Trusts managed by banks, thrifts or trust companies, including those
          affiliated with the Manager or its affiliates, that meet certain
          conditions



     o    Investment or central asset accounts sponsored by the Manager or its
          affiliates, or by selected securities dealers or other financial
          intermediaries that meet certain conditions



     o    Purchases using proceeds from the sale of certain affiliated
          closed-end funds that meet certain conditions



     o    Investors, including directors or trustees of the Manager or its
          affiliates or of mutual funds sponsored by the Manager or its
          affiliates, employees or customers of the Manager or its affiliates,
          and employees or customers of selected securities dealers that meet
          certain qualifications




                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              21


Your Account
[GRAPHIC OMITTED]



     o    Fee-based programs of the Manager, its affiliates, or selected
          securities dealers and other financial intermediaries that have
          agreements with the Distributor or its affiliates and that meet
          certain conditions


More information about existing sales charge reductions and waivers is
available free of charge in a clear and prominent format via hyperlink at our
web site at www.mutualfunds.ml.com and in the Statement of Additional
Information, which is available on request.


Only certain investors are eligible to buy Class I shares. Your financial
adviser or other financial intermediary can help you determine whether you are
eligible to buy Class I shares or to participate in any of these programs.


If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class I shares, you should buy Class I
shares since Class A shares are subject to an annual 0.10% account maintenance
fee, while Class I shares are not. The Distributor normally pays the annual
0.10% Class A account maintenance fee to dealers as a service fee on a monthly
basis.


If you redeem Class A or Class I shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your financial
adviser, selected securities dealer or other financial intermediary or contact
the Fund's Transfer Agent at 1-800-637-3863.



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



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



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
22



the deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the financial adviser, selected
securities dealer or other financial intermediary who assists you in purchasing
Fund shares.


The Distributor currently pays a sales concession of 4.00% of the purchase
price of Class B shares to dealers from its own resources at the time of sale.
The Distributor also normally pays the annual 0.25% Class B account maintenance
fee to dealers as a service fee on a monthly basis. The Distributor normally
retains the Class B shares distribution fee.


The Distributor currently pays dealers a sales concession of 1.00% of the
purchase price of Class C shares from its own resources at the time of sale.
The Distributor pays the annual 0.35% Class C shares distribution fee and the
annual 0.25% Class C account maintenance fee as an ongoing concession and as a
service fee, respectively, to dealers for Class C shares held for over a year
and normally retains the Class C distribution fee and account maintenance fee
during the first year after purchase. Under certain circumstances, the
Distributor will pay the full Class C shares distribution fee and account
maintenance fee to dealers beginning in the first year after purchase in lieu
of paying the sales concession.



CLASS B SHARES


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






YEARS SINCE PURCHASE       SALES CHARGE#
----------------------   -----------------

  0 -- 1                        4.00%
----------------------   -----------
  1 -- 2                        4.00%
----------------------   -----------
  2 -- 3                        3.00%
----------------------   -----------
  3 -- 4                        3.00%
----------------------   -----------
  4 -- 5                        2.00%
----------------------   -----------
  5 -- 6                        1.00%
----------------------   -----------
  6 and thereafter               None
----------------------    -----------




 # The percentage charge will apply to the lesser of the original cost of the
  shares being redeemed or the proceeds of your redemption. Shares acquired
  through reinvestment of dividends are not subject to a deferred sales
  charge. For shares acquired prior to December 1, 2002, the four-year
  contingent deferred sales charge schedule in effect at that time will apply.
  Not all Select Pricing Funds have identical deferred sales charge schedules.
  If you exchange your shares for shares of another fund, the higher charge
  will apply.



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              23


Your Account
[GRAPHIC OMITTED]


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


     o    Redemption by certain group plans participating in the BlueprintSM
          Program sponsored by an affiliate of the Manager

     o    Redemption in connection with participation in certain fee-based
          programs of the Manager, its affiliates, or selected securities
          dealers or other financial intermediaries that have agreements with
          the Distributor or its affiliates or in connection with involuntary
          termination of an account in which Fund shares are held


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


     o    Withdrawal through the systematic withdrawal plan offered by an
          affiliate of the Manager (Systematic Withdrawal Plan) of up to 10% per
          year of your Class B account value at the time the plan is established



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



Different conversion schedules apply to Class B shares of different mutual
funds advised by the Manager or its affiliates. For example, Class B shares of
a fixed income fund typically convert approximately ten years after purchase
compared to approximately eight years for equity funds. If you acquire your
Class B shares in an exchange from another fund with a shorter conversion
schedule, the Fund's longer conversion schedule will apply. If you exchange
your Class B shares in the Fund for Class B shares of a fund with a longer
conversion schedule, the other fund's longer conversion schedule will apply.
The length of time that you hold both the original and exchanged Class B shares
in both



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
24


funds will count toward the conversion schedule. The conversion schedule may be
modified in certain other cases as well.


CLASS C SHARES



If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through a Systematic Withdrawal Plan.



Class C shares do not offer a conversion privilege.



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

The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through your financial adviser, a selected securities dealer,
broker, investment adviser, service provider or other financial intermediary.
You may also buy, sell, transfer and exchange shares through the Transfer
Agent. To learn more about buying, selling, transferring or exchanging shares
through the Transfer Agent, call 1-800-637-3863. Because the selection of a
mutual fund involves many considerations, your financial adviser or other
financial intermediary may help you with this decision.



Because of the high costs of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account (without charging any deferred sales
charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will
then have 60 days to make an additional investment to bring the value of your
account to at least $500 before the Fund takes any action. This involuntary
redemption does not apply to Uniform Gifts or Transfers to Minors Act accounts.


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              25


Your Account
[GRAPHIC OMITTED]





IF YOU WANT TO  YOUR CHOICES                      INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------

 Buy Shares      First, select the share class    Refer to the Select Pricing Fund table in this Prospectus. Be sure
                appropriate for you               to read this Prospectus carefully.
                --------------------------------------------------------------------------------------------------------
                 Next, determine the amount of    The minimum initial investment for the Fund is, $1,000 for all
                your investment                   accounts except that certain fee based programs have a $250
                                                  minimum investment
                                                  (The minimums for initial investments may be waived under
                                                  certain circumstances.)
                --------------------------------------------------------------------------------------------------------
                 Have your financial adviser,     The price of your shares is based on the next calculation of net
                selected securities dealer or     asset value after your order is placed. Any purchase orders
                other financial intermediary      placed prior to the close of business on the New York Stock
                submit your purchase order        Exchange (generally 4:00 p.m. Eastern time) will be priced at the
                                                  net asset value determined that day. Certain financial
                                                  intermediaries, however, may require submission of orders prior
                                                  to that time.
                                                  Purchase orders placed after that time will be priced at the net
                                                  asset value determined on the next business day. The Fund may
                                                  reject any order to buy shares and may suspend the sale of
                                                  shares at any time. Selected securities dealers or other financial
                                                  intermediaries may charge a processing fee to confirm a
                                                  purchase. Merrill Lynch, an affiliate of the Manager, generally
                                                  charges a processing fee of $5.35.
                --------------------------------------------------------------------------------------------------------
                 Or contact the Transfer Agent    To purchase shares directly, call the Transfer Agent at
                                                  1-800-637-3863 and request a purchase order. Mail the
                                                  completed purchase application to the Transfer Agent at the
                                                  address on the inside back cover of this Prospectus.
------------------------------------------------------------------------------------------------------------------------
 Add to Your     Purchase additional shares       The minimum investment for additional purchases is generally
 Investment                                       $50 except that certain programs, such as automatic investment
                                                  programs, may have higher minimums. (The minimums for
                                                  additional purchases may be waived under certain
                                                  circumstances.)
                --------------------------------------------------------------------------------------------------------
                 Acquire additional shares        All dividends are automatically reinvested without a sales
                through the automatic             charge.
                dividend reinvestment plan
                --------------------------------------------------------------------------------------------------------
                 Participate in the automatic     You may invest a specific amount on a periodic basis through
                investment plan                   certain investment or central asset accounts sponsored by the
                                                  Manager's affiliates.
------------------------------------------------------------------------------------------------------------------------



                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
26






IF YOU WANT TO       YOUR CHOICES                        INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------

 Transfer Shares     Transfer to a participating         You may transfer your Fund shares only to another securities
 to Another          securities dealer or other          dealer that has entered into an agreement with the Distributor.
 Securities Dealer   financial intermediary              Certain shareholder services may not be available for the
 or Other                                                transferred shares. You may only purchase additional shares of
 Financial                                               funds previously owned before the transfer. All future trading
 Intermediary                                            of these assets must be coordinated by the receiving firm.
                --------------------------------------------------------------------------------------------------------
                     Transfer to a non-participating     You must either:
                     securities dealer or other          o  Transfer your shares to an account with the Transfer Agent; or
                     financial intermediary
                                                         o  Sell your shares, paying any applicable deferred sales charge.
------------------------------------------------------------------------------------------------------------------------
 Sell Your Shares    Have your financial adviser,        The price of your shares is based on the next calculation of net
                     selected securities dealer or       asset value after your order is placed. For your redemption
                     other financial intermediary        request to be priced at the net asset value on the day of your
                     submit your sales order             request, you must submit your request to your dealer or other
                                                         financial intermediary prior to that day's close of business on
                                                         the New York Stock Exchange (generally 4:00 p.m. Eastern time).
                                                         Certain financial intermediaries, however, may require
                                                         submission of orders prior to that time. Any redemption request
                                                         placed after that time will be priced at the net asset value at the
                                                         close of business on the next business day.
                                                         Securities dealers or other financial intermediaries may charge a
                                                         fee to process a redemption of shares. Merrill Lynch generally
                                                         charges a fee of $5.35. No processing fee is charged if you redeem
                                                         shares directly through the Transfer Agent.
                                                         The Fund may reject an order to sell shares under certain
                                                         circumstances.
                --------------------------------------------------------------------------------------------------------
                     Sell through the Transfer Agent     You may sell shares held at the Transfer Agent by writing to the
                                                         Transfer Agent at the address on the inside back cover of this
                                                         Prospectus. All shareholders on the account must sign the letter.
                                                         A signature guarantee will generally be required but may be
                                                         waived in certain limited circumstances. You can obtain a
                                                         signature guarantee from a bank, securities dealer, securities
                                                         broker, credit union, savings association, national securities
                                                         exchange or registered securities association. A notary public
                                                         seal will not be acceptable. If you hold stock certificates, return
                                                         the certificates with the letter. The Transfer Agent will normally
                                                         mail redemption proceeds within seven days following receipt
                                                         of a properly completed request. If you make a redemption
                                                         request before the Fund has collected payment for the purchase
                                                         of shares, the Fund or the Transfer Agent may delay mailing
                                                         your proceeds. This delay will usually not exceed ten days.
                                                         You may also sell shares held at the Transfer Agent by telephone
                                                         request if the amount being sold is less than $50,000 and if
                                                         certain other conditions are met. Contact the Transfer Agent at
                                                         1-800-637-3863 for details.
------------------------------------------------------------------------------------------------------------------------



                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              27


Your Account
[GRAPHIC OMITTED]




IF YOU WANT TO    YOUR CHOICES                       INFORMATION IMPORTANT FOR YOU TO KNOW
------------------------------------------------------------------------------------------------------------------------

 Sell Shares      Participate in the Fund's          You can choose to receive systematic payments from your Fund
 Systematically   Systematic Withdrawal Plan         account either by check or through direct deposit to your bank
                                                     account on a monthly or quarterly basis. If you hold your fund
                                                     shares in a cash management account offered by an affiliate of
                                                     the Manager you can arrange for systematic redemptions of a
                                                     fixed dollar amount on a monthly, bi-monthly, quarterly,
                                                     semi-annual or annual basis, subject to certain conditions. Under
                                                     either method you must have dividends automatically
                                                     reinvested. For Class B and Class C shares your total annual
                                                     withdrawals cannot be more than 10% per year of the value of
                                                     your shares at the time your plan is established. The deferred
                                                     sales charge is waived for systematic redemptions.
                                                     Ask your financial adviser or other financial intermediary for
                                                     details.
------------------------------------------------------------------------------------------------------------------------
 Exchange Your    Select the fund into which you     You can exchange your Class A, Class B, Class C and Class I shares
 Shares           want to exchange. Be sure to       of the Fund for shares of many other Select Pricing Funds. You
                  read the fund's prospectus         must have held the shares used in the exchange for at least 15
                                                     calendar days before you can exchange to another fund.
                                                     Class A, Class B, Class C and Class I shares are generally
                                                     exchangeable for shares of the same class of another fund. If
                                                     you own Class I shares and wish to exchange into a fund in
                                                     which you have no Class I shares (and are not eligible to
                                                     purchase Class I shares), you will exchange into Class A shares.
                                                     Some of the Select Pricing Funds impose a different initial or
                                                     deferred sales charge schedule. If you exchange Class A or Class I
                                                     shares for shares of a fund with a higher initial sales charge than
                                                     you originally paid, you will be charged the difference at the
                                                     time of exchange. If you exchange Class B shares for shares of a
                                                     fund with a different deferred sales charge schedule, the higher
                                                     schedule will apply. The time you hold Class B or Class C shares
                                                     in both funds will count when determining your holding period
                                                     for calculating a deferred sales charge at redemption. If you
                                                     exchange Class A or Class I shares for money market fund shares,
                                                     you will receive Class A shares of Summit Cash Reserves Fund.
                                                     Class B or Class C shares of the Fund will be exchanged for Class
                                                     B shares of Summit Cash Reserves Fund.
                                                     To exercise the exchange privilege contact your financial adviser,
                                                     selected securities dealer or other financial intermediary or call
                                                     the Transfer Agent at 1-800-637-3863.
                                                     Although there is currently no limit on the number of exchanges
                                                     that you can make, the exchange privilege may be modified or
                                                     terminated at any time in the future.
------------------------------------------------------------------------------------------------------------------------





                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
28



SHORT-TERM TRADING


The Fund reserves the right to reject any purchase order, including exchanges.
Short-term or excessive trading (sometimes known as "market timing") into and
out of the Fund, particularly in larger amounts, may harm performance by
disrupting portfolio management strategies and by increasing expenses,
including brokerage and administrative costs, and may also dilute the value of
the holdings of other shareholders of the Fund. Short-term or excessive trading
may cause the Fund to retain more cash than the portfolio manager would
normally retain in order to meet unanticipated redemptions or may force the
Fund to sell portfolio securities at disadvantageous times to raise the cash
needed to meet those redemption or exchange requests. Accordingly, the Fund has
adopted certain policies and procedures, which have been reviewed and approved
by the Fund's Board of Trustee's, designed to deter such short-term or
excessive trading. Shareholders may not exchange their shares of the Fund for
shares of another mutual fund advised by the Manager or its affiliates unless
they have held the shares to be used in the exchange for at least fifteen days.
The Fund will reject purchase orders from investors who have previously
purchased and sold shares of the Fund within a fifteen day period. In addition,
the Fund will reject purchase orders, including exchanges that fall both
within and outside the fifteen day holding period, from market timers or other
investors if Fund management in its discretion has determined that such orders
are short-term or excessive, and will be disruptive to the Fund. For these
purposes, Fund management considers an investor's trading history in the Fund
or other funds advised by the Manager or its affiliates, and accounts under
common ownership or control. The Distributor has entered into agreements with
respect to financial advisers and other financial intermediaries that maintain
omnibus accounts with the Fund's Transfer Agent pursuant to which such
financial advisers and other financial intermediaries undertake to cooperate
with the Distributor in monitoring purchase, exchange and redemption orders by
their customers in order to detect and prevent short-term or excessive trading
in the Fund's shares through such accounts.


The Fund applies these policies to all shareholders. However, Fund management
may not be able to determine that a specific order, particularly with respect
to orders made through omnibus accounts or 401(k) plans, is short-term or



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              29


Your Account
[GRAPHIC OMITTED]



excessive, and will be disruptive to the Fund and so makes no representation
that all such orders can or will be rejected.


ANTI-MONEY LAUNDERING REQUIREMENTS


The Fund is subject to the USA Patriot Act (the "Patriot Act"). The Patriot Act
is intended to prevent the use of the U.S. financial system in furtherance of
money laundering, terrorism or other illicit activities. Pursuant to
requirements under the Patriot Act, the Fund may request information from
shareholders to enable it to form a reasonable belief that it knows the true
identity of its shareholders. This information will be used to verify the
identity of investors or, in some cases, the status of financial advisers; it
will be used only for compliance with the requirements of the Patriot Act. The
Fund reserves the right to reject purchase orders from persons who have not
submitted information sufficient to allow the Fund to verify their identity.
The Fund also reserves the right to redeem any amounts in the Fund from persons
whose identity it is unable to verify on a timely basis. It is the Fund's
policy to cooperate fully with appropriate regulators in any investigations
conducted with respect to potential money laundering, terrorism or other
illicit activities.





                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
30


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

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


The Fund generally values its portfolio securities using market prices provided
by an independent pricing service approved by the Fund's Board of Trustees. If
market quotations are not readily available or, in the Manager's judgment, they
do not accurately reflect fair value for a security, that security may be
valued by another method that the Board of Trustees believes more accurately
reflects the fair value. The Board has adopted valuation procedures for the
Fund and has delegated the day-to-day responsibility for fair value
determinations to the Manager's Valuation Committee. Fair value determinations
may be made by the Fund's independent pricing service using a matrix pricing
system or by the Valuation Committee after consideration of the material
factors that may affect the value of a particular security. Fair value
determinations by the Manager that materially affect the Fund's net asset value
are subject to review, approval or ratification, as appropriate, by the Board
of Trustees. The Fund's use of fair value pricing is designed to ensure that
the Fund's net asset value reflects the value of its underlying portfolio
securities as accurately as possible. There can be no assurance, however, that
a fair valuation used by the Fund on any given day will more accurately reflect
the market value of a security or securities than the market price of such
security or securities on that day.


The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the intermediary or designee and the order will receive the net asset value
next computed by the Fund after such acceptance. If the payment for a purchase
order is not made by a designated later time, the order will be canceled and
the financial intermediary could be held liable for any losses.


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


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              31


Your Account
[GRAPHIC OMITTED]


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



PARTICIPATION IN FEE-BASED PROGRAMS

--------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by the Manager or an
affiliate of the Manager, or selected securities dealers or other financial
intermediaries that have agreements with the Distributor, you may be able to
buy Class I shares at net asset value, including by exchanges from other share
classes. Sales charges on the shares being exchanged may be reduced or waived
under certain circumstances.


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


Shareholders that participate in a fee based program generally have two options
at termination. The program can be terminated and the shares liquidated or the
program can be terminated and the shares held in an account. In general, when a
shareholder chooses to continue to hold the shares, whatever share class was
held in the program can be held after termination. Shares that have been held
for less than specified periods within the program may be subject to a fee upon
redemption. Shareholders that held Class A or Class I shares in the program are
eligible to purchase additional shares of the respective share class of the
Fund, but may be subject to upfront sales charges. Additional purchases of Class
I shares are eligible only if you have an existing position at the time of
purchase or are otherwise eligible for Class I shares.



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
32



Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your
financial adviser, selected securities dealer or other financial intermediary.



DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

The Fund will distribute net investment income, if any, monthly and net
realized capital gains, if any, at least annually. The Fund may also pay a
special distribution at the end of the calendar year to comply with Federal tax
requirements. DIVIDENDS may be reinvested automatically in shares of the Fund
at net asset value or may be taken in cash. If you would like to receive
dividends in cash, contact your financial adviser, selected securities dealer,
other financial intermediary or the Transfer Agent.


The Fund intends to make distributions most of which will be excludable from
gross income for Federal income tax purposes.


The Fund will only purchase a tax-exempt or municipal security if it is
accompanied by an opinion of counsel to the issuer, which is delivered on the
date of issuance of the security, that the interest paid on such security is
excludable from gross income for Federal income tax purposes and exempt from
New York State and New York City personal income taxes (i.e., "tax-exempt"). To
the extent that the dividends distributed by the Fund are from bond interest
income that is excludable from gross income for Federal income tax purposes,
they are exempt from Federal income tax. To the extent that the distributions
by the Fund are derived from interest or gains from New York municipal bonds
and the Fund meets certain New York tax requirements, they are also exempt from
New York State and New York City personal income taxes. Interest income from
other investments may produce taxable distributions. Dividends derived from
capital gains realized by the Fund may be subject to New York State and New
York City personal income tax to the extent not attributable to gains from New
York municipal bonds. If you are subject to income tax in a state other than
New York, the dividends and gains derived from New York municipal bonds
generally will not be exempt from income tax in that state.


There is a possibility that events occurring after the date of issuance of a
security, or after the Fund's acquisition of a security, may result in a
determination that the interest on that security is, in fact, includable in
gross income for Federal


[SIDEBAR]
DIVIDENDS -- exempt-interest, ordinary income and capital gains paid to
shareholders. Dividends may be reinvested in additional Fund shares as they are
paid.

"BUYING A DIVIDEND"

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

[END SIDEBAR]


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              33


Your Account
[GRAPHIC OMITTED]



income tax purposes retroactively to its date of issue. Such a determination may
cause a portion of prior distributions received by shareholders to be taxable to
those shareholders in the year of receipt.


Distributions derived from taxable interest income or capital gains on
portfolio securities, if any, will be subject to Federal income taxes and will
generally be subject to state and local income taxes. If you redeem or exchange
shares of the Fund, you generally will be treated as having sold your shares
and any gain on the transaction may be subject to tax. Certain investors may be
subject to a Federal alternative minimum tax on dividends attributable to the
Fund's investment in private activity bonds.


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


By law, your dividends and redemption proceeds will be subject to a withholding
tax if you have not provided a taxpayer identification number or social
security number or if the number you have provided is incorrect.


This section summarizes some of the consequences under current Federal and New
York State or New York City income tax laws. It is not a substitute for
personal tax advice. You should consult your personal tax adviser about the
potential tax consequences of an investment in the Fund under all applicable
tax laws.



ELECTRONIC DELIVERY
--------------------------------------------------------------------------------

The Fund offers electronic delivery of communications to its shareholders. To
sign up for this service, simply access this website at
http://www.icsdelivery.com/live/ and follow the instructions. When you visit
this site, you will obtain a personal identification number (PIN). You will
need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make other changes to the service. This service
is not available for certain retirement accounts at this time.



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
34


Management of the Fund
[GRAPHIC OMITTED]


FUND ASSET MANAGEMENT, L.P.
--------------------------------------------------------------------------------

Fund Asset Management, L.P., the Fund's Manager, manages the Fund's investments
and its business operations under the overall supervision of the Fund's Board
of Trustees. The Manager has the responsibility for making all investment
decisions for the Fund. The Fund pays the Manager a fee at the annual rate of
0.55% of the average daily net assets of the Fund. The Manager has voluntarily
agreed to waive a portion of the fee if the Fund's net assets exceed $500
million so that the Fund would pay the Manager 0.55% of the average daily net
assets for the first $500 million; 0.525% of the average daily net assets from
$500 million to $1 billion; and 0.50% of the average daily net assets above $1
billion. For the fiscal year ended September 30, 2004, the Manager received a
fee at the annual rate of 0.55% of the Fund's average daily net assets.


Fund Asset Management, L.P. was organized as an investment adviser in 1977 and
offers investment advisory services to more than 50 registered investment
companies. Fund Asset Management, L.P. and its affiliates had approximately
$496 billion in investment company and other portfolio assets under management
as of December 2004.


CONFLICTS OF INTEREST


The investment activities of the Manager and its affiliates in the management
of, or their interest in, their own accounts and other accounts they manage,
may present conflicts of interest that could disadvantage the Fund and its
shareholders. The Manager provides investment management services to other
funds and discretionary managed accounts that follow an investment program
similar to that of the Fund. Merrill Lynch (including, for these purposes, the
Manager, Merrill Lynch & Co., Inc. and their affiliates, directors, partners,
trustees, managing members, officers and employees), is a diversified global
financial services firm involved with a broad spectrum of financial services
and asset management activities, that may, for example, engage in the ordinary
course of business in activities in which its interests or the interests of its
clients may conflict with those of the Fund. Merrill Lynch's trading activities
are carried out without reference to positions held directly or indirectly by
the Fund and may result in Merrill Lynch having positions that are adverse to
those of the Fund. Merrill Lynch is not under any obligation to share any
investment opportunity, idea or strategy with the Fund. As a result, Merrill
Lynch may compete with the Fund for appropriate investment opportunities. In
addition, the Fund may invest in securities of companies with which Merrill
Lynch has or is trying to develop investment banking relationships. The Fund
also may



                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              35


Management of the Fund
[GRAPHIC OMITTED]



invest in securities of companies for which Merrill Lynch provides or may some
day provide research coverage. The Fund may also make brokerage and other
payments to Merrill Lynch in connection with the Fund's portfolio investment
transactions.


The activities of the Manager or its affiliates may give rise to other
conflicts of interest that could disadvantage the Fund and its shareholders.
See the Statement of Additional Information for further information.





                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
36


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


The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects the
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned or lost on an investment in
the Fund (assuming reinvestment of all dividends). The information has been
audited by DELOITTE & TOUCHE LLP, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which is available upon
request.






                                                                        Class A
                                       -------------------------------------------------------------------------
                                                           For the Year Ended September 30,
                                       -------------------------------------------------------------------------
Increase (Decrease) in Net Asset
Value                                       2004         2003          2002            2001           2000
-------------------------------------  ------------- ------------- --------------- --------------- -------------

 Per Share Operating Performance:
-------------------------------------
 Net asset value, beginning of year      $  11.23      $  11.45      $  11.14        $  10.49        $  10.49
-------------------------------------    --------      --------      --------        --------        --------
 Investment income -- net                     .53#          .54#          .51             .50             .50
-------------------------------------    --------      --------      --------        --------        --------
 Realized and unrealized gain
 (loss) -- net                               (.20)         (.22)          .32             .64             .01
-------------------------------------    --------      --------      --------        --------        --------
 Total from investment operations             .33           .32           .83            1.14             .51
-------------------------------------    --------      --------      --------        --------        --------
 Less dividends and distributions:
 Investment income -- net                    (.53)         (.54)         (.52)           (.49)           (.50)
 Realized gain -- net                          --##          --            --##            --              --
 In excess of realized gain -- net             --            --            --              --            (.01)
-------------------------------------    --------      --------      --------        --------        --------
 Total dividends and distributions           (.53)         (.54)         (.52)           (.49)           (.51)
-------------------------------------    --------      --------      --------        --------        --------
 Net asset value, end of year            $  11.03      $  11.23      $  11.45        $  11.14        $  10.49
-------------------------------------    --------      --------      --------        --------        --------
 Total Investment Return:*
-------------------------------------
 Based on net asset value per share          3.05%         2.89%         7.73%          11.01%           5.08%
-------------------------------------    --------      --------      --------        --------        --------
 Ratios to Average Net Assets:
-------------------------------------
 Expenses, net of reimbursement               .84%          .84%          .80%**          .69%**          .79%
-------------------------------------    --------      --------      --------        --------        --------
 Expenses                                     .85%          .84%          .80%**          .69%**          .79%
-------------------------------------    --------      --------      --------        --------        --------
 Investment income -- net                    4.79%         4.83%         4.60%           4.56%           4.85%
-------------------------------------    --------      --------      --------        --------        --------
 Supplemental Data:
-------------------------------------
 Net assets, end of year (in
 thousands)                              $145,532      $150,395      $145,267        $134,563        $126,138
-------------------------------------    --------      --------      --------        --------        --------
 Portfolio turnover                         21.68%        55.91%        53.86%          76.22%         149.47%
-------------------------------------    --------      --------      --------        --------        --------




                                                                      Class B
                                       ----------------------------------------------------------------------
                                                          For the Year Ended September 30,
                                       ----------------------------------------------------------------------
Increase (Decrease) in Net Asset
Value                                      2004         2003          2002            2001          2000
-------------------------------------  ------------ ------------ --------------- --------------- ------------

 Per Share Operating Performance:
-------------------------------------
 Net asset value, beginning of year     $   11.23    $   11.46     $   11.15       $   10.50      $   10.49
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Investment income -- net                     .49#         .50#          .47             .45            .46
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Realized and unrealized gain
 (loss) -- net                               (.20)        (.24)          .32             .64            .02
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Total from investment operations             .29          .26           .79            1.09            .48
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Less dividends and distributions:
 Investment income -- net                    (.48)        (.49)         (.48)           (.44)          (.46)
 Realized gain --- net                         --##         --            --##            --             --
 In excess of realized gain -- net             --           --            --              --           (.01)
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Total dividends and distributions           (.48)        (.49)         (.48)           (.44)          (.47)
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Net asset value, end of year           $   11.04    $   11.23     $   11.46       $   11.15      $   10.50
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Total Investment Return:*
-------------------------------------
 Based on net asset value per share          2.72%        2.38%         7.29%          10.56%          4.75%
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Ratios to Average Net Assets:
-------------------------------------
 Expenses, net of reimbursement              1.25%        1.25%         1.21%**         1.10%**        1.20%
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Expenses                                    1.25%        1.25%         1.21%**         1.10%**        1.20%
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Investment income -- net                    4.39%        4.41%         4.19%           4.16%          4.44%
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Supplemental Data:
-------------------------------------
 Net assets, end of year (in
 thousands)                             $  57,409    $  78,510     $ 102,847       $ 123,173      $ 133,180
-------------------------------------   ---------    ---------     ---------       ---------      ---------
 Portfolio turnover                         21.68%       55.91%        53.86%          76.22%        149.47%
-------------------------------------   ---------    ---------     ---------       ---------      ---------




 # Based on average shares outstanding.
## Amount is less than $(.01) per share.
 * Total investment returns exclude the effects of sales charges.
**    The Fund did not pay an investment advisory fee to the Manager for a
      portion of the fiscal years ended September 30, 2001 and 2002. If the
      Fund had paid an investment advisory fee to the Manager for the entire
      fiscal years ended September 30, 2001 and 2002, the Fund's expenses as a
      percentage of its net assets would have been higher.


                           MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
                                                                              37


Management of the Fund
[GRAPHIC OMITTED]


FINANCIAL HIGHLIGHTS (CONCLUDED)
--------------------------------------------------------------------------------



                                                                      Class C
                                       ----------------------------------------------------------------------
                                                          For the Year Ended September 30,
                                       ----------------------------------------------------------------------
Increase (Decrease) in Net Asset
Value                                      2004         2003          2002            2001          2000
-------------------------------------  ------------ ------------ --------------- --------------- ------------

 Per Share Operating Performance:
-------------------------------------
 Net asset value, beginning of year      $  11.24     $  11.46      $  11.15        $  10.50       $  10.50
-------------------------------------    --------     --------      --------        --------       --------
 Investment income -- net#                    .48#         .48#          .45             .44            .45
-------------------------------------    --------     --------      --------        --------       --------
 Realized and unrealized gain
 (loss) -- net                               (.21)        (.22)          .32             .64            .01
-------------------------------------    --------     --------      --------        --------       --------
 Total from investment operations             .27          .26           .77            1.08            .46
-------------------------------------    --------     --------      --------        --------       --------
 Less dividends and distributions:
 Investment income -- net                    (.47)        (.48)         (.46)           (.43)          (.45)
 Realized gain -- net                          --##         --            --##            --             --
 In excess of realized gain -- net             --           --            --              --           (.01)
-------------------------------------    --------     --------      --------        --------       --------
 Total dividends and distributions:          (.47)        (.48)         (.46)           (.43)          (.46)
-------------------------------------    --------     --------      --------        --------       --------
 Net asset value, end of year            $  11.04     $  11.24      $  11.46        $  11.15       $  10.50
-------------------------------------    --------     --------      --------        --------       --------
 Total Investment Return:*
-------------------------------------
 Based on net asset value per share          2.53%        2.38%         7.19%          10.45%          4.55%
-------------------------------------    --------     --------      --------        --------       --------
 Ratios to Average Net Assets:
-------------------------------------
 Expenses, net reimbursement                 1.35%        1.34%         1.31%**         1.19%**        1.30%
-------------------------------------    --------     --------      --------        --------       --------
 Expenses                                    1.35%        1.35%         1.31%**         1.19%**        1.30%
-------------------------------------    --------     --------      --------        --------       --------
 Investment income -- net                    4.29%        4.32%         4.10%           4.05%          4.34%
-------------------------------------    --------     --------      --------        --------       --------
 Supplemental Data:
-------------------------------------
 Net assets, end of year (in
 thousands)                              $ 17,309     $ 16,729      $ 14,773        $  8,730       $  6,777
-------------------------------------    --------     --------      --------        --------       --------
 Portfolio turnover                         21.68%       55.91%        53.86%          76.22%        149.47%
-------------------------------------    --------     --------      --------        --------       --------




                                                                      Class I
                                       ----------------------------------------------------------------------
                                                          For the Year Ended September 30,
                                       ----------------------------------------------------------------------
Increase (Decrease) in Net Asset
Value                                      2004         2003           2002            2001          2000
-------------------------------------  ------------ ------------ --------------- --------------- ------------

 Per Share Operating Performance:
-------------------------------------
 Net asset value, beginning of year     $  11.23     $  11.46      $  11.14        $  10.49        $  10.49
-------------------------------------   --------     --------      --------        --------        --------
 Investment income -- net                    .54#         .55#          .52             .51             .51
-------------------------------------   --------     --------      --------        --------        --------
 Realized and unrealized gain
 (loss) -- net                              (.20)        (.23)          .33             .64             .01
-------------------------------------   --------     --------      --------        --------        --------
 Total from investment operations            .34          .32           .85            1.15             .52
-------------------------------------   --------     --------      --------        --------        --------
 Less dividends and distributions:
 Investment income -- net                   (.54)        (.55)         (.53)           (.50)           (.51)
 Realized gain -- net                         --##         --            --##            --             --
 In excess of realized gain -- net            --           --            --              --            (.01)
-------------------------------------   --------     --------      --------        --------        --------
 Total dividends and distributions:         (.54)        (.55)         (.53)           (.50)           (.52)
-------------------------------------   --------     --------      --------        --------        --------
 Net asset value, end of year           $  11.03     $  11.23      $  11.46        $  11.14        $  10.49
-------------------------------------   --------     --------      --------        --------        --------
 Total Investment Return:*
-------------------------------------
 Based on net asset value per share         3.15%        2.89%         7.93%          11.12%           5.19%
-------------------------------------   --------     --------      --------        --------        --------
 Ratios to Average Net Assets:
-------------------------------------
 Expenses, net reimbursement                 .74%         .74%          .71%**          .59%**          .70%
-------------------------------------   --------     --------      --------        --------        --------
 Expenses                                    .75%         .74%          .71%**          .59%**          .70%
-------------------------------------   --------     --------      --------        --------        --------
 Investment income -- net                   4.90%        4.92%         4.69%           4.66%           4.95%
-------------------------------------   --------     --------      --------        --------        --------
 Supplemental Data:
-------------------------------------
 Net assets, end of year (in
 thousands)                             $ 10,332     $ 10,275      $ 11,928        $ 17,553        $ 12,579
-------------------------------------   --------     --------      --------        --------        --------
 Portfolio turnover                        21.68%       55.91%        53.86%          76.22%         149.47%
-------------------------------------   --------     --------      --------        --------        --------




 #    Based on average shares outstanding.
##    Amount is less than $(.01) per share.
 *    Total investment returns exclude the effects of sales charges.
**    The Fund did not pay an investment advisory fee to the Manager for a
      portion of the fiscal years ended September 30, 2001 and 2002. If the
      Fund had paid an investment advisory fee to the Manager for the entire
      fiscal years ended September 30, 2001 and 2002, the Fund's expenses as a
      percentage of its net assets would have been higher.



                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
38


                                                         [GRAPHIC OMITTED]




                                                         POTENTIAL INVESTORS
                                                    Open an account (two options)


FINANCIAL ADVISER                                                                                                     TRANSFER AGENT
or SECURITIES DEALER                                                                                   FINANCIAL DATA SERVICES, INC.
Advises shareholders on their Fund investments.                                                               ADMINISTRATIVE OFFICES
                                                                                                           4800 Deer Lake Drive East
                                                                                                    Jacksonville, Florida 32232-5289
                                                                                                  Performs Shareholder recordkeeping
                                                                                                             and reporting services.


                                                            DISTRIBUTOR
                                                       FAM DISTRIBUTORS, INC.
                                                           P.O. Box 9081
                                                  Princeton, New Jersey 08543-9081
                                               Arranges for the sale of Funds shares.


COUNSEL                                                        THE FUND                                                    CUSTODIAN
SIDLEY AUSTIN BROWN & Wood LLP                           The Board of Trustees                                     STATE STREET BANK
787 Seventh Avenue                                        oversees the Fund.                                       AND TRUST COMPANY
New York, New York 10019-6018                                                                                           P.O. Box 351
Provides legal advice to the Fund.                                                                        Boston Massachusetts 02101
                                                                                            Holds the Fund's assets for safekeeping.


INDEPENDENT REGISTERED                                  ACCOUNTING SERVICES                                                  MANAGER
PUBLIC ACCOUNTING FIRM                                        PROVIDER                                   FUND ASSET MANAGEMENT, L.P.
DELOITTE & TOUCHE LLP                                STATE STREET BANK                                    ADMINISTRATIVE OFFICES
750 College Road East                                    AND TRUST COMPANY                                    800 Scudders Mill Road
Princeton, New Jersey 08540                            500 College Road East                            Plainsboro, New Jersey 08536
Audits the financial                                Princeton, New Jersey 08540                                      MAILING ADDRESS
statements of the Fund.                             Provides certain accounting                                        P.O. Box 9011
                                                       services to the Fund.                        Princeton, New Jersey 08543-9011
                                                                                                                      1-800-637-3863
                                                                                           Manages the Fund's day-to-day activities.


                   MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND


For More Information
[GRAPHIC OMITTED]

[SIDEBAR]
SHAREHOLDER REPORTS



Additional information about the Fund's investments is available in the Fund's
Annual and Semi-Annual Reports. In the Fund's Annual Report you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year. You may obtain
these reports at no cost at www.mutualfunds.ml.com or by calling 1-800-637-3863.



The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your financial adviser or
other financial intermediary or write to the Transfer Agent at its mailing
address. Include your name, address, tax identification number and brokerage or
mutual fund account number. If you have any questions, please call your
financial adviser or other financial intermediary or call the Transfer Agent at
1-800-637-3863.


STATEMENT OF ADDITIONAL INFORMATION


The Statement of Additional Information contains further information about the
Fund. The portions of the Statement of Additional Information relating to the
Fund are incorporated by reference into (legally considered part of) this
Prospectus. The portions of the Statement of Additional Information that do not
relate to the Fund are not incorporated by reference, are not part of this
Prospectus, and should not be relied on by investors in the Fund. You may
request a free copy by writing to the Fund at Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32231-5289 or by calling 1-800-637-3863.

Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the Securities and Exchange Commission's ("SEC")
Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information
on the operation of the public reference room. This information is also
available on the SEC's Internet site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee, by electronic request at the
following E-mail address: publicinfo@sec.gov, or by writing the Public
Reference Section of the SEC, Washington, D.C. 20549-0102.



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

Investment Company Act file #811-4375


Code #10342-0105


(Copyright)  Fund Asset Management, L.P.
[END SIDEBAR]





Prospectus
January 31, 2005


MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.

MERRILL LYNCH Investment Managers
www.mlim.ml.com

MERCURY Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com




                       STATEMENT OF ADDITIONAL INFORMATION



    MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE
                             MUNICIPAL SERIES TRUST

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


This Statement of Additional Information of Merrill Lynch New York Municipal
Bond Fund (the "Fund"), a series of Merrill Lynch Multi-State Municipal Series
Trust (the "Trust") is not a prospectus and should be read in conjunction with
the Prospectus of the Fund, dated January 31, 2005, which has been filed with
the Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling 1-800-637-3863 or by writing to the Fund at the
above address. The Fund's Prospectus is incorporated by reference into this
Statement of Additional Information, and Part I of this Statement of Additional
Information and the portions of Part II of this Statement of Additional
Information that relate to the Fund have been incorporated by reference into
the Fund's Prospectus. The portions of Part II of this Statement of Additional
Information that do not relate to the Fund do not form a part of the Fund's
Statement of Additional Information, have not been incorporated by reference
into the Fund's Prospectus and should not be relied upon by investors in the
Fund. The Fund's audited financial statements are incorporated into this
Statement of Additional Information by reference to the Fund's 2004 Annual
Report. You may request a copy of the Annual Report at no charge by calling
1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern time on any business
day.



                     FUND ASSET MANAGEMENT, L.P. -- MANAGER


                      FAM DISTRIBUTORS, INC. -- DISTRIBUTOR



    The date of this Statement of Additional Information is January 31, 2005



                                TABLE OF CONTENTS


Investment Objectives and Policies ...................................... I-2
Investment Restrictions ................................................. I-4
Information on Trustees and Officers .................................... I-5
Management and Advisory Arrangements ................................... I-10
Information on Sales Charges and Distribution Related Expenses ......... I-12
Computation of Offering Price Per Share ................................ I-14
Portfolio Transactions and Brokerage ................................... I-15
Fund Performance ....................................................... I-15
Additional Information ................................................. I-16

Financial Statements ................................................... I-17


PART II
Investment Risks and Considerations .................................... II-2
Management and Other Service Arrangements ............................. II-37
Purchase of Shares .................................................... II-44
Redemption of Shares .................................................. II-52
Shareholder Services .................................................. II-54
Pricing of Shares ..................................................... II-59
Portfolio Transactions and Brokerage .................................. II-61
Dividends and Taxes ................................................... II-64
Performance Data ...................................................... II-69
Proxy Voting Policies and Procedures .................................. II-71
General Information ................................................... II-74

Appendix A .............................................................. A-1
Appendix B .............................................................. B-1





PART I: INFORMATION ABOUT MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND OF MERRILL
                    LYNCH MULTI-STATE MUNICIPAL SERIES TRUST


Part I of this Statement of Additional Information sets forth information about
Merrill Lynch New York Municipal Bond Fund of Merrill Lynch Multi-State
Municipal Series Trust. It includes information about the Fund's Board of
Trustees, the advisory services provided to and the management fees paid by the
Fund, performance data for the Fund, and information about other fees paid by
and services provided to the Fund. This Part I should be read in conjunction
with the Fund's Prospectus and those portions of Part II of this Statement of
Additional Information that pertain to the Fund.



I.     INVESTMENT OBJECTIVES AND POLICIES


The investment objective of the Fund is to provide shareholders with income that
is exempt from Federal income tax and New York State and New York City personal
income taxes. The investment objective of the Fund is a fundamental policy and
may not be changed without a vote of a majority of the outstanding shares of the
Fund. There can be no assurance that the investment objective of the Fund will
be achieved. The Fund seeks to achieve its objective by investing primarily in a
portfolio of long-term investment grade obligations issued by or on behalf of
New York State, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto Rico,
the U.S. Virgin Islands and Guam, that pay interest that is, in the opinion of
bond counsel to the issuer, excludable from gross income for Federal income tax
purposes and exempt from New York State and New York City personal income taxes.
Obligations that pay interest excludable from gross income for Federal income
tax purposes are referred to herein as "Municipal Bonds," and obligations that
pay interest excludable from gross income for Federal income tax purposes and
exempt from New York State and New York City personal income taxes are referred
to as "New York Municipal Bonds." Unless otherwise indicated, references to
Municipal Bonds shall be deemed to include New York Municipal Bonds. The Fund is
classified as a diversified fund under the Investment Company Act of 1940, as
amended (the "Investment Company Act").


Under normal circumstances, except when acceptable securities are unavailable
as determined by Fund Asset Management, L.P. (the "Manager" or "FAM"), the
Fund's manager, or for temporary defensive purposes, the Fund will invest at
least 80% of its net assets in New York Municipal Bonds. For this purpose, net
assets include any borrowings for investment purposes. This policy is a
fundamental policy of the Fund and may not be changed without approval of a
majority of the Fund's outstanding shares.


Under normal circumstances, at least 80% of the Fund's assets will be invested
in Municipal Bonds that 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 Moody's Investors Service, Inc.
("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's ("S&P") (currently
AAA, AA, A and BBB) or Fitch Ratings ("Fitch") (currently AAA, AA, A and BBB).
If unrated, such securities will possess creditworthiness comparable, in the
opinion of the Manager, to other obligations in which the Fund may invest.
Securities rated in the lowest investment grade rating category may be
considered to have speculative characteristics.

The Fund may invest up to 20% of its assets in Municipal Bonds that are rated
below Baa by Moody's or below BBB by S&P or Fitch or that, 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 Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.


Under normal conditions, it is generally anticipated that the Fund's weighted
average maturity will be in excess of ten years. For temporary periods or to
provide liquidity, the Fund has the authority to invest as much as 35% of its
assets in tax-exempt or taxable money market obligations with a maturity of


                                      I-2


one year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
generally exceed 20% of the Fund's net assets.

The Fund may also invest in variable rate demand obligations ("VRDOs") and
VRDOs in the form of participation interests in variable rate tax-exempt
obligations held by a financial institution ("Participating VRDOs"). 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.

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


The Fund ordinarily does not intend to realize investment income that is not
excludable from gross income for Federal income tax purposes and exempt from
New York State and New York City personal income taxes. However, to the extent
that suitable New York 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, in the opinion
of bond counsel to the issuer, excludable from gross income for Federal income
tax purposes, but not exempt from New York State and New York City personal
income taxes. 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 excludable from gross income for
Federal income tax purposes ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities could include trust certificates or other
instruments evidencing interest in one or more long-term municipal securities.
Non-Municipal Tax-Exempt Securities also may include securities issued by other
investment companies that invest in New York Municipal Bonds or Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act. Certain Non-Municipal Tax-Exempt Securities may be characterized as
derivative instruments. For purposes of the Fund's investment objective and
policies, Non-Municipal Tax-Exempt Securities that pay interest that is
excludable from gross income for Federal income tax purposes will be considered
"Municipal Bonds" and Non-Municipal Tax-Exempt Securities that pay interest
that is excludable from gross income for Federal income tax purposes and exempt
from New York State and New York City personal income taxes will be considered
"New York Municipal Bonds." The Fund at all times will have at least 80% of its
net assets invested in securities the interest on which is, in the opinion of
bond counsel to the issuer, excludable from gross income for Federal income tax
purposes and exempt from New York State and New York City personal income
taxes. However, interest received on certain otherwise tax-exempt securities
that are classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) may be subject to a Federal alternative minimum tax.
The percentage of the Fund's total assets invested in "private activity bonds"
will vary during the year. Federal tax legislation has limited the types and
volume of bonds the interest on which qualifies for a Federal income tax
exemption. As a result, this legislation and legislation that may be enacted in
the future may affect the availability of Municipal Bonds for investment by the
Fund.


Description of Temporary Investments --The Fund may invest in short-term
tax-exempt and taxable securities subject to the limitations set forth above
and in the Prospectus under "How the Fund Invests." The tax-exempt money market
securities may include municipal notes, municipal commercial paper, municipal
bonds with a remaining maturity of less than one year, variable rate demand
notes and participations therein. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes and grant
anticipation notes. Anticipation notes are sold as interim financing in
anticipation of tax collection, bond sales, government grants or revenue
receipts. Municipal commercial paper refers to short-term unsecured promissory
notes generally issued to finance short-term credit needs. The taxable money
market securities in which the Fund may invest as Temporary Investments consist
of U.S. Government securities, U.S. Government agency securities, domestic bank
or


                                      I-3


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 date of purchase. The Fund may not invest in any
security issued by a commercial bank or a savings institution unless the bank
or institution is organized and operating in the United States, has total
assets of at least $1 billion and is a member of the Federal Deposit Insurance
Corporation ("FDIC"), except that up to 10% of total assets may be invested in
certificates of deposit of smaller institutions if such certificates are fully
insured by the FDIC.


II.    INVESTMENT RESTRICTIONS

The Trust, on behalf of the Fund, has adopted restrictions and policies
relating to the investment of its assets and its activities. Certain of the
restrictions are fundamental policies of the Trust 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 Investment Company Act,
means the lesser of (i) 67% of the shares present at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Trust has also adopted certain non-fundamental
investment restrictions, which may be changed by the Board of Trustees without
shareholder approval.


Set forth below are the Trust's fundamental and non-fundamental investment
restrictions. Unless otherwise provided, all references below to the assets of
the Fund are in terms of current market value.


Under the Trust's fundamental investment restrictions, the Fund may not:

(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.

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

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

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

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

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

(7) Borrow money, except that (i) the Fund may borrow from banks (as defined in
the Investment Company Act) in amounts up to 331/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of portfolio securities and (iv) the
Fund may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such borrowings
or, to the extent permitted by the Fund's investment policies as set forth in
its Prospectus and Statement of


                                      I-4


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.

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

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

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

(a) Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law. As a matter of policy, however,
the Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G)
(the "fund of funds" provisions) of the Investment Company Act, at any time the
Fund's shares are owned by another investment company that is part of the same
group of investment companies as the Fund.

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

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

(d) Notwithstanding fundamental investment restriction (7) 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.


Except with respect to restriction (7), if a percentage restriction on the
investment or use of assets set forth above is adhered to at the time a
transaction is effected, later changes in percentages resulting from changing
values will not be considered a violation.

For purposes of investment restriction (2) above, the Fund uses the
classifications and subclassifications of Morgan Stanley Capital International
as a guide to identify industries.



III.   INFORMATION ON TRUSTEES AND OFFICERS


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

Each non-interested Trustee is a member of the Trust's Audit Committee (the
"Audit Committee"). The principal responsibilities of the Audit Committee are
the appointment, compensation and oversight of the Fund's independent
accountants, including the resolution of disagreements regarding financial
reporting between Fund management and such independent accountants. The Audit
Committee's responsibilities include, without limitation, to (i) review with
the independent accountants the arrangements for and scope of annual and
special audits and any other services provided by the independent accountants
to the Fund; (ii) discuss with the independent accountants certain matters
relating to the Fund's financial statements, including any adjustment to such
financial statements recommended by such



                                      I-5



independent accountants or any other results of any audit; (iii) ensure that
the independent accountants submit on a periodic basis a formal written
statement with respect to their independence, discuss with the independent
accountants any relationships or services disclosed in the statement that may
impact the objectivity and independence of the Fund's independent accountants
and recommend that the Board take appropriate action in response thereto to
satisfy itself of the independent accountants' independence; and (iv) consider
the comments of the independent accountants with respect to the quality and
adequacy of the Fund's accounting and financial reporting policies and
practices and internal controls and Fund management's responses thereto. The
Trust's Board has adopted a written charter for the Audit Committee. The Audit
Committee has retained independent legal counsel to assist it in connection
with these duties. The Audit Committee met four times during the fiscal year
ended September 30, 2004.


The Trust also has a Nominating Committee, which consists of three of the
non-interested Trustees: Herbert I. London, Roberta Cooper Ramo and Robert S.
Salomon. The principal responsibilities of the Nominating Committee are to
identify individuals qualified to serve as non-interested Trustees of the Trust
and to recommend its nominees for consideration by the full Board. While the
Nominating Committee is solely responsible for the selection and nomination of
the Trust's non-interested Trustees, the Nominating Committee may consider
nominations for the office of Trustee made by Fund shareholders as it deems
appropriate. Fund shareholders who wish to recommend a nominee should send
nominations to the Secretary of the Trust that include biographical information
and set forth the qualifications of the proposed nominee. The Nominating
Committee met once during the Trust's fiscal year ended September 30, 2004.



BIOGRAPHICAL INFORMATION



Certain biographical and other information relating to the non-interested
Trustees of the Trust is set forth below, including their ages, their principal
occupations for at least the last five years, the length of time served, the
total number of investment companies and portfolios overseen in the complex of
funds advised by the Manager, Merrill Lynch Investment Managers, L.P. ("MLIM")
or their affiliates ("MLIM/FAM-advised funds") and other public directorships.







                                   TERM OF
                     POSITION(S)   OFFICE## AND
NAME, ADDRESS#       HELD WITH     LENGTH OF TIME
AND AGE OF TRUSTEE   THE TRUST     SERVED
-------------------- ------------- ----------------

James H.             Trustee       Trustee since
Bodurtha(60)*                      1995




                                                                      NUMBER OF
                                                                      MLIM/FAM-
                                                                      ADVISED FUNDS
NAME, ADDRESS#           PRINCIPAL OCCUPATION(S) DURING PAST FIVE     AND PORTFOLIOS   PUBLIC
AND AGE OF TRUSTEE                         YEARS                      OVERSEEN         DIRECTORSHIPS
-------------------- ------------------------------------------------ ---------------- --------------

James H.             Director, The China Business Group, Inc. since   38 registered    None
Bodurtha(60)*        1996 and Executive Vice President thereof        investment
                     from 1996 to 2003; Chairman of the Board,        companies
                     Berkshire Holding Corporation since 1980;        consisting of
                     Partner, Squire, Sanders & Dempsey from          55 portfolios
                     1980 to 1993.



                                       I-6






                                   TERM OF
                     POSITION(S)   OFFICE## AND
NAME, ADDRESS#       HELD WITH     LENGTH OF TIME
AND AGE OF TRUSTEE   THE TRUST     SERVED
-------------------- ------------- ----------------

Joe Grills(69)*      Trustee       Trustee since
                                   2002
Herbert I.           Trustee       Trustee since
London(65)                         1987
Roberta Cooper       Trustee       Trustee since
Ramo(62)                           2000
Robert S.            Trustee       Trustee since
Salomon(68)                        2002




                                                                       NUMBER OF
                                                                       MLIM/FAM-
                                                                       ADVISED FUNDS
NAME, ADDRESS#            PRINCIPAL OCCUPATION(S) DURING PAST FIVE     AND PORTFOLIOS   PUBLIC
AND AGE OF TRUSTEE                         YEARS                       OVERSEEN         DIRECTORSHIPS
-------------------- ------------------------------------------------- ---------------- --------------

Joe Grills (69)*     Member of the Committee of Investment of          38 registered    Kimco Realty
                     Employee Benefit Assets of the Association of     investment       Corporation
                     Financial Professionals ("CIEBA") since 1986;     companies
                     Member of CIEBA's Executive Committee             consisting of
                     since 1988 and its Chairman from 1991 to          55 portfolios
                     1992; Assistant Treasurer of International
                     Business Machines Corporation ("IBM") and
                     Chief Investment Officer of IBM Retirement
                     Funds from 1986 to 1993; Member of the
                     Investment Advisory Committee of the State of
                     New York Common Retirement Fund since
                     1989; Member of the Investment Advisory
                     Committee of the Howard Hughes Medical
                     Institute from 1997 to 2000; Director, Duke
                     University Management Company from 1992
                     to 2004, Vice Chairman thereof from 1998 to
                     2004, and Director Emeritus thereof since
                     2004; Director, LaSalle Street Fund from 1995
                     to 2001; Director, Kimco Realty Corporation
                     since 1997; Member of the Investment
                     Advisory Committee of the Virginia
                     Retirement System since 1998 and Vice
                     Chairman thereof since 2002 ; Director,
                     Montpelier Foundation since 1998 and its
                     Vice Chairman since 2000; Member of the
                     Investment Committee of the Woodberry
                     Forest School since 2000; Member of the
                     Investment Committee of the National Trust
                     for Historic Preservation since 2000.
Herbert I.           John M. Olin Professor of Humanities, New         38 registered    None
London (65)          York University since 1993 and Professor          investment
                     thereof since 1980; President, Hudson Institute   companies
                     since 1997 and Trustee thereof since 1980;        consisting of
                     Dean, Gallatin Division of New York               55 portfolios
                     University from 1976 to 1993; Distinguished
                     Fellow, Herman Kahn Chair, Hudson Institute
                     from 1984 to 1985; Director, Damon Corp.
                     from 1991 to 1995; Overseer, Center for
                     Naval Analyses from 1983 to 1993.
Roberta Cooper       Shareholder, Modrall, Sperling, Roehl, Harris     38 registered    None
Ramo (62)            & Sisk, P.A. since 1993; President, American      investment
                     Bar Association from 1995 to 1996 and             companies
                     Member of the Board of Governors thereof          consisting of
                     from 1994 to 1997; Shareholder, Poole, Kelly      55 portfolios
                     and Ramo, Attorneys at Law P.C. from 1977
                     to 1993; Director of ECMC Group (service
                     provider to students, schools and lenders)
                     since 2001; Director, United New Mexico
                     Bank (now Wells Fargo) from 1983 to 1988;
                     Director, First National Bank of New Mexico
                     (now Wells Fargo) from 1975 to 1976; Vice
                     President, American Law Institute since 2004.
Robert S.            Principal of STI Management (investment           38 registered    None
Salomon (68)         adviser) since 1994; Chairman and CEO of          investment
                     Salomon Brothers Asset Management Inc.            companies
                     from 1992 to 1995; Chairman of Salomon            consisting of
                     Brothers Equity Mutual Funds from 1992 to         55 portfolios
                     1995; regular columnist with Forbes Magazine
                     from 1992 to 2002; Director of Stock
                     Research and U.S. Equity Strategist at
                     Salomon Brothers Inc. from 1975 to 1991;
                     Trustee, Commonfund from 1980 to 2001.



                                       I-7






                                                                                                  NUMBER OF
                                   TERM OF                                                        MLIM/FAM-
                     POSITION(S)   OFFICE## AND                                                   ADVISED FUNDS
NAME, ADDRESS#       HELD WITH     LENGTH OF TIME      PRINCIPAL OCCUPATION(S) DURING PAST FIVE   AND PORTFOLIOS   PUBLIC
AND AGE OF TRUSTEE   THE TRUST     SERVED                               YEARS                     OVERSEEN         DIRECTORSHIPS
-------------------- ------------- ---------------- --------------------------------------------- ---------------- --------------

Stephen B.           Trustee       Trustee since    Chairman of Fernwood Advisors, Inc.           39 registered    None
Swensrud (71)                      2002             (investment adviser) since 1996; Principal,   investment
                                                    Fernwood Associates (financial consultants)   companies
                                                    since 1975; Chairman of R.P.P. Corporation    consisting of
                                                    (manufacturing company) since 1978;           56 portfolios
                                                    Director of International Mobile
                                                    Communications, Inc. (telecommunications)
                                                    since 1998.



------------
 # The address of each non-interested Trustee is P.O. Box 9095, Princeton, New
   Jersey 08543-9095.

## Each Trustee serves until his or her successor is elected and qualified, or
   until his or her death, resignation, or removal as provided in the Trust's
   by-laws or charter or by statute, or until December 31 of the year in which
   he or she turns 72.
 * Co-Chairman of the Board of Trustees and Co-Chairman of the Audit Committee.



Certain biographical and other information relating to the Trustee who is an
officer and "interested person" of the Fund as defined in the Investment
Company Act and to the other officers of the Fund is set forth below, including
their ages, their principal occupations for at least the last five years, the
length of time served, the total number of MLIM/FAM-advised funds overseen and
other public directorships:







                                     TERM OF
                       POSITION(S)   OFFICE##
                       HELD WITH     AND
NAME, ADDRESS#         THE           LENGTH OF TIME
AND AGE                FUND          SERVED
---------------------- ------------- -----------------

Robert C. Doll, Jr.*   President     Trustee** and
 (50)                  and Trustee   President since
                                     2005
Donald C. Burke        Vice          Vice President
 (44)                  President     since 1993 and
                       and           Treasurer since
                       Treasurer     1999
Kenneth A. Jacob       Senior Vice   Senior Vice
 (50)                  President     President since
                                     2001
John Loffredo (39)     Senior Vice   Senior Vice
                       President     President since
                                     2001
Timothy T. Browse      Vice          Vice President
 (50)                  President     since 2004
                       and
                       Portfolio
                       Manager




                                                                     NUMBER OF
                                                                     MLIM/FAM-
                                                                     ADVISED
                                                                     FUNDS AND
NAME, ADDRESS#                    PRINCIPAL OCCUPATION(S)            PORTFOLIOS       PUBLIC
AND AGE                            DURING PAST FIVE YEARS            OVERSEEN         DIRECTORSHIPS
---------------------- --------------------------------------------- ---------------- --------------

Robert C. Doll, Jr.*   President MLIM Funds since 2005; President    107 registered   None
 (50)                  of MLIM and FAM since 2001, Co-Head (Americas investment
                       Region) thereof from 2000 to 2001 and Senior  companies
                       Vice President from 1999 to 2001; President   consisting of
                       and Director of Princeton Services, Inc.      127 portfolios
                       ("Princeton Services") since 2001; President
                       of Princeton Administrators, L.P. ("Princeton
                       Administrators") since 2001; Chief Investment
                       Officer of OppenheimerFunds, Inc. in 1999 and
                       Executive Vice President thereof from 1991 to
                       1999.
Donald C. Burke        First Vice President of MLIM and FAM since    123 registered   None
 (44)                  1997 and the Treasurer thereof since 1999;    investment
                       Senior Vice President and Treasurer of        companies
                       Princeton Services since 1999 and Director    consisting of
                       since 2004; Vice President of FAMD since      162 portfolios
                       1999; Vice President of MLIM and FAM from
                       1990 to 1997; Director of Taxation of MLIM
                       from 1990 to 2001.
Kenneth A. Jacob       Managing Director of MLIM since 2000; First   37 registered    None
 (50)                  Vice President of MLIM from 1997 to 2000;     investment
                       Vice President of MLIM from 1984 to 1997;     companies
                                                                     consisting of
                                                                     40 portfolios
John Loffredo (39)     Managing Director of MLIM since 2000; First   37 registered    None
                       Vice President of MLIM from 1997 to 2000;     investment
                       Vice President of MLIM from 1991 to 1997.     companies
                                                                     consisting of
                                                                     49 portfolios
Timothy T. Browse      Vice President (Tax-Exempt Fixed Income) and  4 registered     None
 (50)                  portfolio manager with the Tax-Exempt Fixed   investment
                       Income group of MLIM; Vice President,         companies
                       portfolio manager and team leader of the      consisting of 3
                       Municipal Investments Team with Lord Abbett   portfolios
                       & Co. from 2000 to 2003; Vice President and
                       portfolio manager in the municipal fund
                       management group of Eaton Vance
                       Management, Inc. from 1992 to 2000.



                                       I-8






                                    TERM OF
                      POSITION(S)   OFFICE##
                      HELD WITH     AND
NAME, ADDRESS#        THE           LENGTH OF TIME
AND AGE               FUND          SERVED
--------------------- ------------- -----------------

Jeffrey Hiller (53)   Chief         Chief
                      Compliance    Compliance
                      Officer       Officer since
                                    2004
Alice A. Pellegrino   Secretary     Secretary since
  (44)                              2004




                                                                    NUMBER OF
                                                                    MLIM/FAM-
                                                                    ADVISED
                                                                    FUNDS AND
NAME, ADDRESS#                   PRINCIPAL OCCUPATION(S)            PORTFOLIOS       PUBLIC
AND AGE                           DURING PAST FIVE YEARS            OVERSEEN         DIRECTORSHIPS
--------------------- --------------------------------------------- ---------------- --------------

Jeffrey Hiller (53)   Chief Compliance Officer of the               124 registered   None
                      MLIM/FAM-advised funds and First Vice         investment
                      President and Chief Compliance Officer of     companies
                      MLIM (Americas) since 2004; Global Director   consisting of
                      of Compliance at Morgan Stanley Investment    163 portfolios
                      Management from 2002 to 2004; Managing
                      Director and Global Director of Compliance
                      at Citigroup Asset Management from 2000 to
                      2002; Chief Compliance Officer at Soros Fund
                      Management in 2000; Chief Compliance
                      Officer at Prudential Financial from 1995 to
                      2000; Senior Counsel in the Commission's
                      Division of Enforcement in Washington, D.C.
                      from 1990 to 1995.
Alice A. Pellegrino   Director (Legal Advisory) of MLIM since       123 registered   None
  (44)                2002; Vice President of MLIM from 1999 to     companies
                      2002; Attorney associated with MLIM since     consisting of
                      1997; Secretary of MLIM, FAM, FAMD and        162 portfolios
                      Princeton Services since 2004.



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

 # The address of each Trustee and officer listed above is P.O. Box 9011,
   Princeton, New Jersey 08543-9011.
## Each officer is elected by and serves at the pleasure of the Board of
   Trustees of the Fund.
 * Mr. Doll is an "interested person," as defined in the Investment Company
   Act, of the Fund based on his positions with FAM, MLIM, Princeton Services
   and Princeton Administrators, L.P.
** As a Trustee, Mr. Doll serves until his successor is elected and qualified,
   until December 31 of the year in which he turns 72, or until his death,
   resignation, or removal as provided in the Trust's By-laws or charter or by
   statute.


  SHARE OWNERSHIP


Information relating to each Trustee's share ownership in the Fund and in all
MLIM/FAM-advised funds that are overseen by the respective Trustee ("Supervised
Funds") as of December 31, 2004 is set forth in the chart below.







                                                         AGGREGATE DOLLAR RANGE
                              AGGREGATE DOLLAR RANGE        OF SECURITIES IN
           NAME                OF EQUITY IN THE FUND        SUPERVISED FUNDS
--------------------------   ------------------------   -----------------------

Interested Trustee:
  Robert C. Doll, Jr.                 None                   Over $100,000
Non-Interested Trustees:
  James H. Bodurtha                   None                   Over $100,000
  Joe Grills                          None                   Over $100,000
  Herbert I. London               $10,001-$50,000            Over $100,000
  Roberta Cooper Ramo                 None                   Over $100,000
  Robert S. Salomon                   None                   Over $100,000
  Stephen B. Swensrud                 None              $10,001-$50,000



Trustees of the Fund may purchase Class I shares of the Fund at net asset
value.


As of January 10, 2005, the Trustees and officers of the Fund as a group owned
an aggregate of less than 1% of the outstanding shares of the Fund. As of
December 31, 2004, none of the non-interested Trustees of the Fund or their
immediate family members owned beneficially or of record any securities in
Merrill Lynch & Co., Inc. ("ML & Co.").


  COMPENSATION OF TRUSTEES


Each non-interested Trustee receives an annual retainer of $125,000 for his or
her services to the MLIM/FAM-advised funds. The portion of the annual retainer
allocated to each MLIM/FAM-advised fund is determined quarterly based on the
relative net assets of each fund. In addition, each non-interested Trustee
receives a fee for each in-person Board meeting attended and each in-person
Audit Committee meeting attended. The annual per-meeting fees paid to each
non-interested Trustee aggregate



                                      I-9



$100,000, for all MLIM/FAM-advised funds for which that Trustee serves and are
allocated equally among those funds. Each Co-Chairman of the Audit Committee
receives an additional annual retainer in the amount of $50,000, which is paid
quarterly and allocated to each MLIM/FAM-advised fund for which such
Co-Chairman provides services, based on the relative net assets of each such
fund.

The following table sets forth the compensation earned by the non-interested
Trustees for the fiscal year ended September 30, 2004 and the aggregate
compensation paid to them by all MLIM/FAM-advised funds for the calendar ended
December 31, 2004.







                                                                           AGGREGATE COMPENSATION
                                                PENSION OR RETIREMENT        FROM THE FUND AND
                                                       BENEFITS                    OTHER
                         COMPENSATION FROM     ACCRUED AS PART OF FUND        MLIM/FAM-ADVISED
         NAME                 THE FUND                 EXPENSES                   FUNDS #
---------------------   -------------------   -------------------------   -----------------------

James H. Bodurtha##     $2,492                           None             $250,000
Joe Grills##            $2,492                           None             $250,000
Herbert I. London       $2,331                           None             $225,000
Andre F. Perold*        $2,331                           None             $168,750
Roberta Cooper Ramo     $2,331                           None             $225,000
Robert S. Salomon       $2,331                           None             $225,000
Stephen B. Swensrud     $2,331                           None             $231,000




------------
 # For the number of MLIM/FAM-advised funds from which each Trustee receives
   compensation, see chart beginning on p. I-6.
## Co-Chairman of the Board of Trustees and Co-Chairman of the Audit Committee.

 *
     Mr. Perold resigned as a Trustee effective October 1, 2004.



IV.    MANAGEMENT AND ADVISORY ARRANGEMENTS


The Trust, on behalf the Fund, has entered into a management agreement with FAM
(the "Management Agreement"). Pursuant to the Management Agreement, the Manager
receives for its services to the Fund a monthly fee at the annual rate of 0.55%
of the average daily net assets of the Fund. In the event that the Fund's
average daily net assets exceed $500 million, the Manager has voluntarily
agreed to waive a portion of the compensation due under the Management
Agreement and to receive a fee calculated as follows:






 PORTION OF AVERAGE DAILY NET ASSETS:       RATE
--------------------------------------   ----------

Not exceeding $500 million                0.55%
In excess of $500 million but not
exceeding $1 billion                     0.525%
In excess of $1 billion                   0.50%


The Manager may discontinue or reduce this waiver of fees at any time without
notice.


For the fiscal year ended September 30, 2004, the Manager received a fee equal
to 0.55% of the Fund's average daily net assets. Set forth below are the total
management fees paid by the Fund to the Manager pursuant to the Management
Agreement for the fiscal years ended September 30, 2004, 2003 and 2002:







 FISCAL YEAR ENDED SEPTEMBER 30,     MANAGEMENT FEE
---------------------------------   ---------------

               2004                 $ 1,336,830#
               2003                 $ 1,443,859#
               2002                 $1,341,038##



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

 # In Fiscal Years 2004 and 2003, the Manager reimbursed $12,204 and $19,802,
   respectively, of the Fund's management fee in connection with the Fund's
   investment in an affiliated money market fund.
## On July 31, 2001, as a result of the inadvertent termination of the
   Management Agreement, the Fund ceased paying a management fee, pending
   shareholder approval of a new Management Agreement with the Manager. If the
   Fund had paid a fee for the



                                      I-10



(footnote continued from previous page)

     entire fiscal year, the management fee would have been approximately
     $1,500,021 in 2002. The new Management Agreement was approved by
     shareholders and became effective on November 7, 2001.



At each quarterly meeting of the Board of Trustees and the Audit Committee, the
Board of Trustees and the Audit Committee receive, review and evaluate
information concerning the nature, extent and quality of the services provided
by and the personnel of the Manager and its affiliates. While particular focus
is given to information concerning profitability, comparability of fees and
total expenses and Fund performance at the meeting at which the renewal of the
Management Agreement is considered, the evaluation process is an ongoing one
and includes deliberations at other quarterly meetings in addition to the
annual renewal meeting.

In connection with the Board of Trustees' consideration of the Management
Agreement, the Board received from the Manager financial and performance data
for the Fund and information as to services rendered to the Fund and
compensation paid to affiliates of the Manager by the Fund. The Board also
received from Lipper Inc. information comparing the Fund to certain other
non-MLIM/FAM-advised open-end New York municipal bond funds. This information
included comparative data on performance, the Fund's fee rate for advisory and
administrative services and ratios for management expenses, investment-related
expenses and total expenses. In particular, the Board of Trustees noted that
the Fund had a contractual management fee rate at a common asset level that was
very slightly (0.009%) above the median of the twelve funds in its category.
The Board of Trustees also found that the Fund's actual management fee rate,
which includes advisory and administrative services and the effects of any fee
waivers, as a percentage of total assets at a common asset level was slightly
(less than 0.05%) above the median in its category. The Board also compared the
Fund's total expenses to those of other, similarly managed funds and concluded
that the Fund's expenses were below the median of the Funds in its group. The
Board also noted that the Fund had historical net performance that was in the
second quartile of the funds in the applicable group for the one and three year
periods, although it was in the fourth quartile for the five year period, a
portion of which was under a different portfolio manager. The Board also
requested, received and considered profitability information related to the
management revenues from the Fund. Based upon the information reviewed and
their discussion, the Trustees concluded that the Fund's management fee rate
schedule was reasonable in relation to the services provided by the Manager to
the Fund as well as the costs incurred and benefits to be gained by the Manager
and its affiliates in providing such services. The Board also found the
management fee and total expense ratio to be reasonable in comparison to the
fees charged by other comparable funds of similar size.

The Board of Trustees considered the compensation paid to the Manager and the
services provided to the Fund by the Manager under the Management Agreement, as
well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. These services
include administrative services, stockholder services, oversight of fund
accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund. The
Board of Trustees also considered the direct and indirect benefits to the
Manager from its relationship with the Fund. Based on their experience as
Trustees of the Trust and as directors of other MLIM/FAM-advised funds, the
Board of Trustees concluded that the Fund benefits, and should continue to
benefit, from those services.

In reviewing the Management Agreement, the Board focused on the experience,
resources and strengths of the Manager and its affiliates in managing
investment companies that invest primarily in Municipal Bonds and New York
Municipal Bonds -- including other MLIM/FAM-advised funds that have investment
objectives and strategies substantially similar to those of the Fund. The Board
considered the amount of fixed income assets, including tax-exempt fixed income
assets, under the management of the Manager and its affiliates as well as the
experience of the Fund's portfolio management team. The Board noted that the
Manager is one of the largest managers of tax-exempt fixed income fund assets
and has over twenty-five years experience investing in Municipal Bonds and New
York Municipal Bonds, and that Timothy T. Browse, the Fund's portfolio manager,
has over ten years of experience investing in Municipal



                                      I-11



Bonds. The Board also noted that, in connection with the Fund's investments in
Municipal Bonds and New York Municipal Bonds, the Manager may need to assess the
quality of such Municipal Bonds and New York Municipal Bonds by performing an
independent credit analysis of the issuer of such bonds, as well as of any
insurance, letters of credit or similar credit enhancements to which particular
Municipal Bonds and New York Municipal Bonds are entitled and the
creditworthiness of the financial institutions that provide such credit
enhancement, and that the Manager has substantial expertise and experience in
such analysis. The Board noted that the Manager has a high level of expertise in
managing the types of investments used by the Fund and concluded that the Fund
benefits, and should continue to benefit, from that expertise. The Board of
Trustees based its conclusions on the Trustees' experience as directors of other
open-end and closed-end investment companies managed by the Manager that invest
in Municipal Bonds and/or New York Municipal Bonds and on their experience with
the credit analysis and risk management performed by the Manager.


The Board considered whether there should be changes in the advisory fee rate
or structure in order to enable the Fund to participate in any economies of
scale that the Manager may experience as a result of growth in the Fund's
assets. The Board determined that the current management fee rate schedule,
which includes a number of breakpoints that reduce the Fund's management fee
rate as the aggregate assets of the Fund increase, was reasonable and that no
changes are currently necessary. The non-interested Trustees were represented
by independent counsel who assisted them in their deliberations.



  TRANSFER AGENCY SERVICES



The following table sets forth the fees paid to the transfer agent by the Fund
for the periods indicated:







 FISCAL YEAR ENDED SEPTEMBER 30,     TRANSFER AGENT FEES
---------------------------------   --------------------

               2004                 $128,006
               2003                 $148,765
               2002                 $192,234




  ACCOUNTING SERVICES



The table below shows the amount paid by the Fund to State Street Bank and
Trust Company ("State Street") and to the Manager for accounting services for
the periods indicated:






 FISCAL YEAR ENDED        PAID TO       PAID TO THE
   SEPTEMBER 30,       STATE STREET       MANAGER
-------------------   --------------   ------------

        2004          $117,355         $ 5,943
        2003          $122,112         $ 5,797
        2002          $124,575         $14,002



V.     INFORMATION ON SALES CHARGES AND DISTRIBUTION RELATED EXPENSES


Set forth below is information on sales charges (including any contingent
deferred sales charges ("CDSCs")) received by the Fund, including the amounts
paid to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
for each of the Fund's last three fiscal years.


                                      I-12


  CLASS A AND CLASS I SALES CHARGE INFORMATION





                                                                       CLASS A SHARES
                                            ---------------------------------------------------------------------
                                                                                                   CDSCS RECEIVED
                                                                                                   ON REDEMPTION
                                             GROSS SALES     SALES CHARGES      SALES CHARGES            OF
                                               CHARGES        RETAINED BY      PAID TO MERRILL      LOAD-WAIVED
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30,      COLLECTED       DISTRIBUTOR           LYNCH              SHARES
-----------------------------------------   -------------   ---------------   -----------------   ---------------

                   2004                     $ 32,771        $3,733            $29,038             $0
                   2003                     $ 34,316        $3,845            $30,471             $0
                   2002                     $ 32,255        $3,031            $29,224             $0







                                                                       CLASS I SHARES
                                            ---------------------------------------------------------------------
                                                                                                   CDSCS RECEIVED
                                                                                                   ON REDEMPTION
                                             GROSS SALES     SALES CHARGES      SALES CHARGES            OF
                                               CHARGES        RETAINED BY      PAID TO MERRILL      LOAD-WAIVED
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30,      COLLECTED       DISTRIBUTOR           LYNCH              SHARES
-----------------------------------------   -------------   ---------------   -----------------   ---------------

                   2004                     $1,637          $137              $1,500              $     0
                   2003                     $3,724          $345              $3,379              $ 9,262
                   2002                     $3,428          $280              $3,148              $17,057


  CLASS B AND C SALES CHARGE INFORMATION






                                                      CLASS B# SHARES
                                            ------------------------------------
                                             CDSCS RECEIVED        CDSCS PAID
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30,     BY DISTRIBUTOR     TO MERRILL LYNCH
-----------------------------------------   ----------------   -----------------

                   2004                     $ 58,101           $ 58,101
                   2003                     $ 93,101           $ 93,101
                   2002                     $101,731           $101,731







                                                       CLASS C SHARES
                                            ------------------------------------
                                             CDSCS RECEIVED        CDSCS PAID
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30,     BY DISTRIBUTOR     TO MERRILL LYNCH
-----------------------------------------   ----------------   -----------------

                   2004                     $5,661             $5,661
                   2003                     $3,407             $3,407
                   2002                     $4,911             $4,911



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

 # Additional Class B CDSCs payable to the Distributor may have been waived or
   converted to a contingent obligation in connection with a shareholder's
   participation in certain fee-based programs.

As of September 30, 2004, direct cash distribution revenues for the period
since the commencement of operations of Class B shares exceeded direct cash
distribution expenses by $26,452,782 (42.97% of Class B average net assets at
that date). As of September 30, 2004, direct cash distribution revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash distribution expenses by $316,250 (1.82% of Class C average net assets at
that date).

For the fiscal year ended September 30, 2004, the Fund paid the Distributor
$147,997 pursuant to the Class A Distribution Plan (based on average daily net
assets subject to such Class A Distribution Plan of approximately $147.8
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class A shares. For the fiscal year
ended September 30, 2004, the Fund paid the Distributor $336,046 pursuant to
the Class B Distribution Plan (based on average daily net assets subject to
such Class B Distribution Plan of approximately $67.1 million), all of which
was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended September 30, 2004, the Fund paid the Distributor
$105,380 pursuant to the Class C Distribution Plan (based on average daily net
assets subject



                                      I-13


to such Class C Distribution Plan of approximately $17.5 million), all of which
was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.



  LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES



The following table sets forth comparative information as of September 30, 2004
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.







                                         DATA CALCULATED AS OF SEPTEMBER 30, 2004
                                                      (IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------
                                                                                                                  ANNUAL
                                                                                                               DISTRIBUTION
                                               ALLOWABLE   ALLOWABLE                  AMOUNTS                     FEE AT
                                   ELIGIBLE    AGGREGATE    INTEREST    MAXIMUM      PREVIOUSLY    AGGREGATE     CURRENT
                                    GROSS        SALES     ON UNPAID     AMOUNT       PAID TO        UNPAID     NET ASSET
                                    SALES#     CHARGES##    BALANCE*    PAYABLE    DISTRIBUTOR**    BALANCE       LEVEL+
                                ------------- ----------- ----------- ----------- --------------- ----------- -------------

CLASS B SHARES, FOR THE PERIOD
NOVEMBER 1, 1985
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 2004
Under NASD Rule as Adopted       $1,488,953     $91,694    $188,618    $280,312       $35,318      $244,994        $146
Under Distributor's Voluntary
Maximum                          $1,488,953     $91,694    $  8,810    $100,504       $35,318      $ 65,186        $146
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 2004
Under NASD Rule as Adopted       $   30,421     $ 2,122    $    720    $  2,842       $   315      $  2,527        $ 61



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


#  Purchase price of all eligible Class B or Class C shares sold during the
   periods indicated other than shares acquired through dividend reinvestment
   and the exchange privilege.
## Includes amounts attributable to exchanges from Summit Cash Reserves Fund
   ("Summit") that are not reflected in Eligible Gross Sales. Shares of Summit
   can only be purchased by exchange from another fund (the "redeemed fund").
   Upon such an exchange, the maximum allowable sales charge payment to the
   redeemed fund is reduced in accordance with the amount of the redemption.
   This amount is then added to the maximum allowable sales charge payment with
   respect to Summit. Upon an exchange out of Summit, the remaining balance of
   this amount is deducted from the maximum allowable sales charge payment to
   Summit and added to the maximum allowable sales charge payment to the fund
   into which the exchange is made.
*  Interest is computed on a monthly basis based upon the prime rate, as
   reported in The Wall Street Journal plus 1.00% as permitted under the NASD
   Rule.
** Consists of CDSC payments, distribution fee payments and accruals. See "Key
   Facts -- Fees and Expenses" in the Prospectus. This figure may include CDSCs
   that were deferred when a shareholder redeemed shares prior to the expiration
   of the applicable CDSC period and invested the proceeds, without the
   imposition of a sales charge, in Class I shares in conjunction with the
   shareholder's participation in the Merrill Lynch Mutual Fund Advisor ("MFA")
   program. The CDSC is booked as a contingent obligation that may be payable if
   the shareholder terminates participation in the MFA program.
+  Provided to illustrate the extent to which the current level of distribution
   fee payments (not including any CDSC payments) is amortizing the unpaid
   balance. No assurance can be given that payments of the distribution fee will
   reach either the voluntary maximum (with respect to Class B shares) or the
   NASD maximum (with respect to Class B and Class C shares).


VI.    COMPUTATION OF OFFERING PRICE PER SHARE



An illustration of the computation of the offering price for Class A, Class B,
Class C and Class I shares of the Fund based on the value of the Fund's net
assets and number of sales outstanding on September 30, 2004 is set forth
below.



                                      I-14






                                              CLASS A             CLASS B            CLASS C            CLASS I
                                         -----------------   ----------------   ----------------   ----------------

Net Assets                               $145,532,288        $57,408,692        $17,309,235        $10,332,395
Number of Shares Outstanding              13,195,702          5,202,180          1,568,069            936,583
Net Asset Value Per
Share (net assets divided
by number of shares outstanding)         $     11.03         $    11.04         $    11.04         $    11.03
Sales Charge (for Class A and Class I
Shares: 4.00% of offering price;
4.17% of net asset value per share)#             .46                 ##                 ##                .46
Offering Price                           $     11.49         $    11.04         $    11.04         $    11.49




------------
 # 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 Part II "Purchase of
   Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
   in this Statement of Additional
     Information.



VII.   PORTFOLIO TRANSACTIONS AND BROKERAGE

See Part II "Portfolio Transactions and Brokerage" in this Statement of
Additional Information for more information.

Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:






                                     AGGREGATE BROKERAGE     COMMISSIONS PAID
 FISCAL YEAR ENDED SEPTEMBER 30,       COMMISSION PAID       TO MERRILL LYNCH
---------------------------------   ---------------------   -----------------

               2004                 $ 2,689                 $    0
               2003                 $ 4,025                 $1,595
               2002                 $14,049                 $    0



VIII.  FUND PERFORMANCE


Set forth in the tables below is information on average annual total return
(before and after taxes), for the Class A, Class B, Class C and Class I shares
of the Fund for the periods indicated expressed as a percentage based on a
hypothetical $1,000 investment.







                                                                        AVERAGE ANNUAL TOTAL RETURN
                                                                 (INCLUDING MAXIMUM APPLICALE SALES CHARGE)
                                                 --------------------------------------------------------------------------
                    PERIOD                        CLASS A SHARES#     CLASS B SHARES     CLASS C SHARES     CLASS I SHARES#
----------------------------------------------   -----------------   ----------------   ----------------   ----------------

One Year Ended September 30, 2004                 -1.08%              -1.21%            1.54%               -0.98%
Five Years Ended September 30, 2004               5.05%               5.17%             5.37%               5.15%
Ten Years Ended September 30, 2004                  --                5.05%               --                5.15%
Inception (October 21, 1994) to September 30,
2004                                              5.15%                 --              5.06%                 --







                                                                        AVERAGE ANNUAL TOTAL RETURN
                                                                          AFTER TAXES ON DIVIDENDS
                                                                (INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
                                                 --------------------------------------------------------------------------
                    PERIOD                        CLASS A SHARES#     CLASS B SHARES     CLASS C SHARES     CLASS I SHARES#
----------------------------------------------   -----------------   ----------------   ----------------   ----------------

One Year Ended September 30, 2004                 -1.09%              -1.22%            1.53%               -0.99%
Five Years Ended September 30, 2004               5.04%               5.16%             5.36%               5.14%
Ten Years Ended September 30, 2004                  --                4.98%               --                5.08%
Inception (October 21, 1994) to September 30,
2004                                              5.09%                 --              4.99%                 --



                                      I-15






                                                                        AVERAGE ANNUAL TOTAL RETURN
                                                                  AFTER TAXES ON DIVIDENDS AND REDEMPTION
                                                                (INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
                                                 --------------------------------------------------------------------------
                    PERIOD                        CLASS A SHARES#     CLASS B SHARES     CLASS C SHARES     CLASS I SHARES#
----------------------------------------------   -----------------   ----------------   ----------------   ----------------

One Year Ended September 30, 2004                0.92%               0.75%              2.50%              1.02%
Five Years Ended September 30, 2004              5.01%               5.08%              5.23%              5.11%
Ten Years Ended September 30, 2004                 --                4.97%                --               5.11%
Inception (October 21, 1994) to September 30,
2004                                             5.10%                 --               4.97%                --



------------
 #

     Prior to April 14, 2003, Class A shares were designated Class D and Class
I shares were designated Class A.



IX.    ADDITIONAL INFORMATION


     DESCRIPTION OF SHARES


The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22,1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is an
open-end management investment company comprised of separate Series, each of
which is a separate portfolio offering shares to selected groups of purchasers.
Each of the Series is managed independently in order to provide shareholders
who are residents of the state to which such Series relates with income exempt
from Federal, and in certain cases, state and local income taxes. The Trustees
are authorized to create an unlimited number of Series and, with respect to
each Series, to issue an unlimited number of full and fractional shares of
beneficial interest, $.10 par value per share, of different classes and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series. The
Trust is presently comprised of the Merrill Lynch Florida Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch Pennsylvania
Municipal Bond Fund and Merrill Lynch New York Municipal Bond Fund. Shareholder
approval is not required for the authorization of additional Series or classes
of a Series of the Trust.

     PRINCIPAL SHAREHOLDERS


To the knowledge of the Fund, the following entities owned beneficially or of
record 5% or more of the Fund's shares as of January 14, 2005:







NAME                                               ADDRESS                    PERCENTAGE AND CLASS
-------------------------------   ----------------------------------------   ---------------------

LAWRENCE KATZMAN                  800 Scudders Mill Road, Plainsboro, NJ     12.42% of Class I
                                  08536
MERRILL LYNCH TRUST CO., FSB      800 Scudders Mill Road, Plainsboro, NJ     8.47% of Class I
TTEE OMAR BUTLER SUPP'L NEEDS     08536
TRUST#
MRS. RUTH HALLE ROWEN             800 Scudders Mill Road, Plainsboro, NJ     5.22% of Class I
                                  08536
JOSEPH SIRULNICK                  800 Scudders Mill Road, Plainsboro, NJ     8.86% of Class A
                                  08536



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

 # Record holder on behalf of certain employee, personal trust or savings plan
   accounts for which it acts as a trustee.

     STATE TAX ISSUES

The portion of the Fund's exempt-interest dividends paid from interest received
by the Fund from New York Municipal Bonds will be exempt from New York State
and New York City personal income taxes. Shareholders subject to income
taxation by states other than New York and cities other than New York City will
realize a lower after-tax rate of return than New York State and/or City
shareholders since the



                                      I-16



dividends distributed by the Fund generally will not be exempt, to any
significant degree, from income taxation by such other states and/or cities.
The Trust will inform shareholders annually regarding the portion of the Fund's
distributions that constitutes exempt-interest dividends and the portion that
is exempt from New York State and New York City personal income taxes.


Interest on indebtedness incurred or continued to purchase or carry Fund shares
is not deductible for New York State and New York City personal income tax
purposes to the extent attributable to exempt-interest dividends.


Fund distributions derived from income on its taxable investments or from the
excess of net short-term capital gains over net long-term capital losses are
considered ordinary income for New York State and New York City personal income
tax purposes. Distributions from capital gains for New York State and New York
City personal income tax purposes are treated as capital gains which are taxed
at ordinary income tax rates.


Distributions from investment income and capital gains, including
exempt-interest dividends, will be subject to New York State corporate
franchise tax, New York City general corporation tax and may also be subject to
other state and local taxes. Accordingly, investors in the Fund, in particular
corporate investors, should consult their tax advisers with respect to the
application of such taxes to an investment in the Fund, to the receipt of Fund
dividends and as to their New York tax situation in general.



X.     FINANCIAL STATEMENTS



The Fund's audited financial statements, including the report of the
independent registered public accounting firm, are incorporated in the Fund's
Statement of Additional Information by reference to its 2004 Annual Report. You
may request a copy of the Annual Report at no charge by calling 1-800-637-3863
between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.




                                      I-17



                                    PART II


Part II of this Statement of Additional Information contains information about
the following funds: Core Bond Portfolio, High Income Portfolio and
Intermediate Term Portfolio of Merrill Lynch Bond Fund, Inc. ("Bond Fund");
Merrill Lynch California Insured Municipal Bond Fund of the Merrill Lynch
California Municipal Series Trust ("California Insured"); Merrill Lynch
Inflation Protected Fund ("Inflation Protected"); Merrill Lynch Low Duration
Fund of Merrill Lynch Investment Managers Funds, Inc. ("Low Duration"); Insured
Portfolio, National Portfolio and Limited Maturity Portfolio of Merrill Lynch
Municipal Bond Fund, Inc. ("Municipal Bond"); Merrill Lynch Municipal
Intermediate Term Fund of Merrill Lynch Municipal Series Trust ("Municipal
Intermediate Term"); Merrill Lynch Florida Municipal Bond Fund ("Florida
Municipal Bond"), Merrill Lynch New Jersey Municipal Bond Fund ("New Jersey
Municipal Bond"), Merrill Lynch New York Municipal Bond Fund ("New York
Municipal Bond") and Merrill Lynch Pennsylvania Municipal Bond Fund
("Pennsylvania Municipal Bond") of Merrill Lynch Multi-State Municipal Series
Trust; Merrill Lynch Short Term U.S. Government Fund, Inc. ("Short Term U.S.
Government"); Merrill Lynch Real Investment Fund ("Real Investment"); Merrill
Lynch U.S. Government Mortgage Fund ("U.S. Government Mortgage"); Merrill Lynch
U.S. High Yield Fund, Inc. ("U.S. High Yield") and Merrill Lynch World Income
Fund, Inc. ("World Income").

Throughout this Statement of Additional Information, each of the above listed
funds may be referred to as a "Fund" or collectively as the "Funds." California
Insured, Municipal Bond, Municipal Intermediate Term, Florida Municipal Bond,
New Jersey Municipal Bond, New York Municipal Bond and Pennsylvania Municipal
Bond are collectively referred to herein as the "Municipal Funds."

Each Fund is organized as a Maryland corporation, a Massachusetts business
trust or a Delaware statutory trust. In each jurisdiction, nomenclature varies.
For ease and clarity of presentation, shares of common stock and shares of
beneficial interest are referred to herein as "shares" or "Common Stock,"
holders of shares or Common Stock are referred to as "shareholders," the
trustees or directors of each Fund are referred to as "Directors," Merrill
Lynch Investment Managers, L.P. ("MLIM") or Fund Asset Management, L.P.
("FAM"), as applicable, is the investment adviser or manager of each Fund and
each is referred to as the "Manager," and the investment advisory agreement or
management agreement applicable to each Fund is referred to as the "Management
Agreement." Each Fund's Articles of Incorporation, Declaration of Trust or
Agreement and Declaration of Trust, together with all amendments thereto, is
referred to as its "charter." The Investment Company Act of 1940, as amended,
is referred to herein as the "Investment Company Act" and the Securities and
Exchange Commission is referred to as the "Commission."

Certain Funds are "feeder" funds (each, a "Feeder Fund") that invest all of
their assets in a corresponding "master" portfolio (each, a "Master Portfolio")
of a master trust (each, a "Master Trust"), a mutual fund that has the same
objective and strategies as the corresponding Feeder Fund. All investments are
generally made at the level of the Master Trust. This structure is sometimes
called a "master/feeder" structure. A Feeder Fund's investment results will
correspond directly to the investment results of the underlying Master Trust in
which it invests. For simplicity, this Statement of Additional Information uses
the term "Fund" to include both a Feeder Fund and its Master Trust.


INVESTMENT RISKS AND CONSIDERATIONS


Set forth below are descriptions of some of the types of investments and
investment strategies that one or more of the Funds may use, and the risks and
considerations associated with those investments and investment strategies.
Please see each Fund's Prospectus and the "Investment Objectives and Policies"
section in Part I of each Fund's Statement of Additional Information for a
complete description of each Fund's investment policies and risks. Information
contained in this section about the risks and considerations associated with a
Fund's investments and/or investment strategies applies only to those Funds
specifically identified as making each type of investment or using each
investment strategy (each, a "Covered Fund").

                                      II-1



Information that does not apply to a Covered Fund does not form a part of that
Covered Fund's Statement of Additional Information and should not be relied on
by investors in that Covered Fund. Only information that is clearly identified
as applicable to a Covered Fund is considered to form a part of that Covered
Fund's Statement of Additional Information.


                                      II-2






                                                                       BOND FUND - CORE BOND PORTFOLIO

144 A Securities                                                                      X
Asset Backed Securities                                                               X
Borrowing and Leverage                                                                X
Convertible Securities                                                                X
Corporate Loans
Debt Securities                                                                       X
Derivatives                                                                           X
Hedging                                                                               X
Indexed and Inverse Floating Rule                                                     X
Swap Agreements                                                                       X
Interest Rate Swaps, Caps and Floors                                                  X
Credit Default Swap Agreements                                                        X
Credit Linked Securities                                                              X
Total Return Swap Agreements                                                          X
Hybrid Instruments
Options on Securities and Securities Indices                                          X
Call Options                                                                          X
Put Options                                                                           X
Options on Government National Mortgage Association ("GNMA")
 Certificates                                                                         X
Types of Options                                                                      X
Futures                                                                               X
Foreign Exchange Transactions                                                         X
Forward Foreign Exchange Transactions                                                 X
Currency Futures                                                                      X
Currency Options                                                                      X
Limitations on Currency Hedging                                                       X
Risk Factors in Hedging Foreign Currency Risks                                        X
Risk Factors in Derivatives                                                           X
Credit Risk                                                                           X
Currency Risk                                                                         X
Leverage Risk                                                                         X
Liquidity Risk                                                                        X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                   X
Distressed Securities
Dollar Rolls                                                                          X
Foreign Investment Risks                                                              X
Foreign Market Risk                                                                   X
Foreign Economy Risk                                                                  X
Currency Risk and Exchange Risk                                                       X
Government Supervision and Regulation / Accounting Standards                          X
Certain Risks of Holding Fund Assets Outside the United States                        X
Settlement Risk                                                                       X
Illiquid or Restricted Securities                                                     X
Inflation-indexed Bonds                                                               X
Investment in Emerging Markets                                                        X
Restriction on Certain Investments
Investment in Other Investment Companies                                              X
Junk Bonds                                                                            X
Mortgage-Related Securities                                                           X
Mortgage Backed Securities                                                            X
Mortgage Pass-Through Securities                                                      X
Collateralized Mortgage Obligations ("CMOs")                                          X
Adjustable Rate-Mortgage Securities                                                   X
CMO Residulas                                                                         X
Stripped Mortgage Backed Securities                                                   X
Tiered Index Bonds                                                                    X
Municipal Investments
Risk Factors and Special Considerations Relating to Municipal Bonds
Description of Municipal Bonds
General Obligation Bonds
Revenue Bonds
PABs
Moral Obligation Bonds
Municipal Notes
Municipal Commercial Paper
Municipal Lease Obligations
Yields
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs
Transactions in Financial Futures Contracts
Call Rights
Municipal Interest Rate Swap Transactions
Real Estate Investment Trusts ("REITS")                                               X
Repurchase Agreements and Purchase and Sale Contracts                                 X
Reverse Repurchase Agreements                                                         X




                                                                       BOND FUND - HIGH INCOME PORTFOLIO

144 A Securities                                                                       X
Asset Backed Securities                                                                X
Borrowing and Leverage                                                                 X
Convertible Securities                                                                 X
Corporate Loans                                                                        X
Debt Securities                                                                        X
Derivatives                                                                            X
Hedging                                                                                X
Indexed and Inverse Floating Rule                                                      X
Swap Agreements                                                                        X
Interest Rate Swaps, Caps and Floors                                                   X
Credit Default Swap Agreements                                                         X
Credit Linked Securities                                                               X
Total Return Swap Agreements                                                           X
Hybrid Instruments
Options on Securities and Securities Indices                                           X
Call Options                                                                           X
Put Options                                                                            X
Options on Government National Mortgage Association ("GNMA")
 Certificates                                                                          X
Types of Options                                                                       X
Futures                                                                                X
Foreign Exchange Transactions                                                          X
Forward Foreign Exchange Transactions                                                  X
Currency Futures                                                                       X
Currency Options                                                                       X
Limitations on Currency Hedging                                                        X
Risk Factors in Hedging Foreign Currency Risks                                         X
Risk Factors in Derivatives                                                            X
Credit Risk                                                                            X
Currency Risk                                                                          X
Leverage Risk                                                                          X
Liquidity Risk                                                                         X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                    X
Distressed Securities                                                                  X
Dollar Rolls                                                                           X
Foreign Investment Risks                                                               X
Foreign Market Risk                                                                    X
Foreign Economy Risk                                                                   X
Currency Risk and Exchange Risk                                                        X
Government Supervision and Regulation / Accounting Standards                           X
Certain Risks of Holding Fund Assets Outside the United States                         X
Settlement Risk                                                                        X
Illiquid or Restricted Securities                                                      X
Inflation-indexed Bonds                                                                X
Investment in Emerging Markets                                                         X
Restriction on Certain Investments
Investment in Other Investment Companies                                               X
Junk Bonds                                                                             X
Mortgage-Related Securities                                                            X
Mortgage Backed Securities                                                             X
Mortgage Pass-Through Securities                                                       X
Collateralized Mortgage Obligations ("CMOs")                                           X
Adjustable Rate-Mortgage Securities                                                    X
CMO Residulas                                                                          X
Stripped Mortgage Backed Securities                                                    X
Tiered Index Bonds                                                                     X
Municipal Investments
Risk Factors and Special Considerations Relating to Municipal Bonds
Description of Municipal Bonds
General Obligation Bonds
Revenue Bonds
PABs
Moral Obligation Bonds
Municipal Notes
Municipal Commercial Paper
Municipal Lease Obligations
Yields
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs
Transactions in Financial Futures Contracts
Call Rights
Municipal Interest Rate Swap Transactions
Real Estate Investment Trusts ("REITS")                                                X
Repurchase Agreements and Purchase and Sale Contracts                                  X
Reverse Repurchase Agreements                                                          X




                                                                       BOND FUND - INTERMEDIATE TERM PORTFOLIO

144 A Securities                                                                          X
Asset Backed Securities                                                                   X
Borrowing and Leverage                                                                    X
Convertible Securities                                                                    X
Corporate Loans
Debt Securities                                                                           X
Derivatives                                                                               X
Hedging                                                                                   X
Indexed and Inverse Floating Rule                                                         X
Swap Agreements                                                                           X
Interest Rate Swaps, Caps and Floors                                                      X
Credit Default Swap Agreements                                                            X
Credit Linked Securities                                                                  X
Total Return Swap Agreements                                                              X
Hybrid Instruments
Options on Securities and Securities Indices                                              X
Call Options                                                                              X
Put Options                                                                               X
Options on Government National Mortgage Association ("GNMA")
 Certificates                                                                             X
Types of Options                                                                          X
Futures                                                                                   X
Foreign Exchange Transactions                                                             X
Forward Foreign Exchange Transactions                                                     X
Currency Futures                                                                          X
Currency Options                                                                          X
Limitations on Currency Hedging                                                           X
Risk Factors in Hedging Foreign Currency Risks                                            X
Risk Factors in Derivatives                                                               X
Credit Risk                                                                               X
Currency Risk                                                                             X
Leverage Risk                                                                             X
Liquidity Risk                                                                            X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                       X
Distressed Securities
Dollar Rolls                                                                              X
Foreign Investment Risks                                                                  X
Foreign Market Risk                                                                       X
Foreign Economy Risk                                                                      X
Currency Risk and Exchange Risk                                                           X
Government Supervision and Regulation / Accounting Standards                              X
Certain Risks of Holding Fund Assets Outside the United States                            X
Settlement Risk                                                                           X
Illiquid or Restricted Securities                                                         X
Inflation-indexed Bonds                                                                   X
Investment in Emerging Markets                                                            X
Restriction on Certain Investments
Investment in Other Investment Companies                                                  X
Junk Bonds                                                                                X
Mortgage-Related Securities                                                               X
Mortgage Backed Securities                                                                X
Mortgage Pass-Through Securities                                                          X
Collateralized Mortgage Obligations ("CMOs")                                              X
Adjustable Rate-Mortgage Securities                                                       X
CMO Residulas                                                                             X
Stripped Mortgage Backed Securities                                                       X
Tiered Index Bonds                                                                        X
Municipal Investments
Risk Factors and Special Considerations Relating to Municipal Bonds
Description of Municipal Bonds
General Obligation Bonds
Revenue Bonds
PABs
Moral Obligation Bonds
Municipal Notes
Municipal Commercial Paper
Municipal Lease Obligations
Yields
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs
Transactions in Financial Futures Contracts
Call Rights
Municipal Interest Rate Swap Transactions
Real Estate Investment Trusts ("REITS")                                                   X
Repurchase Agreements and Purchase and Sale Contracts                                     X
Reverse Repurchase Agreements                                                             X




                                                                        CALIFORNIA INSURED  INFLATION PROTECTED  LOW DURATION

144 A Securities                                                                                     X                X
Asset Backed Securities                                                                              X                X
Borrowing and Leverage                                                          X                    X                X
Convertible Securities                                                                               X                X
Corporate Loans                                                                                                       X
Debt Securities                                                                 X                    X                X
Derivatives                                                                     X                    X                X
Hedging                                                                         X                    X                X
Indexed and Inverse Floating Rule                                               X                    X                X
Swap Agreements                                                                 X                    X                X
Interest Rate Swaps, Caps and Floors                                                                 X                X
Credit Default Swap Agreements                                                  X                    X                X
Credit Linked Securities                                                        X                    X                X
Total Return Swap Agreements                                                    X                    X                X
Hybrid Instruments
Options on Securities and Securities Indices                                    X                    X                X
Call Options                                                                    X                    X                X
Put Options                                                                     X                    X                X
Options on Government National Mortgage Association ("GNMA")
 Certificates                                                                                        X                X
Types of Options                                                                X                    X                X
Futures                                                                         X                    X                X
Foreign Exchange Transactions                                                                                         X
Forward Foreign Exchange Transactions                                                                                 X
Currency Futures                                                                                                      X
Currency Options                                                                                                      X
Limitations on Currency Hedging                                                                                       X
Risk Factors in Hedging Foreign Currency Risks                                                                        X
Risk Factors in Derivatives                                                     X                    X                X
Credit Risk                                                                     X                    X                X
Currency Risk                                                                                                         X
Leverage Risk                                                                   X                    X                X
Liquidity Risk                                                                  X                    X                X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                             X                    X                X
Distressed Securities
Dollar Rolls                                                                                         X                X
Foreign Investment Risks                                                                             X                X
Foreign Market Risk                                                                                  X                X
Foreign Economy Risk                                                                                 X                X
Currency Risk and Exchange Risk                                                                      X                X
Government Supervision and Regulation / Accounting Standards                                         X                X
Certain Risks of Holding Fund Assets Outside the United States                                       X                X
Settlement Risk                                                                                      X                X
Illiquid or Restricted Securities                                               X                    X                X
Inflation-indexed Bonds                                                                              X
Investment in Emerging Markets                                                                       X                X
Restriction on Certain Investments
Investment in Other Investment Companies                                        X                    X                X
Junk Bonds                                                                      X                    X                X
Mortgage-Related Securities                                                                          X                X
Mortgage Backed Securities                                                                           X                X
Mortgage Pass-Through Securities                                                                     X                X
Collateralized Mortgage Obligations ("CMOs")                                                         X                X
Adjustable Rate-Mortgage Securities                                                                  X                X
CMO Residulas                                                                                        X                X
Stripped Mortgage Backed Securities                                                                  X                X
Tiered Index Bonds                                                                                   X                X
Municipal Investments                                                           X                    X                X
Risk Factors and Special Considerations Relating to Municipal Bonds             X                    X                X
Description of Municipal Bonds                                                  X                    X                X
General Obligation Bonds                                                        X                    X                X
Revenue Bonds                                                                   X                    X                X
PABs                                                                            X                    X                X
Moral Obligation Bonds                                                          X                    X                X
Municipal Notes                                                                 X                    X                X
Municipal Commercial Paper                                                      X                    X                X
Municipal Lease Obligations                                                     X                    X                X
Yields                                                                          X                    X                X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                          X                    X                X
Transactions in Financial Futures Contracts                                     X                    X                X
Call Rights                                                                     X                    X                X
Municipal Interest Rate Swap Transactions                                       X                    X                X
Real Estate Investment Trusts ("REITS")                                                              X                X
Repurchase Agreements and Purchase and Sale Contracts                           X                    X                X
Reverse Repurchase Agreements                                                   X                    X                X




                                                                       MUNICIPAL BOND - INSURED PORTFOLIO

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                                 X
Convertible Securities
Corporate Loans                                                                        X
Debt Securities                                                                        X
Derivatives                                                                            X
Hedging                                                                                X
Indexed and Inverse Floating Rule                                                      X
Swap Agreements                                                                        X
Interest Rate Swaps, Caps and Floors
Credit Default Swap Agreements                                                         X
Credit Linked Securities                                                               X
Total Return Swap Agreements                                                           X
Hybrid Instruments
Options on Securities and Securities Indices                                           X
Call Options                                                                           X
Put Options                                                                            X
Options on Government National Mortgage Association ("GNMA")
 Certificates
Types of Options                                                                       X
Futures                                                                                X
Foreign Exchange Transactions
Forward Foreign Exchange Transactions
Currency Futures
Currency Options
Limitations on Currency Hedging
Risk Factors in Hedging Foreign Currency Risks
Risk Factors in Derivatives                                                            X
Credit Risk                                                                            X
Currency Risk
Leverage Risk                                                                          X
Liquidity Risk                                                                         X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                    X
Distressed Securities
Dollar Rolls
Foreign Investment Risks
Foreign Market Risk
Foreign Economy Risk
Currency Risk and Exchange Risk
Government Supervision and Regulation / Accounting Standards
Certain Risks of Holding Fund Assets Outside the United States
Settlement Risk
Illiquid or Restricted Securities                                                      X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                               X
Junk Bonds
Mortgage-Related Securities
Mortgage Backed Securities
Mortgage Pass-Through Securities
Collateralized Mortgage Obligations ("CMOs")
Adjustable Rate-Mortgage Securities
CMO Residulas
Stripped Mortgage Backed Securities
Tiered Index Bonds
Municipal Investments                                                                  X
Risk Factors and Special Considerations Relating to Municipal Bonds                    X
Description of Municipal Bonds                                                         X
General Obligation Bonds                                                               X
Revenue Bonds                                                                          X
PABs                                                                                   X
Moral Obligation Bonds                                                                 X
Municipal Notes                                                                        X
Municipal Commercial Paper                                                             X
Municipal Lease Obligations                                                            X
Yields                                                                                 X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                                 X
Transactions in Financial Futures Contracts                                            X
Call Rights                                                                            X
Municipal Interest Rate Swap Transactions                                              X
Real Estate Investment Trusts ("REITS")
Repurchase Agreements and Purchase and Sale Contracts                                  X
Reverse Repurchase Agreements                                                          X




                                                                       MUNICIPAL BOND LIMITED MATURITY PORTFOLIO

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                                     X
Convertible Securities
Corporate Loans                                                                            X
Debt Securities                                                                            X
Derivatives                                                                                X
Hedging                                                                                    X
Indexed and Inverse Floating Rule                                                          X
Swap Agreements                                                                            X
Interest Rate Swaps, Caps and Floors
Credit Default Swap Agreements                                                             X
Credit Linked Securities                                                                   X
Total Return Swap Agreements                                                               X
Hybrid Instruments
Options on Securities and Securities Indices                                               X
Call Options                                                                               X
Put Options                                                                                X
Options on Government National Mortgage Association ("GNMA")
 Certificates
Types of Options                                                                           X
Futures                                                                                    X
Foreign Exchange Transactions
Forward Foreign Exchange Transactions
Currency Futures
Currency Options
Limitations on Currency Hedging
Risk Factors in Hedging Foreign Currency Risks
Risk Factors in Derivatives                                                                X
Credit Risk                                                                                X
Currency Risk
Leverage Risk                                                                              X
Liquidity Risk                                                                             X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                        X
Distressed Securities
Dollar Rolls
Foreign Investment Risks
Foreign Market Risk
Foreign Economy Risk
Currency Risk and Exchange Risk
Government Supervision and Regulation / Accounting Standards
Certain Risks of Holding Fund Assets Outside the United States
Settlement Risk
Illiquid or Restricted Securities                                                          X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                                   X
Junk Bonds
Mortgage-Related Securities
Mortgage Backed Securities
Mortgage Pass-Through Securities
Collateralized Mortgage Obligations ("CMOs")
Adjustable Rate-Mortgage Securities
CMO Residulas
Stripped Mortgage Backed Securities
Tiered Index Bonds
Municipal Investments                                                                      X
Risk Factors and Special Considerations Relating to Municipal Bonds                        X
Description of Municipal Bonds                                                             X
General Obligation Bonds                                                                   X
Revenue Bonds                                                                              X
PABs                                                                                       X
Moral Obligation Bonds                                                                     X
Municipal Notes                                                                            X
Municipal Commercial Paper                                                                 X
Municipal Lease Obligations                                                                X
Yields                                                                                     X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                                     X
Transactions in Financial Futures Contracts                                                X
Call Rights                                                                                X
Municipal Interest Rate Swap Transactions                                                  X
Real Estate Investment Trusts ("REITS")
Repurchase Agreements and Purchase and Sale Contracts                                      X
Reverse Repurchase Agreements                                                              X




                                                                       MUNICIPAL BOND - NATIONAL PORTFOLIO

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                                  X
Convertible Securities
Corporate Loans                                                                         X
Debt Securities                                                                         X
Derivatives                                                                             X
Hedging                                                                                 X
Indexed and Inverse Floating Rule                                                       X
Swap Agreements                                                                         X
Interest Rate Swaps, Caps and Floors
Credit Default Swap Agreements                                                          X
Credit Linked Securities                                                                X
Total Return Swap Agreements                                                            X
Hybrid Instruments
Options on Securities and Securities Indices                                            X
Call Options                                                                            X
Put Options                                                                             X
Options on Government National Mortgage Association ("GNMA")
 Certificates
Types of Options                                                                        X
Futures                                                                                 X
Foreign Exchange Transactions
Forward Foreign Exchange Transactions
Currency Futures
Currency Options
Limitations on Currency Hedging
Risk Factors in Hedging Foreign Currency Risks
Risk Factors in Derivatives                                                             X
Credit Risk                                                                             X
Currency Risk
Leverage Risk                                                                           X
Liquidity Risk                                                                          X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                     X
Distressed Securities
Dollar Rolls
Foreign Investment Risks
Foreign Market Risk
Foreign Economy Risk
Currency Risk and Exchange Risk
Government Supervision and Regulation / Accounting Standards
Certain Risks of Holding Fund Assets Outside the United States
Settlement Risk
Illiquid or Restricted Securities                                                       X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                                X
Junk Bonds                                                                              X
Mortgage-Related Securities
Mortgage Backed Securities
Mortgage Pass-Through Securities
Collateralized Mortgage Obligations ("CMOs")
Adjustable Rate-Mortgage Securities
CMO Residulas
Stripped Mortgage Backed Securities
Tiered Index Bonds
Municipal Investments                                                                   X
Risk Factors and Special Considerations Relating to Municipal Bonds                     X
Description of Municipal Bonds                                                          X
General Obligation Bonds                                                                X
Revenue Bonds                                                                           X
PABs                                                                                    X
Moral Obligation Bonds                                                                  X
Municipal Notes                                                                         X
Municipal Commercial Paper                                                              X
Municipal Lease Obligations                                                             X
Yields                                                                                  X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                                  X
Transactions in Financial Futures Contracts                                             X
Call Rights                                                                             X
Municipal Interest Rate Swap Transactions                                               X
Real Estate Investment Trusts ("REITS")
Repurchase Agreements and Purchase and Sale Contracts                                   X
Reverse Repurchase Agreements                                                           X




                                                                       MUNICIPAL INTERMEDIATE TERM  FLORIDA MUNICIPAL BOND

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                              X                         X
Convertible Securities
Corporate Loans
Debt Securities                                                                     X                         X
Derivatives                                                                         X                         X
Hedging                                                                             X                         X
Indexed and Inverse Floating Rule                                                   X                         X
Swap Agreements                                                                     X                         X
Interest Rate Swaps, Caps and Floors
Credit Default Swap Agreements                                                      X                         X
Credit Linked Securities                                                            X                         X
Total Return Swap Agreements                                                        X                         X
Hybrid Instruments
Options on Securities and Securities Indices                                        X                         X
Call Options                                                                        X                         X
Put Options                                                                         X                         X
Options on Government National Mortgage Association ("GNMA")
 Certificates
Types of Options                                                                    X                         X
Futures                                                                             X                         X
Foreign Exchange Transactions
Forward Foreign Exchange Transactions
Currency Futures
Currency Options
Limitations on Currency Hedging
Risk Factors in Hedging Foreign Currency Risks
Risk Factors in Derivatives                                                         X                         X
Credit Risk                                                                         X                         X
Currency Risk
Leverage Risk                                                                       X                         X
Liquidity Risk                                                                      X                         X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                 X                         X
Distressed Securities
Dollar Rolls
Foreign Investment Risks
Foreign Market Risk
Foreign Economy Risk
Currency Risk and Exchange Risk
Government Supervision and Regulation / Accounting Standards
Certain Risks of Holding Fund Assets Outside the United States
Settlement Risk
Illiquid or Restricted Securities                                                   X                         X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                            X                         X
Junk Bonds                                                                          X                         X
Mortgage-Related Securities
Mortgage Backed Securities
Mortgage Pass-Through Securities
Collateralized Mortgage Obligations ("CMOs")
Adjustable Rate-Mortgage Securities
CMO Residulas
Stripped Mortgage Backed Securities
Tiered Index Bonds
Municipal Investments                                                               X                         X
Risk Factors and Special Considerations Relating to Municipal Bonds                 X                         X
Description of Municipal Bonds                                                      X                         X
General Obligation Bonds                                                            X                         X
Revenue Bonds                                                                       X                         X
PABs                                                                                X                         X
Moral Obligation Bonds                                                              X                         X
Municipal Notes                                                                     X                         X
Municipal Commercial Paper                                                          X                         X
Municipal Lease Obligations                                                         X                         X
Yields                                                                              X                         X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                              X                         X
Transactions in Financial Futures Contracts                                         X                         X
Call Rights                                                                         X                         X
Municipal Interest Rate Swap Transactions                                           X                         X
Real Estate Investment Trusts ("REITS")
Repurchase Agreements and Purchase and Sale Contracts                               X                         X
Reverse Repurchase Agreements                                                       X                         X




                                                                       NEW JERSEY MUNICIPAL BOND  NEW YORK MUNICIPAL BOND

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                             X                         X
Convertible Securities
Corporate Loans
Debt Securities                                                                    X                         X
Derivatives                                                                        X                         X
Hedging                                                                            X                         X
Indexed and Inverse Floating Rule                                                  X                         X
Swap Agreements                                                                    X                         X
Interest Rate Swaps, Caps and Floors
Credit Default Swap Agreements                                                     X                         X
Credit Linked Securities                                                           X                         X
Total Return Swap Agreements                                                       X                         X
Hybrid Instruments
Options on Securities and Securities Indices                                       X                         X
Call Options                                                                       X                         X
Put Options                                                                        X                         X
Options on Government National Mortgage Association ("GNMA")
 Certificates
Types of Options                                                                   X                         X
Futures                                                                            X                         X
Foreign Exchange Transactions
Forward Foreign Exchange Transactions
Currency Futures
Currency Options
Limitations on Currency Hedging
Risk Factors in Hedging Foreign Currency Risks
Risk Factors in Derivatives                                                        X                         X
Credit Risk                                                                        X                         X
Currency Risk
Leverage Risk                                                                      X                         X
Liquidity Risk                                                                     X                         X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                X                         X
Distressed Securities
Dollar Rolls
Foreign Investment Risks
Foreign Market Risk
Foreign Economy Risk
Currency Risk and Exchange Risk
Government Supervision and Regulation / Accounting Standards
Certain Risks of Holding Fund Assets Outside the United States
Settlement Risk
Illiquid or Restricted Securities                                                  X                         X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                           X                         X
Junk Bonds                                                                         X                         X
Mortgage-Related Securities
Mortgage Backed Securities
Mortgage Pass-Through Securities
Collateralized Mortgage Obligations ("CMOs")
Adjustable Rate-Mortgage Securities
CMO Residulas
Stripped Mortgage Backed Securities
Tiered Index Bonds
Municipal Investments                                                              X                         X
Risk Factors and Special Considerations Relating to Municipal Bonds                X                         X
Description of Municipal Bonds                                                     X                         X
General Obligation Bonds                                                           X                         X
Revenue Bonds                                                                      X                         X
PABs                                                                               X                         X
Moral Obligation Bonds                                                             X                         X
Municipal Notes                                                                    X                         X
Municipal Commercial Paper                                                         X                         X
Municipal Lease Obligations                                                        X                         X
Yields                                                                             X                         X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                             X                         X
Transactions in Financial Futures Contracts                                        X                         X
Call Rights                                                                        X                         X
Municipal Interest Rate Swap Transactions                                          X                         X
Real Estate Investment Trusts ("REITS")
Repurchase Agreements and Purchase and Sale Contracts                              X                         X
Reverse Repurchase Agreements                                                      X                         X




                                                                       PENNSYLVANIA MUNICIPAL BOND  REAL INVESTMENT

144 A Securities                                                                                           X
Asset Backed Securities                                                                                    X
Borrowing and Leverage                                                              X                      X
Convertible Securities                                                                                     X
Corporate Loans
Debt Securities                                                                     X                      X
Derivatives                                                                         X                      X
Hedging                                                                             X                      X
Indexed and Inverse Floating Rule                                                   X                      X
Swap Agreements                                                                     X                      X
Interest Rate Swaps, Caps and Floors                                                                       X
Credit Default Swap Agreements                                                      X                      X
Credit Linked Securities                                                            X                      X
Total Return Swap Agreements                                                        X                      X
Hybrid Instruments                                                                                         X
Options on Securities and Securities Indices                                        X                      X
Call Options                                                                        X                      X
Put Options                                                                         X                      X
Options on Government National Mortgage Association ("GNMA")
 Certificates                                                                                              X
Types of Options                                                                    X                      X
Futures                                                                             X                      X
Foreign Exchange Transactions                                                                              X
Forward Foreign Exchange Transactions                                                                      X
Currency Futures                                                                                           X
Currency Options                                                                                           X
Limitations on Currency Hedging                                                                            X
Risk Factors in Hedging Foreign Currency Risks                                                             X
Risk Factors in Derivatives                                                         X                      X
Credit Risk                                                                         X                      X
Currency Risk                                                                                              X
Leverage Risk                                                                       X                      X
Liquidity Risk                                                                      X                      X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                                 X                      X
Distressed Securities
Dollar Rolls                                                                                               X
Foreign Investment Risks                                                                                   X
Foreign Market Risk                                                                                        X
Foreign Economy Risk                                                                                       X
Currency Risk and Exchange Risk                                                                            X
Government Supervision and Regulation / Accounting Standards                                               X
Certain Risks of Holding Fund Assets Outside the United States                                             X
Settlement Risk                                                                                            X
Illiquid or Restricted Securities                                                   X                      X
Inflation-indexed Bonds                                                                                    X
Investment in Emerging Markets                                                                             X
Restriction on Certain Investments
Investment in Other Investment Companies                                            X                      X
Junk Bonds                                                                          X                      X
Mortgage-Related Securities                                                                                X
Mortgage Backed Securities                                                                                 X
Mortgage Pass-Through Securities                                                                           X
Collateralized Mortgage Obligations ("CMOs")                                                               X
Adjustable Rate-Mortgage Securities                                                                        X
CMO Residulas                                                                                              X
Stripped Mortgage Backed Securities                                                                        X
Tiered Index Bonds                                                                                         X
Municipal Investments                                                               X
Risk Factors and Special Considerations Relating to Municipal Bonds                 X
Description of Municipal Bonds                                                      X
General Obligation Bonds                                                            X
Revenue Bonds                                                                       X
PABs                                                                                X
Moral Obligation Bonds                                                              X
Municipal Notes                                                                     X
Municipal Commercial Paper                                                          X
Municipal Lease Obligations                                                         X
Yields                                                                              X
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs                                                                              X
Transactions in Financial Futures Contracts                                         X
Call Rights                                                                         X
Municipal Interest Rate Swap Transactions                                           X
Real Estate Investment Trusts ("REITS")                                                                    X
Repurchase Agreements and Purchase and Sale Contracts                               X                      X
Reverse Repurchase Agreements                                                       X                      X










                                                                      SHORT TERM U.S. GOVERNMENT


                                                                                 U.S. GOVERNMENT


                                                                                 U.S. GOVERNMENT
.S. GOVERNMENT MORTGAGE

144 A Securities                                                      X          U.S. GOVERNMENT          XU

Asset Backed Securities                                               X          U.S. GOVERNMENT          X

Borrowing and Leverage                                                X          U.S. GOVERNMENT          X

Convertible Securities                                                           U.S. GOVERNMENT
Corporate Loans                                                                  U.S. GOVERNMENT
Debt Securities                                                       X          U.S. GOVERNMENT          X

Derivatives                                                           X          U.S. GOVERNMENT          X

Hedging                                                               X          U.S. GOVERNMENT          X

Indexed and Inverse Floating Rule                                     X          U.S. GOVERNMENT          X

Swap Agreements                                                       X          U.S. GOVERNMENT          X

Interest Rate Swaps, Caps and Floors                                  X          U.S. GOVERNMENT          X

Credit Default Swap Agreements                                        X          U.S. GOVERNMENT          X

Credit Linked Securities                                              X          U.S. GOVERNMENT          X

Total Return Swap Agreements                                          X          U.S. GOVERNMENT          X

Hybrid Instruments                                                               U.S. GOVERNMENT
Options on Securities and Securities Indices                          X          U.S. GOVERNMENT          X

Call Options                                                          X          U.S. GOVERNMENT          X

Put Options                                                           X          U.S. GOVERNMENT          X

Options on Government National Mortgage Association ("GNMA")                     U.S. GOVERNMENT Certificates                      X
          X
Types of Options                                                      X          U.S. GOVERNMENT          X

Futures                                                               X          U.S. GOVERNMENT          X

Foreign Exchange Transactions                                                    U.S. GOVERNMENT
Forward Foreign Exchange Transactions                                            U.S. GOVERNMENT
Currency Futures                                                                 U.S. GOVERNMENT
Currency Options                                                                 U.S. GOVERNMENT
Limitations on Currency Hedging                                                  U.S. GOVERNMENT
Risk Factors in Hedging Foreign Currency Risks                                   U.S. GOVERNMENT
Risk Factors in Derivatives                                           X          U.S. GOVERNMENT          X

Credit Risk                                                           X          U.S. GOVERNMENT          X

Currency Risk                                                                    U.S. GOVERNMENT
Leverage Risk                                                         X          U.S. GOVERNMENT          X

Liquidity Risk                                                        X          U.S. GOVERNMENT          X

Additional Risk Factors of OTC Transactions; Limitations on the use              U.S. GOVERNMENT of OTC Derivatives                X
          X

Distressed Securities                                                            U.S. GOVERNMENT
Dollar Rolls                                                          X          U.S. GOVERNMENT          X

Foreign Investment Risks                                                         U.S. GOVERNMENT
Foreign Market Risk                                                              U.S. GOVERNMENT
Foreign Economy Risk                                                             U.S. GOVERNMENT
Currency Risk and Exchange Risk                                                  U.S. GOVERNMENT
Government Supervision and Regulation / Accounting Standards                     U.S. GOVERNMENT
Certain Risks of Holding Fund Assets Outside the United States                   U.S. GOVERNMENT
Settlement Risk                                                                  U.S. GOVERNMENT
Illiquid or Restricted Securities                                     X          U.S. GOVERNMENT          X

Inflation-indexed Bonds                                               X          U.S. GOVERNMENT          X

Investment in Emerging Markets                                                   U.S. GOVERNMENT
Restriction on Certain Investments                                               U.S. GOVERNMENT
Investment in Other Investment Companies                              X          U.S. GOVERNMENT          X

Junk Bonds                                                                       U.S. GOVERNMENT
Mortgage-Related Securities                                           X          U.S. GOVERNMENT          X

Mortgage Backed Securities                                            X          U.S. GOVERNMENT          X

Mortgage Pass-Through Securities                                      X          U.S. GOVERNMENT          X

Collateralized Mortgage Obligations ("CMOs")                          X          U.S. GOVERNMENT          X

Adjustable Rate-Mortgage Securities                                   X          U.S. GOVERNMENT          X

CMO Residulas                                                         X          U.S. GOVERNMENT          X

Stripped Mortgage Backed Securities                                   X          U.S. GOVERNMENT          X

Tiered Index Bonds                                                    X          U.S. GOVERNMENT          X

Municipal Investments                                                            U.S. GOVERNMENT
Risk Factors and Special Considerations Relating to Municipal Bonds              U.S. GOVERNMENT
Description of Municipal Bonds                                                   U.S. GOVERNMENT
General Obligation Bonds                                                         U.S. GOVERNMENT
Revenue Bonds                                                                    U.S. GOVERNMENT
PABs                                                                             U.S. GOVERNMENT
Moral Obligation Bonds                                                           U.S. GOVERNMENT
Municipal Notes                                                                  U.S. GOVERNMENT
Municipal Commercial Paper                                                       U.S. GOVERNMENT
Municipal Lease Obligations                                                      U.S. GOVERNMENT
Yields                                                                           U.S. GOVERNMENT
Variable Rate Demand Obligations ("VRDOs") and Participating                     U.S. GOVERNMENT VRDOs

Transactions in Financial Futures Contracts                                      U.S. GOVERNMENT
Call Rights                                                                      U.S. GOVERNMENT
Municipal Interest Rate Swap Transactions                                        U.S. GOVERNMENT
Real Estate Investment Trusts ("REITS")                               X          U.S. GOVERNMENT          X

Repurchase Agreements and Purchase and Sale Contracts                 X          U.S. GOVERNMENT          X

Reverse Repurchase Agreements                                         X          U.S. GOVERNMENT          X




                         U.S. HIGH YIELD
                                          WORLD INCOME                 U.S. HIGH YIELD  WORLD INCOME

144 A Securities                                                              X              X
                                X              X
Asset Backed Securities                                                       X              X
                                X              X
Borrowing and Leverage                                                        X              X
                                X              X
Convertible Securities                                                        X              X
                                X              X
Corporate Loans                                                               X
                                X
Debt Securities                                                               X              X
                                X              X
Derivatives                                                                   X              X
                                X              X
Hedging                                                                       X              X
                                X              X
Indexed and Inverse Floating Rule                                             X              X
                                X              X
Swap Agreements                                                               X              X
                                X              X
Interest Rate Swaps, Caps and Floors                                          X              X
                                X              X
Credit Default Swap Agreements                                                X              X
                                X              X
Credit Linked Securities                                                      X              X
                                X              X
Total Return Swap Agreements                                                  X              X
                                X              X
Hybrid Instruments
Options on Securities and Securities Indices                                  X              X
                                X              X
Call Options                                                                  X              X
                                X              X
Put Options                                                                   X              X
                                X              X
Options on Government National Mortgage Association ("GNMA")
 Certificates
Types of Options                                                              X              X
                                X              X
Futures                                                                       X              X
                                X              X
Foreign Exchange Transactions                                                 X              X
                                X              X
Forward Foreign Exchange Transactions                                         X              X
                                X              X
Currency Futures                                                              X              X
                                X              X
Currency Options                                                              X              X
                                X              X
Limitations on Currency Hedging                                               X              X
                                X              X
Risk Factors in Hedging Foreign Currency Risks                                X              X
                                X              X
Risk Factors in Derivatives                                                   X              X
                                X              X
Credit Risk                                                                   X              X
                                X              X
Currency Risk                                                                 X              X
                                X              X
Leverage Risk                                                                 X              X
                                X              X
Liquidity Risk                                                                X              X
                                X              X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                           X              X
                                X              X
Distressed Securities                                                         X
                                X
Dollar Rolls                                                                  X              X
                                X              X
Foreign Investment Risks                                                      X              X
                                X              X
Foreign Market Risk                                                           X              X
                                X              X
Foreign Economy Risk                                                          X              X
                                X              X
Currency Risk and Exchange Risk                                               X        X
                                X        X
Government Supervision and Regulation / Accounting Standards                  X              X
                                X              X
Certain Risks of Holding Fund Assets Outside the United States                X              X
                                X              X
Settlement Risk                                                               X              X
                                X              X
Illiquid or Restricted Securities                                             X              X
                                X              X
Inflation-indexed Bonds                                                       X              X
                                X              X
Investment in Emerging Markets                                                               X
                                               X
Restriction on Certain Investments                                                           X
                                               X
Investment in Other Investment Companies                                      X              X
                                X              X
Junk Bonds                                                                    X              X
                                X              X
Mortgage-Related Securities                                                                  X
                                               X
Mortgage Backed Securities                                                                   X
                                               X
Mortgage Pass-Through Securities                                                             X
                                               X
Collateralized Mortgage Obligations ("CMOs")                                                 X
                                               X
Adjustable Rate-Mortgage Securities                                                          X
                                               X
CMO Residulas                                                                                X
                                               X
Stripped Mortgage Backed Securities                                                          X
                                               X
Tiered Index Bonds                                                                           X
                                               X
Municipal Investments
Risk Factors and Special Considerations Relating to Municipal Bonds
Description of Municipal Bonds
General Obligation Bonds
Revenue Bonds
PABs
Moral Obligation Bonds
Municipal Notes
Municipal Commercial Paper
Municipal Lease Obligations
Yields
Variable Rate Demand Obligations ("VRDOs") and Participating
 VRDOs
Transactions in Financial Futures Contracts
Call Rights
Municipal Interest Rate Swap Transactions
Real Estate Investment Trusts ("REITS")                                       X              X
                                X              X
Repurchase Agreements and Purchase and Sale Contracts                         X              X
                                X              X
Reverse Repurchase Agreements                                                 X              X
                                X              X



                                      II-3






                                                                  BOND FUND - CORE BOND PORTFOLIO

Securities Lending                                                               X
Short Sales                                                                      X
Sovereign Debt                                                                   X
Standy Commitment Agreements                                                     X
Stripped Securities                                                              X
Supranational Entities                                                           X
Warrants                                                                         X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                     X
Zero Coupon Securities                                                           X




                                                                  BOND FUND - HIGH INCOME PORTFOLIO

Securities Lending                                                                X
Short Sales                                                                       X
Sovereign Debt                                                                    X
Standy Commitment Agreements                                                      X
Stripped Securities                                                               X
Supranational Entities                                                            X
Warrants                                                                          X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                      X
Zero Coupon Securities                                                            X




                                                                  BOND FUND - INTERMEDIATE TERM PORTFOLIO   CALIFORNIA INSURED

Securities Lending                                                                   X
Short Sales                                                                          X
Sovereign Debt                                                                       X
Standy Commitment Agreements                                                         X
Stripped Securities                                                                  X
Supranational Entities                                                               X
Warrants                                                                             X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                         X                              X
Zero Coupon Securities                                                               X




                                                                  INFLATION PROTECTED  LOW DURATION

Securities Lending                                                         X                X
Short Sales                                                                X                X
Sovereign Debt                                                             X                X
Standy Commitment Agreements                                               X                X
Stripped Securities                                                        X                X
Supranational Entities                                                     X                X
Warrants                                                                   X                X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                               X                X
Zero Coupon Securities                                                     X                X




                                                                  MUNICIPAL BOND - INSURED PORTFOLIO

Securities Lending
Short Sales
Sovereign Debt
Standy Commitment Agreements
Stripped Securities
Supranational Entities
Warrants
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                      X
Zero Coupon Securities




                                                                  MUNICIPAL BOND LIMITED MATURITY PORTFOLIO

Securities Lending
Short Sales
Sovereign Debt
Standy Commitment Agreements
Stripped Securities
Supranational Entities
Warrants
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                          X
Zero Coupon Securities




                                                                  MUNICIPAL BOND - NATIONAL PORTFOLIO  MUNICIPAL INTERMEDIATE TERM

Securities Lending
Short Sales
Sovereign Debt
Standy Commitment Agreements
Stripped Securities
Supranational Entities
Warrants
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                       X                                X
Zero Coupon Securities




                                                                  FLORIDA MUNICIPAL BOND  NEW JERSEY MUNICIPAL BOND

Securities Lending
Short Sales
Sovereign Debt
Standy Commitment Agreements
Stripped Securities
Supranational Entities
Warrants
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                X                         X
Zero Coupon Securities




                                                                  NEW YORK MUNICIPAL BOND  PENNSYLVANIA MUNICIPAL BOND

Securities Lending
Short Sales
Sovereign Debt
Standy Commitment Agreements
Stripped Securities
Supranational Entities
Warrants
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                 X                          X
Zero Coupon Securities




                                                                                  SHORT TERM U.S. GOVERNMENTN




                                                                                                  GOVERNMENTN

                                                                  REAL INVESTMENT

Securities Lending                                                       X        X               GOVERNMENTN


Short Sales                                                              X        X               GOVERNMENTN


Sovereign Debt                                                                                    GOVERNMENTN

Standy Commitment Agreements                                             X        X               GOVERNMENTN


Stripped Securities                                                      X        X               GOVERNMENTN


Supranational Entities                                                   X                        GOVERNMENTN

Warrants                                                                 X                        GOVERNMENTN

When Issued Securities, Delayed Delivery Securities and Forward                                   GOVERNMENTN
 Commitments                                                             X        X


Zero Coupon Securities                                                   X        X               GOVERNMENTN





                                                                  U.S. GOVERNMENT MORTGAGE





OVERNMENT MORTGAGE                                                U.S. G
                    U.S. HIGH YIELD
                                     WORLD INCOME

Securities Lending                                                        X .S. G                  X              X
  X .S. G                  X              X

Short Sales                                                                  X                     X              X
     X                     X              X

Sovereign Debt                                                                                                    X
                                          X

Standy Commitment Agreements                                                 X                     X              X
     X                     X              X

Stripped Securities                                                          X
     X
Supranational Entities                                                                             X              X
                           X              X

Warrants                                                                                           X              X
                           X              X

When Issued Securities, Delayed Delivery Securities and Forward          Commitments
 Commitments                                                               X
   X

Zero Coupon Securities                                                       X                     X              X
     X                     X              X






                                      II-4




144A SECURITIES. A Fund may purchase restricted securities that can be offered
and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Directors have determined to treat as liquid Rule 144A
securities that are either freely tradable in their primary markets offshore or
have been determined to be liquid in accordance with the policies and procedures
adopted by the Fund's Directors. The Directors have adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of restricted securities. The Directors, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will continue to develop,
the Directors will carefully monitor a Fund's investments in these securities.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these securities.


ASSET-BACKED SECURITIES. Asset-backed securities are "pass-through" securities,
meaning that principal and interest payments made by the borrower on the
underlying assets (such as credit card receivables) are passed through to a
Fund. The value of asset-backed securities, like that of traditional
fixed-income securities, typically increases when interest rates fall and
decreases when interest rates rise. However, asset-backed securities differ
from traditional fixed-income securities because of their potential for
prepayment. The price paid by a Fund for its asset-backed securities, the yield
the Fund expects to receive from such securities and the average life of the
securities are based on a number of factors, including the anticipated rate of
prepayment of the underlying assets. In a period of declining interest rates,
borrowers may prepay the underlying assets more quickly than anticipated,
thereby reducing the yield to maturity and the average life of the asset-backed
securities. Moreover, when a Fund reinvests the proceeds of a prepayment in
these circumstances, it will likely receive a rate of interest that is lower
than the rate on the security that was prepaid. To the extent that a Fund
purchases asset-backed securities at a premium, prepayments may result in a
loss to the extent of the premium paid. If a Fund buys such securities at a
discount, both scheduled payments and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying assets may occur
at a slower than expected rate, creating maturity extension risk. This
particular risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a longer term security. Since
longer-term securities generally fluctuate more widely in response to changes
in interest rates than shorter term securities, maturity extension risk could
increase the inherent volatility of the Fund.

BORROWING AND LEVERAGE. Each Fund may borrow from banks as a temporary measure
for extraordinary or emergency purposes, including to meet redemptions or to
settle securities transactions. Most Funds will not purchase securities at any
time when borrowings exceed 5% of their total assets, except (a) to honor prior
commitments or (b) to exercise subscription rights when outstanding borrowings
have been obtained exclusively for settlements of other securities transactions.
Certain Funds may also borrow in order to make investments. The purchase of
securities while borrowings are outstanding will have the effect of leveraging
the Fund. Such leveraging increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs that will reduce net income. The
use of leverage by a Fund creates an opportunity for greater total return, but,
at the same time, creates special risks. For example, leveraging may exaggerate
changes in the net asset value of Fund shares and in the yield on the Fund's
portfolio. Although the principal of such borrowings will be fixed, the Fund's
assets may change in value during the time the borrowings are outstanding.
Borrowings will create interest expenses for the Fund that can exceed the income
from the assets purchased with the borrowings. To the extent the income or
capital appreciation derived from securities purchased with borrowed funds
exceeds the interest the Fund will have to pay on the borrowings, the Fund's
return will be greater than if leverage had not been used. Conversely, if the
income or capital appreciation from the securities purchased with such borrowed
funds is not sufficient to cover the cost of borrowing, the return to the Fund
will be less than if leverage had not been used, and


                                      II-5


therefore the amount available for distribution to shareholders as dividends
will be reduced. In the latter case, the Manager in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
expects that the benefits to the Fund's shareholders of maintaining the
leveraged position will outweigh the current reduced return.

Certain types of borrowings by a Fund may result in the Fund being subject to
covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Manager from managing a Fund's
portfolio in accordance with the Fund's investment objectives and policies.
However, a breach of any such covenants not cured within the specified cure
period may result in acceleration of outstanding indebtedness and require the
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.

Each Fund may at times borrow from affiliates of the Manager, provided that the
terms of such borrowings are no less favorable than those available from
comparable sources of funds in the marketplace.


CONVERTIBLE SECURITIES. Convertible securities entitle the holder to receive
interest payments paid on corporate debt securities or the dividend preference
on a preferred stock until such time as the convertible security matures or is
redeemed or until the holder elects to exercise the conversion privilege.

The characteristics of convertible securities make them appropriate investments
for an investment company seeking a high total return from capital appreciation
and investment income. These characteristics include the potential for capital
appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.

In analyzing convertible securities, the Manager will consider both the yield on
the convertible security relative to its credit quality and the potential
capital appreciation that is offered by the underlying common stock, among other
things.

Convertible securities are issued and traded in a number of securities markets.
Even in cases where a substantial portion of the convertible securities held by
a Fund are denominated in U.S. dollars, the underlying equity securities may be
quoted in the currency of the country where the issuer is domiciled. With
respect to convertible securities denominated in a currency different from that
of the underlying equity securities, the conversion price may be based on a
fixed exchange rate established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted will
affect the value of the convertible security. As described below, a Fund is
authorized to enter into foreign currency hedging transactions in which it may
seek to reduce the effect of such fluctuations.

Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.


                                      II-6


To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.

Holders of convertible securities generally have a claim on the assets of the
issuer prior to the common stockholders but may be subordinated to other debt
securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder, which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.

Synthetic convertible securities may be either (i) a debt security or preferred
stock that may be convertible only under certain contingent circumstances or
that may pay the holder a cash amount based on the value of shares of underlying
common stock partly or wholly in lieu of a conversion right (a "Cash-Settled
Convertible"), (ii) a combination of separate securities chosen by the Manager
in order to create the economic characteristics of a convertible security, i.e.,
a fixed income security paired with a security with equity conversion features,
such as an option or warrant (a "Manufactured Convertible") or (iii) a synthetic
security manufactured by another party.

Synthetic convertible securities may include either Cash-Settled Convertibles or
Manufactured Convertibles. Cash-Settled Convertibles are instruments that are
created by the issuer and have the economic characteristics of traditional
convertible securities but may not actually permit conversion into the
underlying equity securities in all circumstances. As an example, a private
company may issue a Cash-Settled Convertible that is convertible into common
stock only if the company successfully completes a public offering of its common
stock prior to maturity and otherwise pays a cash amount to reflect any equity
appreciation. Manufactured Convertibles are created by the Manager by combining
separate securities that possess one of the two principal characteristics of a
convertible security, i.e., fixed income ("fixed income component") or a right
to acquire equity securities ("convertibility component"). The fixed income
component is achieved by investing in nonconvertible fixed income securities,
such as nonconvertible bonds, preferred stocks and money market instruments. The
convertibility component is achieved by investing in call options, warrants, or
other securities with equity conversion features ("equity features") granting
the holder the right to purchase a specified quantity of the underlying stocks
within a specified period of time at a specified price or, in the case of a
stock index option, the right to receive a cash payment based on the value of
the underlying stock index.

A Manufactured Convertible differs from traditional convertible securities in
several respects. Unlike a traditional convertible security, which is a single
security having a unitary market value, a Manufactured Convertible is comprised
of two or more separate securities, each with its own market value. Therefore,
the total "market value" of such a Manufactured Convertible is the sum of the
values of its fixed income component and its convertibility component.

More flexibility is possible in the creation of a Manufactured Convertible than
in the purchase of a traditional convertible security. Because many corporations
have not issued convertible securities, the Manager may combine a fixed income
instrument and an equity feature with


                                      II-7



respect to the stock of the issuer of the fixed income instrument to create a
synthetic convertible security otherwise unavailable in the market. The Manager
may also combine a fixed income instrument of an issuer with an equity feature
with respect to the stock of a different issuer when the Manager believes such a
Manufactured Convertible would better promote a Fund's objective than alternate
investments. For example, the Manager may combine an equity feature with respect
to an issuer's stock with a fixed income security of a different issuer in the
same industry to diversify the Fund's credit exposure, or with a U.S. Treasury
instrument to create a Manufactured Convertible with a higher credit profile
than a traditional convertible security issued by that issuer. A Manufactured
Convertible also is a more flexible investment in that its two components may be
purchased separately and, upon purchasing the separate securities, "combined" to
create a Manufactured Convertible. For example, the Fund may purchase a warrant
for eventual inclusion in a Manufactured Convertible while postponing the
purchase of a suitable bond to pair with the warrant pending development of more
favorable market conditions.

The value of a Manufactured Convertible may respond differently to certain
market fluctuations than would a traditional convertible security with similar
characteristics. For example, in the event a Fund created a Manufactured
Convertible by combining a short-term U.S. Treasury instrument and a call option
on a stock, the Manufactured Convertible would likely outperform a traditional
convertible of similar maturity that is convertible into that stock during
periods when Treasury instruments outperform corporate fixed income securities
and underperform during periods when corporate fixed-income securities
outperform Treasury instruments.



CORPORATE LOANS. Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change in
response to changes in market interest rates such as the London Interbank
Offered Rate ("LIBOR") or the prime rate of U.S. banks. As a result, the value
of corporate loan investments is generally less responsive to shifts in market
interest rates. Because the trading market for corporate loans is less
developed than the secondary market for bonds and notes, a Fund may experience
difficulties from time to time in selling its corporate loans. Borrowers
frequently provide collateral to secure repayment of these obligations. Leading
financial institutions often act as agent for a broader group of lenders,
generally referred to as a "syndicate." The syndicate's agent arranges the
corporate loans, holds collateral and accepts payments of principal and
interest. If the agent develops financial problems, a Fund may not recover its
investment, or there might be a delay in the Fund's recovery. By investing in a
corporate loan, a Fund becomes a member of the syndicate.


As in the case of junk bonds, the Corporate Loans in which a Fund may invest
can be expected to provide higher yields than higher-rated fixed income
securities but may be subject to greater risk of loss of principal and income.
There are, however, some significant differences between Corporate Loans and
junk bonds. Corporate Loans are frequently secured by pledges of liens and
security interests in the assets of the borrower, and the holders of Corporate
Loans are frequently the beneficiaries of debt service subordination provisions
imposed on the borrower's bondholders. These arrangements are designed to give
Corporate Loan investors preferential treatment over junk bond investors in the
event of a deterioration in the credit quality of the issuer. Even when these
arrangements exist, however, there can be no assurance that the principal and
interest owed on the Corporate Loans will be repaid in full. Corporate Loans
generally bear interest at rates set at a margin above a generally recognized
base lending rate that may fluctuate on a day-to-day basis, in the case of the
Prime Rate of a U.S. bank, or that may be adjusted on set dates, typically 30
days but generally not more than one year, in the case of LIBOR. Consequently,
the value of Corporate Loans held by a Fund may be expected to fluctuate
significantly less than the value of fixed rate junk bond instruments as a
result of changes in the interest rate environment. On the other hand, the
secondary dealer market for Corporate Loans is not as well developed as the
secondary dealer market for junk bonds, and therefore presents increased market
risk relating to liquidity and pricing concerns.

A Fund may acquire interests in Corporate Loans by means of a novation,
assignment or participation. In a novation, a Fund would succeed to all the
rights and obligations of the assigning institution and become a contracting
party under the credit agreement with respect to the debt obligation. As an
alternative, a Fund


                                      II-8


may purchase an assignment, in which case the Fund may be required to rely on
the assigning institution to demand payment and enforce its rights against the
borrower but would otherwise typically be entitled to all of such assigning
institution's rights under the credit agreement. Participation interests in a
portion of a debt obligation typically result in a contractual relationship only
with the institution selling the participation interest and not with the
borrower. In purchasing a loan participation, a Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement, nor any rights of set-off against the borrower, and the Fund may not
directly benefit from the collateral supporting the debt obligation in which it
has purchased the participation. As a result, a Fund will assume the credit risk
of both the borrower and the institution selling the participation to the Fund.


DEBT SECURITIES. Debt securities, such as bonds, involve credit risk. This is
the risk that the issuer will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. Changes in an issuer's credit rating or the
market's perception of an issuer's creditworthiness may also affect the value
of a Fund's investment in that issuer. Credit risk is reduced to the extent a
Fund limits its debt investments to U.S. Government securities. All debt
securities, however, are subject to interest rate risk. This is the risk that
the value of the security



may fall when interest rates rise. In general, the market price of debt
securities with longer maturities will go up or down more in response to
changes in interest rates than the market price of shorter-term securities.

DERIVATIVES

Each Fund may use instruments referred to as derivative securities
("Derivatives"). Derivatives are financial instruments the value of which is
derived from another security, a commodity (such as gold or oil), a currency or
an index (a measure of value or rates, such as the S&P 500 Index or the prime
lending rate). Derivatives allow a Fund to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Each Fund may use Derivatives for
hedging purposes. Certain Funds may also use derivatives to seek to enhance
returns. The use of a Derivative is speculative if the Fund is primarily
seeking to achieve gains, rather than offset the risk of other positions. When
the Fund invests in a Derivative for speculative purposes, the Fund will be
fully exposed to the risks of loss of that Derivative, which may sometimes be
greater than the Derivative's cost. No Fund may use any Derivative to gain
exposure to an asset or class of assets that it would be prohibited by its
investment restrictions from purchasing directly.

Hedging. Hedging is a strategy in which a Derivative is used to offset the
risks associated with other Fund holdings. Losses on the other investment may
be substantially reduced by gains on a Derivative that reacts in an opposite
manner to market movements. While hedging can reduce losses, it can also reduce
or eliminate gains or cause losses if the market moves in a different manner
than anticipated by the Fund or if the cost of the Derivative outweighs the
benefit of the hedge. Hedging also involves the risk that changes in the value
of the Derivative will not match those of the holdings being hedged as expected
by a Fund, in which case any losses on the holdings being hedged may not be
reduced or may be increased. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to hedge
effectively its portfolio. There is also a risk of loss by the Fund of margin
deposits or collateral in the event of bankruptcy of a broker with whom the
Fund has an open position in an option, a futures contract or a related option.
There can be no assurance that a Fund's hedging strategies will be effective.
No Fund is required to engage in hedging transactions and each Fund may choose
not to do so.

A Fund may use Derivative instruments and trading strategies including the
following:

Indexed and Inverse Floating Rate Securities. A Fund may invest in securities
that yield a potential return based on a particular index of value or interest
rates. For example, a Fund may invest in securities that pay interest based on
an index of interest rates. The principal amount payable upon maturity of
certain securities also may be based on the value of the index. To the extent a
Fund invests in these types of


                                     II-9


securities, the Fund's return on such securities will be subject to risk with
respect to the value of the particular index. Interest and principal payable on
the securities may also be based on relative changes among particular indices.
Also, a Fund may invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates vary inversely with a floating rate
(which may be reset periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). A Fund may purchase
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, income on inverse floating rate bonds will decrease
when interest rates increase, and will increase when interest rates decrease.
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 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 securities. To
seek to limit the volatility of these securities, a Fund may purchase inverse
floating obligations with shorter-term maturities or which contain limitations
on the extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. A 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 Manager believes that indexed and inverse floating
obligations represent flexible portfolio management instruments for a Fund that
allow the Fund to seek potential investment rewards, hedge other portfolio
positions or vary the degree of investment leverage relatively efficiently under
different market conditions. A Fund may invest in indexed and inverse securities
for hedging purposes only or to increase returns. When used for hedging
purposes, indexed and inverse securities involve correlation risk. Furthermore,
where such a security includes a contingent liability, in the event of such an
adverse movement, a Fund may be required to pay substantial additional margin to
maintain the position.


Swap Agreements. A Fund may enter into swap agreements, including interest rate
and index swap agreements, for purposes of attempting to obtain a particular
desired return at a lower cost to a Fund than if the Fund had invested directly
in an instrument that yielded the desired return. Swap agreements are two party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations that the
parties to a swap agreement have agreed to exchange. A Fund's obligations (or
rights) under a swap agreement will generally be equal only to the net amount to
be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). A Fund's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by marking as segregated cash, U.S. government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, to avoid any potential leveraging of the Fund's
portfolio.

Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Manager's ability to correctly predict
whether certain types of investments are likely to produce greater returns than
other investments. Because they are two party contracts and because they may
have terms of greater than seven days, swap agreements may be considered to be
illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. Restrictions imposed by the Internal Revenue Code
of 1986, as amended (the "Code"), may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated. It is possible that
development in the swap market, including


                                     II-10



potential government regulation, could adversely affect each Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.

See "Credit Default Swap Agreements," "Interest Rate Swaps, Caps and Floors"
and "Municipal Interest Rate Swap Agreements" below for further information on
particular types of swap agreements that may be used by certain Funds.


Interest Rate Swaps, Caps and Floors. A Fund may enter into interest rate
swaps, which are or-the-counter contracts in which each party agrees to make a
periodic payment based on an index or the value of an asset in return for a
periodic payment from the other party based on a different index or asset.

In order to hedge the value of a Fund's portfolio against interest rate
fluctuations or to enhance a Fund's income, a Fund may enter into various
transactions, such as interest rate swaps and the purchase or sale of interest
rate caps and floors. A Fund expects to enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Fund anticipates purchasing at a later date. A Fund generally will use these
transactions primarily as a hedge and not as a speculative investment. However,
a Fund may also invest in interest rate swaps to enhance income or to increase
the Fund's yield during periods of steep interest rate yield curves (i.e., wide
differences between short term and long term interest rates).

A Fund usually will enter into interest rate swap transactions on a net basis,
i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch
as these transactions are entered into for good faith hedging purposes, the
Manager believes that such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis, and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the interest
rate swap transaction is entered into on other than a net basis, the full
amount of a Fund's obligations will be accrued on a daily basis, and the full
amount of the Fund's obligations will be maintained in a segregated account by
the Fund's custodian.

In an interest rate swap, a Fund exchanges with another party their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate
payments for floating rate payments. For example, if a Fund holds a mortgage
backed security with an interest rate that is reset only once each year, it may
swap the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset every week. This would enable a Fund to offset
a decline in the value of the mortgage backed security due to rising interest
rates but would also limit its ability to benefit from falling interest rates.
Conversely, if a Fund holds a mortgage backed security with an interest rate
that is reset every week and it would like to lock in what it believes to be a
high interest rate for one year, it may swap the right to receive interest at
this variable weekly rate for the right to receive interest at a rate that is
fixed for one year. Such a swap would protect the Fund from a reduction in
yield due to falling interest rates and may permit the Fund to enhance its
income through the positive differential between one week and one year interest
rates, but would preclude it from taking full advantage of rising interest
rates.

A Fund also may engage in interest rate transactions in the form of purchasing
or selling interest rate caps or floors. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate floor.



Typically the parties with which a Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. A Fund
will enter into interest rate swap, cap or floor transactions only with


                                     II-11


counterparties that are rated investment grade quality by at least one
nationally recognized statistical rating organization at the time of entering
into such transaction or whose creditworthiness is believed by the Manager to be
equivalent to such rating. If there is a default by the other party to such a
transaction, a Fund will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with other similar
instruments traded in the interbank market. Caps and floors, however, are less
liquid than swaps. Certain Federal income tax requirements may limit a Fund's
ability to engage in certain interest rate transactions. Gains from transactions
in interest rate swaps distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long term capital gains to shareholders.

Credit Default Swap Agreements and Similar Instruments. Each Fund may enter
into credit default swap agreements and similar agreements,and may also buy
credit-linked securities. The credit default swap agreement or similar
instrument may have as reference obligations one or more securities that are
not currently held by a Fund. The protection "buyer" in a credit default
contract may be obligated to pay the protection "seller" an up front or a
periodic stream of payments over the term of the contract provided generally
that no credit event on a reference obligation has occurred. If a credit event
occurs, the seller generally must pay the buyer the "par value" (full notional
value) of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity described in the swap, or the seller may be
required to deliver the related net cash amount, if the swap is cash settled. A
Fund may be either the buyer or seller in the transaction. If a Fund is a buyer
and no credit event occurs, the Fund recovers nothing if the swap is held
through its termination date. However, if a credit event occurs, the buyer may
elect to receive the full notional value of the swap in exchange for an equal
face amount of deliverable obligations of the reference entity that may have
little or no value. As a seller, a Fund generally receives an up front payment
or a fixed rate of income throughout the term of the swap, which typically is
between six months and three years, provided that there is no credit event. If
a credit event occurs, generally the seller must pay the buyer the full
notional value of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity that may have little or no value.

Credit default swaps and similar instruments involve greater risks than if a
Fund had invested in the reference obligation directly, since, in addition to
general market risks, they are subject to illiquidity risk, counterparty risk
and credit risks. A Fund will enter into credit default swap agreements and
similar instruments only with counterparties who are rated investment grade
quality by at least one nationally recognized statistical rating organization
at the time of entering into such transaction or whose creditworthiness is
believed by the Manager to be equivalent to such rating. A buyer also will lose
its investment and recover nothing should no credit event occur and the swap is
held to its termination date. If a credit event were to occur, the value of any
deliverable obligation received by the seller, coupled with the up front or
periodic payments previously received, may be less than the full notional value
it pays to the buyer, resulting in a loss of value to the Fund. When a Fund
acts as a seller of a credit default swap or a similar instrument, it is
exposed to many of the same risks of leverage since, if a credit event occurs,
the seller may be required to pay the buyer the full notional value of the
contract net of any amounts owed by the buyer related to its delivery of
deliverable obligations.

Credit Linked Securities. Among the income producing securities in which a Fund
may invest are credit linked securities, which are issued by a limited purpose
trust or other vehicle that, in turn, invests in a derivative instrument or
basket of derivative instruments, such a credit default swaps, interest rate
swaps and other securities, in order to provide exposure to certain fixed
income markets. For instance, a Fund



may invest in credit linked securities as a cash management tool in order to
gain exposure to a certain market and/or to remain fully invested when more
traditional income producing securities are not available.


                                     II-12


Like an investment in a bond, investments in these credit linked securities
represent the right to receive periodic income payments (in the form of
distributions) and payment of principal at the end of the term of the security.
However, these payments are conditioned on the issuer's receipt of payments
from, and the issuer's potential obligations to, the counterparties to the
derivative instruments and other securities in which the issuer invests. For
instance, the issuer may sell one or more credit default swaps, under which the
issuer would receive a stream of payments over the term of the swap agreements
provided that no event of default has occurred with respect to the referenced
debt obligation upon which the swap is based. If a default occurs, the stream
of payments may stop and the issuer would be obligated to pay the counterparty
the par (or other agreed upon value) of the referenced debt obligation. This,
in turn, would reduce the amount of income and principal that a Fund would
receive. A Fund's investments in these instruments are indirectly subject to
the risks associated with derivative instruments, including, among others,
credit risk, default or similar event risk, counterparty risk, interest rate
risk, leverage risk and management risk. It is also expected that the
securities will be exempt from registration under the Securities Act of 1933.
Accordingly, there may be no established trading market for the securities and
they may constitute illiquid investments.

Total Return Swap Agreements. Total return swap agreements are contracts in
which one party agrees to make periodic payments based on the change in market
value of the underlying assets, which may include a specified security, basket
of securities or securities indices during the specified period, in return for
periodic payments based on a fixed or variable interest rate or the total
return from other underlying assets. Total return swap agreements may be used
to obtain exposure to a security or market without owning or taking physical
custody of such security or market. Total return swap agreements may
effectively add leverage to the Fund's portfolio because, in addition to its
total net assets, the Fund would be subject to investment exposure on the
notional amount of the swap.

Total return swap agreements entail the risk that a party will default on its
payment obligations to the Fund thereunder. Swap agreements also bear the risk
that the Fund will not be able to meet its obligation to the counterparty.
Generally, the Fund will enter into total return swaps on a net basis (i.e.,
the two payment streams are netted out with the Fund receiving or paying, as
the case may be, only the net amount of the two payments). The net amount of
the excess, if any, of the Fund's obligations over its entitlements with
respect to each total return swap will be accrued on a daily basis, and an
amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be segregated by the Fund. If the total
return swap transaction is entered into on other than a net basis, the full
amount of the Fund's obligations will be accrued on a daily basis, and the full
amount of the Fund's obligations will be segregated by the Fund in an amount
equal to or greater than the market value of the liabilities under the total
return swap agreement or the amount it would have cost the Fund initially to
make an equivalent direct investment, plus or minus any amount the Fund is
obligated to pay or is to receive under the total return swap agreement.

Hybrid Instruments. Certain Funds seek to gain exposure to the commodities
markets primarily through investments in hybrid instruments. Hybrid instruments
are either equity or debt derivative securities with one or more
commodity-dependent components that have payment features similar to a
commodity futures contract, a commodity option contract, or a combination of
both. Therefore, these instruments are "commodity-linked." They are considered
"hybrid" instruments because they have both commodity-like and security-like
characteristics. Hybrid instruments are derivative instruments because at least
part of their value is derived from the value of an underlying commodity,
futures contract, index or other readily measurable economic variable.

Qualifying Hybrid Instruments. Certain Funds may invest in hybrid instruments
that qualify for exclusion from regulation under the Commodity Exchange Act and
the regulations adopted thereunder. A hybrid instrument that qualifies for this
exclusion from regulation must be "predominantly a security." A hybrid
instrument is considered to be predominantly a security if (a) the issuer of the
hybrid instrument receives



                                     II-13



payment in full of the purchase price of the hybrid instrument, substantially
contemporaneously with delivery of the hybrid instrument; (b) the purchaser or
holder of the hybrid instrument is not required to make any payment to the
issuer in addition to the purchase price paid under subparagraph (a), whether as
margin, settlement payment, or otherwise, during the life of the hybrid
instrument or at maturity; (c) the issuer of the hybrid instrument is not
subject by the terms of the instrument to mark-to-market margining requirements;
and (d) the hybrid instrument is not marketed as a contract of sale of a
commodity for future delivery (or option on such a contract) subject to
applicable provisions of the Commodity Exchange Act. Hybrid instruments may be
principal protected, partially protected, or offer no principal protection. A
principal protected hybrid instrument means that the issuer will pay, at a
minimum, the par value of the note at maturity. Therefore, if the commodity
value to which the hybrid instrument is linked declines over the life of the
note, the Fund will receive at maturity the face or stated value of the note.
With a principal protected hybrid instrument, the Fund will receive at maturity
the greater of the par value of the note or the increase in its value based on
the underlying commodity or index. This protection is, in effect, an option
whose value is subject to the volatility and price level of the underlying
commodity. The Manager's decision whether to use principal protection depends in
part on the cost of the protection. In addition, the protection feature depends
upon the ability of the issuer to meet its obligation to buy back the security,
and, therefore, depends on the creditworthiness of the issuer. With full
principal protection, the Fund will receive at maturity of the hybrid instrument
either the stated par value of the hybrid instrument, or potentially, an amount
greater than the stated par value if the underlying commodity, index, futures
contract or economic variable to which the hybrid instrument is linked has
increased in value. Partially protected hybrid instruments may suffer some loss
of principal if the underlying commodity, index, futures contract or economic
variable to which the hybrid instrument is linked declines in value during the
term of the hybrid instrument. However, partially protected hybrid instruments
have a specified limit as to the amount of principal that they may lose.

Hybrid Instruments Without Principal Protection. Certain Funds may invest in
hybrid instruments that offer no principal protection. At maturity, there is a
risk that the underlying commodity price, futures contract, index or other
economic variable may have declined sufficiently in value such that some or all
of the face value of the hybrid instrument might not be returned. Some of the
hybrid instruments that a Fund may invest in may have no principal protection
and the hybrid instrument could lose all of its value. The Manager, at its
discretion, may invest in a partially protected principal structured note or a
note without principal protection. In deciding to purchase a note without
principal protection, the Manager may consider, among other things, the
expected performance of the underlying commodity futures contract, index or
other economic variable over the term of the note, the cost of the note, and
any other economic factors that the Manager believes are relevant.

Limitations on Leverage. Some of the hybrid instruments in which a Fund may
invest may involve leverage. To avoid being subject to undue leverage risk, a
Fund will seek to limit the amount of economic leverage it has under one hybrid
instrument in which it invests and the leverage of the Fund's overall portfolio.
A Fund will not invest in a hybrid instrument if, at the time of purchase: (i)
that instrument's "leverage ratio" exceeds 300% of the price increase in the
underlying commodity, futures contract, index or other economic variable or (ii)
the Fund's "portfolio leverage ratio" exceeds 150%, measured at the time of
purchase. "Leverage ratio" is the expected increase in the value of a hybrid
instrument, assuming a one percent price increase in the underlying commodity,
futures contract, index or other economic factor. In other words, for a hybrid
instrument with a leverage factor of 150%, a 1% gain in the underlying economic
variable would be expected to result in a 1.5% gain in value for the hybrid
instrument. Conversely, a hybrid instrument with a leverage factor of 150% would
suffer a 1.5% loss if the underlying economic variable lost 1% of its value.
"Portfolio leverage ratio" is defined as the average (mean) leverage ratio of
all instruments in a Fund's portfolio, weighted by the market values of such
instruments or, in the case of futures contracts, their notional values. To the
extent that the policy on a Fund's use of leverage stated above conflicts with
the Investment Company Act or the rules and regulations thereunder, the


                                     II-14



Fund will comply with the applicable provisions of the Investment Company Act. A
Fund may at times or from time to time decide not to use leverage in its
investments or use less leverage than may otherwise be allowable.

Counterparty Risk. A significant risk of hybrid instruments is counterparty
risk. Unlike exchange-traded futures and options, which are standard contracts,
hybrid instruments are customized securities, tailor-made by a specific issuer.
With a listed futures or options contract, an investor's counterparty is the
exchange clearinghouse. Exchange clearinghouses are capitalized by the exchange
members and typically have high investment grade ratings (e.g., ratings of AAA
or AA by Standard & Poor's). Therefore, the risk is small that an exchange
clearinghouse might be unable to meet its obligations at maturity. However,
with a hybrid instrument, a Fund will take on the counterparty credit risk of
the issuer. That is, at maturity of the hybrid instrument, there is a risk that
the issuer may be unable to perform its obligations under the structured note.

Options on Securities and Securities Indices. A Fund may invest in options on
individual securities, baskets of securities or particular measurements of value
or rate (an "index"), such as an index of the price of treasury securities or an
index representative of short term interest rates.

Types of Options. A Fund may engage in transactions in options on securities or
securities indices on exchanges and in the over-the-counter ("OTC") markets. In
general, exchange-traded options have standardized exercise prices and
expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below.

Call Options. Each Fund may purchase call options on any of the types of
securities or instruments in which it may invest. A purchased call option gives
a Fund the right to buy, and obligates the seller to sell, the underlying
security at the exercise price at any time during the option period. A Fund
also may purchase and sell call options on indices. Index options are similar
to options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option
if the level of the index upon which the option is based is greater than the
exercise price of the option.

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

Each Fund also is authorized to write (i.e., sell) uncovered call options on
securities or instruments in which it may invest but that are not currently
held by the Fund. The principal reason for writing uncovered call options is to
realize income without committing capital to the ownership of the underlying
securities or instruments. When writing uncovered call options, a Fund must
deposit and maintain sufficient



                                     II-15



margin with the broker dealer through which it made the uncovered call option as
collateral to ensure that the securities can be purchased for delivery if and
when the option is exercised. In addition, in connection with each such
transaction a Fund will segregate unencumbered liquid securities or cash with a
value at least equal to the Fund's exposure (the difference between the unpaid
amounts owed by the Fund on such transaction minus any collateral deposited with
the broker dealer), on a marked-to-market basis (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund has
assets available to satisfy its obligations with respect to the transaction and
will avoid any potential leveraging of the Fund's portfolio. Such segregation
will not limit the Fund's exposure to loss. During periods of declining
securities prices or when prices are stable, writing uncovered calls can be a
profitable strategy to increase a Fund's income with minimal capital risk.
Uncovered calls are riskier than covered calls because there is no underlying
security held by a Fund that can act as a partial hedge. Uncovered calls have
speculative characteristics and the potential for loss is unlimited. When an
uncovered call is exercised, a Fund must purchase the underlying security to
meet its call obligation. There is also a risk, especially with less liquid
preferred and debt securities, that the securities may not be available for
purchase. If the purchase price exceeds the exercise price, a Fund will lose the
difference.

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

Each Fund also has authority to write (i.e., sell) put options on the types of
securities or instruments that may be held by the Fund, provided that such put
options are covered, meaning that such options are secured by segregated,
liquid instruments. A Fund will receive a premium for writing a put option,
which increases the Fund's return. A Fund will not sell puts if, as a result,
more than 50% of the Fund's assets would be required to cover its potential
obligations under its hedging and other investment transactions.

Each Fund is also authorized to write (i.e., sell) uncovered put options on
securities or instruments in which it may invest but that the Fund does not
currently have a corresponding short position or has not deposited cash equal
to the exercise value of the put option with the broker dealer through which it
made the uncovered put option as collateral. The principal reason for writing
uncovered put options is to receive premium income and to acquire such
securities or instruments at a net cost below the current market value. A Fund
has the obligation to buy the securities or instruments at an agreed upon price
if the securities or instruments decrease below the exercise price. If the
securities or instruments price increases during the option period, the option
will expire worthless and a Fund will retain the premium and will not have to
purchase the securities or instruments at the exercise price. In connection
with such transaction, a Fund will segregate unencumbered liquid securities or
cash with a value at least equal to the Fund's exposure, on a marked-to-market
basis (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that a Fund has assets available to satisfy its
obligations with respect to the transaction and will avoid any potential
leveraging of the Fund's portfolio. Such segregation will not limit the Fund's
exposure to loss.

Options on Government National Mortgage Association ("GNMA") Certificates. The
following information relates to unique characteristics of options on GNMA
Certificates. Since the remaining principal balance of GNMA Certificates
declines each month as a result of mortgage payments, a Fund, as



                                     II-16



a writer of a GNMA call holding GNMA Certificates as "cover" to satisfy its
delivery obligation in the event of exercise, may find that the GNMA
Certificates it holds no longer have a sufficient remaining principal balance
for this purpose. Should this occur, a Fund will purchase additional GNMA
Certificates from the same pool (if obtainable) or other GNMA Certificates in
the cash market in order to maintain its "cover."

A GNMA Certificate held by a Fund to cover an option position in any but the
nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. If this should occur,
a Fund will no longer be covered, and the Fund will either enter into a closing
purchase transaction or replace such Certificate with a certificate which
represents cover. When a Fund closes its position or replaces such Certificate,
it may realize an unanticipated loss and incur transaction costs.

Futures. A Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts which obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of an
asset at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract a Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day thereafter
until the futures position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures position the prior
day or be entitled to a payment representing any profit experienced as a result
of the futures position the prior day. Futures involve substantial leverage
risk.

The sale of a futures contract limits a Fund's risk of loss through a decline in
the market value of portfolio holdings correlated with the futures contract
prior to the futures contract's expiration date. In the event the market value
of the portfolio holdings correlated with the futures contract increases rather
than decreases, however, a Fund will realize a loss on the futures position and
a lower return on the portfolio holdings than would have been realized without
the purchase of the futures contract.

The purchase of a futures contract may protect a Fund from having to pay more
for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or a Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.

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

Each Fund's Manager has claimed an exclusion from the definition of the term
"commodity pool operator" under the Commodity Exchange Act ("CEA") pursuant to
Rule 4.5 under the CEA. The Manager is not, therefore, subject to registration
or regulation as a "commodity pool operator" under the CEA and each Fund is
operated so as not to be deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.

Foreign Exchange Transactions. A Fund may engage in spot and forward foreign
exchange transactions and currency swaps, purchase and sell options on
currencies and purchase and sell currency futures



                                     II-17



and related options thereon (collectively, "Currency Instruments") for purposes
of hedging against the decline in the value of currencies in which its portfolio
holdings are denominated against the U.S. dollar or, with respect to certain
Funds, to seek to enhance returns. Such transactions could be effected with
respect to hedges on non-U.S. dollar denominated securities owned by a Fund,
sold by a Fund but not yet delivered, or committed or anticipated to be
purchased by a Fund. As an illustration, a Fund may use such techniques to hedge
the stated value in U.S. dollars of an investment in a yen-denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency put
option enabling it to sell a specified amount of yen for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the yen relative to the dollar will tend to be offset by an increase in
the value of the put option. To offset, in whole or in part, the cost of
acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such a call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar. "Straddles" of the type that may be used by a Fund are considered to
constitute hedging transactions and are consistent with the policies described
above. No Fund will attempt to hedge all of its foreign portfolio positions.

Forward Foreign Exchange Transactions. Forward foreign exchange transactions
are OTC contracts to purchase or sell a specified amount of a specified
currency or multinational currency unit at a price and future date set at the
time of the contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. A Fund will enter into foreign
exchange transactions for purposes of hedging either a specific transaction or
a portfolio position, or, with respect to certain Funds, to seek to enhance
returns. A Fund may enter into a foreign exchange transaction for purposes of
hedging a specific transaction by, for example, purchasing a currency needed to
settle a security transaction or selling a currency in which the Fund has
received or anticipates receiving a dividend or distribution. A Fund may enter
into a foreign exchange transaction for purposes of hedging a portfolio
position by selling forward a currency in which a portfolio position of the
Fund is denominated or by purchasing a currency in which the Fund anticipates
acquiring a portfolio position in the near future. A Fund may also hedge
portfolio positions through currency swaps, which are transactions in which one
currency is simultaneously bought for a second currency on a spot basis and
sold for the second currency on a forward basis. Forward foreign exchange
transactions involve substantial currency risk, and also involve credit and
liquidity risk.

Currency Futures. A Fund may also seek to enhance returns or hedge against the
decline in the value of a currency against the U.S. dollar through use of
currency futures or options thereon. Currency futures are similar to forward
foreign exchange transactions except that futures are standardized,
exchange-traded contracts. See "Futures" above. Currency futures involve
substantial currency risk, and also involve leverage risk.

Currency Options. A Fund may also seek to enhance returns or hedge against the
decline in the value of a currency against the U.S. dollar through the use of
currency options. Currency options are similar to options on securities, but in
consideration for an option premium the writer of a currency option is
obligated to sell (in the case of a call option) or purchase (in the case of a
put option) a specified amount of a specified currency on or before the
expiration date for a specified amount of another currency. A Fund may engage
in transactions in options on currencies either on exchanges or OTC markets.
See "Types of Options" above and "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives" below. Currency options involve
substantial currency risk, and may also involve credit, leverage or liquidity
risk.

Limitations on Currency Hedging. Most Funds will not speculate in Currency
Instruments although certain Funds may use such instruments to seek to enhance
returns. Accordingly, a Fund will not hedge a currency in excess of the
aggregate market value of the securities that it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in



                                     II-18



such currency. A Fund may, however, hedge a currency by entering into a
transaction in a Currency Instrument denominated in a currency other than the
currency being hedged (a "cross-hedge"). A Fund will only enter into a
cross-hedge if the Manager believes that (i) there is a demonstrable high
correlation between the currency in which the cross-hedge is denominated and the
currency being hedged, and (ii) executing a cross-hedge through the currency in
which the cross-hedge is denominated will be significantly more cost-effective
or provide substantially greater liquidity than executing a similar hedging
transaction by means of the currency being hedged.

Risk Factors in Hedging Foreign Currency Risks. Hedging transactions involving
Currency Instruments involve substantial risks, including correlation risk.
While a Fund's use of Currency Instruments to effect hedging strategies is
intended to reduce the volatility of the net asset value of the Fund's shares,
the net asset value of the Fund's shares will fluctuate. Moreover, although
Currency Instruments will be used with the intention of hedging against adverse
currency movements, transactions in Currency Instruments involve the risk that
anticipated currency movements will not be accurately predicted and that the
Fund's hedging strategies will be ineffective. To the extent that a Fund hedges
against anticipated currency movements that do not occur, the Fund may realize
losses and decrease its total return as the result of its hedging transactions.
Furthermore, a Fund will only engage in hedging activities from time to time and
may not be engaging in hedging activities when movements in currency exchange
rates occur.

In connection with its trading in forward foreign currency contracts, a Fund
will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
or dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the bank
or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward
contract trading. With respect to its trading of forward contracts, if any, a
Fund will be subject to the risk of bank or dealer failure and the inability
of, or refusal by, a bank or dealer to perform with respect to such contracts.
Any such default would deprive the Fund of any profit potential or force the
Fund to cover its commitments for resale, if any, at the then market price and
could result in a loss to the Fund.

It may not be possible for a Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available and it is not possible to engage in effective
foreign currency hedging. The cost to a Fund of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved.

Risk Factors in Derivatives

Derivatives are volatile and involve significant risks, including:

Credit Risk -- the risk that the counterparty on a Derivative transaction will
be unable to honor its financial obligation to a Fund, or the risk that the
reference entity in a credit default swap or similar derivative will not be able
to honor its financial obligations.

Currency Risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.

Leverage Risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may



                                     II-19



result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.

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

Use of Derivatives for hedging purposes involves correlation risk. If the value
of the Derivative moves more or less than the value of the hedged instruments, a
Fund will experience a gain or loss that will not be completely offset by
movements in the value of the hedged instruments.

A Fund intends to enter into transactions involving Derivatives only if there
appears to be a liquid secondary market for such instruments or, in the case of
illiquid instruments traded in OTC transactions, such instruments satisfy the
criteria set forth below under "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives." However, there can be no assurance
that, at any specific time, either a liquid secondary market will exist for a
Derivative or the Fund will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in a
Derivative without incurring substantial losses, if at all.

Certain transactions in Derivatives (such as futures transactions or sales of
put options) involve substantial leverage risk and may expose a Fund to
potential losses, which exceed the amount originally invested by the Fund. When
a Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that a
Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.

Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives

Certain Derivatives traded in OTC markets, including indexed securities, swaps
and OTC options, involve substantial liquidity risk. The absence of liquidity
may make it difficult or impossible for a Fund to sell such instruments
promptly at an acceptable price. The absence of liquidity may also make it more
difficult for a Fund to ascertain a market value for such instruments. A Fund
will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant
to which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager anticipates
the Fund can receive on each business day at least two independent bids or
offers, unless a quotation from only one dealer is available, in which case
that dealer's quotation may be used.

Because Derivatives traded in OTC markets are not guaranteed by an exchange or
clearing corporation and generally do not require payment of margin, to the
extent that a Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. A Fund will attempt
to minimize the risk that a counterparty will become bankrupt or otherwise fail
to honor its obligations by engaging in transactions in Derivatives traded in
OTC markets only with financial institutions that have substantial capital or
that have provided the Fund with a third-party guaranty or other credit
enhancement.


DISTRESSED SECURITIES. A Fund may invest in securities, including corporate
loans purchased in the secondary market, which are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal and/or
interest at the time of acquisition by the Fund or are rated in the lower rating
categories (Ca or lower by Moody's Investors Service, Inc. ("Moody's") and CC or
lower by Standard & Poor's ("S&P")) or which, if unrated, are in the judgment of
the Manager of equivalent quality ("Distressed Securities"). Investment in
Distressed Securities is speculative and involves significant risks. Distressed
Securities frequently do not produce income while they are outstanding and may
require a Fund to bear certain extraordinary expenses in order to protect and
recover its investment.


                                     II-20


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


DOLLAR ROLLS . A Fund may enter into dollar rolls, in which the Fund will sell
securities for delivery in the current month and simultaneously contract to
repurchase substantially similar (the same type and coupon) securities on a
specified future date from the same party. During the roll period, a Fund
forgoes principal and interest paid on the securities sold. A Fund is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale.

Dollar rolls involve the risk that the market value of the securities subject
to a Fund's forward purchase commitment may decline below the price of the
securities the Fund has sold. In the event the buyer of the securities files
for bankruptcy or becomes insolvent, a Fund's use of the proceeds of the
current sale portion of the transaction may be restricted pending a
determination by the other party, or its trustee or receiver, whether to
enforce the Fund's obligation to purchase the similar securities in the forward
transaction. Dollar rolls are speculative techniques that can be deemed to
involve leverage. A Fund will engage in dollar roll transactions to enhance
return and not for the purpose of borrowing. Each dollar roll transaction is
accounted for as a sale of a portfolio security and a subsequent purchase of a
substantially similar security in the forward market.

FOREIGN INVESTMENT RISKS

Foreign Market Risk. Funds that may invest in foreign securities offer the
potential for more diversification than a Fund that invests only in the United
States because securities traded on foreign markets have often (though not
always) performed differently than securities in the United States. However,
such investments involve special risks not present in U.S. investments that can
increase the chances that a Fund will lose money. In particular, a Fund is
subject to the risk that, because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may be
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets



                                     II-21



may also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect a Fund's operations. Other
foreign market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

Currency Risk and Exchange Risk. Securities in which a Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of a Fund's portfolio.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is worth
fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against
a foreign currency, a security denominated in that currency gains value because
the currency is worth more U.S. dollars. This risk, generally known as
"currency risk," means that a stronger U.S. dollar will reduce returns for U.S.
investors while a weak U.S. dollar will increase those returns.

Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than does the United States. Some countries may not have laws
to protect investors comparable to the U.S. securities laws. For example, some
foreign countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
nonpublic information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition.

Certain Risks of Holding Fund Assets Outside the United States. A Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on a Fund's ability to recover its assets if a
foreign bank or depository or issuer of a security or any of their agents goes
bankrupt. In addition, it is often more expensive for a Fund to buy, sell and
hold securities in certain foreign markets than in the United States. The
increased expense of investing in foreign markets reduces the amount a Fund can
earn on its investments and typically results in a higher operating expense
ratio for the Fund as compared to investment companies that invest only in the
United States.

Settlement Risk. Settlement and clearance procedures in certain foreign markets
differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for a Fund to carry out
transactions. If a Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If a
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.

Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, thereby reducing the amount available
for distribution to shareholders.



                                     II-22



ILLIQUID OR RESTRICTED SECURITIES. Each Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of a Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where a Fund's operations require cash, such as when
the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short term cash requirements or incurring capital losses on
the sale of illiquid investments.

A Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between issuers and their purchasers and may be neither listed on an exchange
nor traded in other established markets. In many cases, privately placed
securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of the
absence of a public trading market, privately placed securities may be less
liquid and more difficult to value than publicly traded securities. To the
extent that privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales, due to illiquidity, could be
less than those originally paid by the Fund or less than their fair market
value. In addition, issuers whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately placed
securities held by a Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Certain of the Fund's investments in
private placements may consist of direct investments and may include
investments in smaller, less seasoned issuers, which may involve greater risks.
These issuers may have limited product lines, markets or financial resources,
or they may be dependent on a limited management group. In making investments
in such securities, a Fund may obtain access to material nonpublic information,
which may restrict the Fund's ability to conduct portfolio transactions in such
securities.

INFLATION-INDEXED BONDS . Inflation-indexed bonds are fixed income securities
or other instruments whose principal value is periodically adjusted according
to the rate of inflation. Two structures are common. The U.S. Treasury and some
other issuers use a structure that accrues inflation into the principal value
of the bond. Most other issuers pay out the Consumer Price Index ("CPI")
accruals as part of a semi-annual coupon.

Inflation-indexed securities issued by the U.S. Treasury have maturities of
five, ten or thirty years, although it is possible that securities with other
maturities will be issued in the future. The U.S. Treasury securities pay
interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if the Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months
was 1%, the mid-year value of the bond would be $1,010 and the first
semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year resulted in the whole year's inflation
equaling 3%, the end of year value of the bond would be $1,030 and the second
semi-annual interest payment would be $15.45 ($1,030 times 1.5%).

If the periodic adjustment rate measuring inflation falls, the principal value
of inflation-indexed bonds will be adjusted downward, and, consequently, the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal on
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed and will fluctuate. The Fund may
also invest in other inflation related bonds that may or may not provide a



                                     II-23



similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal. In addition, if the Fund purchases inflation-indexed bonds offered by
foreign issuers, the rate of inflation measured by the foreign inflation index
may not be correlated to the rate of inflation in the United States.

The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates, in turn, are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds. There can be no assurance,
however, that the value of inflation-indexed bonds will be directly correlated
to changes in interest rates.

While these securities are expected to be protected from long-term inflationary
trends, short-term increases in inflation may lead to a decline in value. If
interest rates rise due to reasons other than inflation (for example, due to
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.

In general, the measure used to determine the periodic adjustment of U.S.
inflation-indexed bonds is the CPI for Urban Consumers ("CPI-U"), which is
calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a
measurement of changes in the cost of living, made up of components such as
housing, food, transportation and energy. Inflation-indexed bonds issued by a
foreign government are generally adjusted to reflect a comparable inflation
index calculate by the applicable government. There can be no assurance that
the CPI-U or any foreign inflation index will accurately measure the real rate
of inflation in the prices of goods and services. Moreover, there can be no
assurance that the rate of inflation in a foreign country will be correlated to
the rate of inflation in the United States.

An increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.

INVESTMENT IN OTHER INVESTMENT COMPANIES. Each Fund may invest in other
investment companies, including exchange traded funds. In accordance with the
Investment Company Act, a Fund may invest up to 10% of its total assets in
securities of other investment companies. In addition, under the Investment
Company Act a Fund may not own more than 3% of the total outstanding voting
stock of any investment company and not more than 5% of the value of the Fund's
total assets may be invested in securities of any investment company. (These
limits do not restrict a Feeder Fund from investing all of its assets in shares
of its Master Portfolio.) Each Fund has received an exemptive order from the
Commission permitting it to invest in affiliated registered money market funds
and in an affiliated private investment company without regard to such
limitations, provided however, that in all cases the Fund's aggregate
investment of cash in shares of such investment companies shall not exceed 25%
of the Fund's total assets at any time. As with other investments, investments
in other investment companies are subject to market and selection risk. In
addition, if a Fund acquires shares in investment companies, shareholders would
bear both their proportionate share of expenses in the Fund (including
management and advisory fees) and, indirectly, the expenses of such investment
companies (including management and advisory fees). Investments by a Fund in
wholly owned investment entities created under the laws of certain countries
will not be deemed an investment in other investment companies.

INVESTMENT IN EMERGING MARKETS. Certain Funds may invest in the securities of
issuers domiciled in various countries with emerging capital markets.
Specifically, a country with an emerging capital market
is any country that the World Bank, the International Finance Corporation, the
United Nations or its authorities has determined to have a low or middle income
economy. Countries with emerging markets can be found in regions such as Asia,
Latin America, Eastern Europe and Africa.



                                     II-24





Investments in the securities of issuers domiciled in countries with emerging
capital markets involve certain additional risks not involved in investments in
securities of issuers in more developed capital markets, such as (i) low or
non-existent trading volume, resulting in a lack of liquidity and increased
volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets, (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments, (iii) possible fluctuations
in exchange rates, differing legal systems and the existence or possible
imposition of exchange controls, custodial restrictions or other foreign or
U.S. governmental laws or restrictions applicable to such investments, (iv)
national policies that may limit a Fund's investment opportunities such as
restrictions on investment in issuers or industries deemed sensitive to
national interests, and (v) the lack or relatively early development of legal
structures governing private and foreign investments and private property. In
addition to withholding taxes on investment income, some countries with
emerging markets may impose differential capital gains taxes on foreign
investors.

Such capital markets are emerging in a dynamic political and economic
environment brought about by events over recent years that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that these capital markets will continue to present
viable investment opportunities for a Fund. In the past, governments of such
nations have expropriated substantial amounts of private property, and most
claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such an event, it is
possible that a Fund could lose the entire value of its investments in the
affected markets.

Also, there may be less publicly available information about issuers in
emerging markets than would be available about issuers in more developed
capital markets, and such issuers may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those to which
U.S. companies are subject. In certain countries with emerging capital markets,
reporting standards vary widely. As a result, traditional investment
measurements used in the United States, such as price/earnings ratios, may not
be applicable. Emerging market securities may be substantially less liquid and
more volatile than those of mature markets, and companies may be held by a
limited number of persons. This may adversely affect the timing and pricing of
the Fund's acquisition or disposal of securities.

Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because a
Fund will need to use brokers and counterparties that are less well
capitalized, and custody and registration of assets in some countries may be
unreliable. The possibility of fraud, negligence, undue influence being exerted
by the issuer or refusal to recognize ownership exists in some emerging
markets, and, along with other factors, could result in ownership registration
being completely lost. A Fund would absorb any loss resulting from such
registration problems and may have no successful claim for compensation.

Restrictions on Certain Investments. A number of publicly traded closed-end
investment companies have been organized to facilitate indirect foreign
investment in developing countries, and certain of such countries, such as
Thailand, South Korea, Chile and Brazil have specifically authorized such funds.
There also are investment opportunities in certain of such countries in pooled
vehicles that resemble open-end investment companies. In accordance with the
Investment Company Act, a Fund may invest up to 10% of its total assets in
securities of other investment companies, not more than 5% of which may be
invested in any one such company. In addition, under the Investment Company Act,
a Fund may not own more than 3% of the total outstanding voting stock of any
investment company. These restrictions on investments in securities of
investment companies may limit opportunities for a Fund to invest indirectly in
certain developing countries. Shares of certain investment companies may at
times be acquired only at market prices representing premiums to their net asset
values. If a Fund acquires shares of other investment companies, shareholders
would bear both their proportionate share of expenses of the Fund (including
management and advisory fees) and, indirectly, the expenses of such other
investment companies.






                                     II-25




JUNK BONDS . Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for a Fund. The major
risks in junk bond investments include the following:

   o  Junk bonds may be issued by less creditworthy companies. These securities
      are vulnerable to adverse changes in the issuer's industry and to general
      economic conditions. Issuers of junk bonds may be unable to meet their
      interest or principal payment obligations because of an economic downturn,
      specific issuer developments or the unavailability of additional
      financing.

   o  The issuers of junk bonds may have a larger amount of outstanding debt
      relative to their assets than issuers of investment grade bonds. If the
      issuer experiences financial stress, it may be unable to meet its debt
      obligations. The issuer's ability to pay its debt obligations also may be
      lessened by specific issuer developments, or the unavailability of
      additional financing.

   o  Junk bonds are frequently ranked junior to claims by other creditors. If
      the issuer cannot meet its obligations, the senior obligations are
      generally paid off before the junior obligations.

   o  Junk bonds frequently have redemption features that permit an issuer to
      repurchase the security from a Fund before it matures. If an issuer
      redeems the junk bonds, a Fund may have to invest the proceeds in bonds
      with lower yields and may lose income.

   o  Prices of junk bonds are subject to extreme price fluctuations. Negative
      economic developments may have a greater impact on the prices of junk
      bonds than on other higher rated fixed income securities.

   o  Junk bonds may be less liquid than higher rated fixed income securities
      even under normal economic conditions. There are fewer dealers in the junk
      bond market, and there may be significant differences in the prices quoted
      for junk bonds by the dealers. Because they are less liquid, judgment may
      play a greater role in valuing certain of a Fund's portfolio securities
      than in the case of securities trading in a more liquid market.


   o  A Fund may incur expenses to the extent necessary to seek recovery upon
      default or to negotiate new terms with a defaulting issuer.


MORTGAGE-RELATED SECURITIES

Mortgage-Backed Securities. Investing in mortgage-backed securities involves
certain unique risks in addition to those generally associated with investing in
the real estate industry in general. These unique risks include the failure of a
party to meet its commitments under the related operative documents, adverse
interest rate changes and the effects of prepayments on mortgage cash flows.
Mortgage-backed securities are "pass-through" securities, meaning that principal
and interest payments made by the borrower on the underlying mortgages are
passed through to a Fund. The value of mortgage-backed securities, like that of
traditional fixed-income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, mortgage-backed securities
differ from traditional fixed-income securities because of their potential for
prepayment without penalty. The price paid by a Fund for its mortgage backed
securities, the yield the Fund expects to receive from such securities and the
average life of the securities are based on a number of factors, including the
anticipated rate of prepayment of the underlying mortgages. In a period of
declining interest rates, borrowers may prepay the underlying mortgages more
quickly than anticipated, thereby reducing the yield to maturity and the average
life of the mortgage-backed securities. Moreover, when a Fund reinvests the
proceeds of a prepayment in these circumstances, it will likely receive a rate
of interest that is lower than the rate on the security that was prepaid.



                                     II-26



To the extent that a Fund purchases mortgage-backed securities at a premium,
mortgage foreclosures and principal prepayments may result in a loss to the
extent of the premium paid. If a Fund buys such securities at a discount, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying mortgages may
occur at a slower than expected rate, creating maturity extension risk. This
particular risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Fund. Under certain interest rate and
prepayment scenarios, a Fund may fail to recoup fully its investment in
mortgage-backed securities notwithstanding any direct or indirect governmental
or agency guarantee.

Mortgage Pass-Through Securities. Mortgage pass-through securities represent
interests in pools of mortgages in which payments of both principal and
interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the
issuer or guarantor of the securities). Mortgage pass-through securities differ
from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at maturity or
specified call dates. Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose a Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to repayment has been purchased at a
premium, in the event of prepayment, the value of the premium would be lost.


There are currently three types of mortgage pass-through securities: (1) those
issued by the U.S. government or one of its agencies or instrumentalities, such
as the Government National Mortgage Association ("Ginnie Mae"), or by
government sponsored enterprises, such as the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"); (2) those issued by private issuers that represent an interest
in or are collateralized by pass-through securities issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities; and (3) those
issued by private issuers that represent an interest in or are collateralized
by whole mortgage loans or pass-through securities without a government
guarantee but usually having some form of private credit enhancement.


Ginnie Mae is a wholly owned U.S. government corporation within the Department
of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with
the full faith and credit of the U.S. government, the timely payment of
principal and interest on securities issued by the institutions approved by
Ginnie Mae (such as savings and loan institutions, commercial banks and
mortgage banks), and backed by pools of Federal Housing Administration
("FHA")-insured or Veterans' Administration ("VA")-guaranteed mortgages.

Obligations of Fannie Mae and Freddie Mac are not backed by the full faith and
credit of the U. S. government. In the case of obligations not backed by the
full faith and credit of the U.S. government, the Fund must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment.
Fannie Mae and Freddie Mac may borrow from the U.S. Treasury to meet its
obligations, but the U.S. Treasury is under no obligation to lend to Fannie Mae
or Freddie Mac.

Private mortgage pass-through securities are structured similarly to Ginnie
Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are
issued by originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.



                                     II-27




Pools created by private mortgage pass-through issuers generally offer a higher
rate of interest than government and government-related pools because there are
no direct or indirect government or agency guarantees of payments in the
private pools. However, timely payment of interest and principal of these pools
may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. The insurance and guarantees and the creditworthiness
of the issuers thereof will be considered in determining whether a
mortgage-related security meets a Fund's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private
mortgage pass-through securities may be bought without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Manager determines that the securities
meet a Fund's quality standards.

Collateralized Mortgage Obligations ("CMOs"). CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by whole mortgage loans or
private mortgage pass-through securities but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae,
Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be
treated as a Real Estate Mortgage Investment Conduit ("REMIC"). All future
references to CMOs also include REMICs.

CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral, which is ordinarily unrelated to the stated
maturity date. CMOs often provide for a modified form of call protection
through a de facto breakdown of the underlying pool of mortgages according to
how quickly the loans are repaid. Monthly payment of principal received from
the pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.

Certain issuers of CMOs are not considered investment companies pursuant to a
rule adopted by the Commission, and a Fund may invest in the securities of such
issuers without the limitations imposed by the Investment Company Act on
investments by a Fund in other investment companies. In addition, in reliance
on an earlier Commission interpretation, a Fund's investments in certain other
qualifying CMOs, which cannot or do not rely on the rule, are also not subject
to the limitation of the Investment Company Act on acquiring interests in other
investment companies. In order to be able to rely on the Commission's
interpretation, these CMOs must be unmanaged, fixed asset issuers, that: (1)
invest primarily in mortgage-backed securities; (2) do not issue redeemable
securities; (3) operate under general exemptive orders exempting them from all
provisions of the Investment Company Act; and (4) are not registered or
regulated under the Investment Company Act as investment companies. To the
extent that a Fund selects CMOs that cannot rely on the rule or do not meet the
above requirements, the Fund may not invest more than 10% of its assets in all
such entities and may not acquire more than 3% of the voting securities of any
single such entity.

A Fund may also invest in, among other things, parallel pay CMOs, Planned
Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and floating rate
CMOs. Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. PAC bonds generally require payments of a
specified amount of principal on each payment date. Sequential pay CMOs
generally pay principal to only one class while paying interest to several
classes. Floating rate CMOs are securities whose coupon rate fluctuates
according to some formula related to an existing market index or rate. Typical
indices would include the eleventh district cost-of-funds index ("COFI"), LIBOR,
one-year Treasury yields, and ten-year Treasury yields.



                                     II-28




Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either
the first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. In the event that
market rates of interest rise more rapidly to levels above that of the ARM's
maximum rate, the ARM's coupon may represent a below market rate of interest.
In these circumstances, the market value of the ARM security will likely have
fallen.

Certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is then utilized to reduce the outstanding principal
balance of the ARM.

CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing. The cash flow generated by the mortgage
assets underlying a series of CMOs is applied first to make required payments
of principal and interest on the CMOs and second to pay the related
administrative expenses of the issuer. The residual in a CMO structure
generally represents the interest in any excess cash flow remaining after
making the foregoing payments. Each payment of such excess cash flow to a
holder of the related CMO residual represents income and/or a return of
capital. The amount of residual cash flow resulting from a CMO will depend on,
among other things, the characteristics of the mortgage assets, the coupon rate
of each class of CMO, prevailing interest rates, the amount of administrative
expenses and the prepayment experience on the mortgage assets. In part, the
yield to maturity on the CMO residuals is extremely sensitive to prepayments on
the related underlying mortgage assets, in the same manner as an interest-only
("IO") class of stripped mortgage-related securities. In addition, if a series
of a CMO includes a class that bears interest at an adjustable rate, the yield
to maturity on the related CMO residual will also be extremely sensitive to
changes in the level of the index upon which interest rate adjustments are
based. In certain circumstances a Fund may fail to recoup fully its initial
investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act. CMO residuals, whether or not registered under the
Securities Act, may be subject to certain restrictions on transferability, and
may be deemed "illiquid" and subject to a Fund's limitations on investment in
illiquid securities. Stripped Mortgage Backed Securities. A Fund may invest in
stripped mortgage backed securities ("SMBSs") issued by agencies or
instrumentalities of the United States. SMBSs are derivative multi-class
mortgage backed securities. SMBS arrangements commonly involve two classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common variety



                                     II-29




of SMBS is where one class (the principal only or PO class) receives some of the
interest and most of the principal from the underlying assets, while the other
class (the interest only or IO class) receives most of the interest and the
remainder of the principal. In the most extreme case, the IO class receives all
of the interest, while the PO class receives all of the principal. While a Fund
may purchase securities of a PO class, a Fund is more likely to purchase the
securities of an IO class. The yield to maturity of an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying assets, and a rapid rate of principal payments in excess of
that considered in pricing the securities will have a material adverse effect on
an IO security's yield to maturity. If the underlying mortgage assets experience
greater than anticipated payments of principal, a Fund may fail to recoup fully
its initial investment in IOs. In addition, there are certain types of IOs that
represent the interest portion of a particular class as opposed to the interest
portion of the entire pool. The sensitivity of this type of IO to interest rate
fluctuations may be increased because of the characteristics of the principal
portion to which they relate. As a result of the above factors, a Fund generally
will purchase IOs only as a component of so called "synthetic" securities. This
means that purchases of IOs will be matched with certain purchases of other
securities, such as POs, inverse floating rate CMOs or fixed rate securities; as
interest rates fall, presenting a greater risk of unanticipated prepayments of
principal, the negative effect on a Fund because of its holdings of IOs should
be diminished somewhat because of the increased yield on the inverse floating
rate CMOs or the increased appreciation on the POs or fixed rate securities. IOs
and POs are considered by the staff of the Commission to be illiquid securities
and, consequently, a Fund will not invest in IOs or POs in an amount which,
taken together with the Fund's other investments in illiquid securities, exceeds
15% of the Fund's net assets.

Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied
to a specified index or market rate. So long as this index or market rate is
below a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.


MUNICIPAL INVESTMENTS

The Municipal Funds and certain other funds may invest in obligations issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, the payments from which, in the opinion of bond counsel to
the issuer, are excludable from gross income for Federal income tax purposes
("Municipal Bonds"). California Insured, Florida Municipal Bond, New Jersey
Municipal Bond, New York Municipal Bond and Pennsylvania Municipal Bond also
invest in Municipal Bonds that pay interest excludable from gross income for
applicable state and local income tax purposes and/or allow the value of their
shares to be exempt from applicable state and local personal property taxes
("State Municipal Bonds"). The Municipal Funds may also invest in securities not
issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Manager believes such securities to pay
excludable from gross income for Federal and applicable state and local income
tax purposes and/or applicable state and local personal property taxes
("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities
could include trust certificates or other instruments evidencing interest in one
or more long term municipal securities. Non-Municipal Tax-Exempt Securities also
may include securities issued by other investment companies that invest in
municipal bonds, to the extent such investments are permitted by applicable law.
Non-Municipal Tax-Exempt Securities that pay interest excludable from gross
income for Federal income tax purposes will be considered "Municipal Bonds" for
purposes of a Municipal Fund's investment objective and policies. Non-Municipal
Tax-Exempt Securities that pay interest excludable from gross income for Federal
and applicable state and local income tax purposes and/or allow the value of




                                     II-30





a Fund's shares to be exempt from applicable state and local personal property
taxes will be considered "State Municipal Bonds" for purposes of the investment
objective and policies of each of California Insured, Florida Municipal Bond,
New Jersey Municipal Bond, New York Municipal Bond and Pennsylvania Municipal
Bond.


Risk Factors and Special Considerations Relating to Municipal Bonds. The risks
and special considerations involved in investment in Municipal Bonds vary with
the types of instruments being acquired. Investments in Non-Municipal
Tax-Exempt Securities may present similar risks, depending on the particular
product. Certain instruments in which the Fund may invest may be characterized
as derivative instruments.

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


A Municipal Fund's ability to distribute dividends exempt from Federal income
tax will depend on the exclusion from gross income of the interest income that
it receives on the Municipal Bonds in which it invests. The Municipal Funds
will only purchase Municipal Bonds if they are accompanied by an opinion of
counsel to the issuer, which is delivered on the date of issuance of that
security, that interest on such securities is excludable from gross income for
Federal income tax purposes (the "tax exemption opinion").

Events occurring after the date of issuance of the Municipal Bonds, however,
may cause the interest on such securities to be includable in gross income for
Federal income tax purposes. For example, the Internal Revenue Code establishes
certain requirements, such as restrictions as to the investment of the proceeds
of the issue, limitations as to the use of proceeds of such issue and the
property financed by such proceeds, and the payment of certain excess earnings
to the Federal government, that must be met after the issuance of the Municipal
Bonds for interest on such securities to remain excludable from gross income
for Federal income tax purposes. The issuers and the conduit borrowers of the
Municipal Bonds generally covenant to comply with such requirements and the tax
exemption opinion generally assumes continuing compliance with such
requirements. Failure to comply with these continuing requirements, however,
may cause the interest on such Municipal Bonds to be includable in gross income
for Federal income tax purposes retroactive to their date of issue.

In addition, the Internal Revenue Service has an ongoing enforcement program
that involves the audit of tax exempt bonds to determine whether an issue of
bonds satisfies all of the requirements that must be met for interest on such
bonds to be excludable from gross income for Federal income tax purposes. From
time to time, some of the Municipal Bonds held by a Fund may be the subject of
such an audit by the IRS, and the IRS may determine that the interest on such
securities is includable in gross income for Federal income tax purposes either
because the IRS has taken a legal position adverse to the conclusion reached by
the counsel to the issuer in the tax exemption opinion or as a result of an
action taken or not taken after the date of issue of such obligation.

If interest paid on a Municipal Security in which a Municipal Fund invests is
determined to be taxable subsequent to its acquisition of such security, the
IRS may demand that such Fund pay taxes on the affected interest income and if
the Fund agrees to do so, its yield could be adversely affected. If the interest
paid on any Municipal Security held by a Municipal Fund is determined to be taxable,
such Fund will dispose of the security as soon as practicable.



                                     II-31



A determination that interest on a security held by a Municipal Fund is
includable in gross income for Federal or state income tax purposes
retroactively to its date of issue may, likewise, cause a portion of prior
distributions received by shareholders to be taxable to those shareholders in
the year of receipt.


Description of Municipal Bonds


Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other specialized
facilities. Such obligations are included within the term Municipal Bonds if
the interest paid thereon is excluded from gross income for Federal income tax
purposes and any applicable state and local taxes. Other types of industrial
development bonds or private activity bonds, the proceeds of which are used for
the construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues. The
interest on Municipal Bonds may bear a fixed rate or be payable at a variable
or floating rate. The two principal classifications of Municipal Bonds are
"general obligation" and "revenue" bonds, which latter category includes
private activity bonds ("PABS") (or "industrial development bonds" under
pre-1986 law).


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

Revenue Bonds. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as payments from
the user of the facility being financed; accordingly the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source.


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

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




                                     II-32



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

Municipal Commercial Paper. Municipal commercial paper is generally unsecured
and issued to meet short-term financing needs. The lack of security presents
some risk of loss to a Fund.


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


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

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


                                     II-33


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

Participating VRDOs provide a Fund with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDOs from
the financial institution upon a specified number of days notice, not to exceed
seven days. In addition, the Participating VRDO is backed by an irrevocable
letter of credit or guaranty of the financial institution. A 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 Funds have been advised by counsel that
they should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations. It is not contemplated that any Fund will
invest more than a limited amount of its total assets in Participating VRDOs.

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


The VRDOs and Participating VRDOs in which a Fund may invest will be in the
following rating categories at the time of purchase: MIG-1/ VMIG-1 through
MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial
paper (as determined by Moody's), SP-1 through SP-2 for notes and A-1 through
A-3 for VRDOs and commercial paper (as determined by S&P), or F-1 through F-3
for notes, VRDOs and commercial paper (as determined by Fitch).


Transactions in Financial Futures Contracts.


The Municipal Funds and certain other funds 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
obligation bonds. Each bond included in the Municipal Bond Index must be rated
A or higher by Moody's or S&P and must have a remaining maturity of 19 years or
more. Twice a month new issues satisfying the eligibility requirements are
added to, and an equal number of old issues are deleted from, the Municipal
Bond Index. The value of the Municipal Bond Index is computed daily according
to a formula based on the price of each bond in the Municipal Bond Index, as
evaluated by six dealer-to-dealer brokers.


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

The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the bonds held by a
Municipal Fund. As a result, a Municipal 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.


                                     II-34



The correlation may be affected by disparities in the average maturity, ratings,
geographical mix or structure of a Municipal 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
a Municipal Fund may be adversely affected by similar factors and the risk of
imperfect correlation between movements in the prices of such futures contracts
and the prices of Municipal Bonds held by a Municipal Fund may be greater.
Municipal Bond Index futures contracts were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than trading in
other futures contracts. The trading of futures contracts also is subject to
certain market risks, such as inadequate trading activity, which could at times
make it difficult or impossible to liquidate existing positions.

Call Rights.

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

Municipal Interest Rate Swap Transactions.

In order to hedge the value of a Fund against interest rate fluctuations or to
enhance a Fund's income, a Fund may enter into interest rate swap transactions
such as Municipal Market Data AAA Cash Curve swaps ("MMD Swaps") or Bond Market
Association Municipal Swap Index swaps ("BMA Swaps"). To the extent that a Fund
enters into these transactions, the Fund expects to do so primarily to preserve
a return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. A Fund intends to use these transactions primarily
as a hedge rather than as a speculative investment. However, a Fund also may
invest in MMD Swaps and BMA Swaps to enhance income or gain or to increase the
Fund's yield, for example, during periods of steep interest rate yield curves
(i.e., wide differences between short term and long term interest rates).

A Fund may purchase and sell BMA Swaps in the BMA swap market. In a BMA Swap, a
Fund exchanges with another party their respective commitments to pay or
receive interest (e.g., an exchange of fixed rate payments for floating rate
payments linked to the Bond Market Association Municipal Swap Index). Because
the underlying index is a tax-exempt index, BMA Swaps may reduce cross-market
risks incurred by a Fund and increase a Fund's ability to hedge effectively.
BMA Swaps are typically quoted for the entire yield curve, beginning with a
seven day floating rate index out to 30 years. The duration of a BMA Swap is
approximately equal to the duration of a fixed-rate Municipal Bond with the
same attributes as the swap (e.g., coupon, maturity, call feature).

A Fund may also purchase and sell MMD Swaps, also known as MMD rate locks. An
MMD Swap permits a Fund to lock in a specified municipal interest rate for a
portion of its portfolio to preserve a return on a particular investment or a
portion of its portfolio as a duration management technique or to protect against
any increase in the price of securities to be purchased at a later date. By using
an MMD Swap, a Fund can create a synthetic long or short position, allowing the
Fund to select the most attractive part of the yield curve. An MMD Swap is a
contract between a Fund and an MMD Swap provider pursuant to which the parties
agree to make payments to each other on a notional amount, contingent upon whether


                                     II-35


the Municipal Market Data AAA General Obligation Scale is above or below a
specified level on the expiration date of the contract. For example, if a Fund
buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is
below the specified level on the expiration date, the counterparty to the contract
will make a payment to the Fund equal to the specified level minus the actual level,
multiplied by the notional amount of the contract. If the Municipal Market Data
AAA General Obligation Scale is above the specified level on the expiration
date, a Fund will make a payment to the counterparty equal to the actual level
minus the specified level, multiplied by the notional amount of the contract.

In connection with investments in BMA and MMD Swaps, there is a risk that
municipal yields will move in the opposite direction than anticipated by a
Fund, which would cause the Fund to make payments to its counterparty in the
transaction that could adversely affect the Fund's performance. A Fund has no
obligation to enter into BMA or MMD Swaps and may not do so. The net amount of
the excess, if any, of a Fund's obligations over its entitlements with respect
to each interest rate swap will be accrued on a daily basis and an amount of
cash or liquid securities having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the Fund's
custodian.


REAL ESTATE INVESTMENT TRUSTS ("REITS"). Investing in REITs involves certain
unique risks in addition to those risks associated with investing in the real
estate industry in general. Equity REITs may be affected by changes in the
value of the underlying property owned by the REITs, while mortgage REITs may
be affected by the quality of any credit extended. REITs are dependent upon
management skills, may not be diversified geographically or by property type,
and are subject to heavy cash flow dependency, default by borrowers and
self-liquidation. REITs must also meet certain requirements under the Code to
avoid entity level tax and be eligible to pass-through certain tax attributes
of their income to shareholders. REITs are consequently subject to the risk of
failing to meet these requirements for favorable tax treatment and of failing
to maintain their exemptions from registration under the Investment Company
Act. REITs are also subject to the risks of changes in the Code, affecting
their tax status.

REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.

Investing in certain REITs involves risks similar to those associated with
investing in small capitalization companies. These REITs may have limited
financial resources, may trade less frequently and in limited volume and may be
subject to more abrupt or erratic price movements than larger company
securities. Historically, small capitalization stocks, such as these REITs,
have been more volatile in price than the larger capitalization stocks included
in the S&P 500 Index. The management of a REIT may be subject to conflicts of
interest with respect to the operation of the business of the REIT and may be
involved in real estate activities competitive with the REIT. REITs may own
properties through joint ventures or in other circumstances in which the REIT
may not have control over its investments. REITs may incur significant amounts
of leverage.

REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS . A Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
Under such agreements, the other party agrees, upon entering into the contract
with a Fund, to repurchase the security at a mutually agreed-upon time and price
in a specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during



                                     II-36



such period, although such return may be affected by currency fluctuations. In
the case of repurchase agreements, the prices at which the trades are conducted
do not reflect accrued interest on the underlying obligation; whereas, in the
case of purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, as a purchaser, a Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition
of the collateral.

A purchase and sale contract differs from a repurchase agreement in that the
contract arrangements stipulate that securities are owned by the Fund. In the
event of a default under such a repurchase agreement or under a purchase and
sale contract, instead of the contractual fixed rate, the rate of return to the
Fund would be dependent upon intervening fluctuations of the market values of
such securities and the accrued interest on the securities. In such event, the
Fund would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the
seller to perform. A Fund may not invest in repurchase agreements or purchase
and sale contracts maturing in more than seven days if such investments,
together with the Fund's other illiquid investments, would exceed 15% of the
Fund's net assets.

REVERSE REPURCHASE AGREEMENTS. A Fund may enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Under a reverse repurchase agreement, a Fund sells securities and
agrees to repurchase them at a mutually agreed date and price. At the time a
Fund enters into a reverse repurchase agreement, it will establish and maintain
a segregated account with its approved custodian containing cash, cash
equivalents or liquid high grade debt securities having a value not less than
the repurchase price (including accrued interest). Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by a Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce a Fund's obligations to repurchase the securities
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.

SECURITIES LENDING. Certain Funds may lend securities with a value not
exceeding 331/3% of its total assets or the limit prescribed by applicable law
to banks, brokers and other financial institutions. In return, the Fund
receives collateral in cash or securities issued or guaranteed by the U.S.
Government, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. Each Fund
maintains the ability to obtain the right to vote or consent on proxy proposals
involving material events affecting securities loaned. A Fund receives the
income on the loaned securities. Where a Fund receives securities as
collateral, the Fund receives a fee for its loans from the borrower and does
not receive the income on the collateral. Where a Fund receives cash
collateral, it may invest such collateral and retain the amount earned, net of
any amount rebated to the borrower. As a result, the Fund's yield may increase.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within the standard time period for
settlement of securities transactions. The Fund is obligated to return the
collateral to the borrower at the termination of the loan. A Fund could suffer
a loss in the event the Fund must return the cash collateral and there are
losses on investments made with the cash collateral. In the event the borrower
defaults on any of its obligations with respect to a securities loan, a Fund
could suffer a loss where there are losses on investments made with



                                     II-37



the cash collateral or, where the value of the securities collateral falls below
the market value of the borrowed securities. A Fund could also experience delays
and costs in gaining access to the collateral. Each Fund may pay reasonable
finder's, lending agent, administrative and custodial fees in connection with
its loans. Each Fund has received an exemptive order from the Commission
permitting it to lend portfolio securities to Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its affiliates and to retain an affiliate of the Fund as
lending agent.

SHORT SALES. Certain Funds may make short sales of securities, either as a
hedge against potential declines in value of a portfolio security or to realize
appreciation when a security that the Fund does not own declines in value. When
a Fund makes a short sale, it borrows the security sold short and delivers it
to the broker-dealer through which it made the short sale. A Fund may have to
pay a fee to borrow particular securities and is often obligated to turn over
any payments received on such borrowed securities to the lender of the
securities.

A Fund secures its obligation to replace the borrowed security by depositing
collateral with the broker-dealer, usually in cash, U.S. Government securities
or other liquid securities similar to those borrowed. With respect to the
uncovered short positions, a Fund is required to deposit similar collateral
with its custodian, if necessary, to the extent that the value of both
collateral deposits in the aggregate is at all times equal to at least 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which the Fund borrowed the security,
regarding payment over of any payments received by the Fund on such security, a
Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.

Because making short sales in securities that it does not own exposes a Fund to
the risks associated with those securities, such short sales involve
speculative exposure risk. As a result, if a Fund makes short sales in
securities that increase in value, it will likely underperform similar mutual
funds that do not make short sales in securities they do not own. A Fund will
incur a loss as a result of a short sale if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. A Fund will realize a gain if the security declines in price
between those dates. There can be no assurance that a Fund will be able to
close out a short sale position at any particular time or at an acceptable
price. Although a Fund's gain is limited to the price at which it sold the
security short, its potential loss is limited only by the maximum attainable
price of the security, less the price at which the security was sold and may,
theoretically, be unlimited.

A Fund may also make short sales "against the box" without being subject to
such limitations imposed on other short sale transactions. In this type of
short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire the identical security at no additional cost.

SOVEREIGN DEBT. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not
be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the government entity's policy towards the International Monetary Fund and the
political constraints to which a government entity may be subject. Governmental
entities may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on the
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to timely service its debts. Consequently, governmental
entities may default on their sovereign debt.



                                     II-38



Holders of sovereign debt may be requested to participate in the rescheduling
of such debt and to extend further loans to government entities. In the event
of a default by a governmental entity, there may be few or no effective legal
remedies for collecting on such debt.

STANDBY COMMITMENT AGREEMENTS. A Fund may enter into standby commitment
agreements. These agreements commit a Fund, for a stated period of time, to
purchase a stated amount of securities that may be issued and sold to that Fund
at the option of the issuer. The price of the security is fixed at the time of
the commitment. At the time of entering into the agreement the Fund is paid a
commitment fee, regardless of whether or not the security is ultimately issued.
A Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous
to the Fund. A Fund will limit its investment in such commitments so that the
aggregate purchase price of securities subject to such commitments, together
with the value of portfolio securities subject to legal restrictions on resale
that affect their marketability, will not exceed 15% of its net assets taken at
the time of the commitment. A Fund segregates liquid assets in an aggregate
amount equal to the purchase price of the securities underlying the commitment.

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

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

STRIPPED SECURITIES. Stripped securities are created when the issuer separates
the interest and principal components of an instrument and sells them as
separate securities. In general, one security is entitled to receive the
interest payments on the underlying assets (the interest only or "IO" security)
and the other to receive the principal payments (the principal only or "PO"
security). Some stripped securities may receive a combination of interest and
principal payments. The yields to maturity on IOs and POs are sensitive to the
expected or anticipated rate of principal payments (including prepayments) on
the related underlying assets, and principal payments may have a material
effect on yield to maturity. If the underlying assets experience greater than
anticipated prepayments of principal, a Fund may not fully recoup its initial
investment in IOs. Conversely, if the underlying assets experience less than
anticipated prepayments of principal, the yield on POs could be adversely
affected. Stripped securities may be highly sensitive to changes in interest
rates and rates of prepayment.

SUPRANATIONAL ENTITIES . A Fund may invest in debt securities of supranational
entities as defined above. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The government members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.

WARRANTS. Warrants are securities permitting, but not obligating, the warrant
holder to subscribe for other securities.  Buying a warrant does not make the
Fund a shareholder of the underlying stock.  The warrant holder has no right to
dividends or votes on the underlying stock.  A warrant does not carry any right
to assets of the issuer, and for this reason investment in warrants may be more
speculative than other equity-based investments.



                                     II-39




WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. A
Fund may purchase or sell securities that it is entitled to receive on a when
issued basis. A Fund may also purchase or sell securities on a delayed delivery
basis or through a forward commitment. These transactions involve the purchase
or sale of securities by a Fund at an established price with payment and
delivery taking place in the future. The Fund enters into these transactions to
obtain what is considered an advantageous price to the Fund at the time of
entering into the transaction. No Fund has established any limit on the
percentage of its assets that may be committed in connection with these
transactions. When a Fund purchases securities in these transactions, the Fund
segregates liquid securities in an amount equal to the amount of its purchase
commitments.

There can be no assurance that a security purchased on a when issued basis will
be issued or that a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the
delivery date may be more or less than the Fund's purchase price. The Fund may
bear the risk of a decline in the value of the security in these transactions
and may not benefit from an appreciation in the value of the security during
the commitment period.

ZERO COUPON SECURITIES. Certain Funds may invest in zero coupon securities.
Zero coupon securities are securities that are sold at a discount to par value
and on which interest payments are not made during the life of the security.
The discount approximates the total amount of interest the security will accrue
and compound over the period until maturity on the particular interest payment
date at a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder is entitled to receive the par
value of the security. While interest payments are not made on such securities,
holders of such securities are deemed to have received income ("phantom
income") annually, notwithstanding that cash may not be received currently. The
effect of owning instruments that do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to invest distributions at a rate as high as the implicit yield on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, some of these
securities may be subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities that
pay interest currently, which fluctuation increases the longer the period to
maturity. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. A Fund accrues income with
respect to these securities for Federal income tax and accounting purposes
prior to the receipt of cash payments. Zero coupon securities may be subject to
greater fluctuation in value and lesser liquidity in the event of adverse
market conditions than comparable rated securities paying cash interest at
regular intervals.

In addition to the above-described risks, there are certain other risks related
to investing in zero coupon securities. During a period of severe market
conditions, the market for such securities may become even less liquid. In
addition, as these securities do not pay cash interest, a Fund's investment
exposure to these securities and their risks, including credit risk, will
increase during the time these securities are held in the Fund's portfolio.
Further, to maintain its qualification for pass-through treatment under the
Federal tax laws, a Fund is required to distribute income to its shareholders
and, consequently, may have to dispose of its portfolio securities under
disadvantageous circumstances to generate the cash, or may have to leverage
itself by borrowing the cash to satisfy these distributions, as they relate to
the income accrued but not yet received. The required distributions will result
in an increase in a Fund's exposure to such securities.




                                     II-40


SUITABILITY (ALL FUNDS)

The economic benefit of an investment in any Fund depends upon many factors
beyond the control of the Fund, the Manager and its affiliates. Each Fund
should be considered a vehicle for diversification and not as a balanced
investment program. The suitability for any particular investor of a purchase
of shares in a Fund will depend upon, among other things, such investor's
investment objectives and such investor's ability to accept the risks
associated with investing in securities, including the risk of loss of
principal.

INVESTMENT RESTRICTIONS (ALL FUNDS)

See Part I, Section II "Investment Restrictions" of each Fund's Statement of
Additional Information for the specific fundamental and non-fundamental
investment restrictions adopted by each Fund. In addition to those investment
restrictions, each Fund is also subject to the restrictions discussed below.


The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, each Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of any such transaction, the sum of the market value of OTC
options currently outstanding that are held by the Fund, the market value of
the underlying securities covered by OTC call options currently outstanding
that were sold by the Fund and margin deposits on the Fund's existing OTC
options on financial futures contracts exceeds 15% of the net assets of the
Fund, taken at market value, together with all other assets of the Fund that
are illiquid or are not otherwise readily marketable. However, if an OTC option
is sold by a Fund to a primary U.S. Government securities dealer recognized by
the Federal Reserve Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price that is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of any Fund and may be amended by the Board of Directors of
the Fund without the approval of the Fund's shareholders. However, no Fund will
change or modify this policy prior to the change or modification by the
Commission staff of its position.

Each Fund's investments will be limited in order to allow the Fund to qualify
as a "regulated investment company" for purposes of the Code. See "Dividends
and Taxes -- Taxes." To qualify, among other requirements, each Fund will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of this restriction, the Municipal Funds generally
will regard each state and each of its political subdivisions, agencies or
instrumentalities and each multi-state agency of which the state is a member as
a separate issuer. Each public authority that issues securities on behalf of a
private entity generally will also be regarded 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. Foreign
government securities (unlike U.S. government securities) are not exempt from
the diversification requirements of the Code and the securities of each foreign
government issuer are considered to be obligations of a single issuer. These
tax-related limitations may be changed by the Directors of a Fund to the extent
necessary to comply with changes to the Federal tax requirements. A Fund that
is "diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets.



                                     II-41


MANAGEMENT AND OTHER SERVICE ARRANGEMENTS

DIRECTORS AND OFFICERS
See Part I, Section III "Information on Directors and Officers," --
Biographical Information," -- Share Ownership" and "-- Compensation of
Directors" of each Fund's Statement of Additional Information for biographical
and certain other information relating to the Directors and officers of your
Fund, including Directors' compensation.


MANAGEMENT ARRANGEMENTS

Management Services. The Manager provides each Fund with investment advisory
and management services. Subject to the supervision of the Directors, the
Manager is responsible for the actual management of a Fund's portfolio and
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 each Fund.


Each Feeder Fund invests all or a portion of its assets in shares of a Master
Portfolio. To the extent a feeder Fund invests its assets in a Master
Portfolio, it does not invest directly in portfolio securities and does not
require management services. For such funds, portfolio management occurs at the
Master Portfolio level.

Management Fee. Each Fund has entered into a management agreement with the
Manager, pursuant to which the Manager receives for its services to the Fund
monthly compensation at an annual rate based on the average daily net assets of
the Fund. For information regarding specific fee rates for your Fund and the
fees paid by your Fund to the Manager for the Fund's last three fiscal years or
other applicable periods, see Part I, Section IV "Management and Advisory
Arrangements" of each Fund's Statement of Additional Information.

Sub-Advisory Fee. The Manager of certain Funds has entered into a sub-advisory
agreement (the "Sub-Advisory Agreement") with the sub-adviser identified in
each such Fund's prospectus (the "Sub-Adviser") pursuant to which the
Sub-Adviser provides sub-advisory services to the Manager with respect to the
Fund. For information relating to the fees, if any, paid by the Manager to the
Sub-Adviser pursuant to the Sub-Advisory Agreement for the Fund's last three
fiscal years or other applicable periods, see Part I, Section IV "Management
And Advisory Arrangements" of each Fund's Statement of Additional Information.

Payment of Fund Expenses. Each Management Agreement obligates the Manager to
provide management services and to pay all compensation of and furnish office
space for officers and employees of a Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are interested persons of the Fund.  Each Fund pays
all other expenses incurred in the operation of that Fund, including among other
things: taxes; expenses for legal and auditing services; costs of preparing,
printing and mailing proxies, shareholder reports, prospectuses and statements
of additional information, except to the extent paid by FAM Distributors, Inc.
(the "Distributor"); charges of the custodian and sub-custodian, and the transfer
agent; expenses of redemption of shares; Commission fees; expenses of registering
the shares under Federal, state or foreign laws; fees and expenses of Directors
who are not interested persons of a Fund as defined in the Investment Company
Act (the "non-interested Directors"); accounting and pricing costs (including
the daily calculations of net asset value); insurance; interest; brokerage
costs; litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund.  Certain accounting services are provided
to each Fund by State Street Bank and Trust Company ("State Street") pursuant
to an agreement between State Street and each Fund.  Each Fund pays a fee for
these services.  In addition, the Manager provides certain accounting services
to each Fund and the Fund pays the Manager a fee for



                                     II-42



such services.  The Distributor pays certain promotional expenses of the Funds
incurred in  connection with the offering of shares of the Funds.  Certain expenses
are  financed by each Fund pursuant to distribution plans in compliance with
Rule 12b-1  under the Investment Company Act.  See "Purchase of Shares --
Distribution Plans."

Organization of the Manager. Fund Asset Management, L.P. and Merrill Lynch
Investment Managers, L.P. each is a limited partnership. The partners of FAM
and MLIM are Merrill Lynch & Co., Inc. ("ML & Co."), a financial services
holding company and the parent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), and Princeton Services, Inc. ("Princeton
Services"). ML & Co. and Princeton Services are "controlling persons" of FAM
and MLIM (as defined under the Investment Company Act) because of their
ownership of FAM's and MLIM's voting securities or their power to exercise a
controlling influence over FAM's and MLIM's management or policies. Merrill
Lynch Investment Managers International Limited ("MLIMIL") is an affiliate of
FAM and MLIM. The ultimate parent of MLIMIL is ML & Co. ML & Co. is a
controlling person of MLIMIL (as defined under the Investment Company Act)
because of its ownership of MLIMIL's voting securities or its power to exercise
a controlling influence over MLIMIL's management or policies.


The following entities may be considered "controlling persons" of Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K."): Merrill Lynch Europe PLC (MLAM
U.K.'s parent), a subsidiary of Merrill Lynch International Holdings, Inc., a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.


OTHER SERVICE ARRANGEMENTS



Administrative Services and Administrative Fee. Certain Funds have entered into
an administration agreement (the "Administration Agreement") with an
administrator identified in the Fund's Prospectus and Part I of the Fund's
Statement of Additional Information (each, an "Administrator"). For information
regarding any administrative fees paid by your Fund to the Administrator for
the periods indicated, see Part I, Section IV "Management and Advisory
Arrangements" of that Fund's Statement of Additional Information.

Each Administration Agreement obligates the Administrator to provide certain
administrative services to the Fund and to pay, or cause its affiliates to pay,
for maintaining its staff and personnel and to provide office space, facilities
and necessary personnel for the Fund. Each Administrator is also obligated to
pay, or cause its affiliates to pay, the fees of those officers and Directors
of the Fund who are affiliated persons of the Administrator or any of its
affiliates.

Duration and Termination. Unless earlier terminated as described below, each
Management Agreement and, if applicable, each Sub-Advisory Agreement and
Administration Agreement will remain in effect from year to year if approved
annually (a) by the Directors or by a vote of a majority of the outstanding
voting securities of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Each Agreement is not


assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Fund.


Transfer Agency Services. Financial Data Services, Inc. (the "Transfer Agent"),
a subsidiary of ML & Co., acts as each Fund's (other than Municipal Investment
Accumulation's) Transfer Agent pursuant to a Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement (each, a "Transfer
Agency Agreement"). Pursuant to each Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and
the opening and maintenance of shareholder accounts. Each Fund currently pays
between $16.00 and $20.00 for each Class A or Class I shareholder account,
between $19.00 and $23.00 for each Class B or Class C shareholder account,
depending on the level of service required, and, where applicable, $16.00 for
each Class R shareholder



                                     II-43


account. Each Fund reimburses the Transfer Agent's reasonable out-of-pocket
expenses and pays a fee of 0.10% of account assets for certain accounts that
participate in the Merrill Lynch Mutual Funds Advisor (Merrill Lynch MFASM)
Program (the "MFA Program"). For purposes of each Transfer Agency Agreement,
the term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of
a person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. The Bank of
New York acts as transfer agent to Municipal Investment Accumulation for a fee.
See Part I, Section IV "Management and Advisory Arrangements -- Transfer
Agency Fees" of each Fund's Statement of Additional Information for information
on the transfer agency fees paid by your Fund for the periods indicated.

Independent Registered Public Accounting Firm. The Audit Committee of each
Fund, which is comprised of all of the Fund's non-interested Directors, has
selected an independent registered public accounting firm for that Fund that
audits the Fund's financial statements. Please see your Fund's Prospectus for
information on your Fund's independent registered public accounting firm.

Custodian Services. The name and address of the custodian (the "Custodian") of
each Fund are identified on the inside back cover page of the Fund's
Prospectus. The Custodian is responsible for safeguarding and controlling the
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investments. The Custodian is
authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside the
United States and with certain foreign banks and securities depositories.


For certain Feeder Funds, the Custodian also acts as the custodian of the
Master Portfolio's assets.

Accounting Services. Each Fund has entered into an agreement with State Street,
pursuant to which State Street provides certain accounting services to the
Fund. Each Fund pays a fee for these services. State Street provides similar
accounting services to the Master Trusts. For Funds operating prior to January
1, 2001, the Manager or the Administrator (in the case of certain funds),
provided accounting services to each Fund and was reimbursed by each Fund at
its cost in connection with such services. The Manager or the Administrator
continues to provide certain accounting services to each Fund and each Fund
reimburses the Manager or the Administrator for these services.

See Part I, Section IV "Management and Advisory Arrangements -- Accounting
Services" of each Fund's Statement of Additional Information for information on
the amounts paid by your Fund and Master Trust, if applicable, to State Street
and the Manager or, if applicable, the Administrator for the periods indicated.



Distribution Expenses. Each Fund has entered into a distribution agreement with
FAM Distributors, Inc. in connection with the continuous offering of each class
of shares of the Fund (the "Distribution Agreement"). The Distribution
Agreement obligates the Distributor to pay certain expenses in connection with
the offering of each class of shares of the Select Pricing Funds. 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 these documents used in connection with the offering to dealers
and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreement is subject to the
same renewal requirements and termination provisions as the Management
Agreement described above.

CODE OF ETHICS

The Board of each Fund has approved a Code of Ethics pursuant to Rule 17j-1
under the Investment Company Act, which covers the Fund, the Manager, the
Sub-Adviser, if any, and the Distributor. The Code of Ethics establishes
procedures for personal investing and restricts certain transactions. Employees

                                     II-44



subject to the Code of Ethics may invest in securities for their personal
investment accounts, including securities that may be purchased or held by the
Fund.


SELECTIVE DISCLOSURE OF PORTFOLIO HOLDINGS

Pursuant to policies and procedures adopted by the Fund and the Manager, the
Fund and the Manager may, under certain circumstances as set forth below, make
selective disclosure with respect to the Fund's portfolio holdings. The Fund's
Board of Directors has approved the adoption by the Fund of the policies and
procedures set forth below, and has delegated to the Manager the responsibility
for ongoing monitoring and supervision to ensure compliance with these policies
and procedures. The Board provides ongoing oversight of the Fund's and Manager's
compliance with the policies and procedures. As part of this oversight function,
the Directors receive from the Fund's Chief Compliance Officer at least
quarterly and more often, as necessary, reports on compliance with these
policies and procedures, including reports on any violations of these policies
and procedures that may occur. In addition, the Directors receive an annual
assessment of the adequacy and effect of the policies and procedures with
respect to the Fund, and any changes thereto, and an annual review of the
operation of the policies and procedures.

Examples of the information that may be disclosed pursuant to the Fund's
policies and procedures would include (but is not limited to) specific portfolio
holdings -- including the number of shares held, weightings of particular
holdings, specific sector and industry weightings, trading details, and the Fund
manager's discussion of Fund performance and reasoning for significant changes
in portfolio composition. This information may be both material non-public
information ("Confidential Information") and proprietary information of the
firm. The Fund may disclose such information to individual investors,
institutional investors, financial advisers and other financial intermediaries
that sell the Fund's shares, affiliates of the Fund, third party service
providers to the Fund, lenders to the Fund, and independent rating agencies and
ranking organizations. The Fund, the Manager and it affiliates receive no
compensation or other consideration with respect to such disclosures.

Subject to the exceptions set forth below, Confidential Information relating to
the Fund may not be disclosed to persons not employed by the Manager or its
affiliates unless such information has been publicly disclosed via a filing with
the Commission (e.g., fund annual report), through a press release or placement
on a publicly-available internet web site, including our web site at
www.mutualfunds.ml.com. If the Confidential Information has not been publicly
disclosed, an employee of the Manager who wishes to distribute Confidential
Information relating to the Fund must first do the following: (i) require the
person or company receiving the Confidential Information to sign, before the
Manager will provide disclosure of any such information, a confidentiality
agreement approved by an attorney in the Manager's Legal department in which
he/she (a) agrees to use the Confidential Information solely in connection with
a legitimate business use (i.e., due diligence, etc.) and (b) agrees not to
trade on the basis of the information so provided; (ii) obtain the authorization
of the an attorney in the Manager's Legal department prior to disclosure; and
(iii) only distribute Confidential Information that is at least thirty (30)
calendar days old unless a shorter period has specifically been approved by an
attorney in the Manager's Legal department. Prior to providing any authorization
for such disclosure of Confidential Information, an attorney in the Manager's
Legal Department must review the proposed arrangement and make a determination
that it is in the best interests of the Fund's shareholders. In connection with
day-to-day portfolio management, the Fund may disclose Confidential Information
to executing brokers-dealers that is less than thirty days old in order to
facilitate the purchase and sale of portfolio holdings. The Fund has adopted
policies and procedures, including a Code of Ethics, Code of Conduct, and
various policies regarding securities trading and trade allocations, to address
potential conflicts of interest that may arise in connection with disclosure of
Confidential Information. These procedures are designed, among other things, to
prohibit personal trading based on Confidential Information, to ensure that
portfolio transactions are conducted in the best interests of each Fund and its
shareholders and to prevent portfolio management from using Confidential
Information for the benefit of one fund or account at the expense of another. In



                                     II-45


addition, as noted, an attorney in the Managers Legal Department must determine
that disclosure of Confidential Information is for a legitimate business purpose
and is in the best interests of the Funds shareholders, and that any conflicts
of interest created by release of the Confidential Information have been
addressed by the Managers existing policies and procedures. For more
information with respect to potential conflicts of interest, see the section
entitled "Management and Other Services Arrangements -- Potential Conflicts of
Interest" in this Statement of Additional Information.

Confidential Information -- whether or not publicly disclosed -- may be
disclosed to Fund Directors, the independent Directors' counsel, outside Fund
counsel, the Fund's accounting services provider and the Fund's independent
registered public accounting firm without meeting the conditions outlined above.
Confidential Information may, with the prior approval of the Fund's Chief
Compliance Officer or the Manager's General Counsel, also be disclosed to any
auditor of the parties to a service agreement involving the Fund, or as required
by judicial or administrative process or otherwise by applicable laws or
regulations or court order. If Confidential Information is disclosed to such
persons, each such person will be subject to restrictions on trading in the
subject securities under either the Fund's and Manager's Code of Ethics or an
applicable confidentiality agreement, or under applicable laws or regulations or
court order.

The Fund has entered into ongoing arrangements to provide selective disclosure
of Fund portfolio holdings to the following persons or entities:

Fund's Board of Directors
Fund's Transfer Agent
Fund's Independent Registered Public Accounting Firm
Fund's accounting services provider -- State Street Bank and Trust Company
Fund Custodian

Independent Rating Agencies -- Morningstar, Inc. and Lipper Inc.
Information aggregators -- Wall Street on Demand and Thomson Financial
Sponsors of 401(k) plans that include MLIM/FAM-advised funds
Consultants for pension plans that invest in MLIM/FAM-advised funds

Other than with respect to the Board of Directors, each of the persons or
entities set forth above is subject to an agreement to keep the information
disclosed confidential and to use it only for legitimate business purposes. The
Board of Directors has a fiduciary duty as directors to act in the best
interests of the Fund and its shareholders. Selective disclosure is made to the
Fund's Board of Directors and independent registered public accounting firm at
least quarterly and otherwise as frequently as necessary to enable such persons
or entities to provide services to the Fund. Selective disclosure is made to
the Fund's Transfer Agent, accounting services provider, and Custodian as
frequently as necessary to enable such persons or entities to provide services
to the Fund, typically on a daily basis. Disclosure is made to Lipper Inc. and
Wall Street on Demand on a monthly basis and to Morningstar and Thomson
Financial on a quarterly basis, and to each such firm upon specific request
with the approval of the Manager's Legal department. Disclosure is made to
401(k) plan sponsors and pension plan consultants on a quarterly basis.

The Fund and the Manager monitor, to the extent possible, the use of
Confidential Information by the individuals or firms to which it has been
disclosed. To do so, in addition to the requirements of any applicable
confidentiality agreement and/or the terms and conditions of the Fund's and
Manager's Code of Ethics and Code of Conduct -- all of which require persons or
entities in possession of Confidential Information to keep such information
confidential and not to trade on such information for their own benefit -- the
Manager's compliance personnel under the supervision of the Fund's Chief
Compliance Officer, monitor the Manager's securities trading desks to determine
whether individuals or firms who have received Confidential Information have
made any trades on the basis of that information. In addition, the Manager
maintains an internal restricted list to prevent trading by the personnel of
the Manager or its affiliates in securities -- including securities held by the
Fund -- about which the Manager has Confidential



Information. There can be no assurance, however, that the Fund's policies and
procedures with respect to the selective disclosure of Fund portfolio holdings
will prevent the misuse of such information by individuals or firms that receive
such information.

POTENTIAL CONFLICTS OF INTEREST

Activities of the Manager, Merrill Lynch & Co., Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and their Affiliates (collectively, "Merrill
Lynch") and Other Accounts Managed by Merrill Lynch.


                                     II-46



Merrill Lynch is a worldwide, full service investment banking, broker-dealer,
asset management and financial services organization. As a result, Merrill
Lynch (including, for these purposes, its Directors, partners, trustees,
managing members, officers and employees), including the entities and personnel
who may be involved in the investment activities and business operations of the
Fund, is engaged in businesses and has interests other than that of managing the
Fund. These are considerations of which investors in the Fund should be aware,
and which may cause conflicts of interest that could disadvantage the Fund. These
activities and interests include potential multiple advisory, transactional,
financial and other interests in securities and other instruments, and companies
that may be purchased or sold by the Fund.


Merrill Lynch and its affiliates, including, without limitation, the Manager
and its advisory affiliates, have proprietary interests in, and may manage or
advise with respect to, accounts or funds (including separate accounts and
other funds and collective investment vehicles) that have investment objectives
similar to those of the Fund and/or that engage in transactions in the same
types of securities, currencies and instruments as the Fund. Merrill Lynch and
its affiliates are also major participants in the global currency, equities,
swap and fixed-income markets, in each case both on a proprietary basis and for
the accounts of customers. As such, Merrill Lynch and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Fund invests. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Fund invests, which could have an adverse impact on the Fund's performance.
Such transactions, particularly in respect of most proprietary accounts or
customer accounts, will be executed independently of the Fund's transactions
and thus at prices or rates that may be more or less favorable than those
obtained by the Fund. When the Manager and its advisory affiliates seek to
purchase or sell the same assets for their managed accounts, including the
Fund, the assets actually purchased or sold may be allocated among the accounts
on a basis determined in their good faith discretion to be equitable. In some
cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Fund.


The results of the Fund's investment activities may differ significantly from
the results achieved by the Manager and its affiliates for their proprietary
accounts or other accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Merrill
Lynch and its affiliates and such other accounts will achieve investment
results that are substantially more or less favorable than the results achieved
by the Fund. Moreover, it is possible that the Fund will sustain losses during
periods in which Merrill Lynch and its affiliates achieve significant profits
on their trading for proprietary or other accounts. The opposite result is also
possible.

The investment activities of Merrill Lynch and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging and other markets in
which limitations are imposed upon the amount of investment, in the aggregate
or in individual issuers, by affiliated foreign investors.

From time to time, the Fund's activities may also be restricted because of
regulatory restrictions applicable to Merrill Lynch and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Manager, and/or its affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Manager and/or its
affiliates are performing services or when position limits have been reached.





                                     II-47


In connection with its management of the Fund, the Manager may have access to
certain fundamental analysis and proprietary technical models developed by
Merrill Lynch. The Manager will not be under any obligation, however, to effect
transactions on behalf of the Fund in accordance with such analysis and models.
In addition, neither Merrill Lynch nor any of its affiliates will have any
obligation to make available any information regarding their proprietary
activities or strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of the Fund and it
is not anticipated that the Manager will have access to such information for the
purpose of managing the Fund. The proprietary activities or portfolio strategies
of Merrill Lynch and its affiliates or the activities or strategies used for
accounts managed by them or other customer accounts could conflict with the
transactions and strategies employed by the Manager in managing the Fund.

In addition, certain principals and certain employees of the Manager are also
principals or employees of Merrill Lynch or its affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other entities may be a consideration of which investors in the Fund
should be aware.

The Manager may enter into transactions and invest in securities, instruments
and currencies on behalf of the Fund in which customers of Merrill Lynch (or,
to the extent permitted by the Commission, Merrill Lynch) serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Fund, and such party may
have no incentive to assure that the Fund obtains the best possible prices or
terms in connection with the transactions. In addition, the purchase, holding
and sale of such investments by the Fund may enhance the profitability of
Merrill Lynch. Merrill Lynch and its affiliates may also create, write or issue
derivative instruments for customers of Merrill Lynch or its affiliates, the
underlying securities, currencies or instruments of which may be those in which
the Fund invests or which may be based on the performance of the Fund. The Fund
may, subject to applicable law, purchase investments that are the subject of an
underwriting or other distribution by Merrill Lynch or its affiliates and may
also enter into transactions with other clients of Merrill Lynch or its
affiliates where such other clients have interests adverse to those of the
Fund. At times, these activities may cause departments of Merrill Lynch or its
affiliates to give advice to clients that may cause these clients to take
actions adverse to the interests of the Fund. To the extent affiliated
transactions are permitted, the Fund will deal with Merrill Lynch and its
affiliates on an arms-length basis.

The Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Merrill Lynch
nor its affiliates will have any obligation to allow their credit to be used in
connection with the Fund's establishment of its business relationships, nor is
it expected that the Fund's counterparties will rely on the credit of Merrill
Lynch or any of its affiliates in evaluating the Fund's creditworthiness.

It is also possible that, from time to time, Merrill Lynch or any of its
affiliates may, although they are not required to, purchase and hold shares of
the Fund in order to increase the assets of the Fund. Increasing the Fund's
assets may enhance investment flexibility and diversification and may
contribute to economies of scale that tend to reduce the Fund's expense ratio.
Merrill Lynch reserves the right to redeem at any time some or all of the shares
of the Fund acquired for its own account. A large redemption of shares of the Fund
by Merrill Lynch could significantly reduce the asset size of the Fund, which
might have an adverse effect on the Fund's investment flexibility, portfolio
diversification and expense ratio. Merrill Lynch will consider the effect of
redemptions on the Fund and other shareholders in deciding whether to redeem
its shares.

It is possible that the Fund may invest in securities of companies with which
Merrill Lynch has or is trying to develop investment banking relationships as
well as securities of entities in which Merrill Lynch makes a market. The Fund
also may invest in securities of companies that Merrill Lynch provides or may
someday provide research coverage. Such investments could cause conflicts
between the interests of



                                     II-48



the Fund and the interests of other Merrill Lynch clients. In making investment
decisions for the Fund, the Manager is not permitted to obtain or use material
non-public information acquired by any division, department or affiliate of
Merrill Lynch in the course of these activities. In addition, from time to time,
Merrill Lynch's activities may limit the Fund's flexibility in purchases and
sales of securities. When Merrill Lynch is engaged in an underwriting or other
distribution of securities of an entity, the Manager may be prohibited from
purchasing or recommending the purchase of certain securities of that entity for
the Fund.

The Manager, its affiliates and their Directors, officers and employees, may
buy and sell securities or other investments for their own accounts, and may
have conflicts of interest with respect to investments made on behalf of the
Fund. As a result of differing trading and investment strategies or
constraints, positions may be taken by Directors, officers and employees and
affiliates of the Manager that are the same, different from or made at
different times than positions taken for the Fund. To lessen the possibility
that the Fund will be adversely affected by this personal trading, the Fund and
the Manager each has adopted a Code of Ethics in compliance with Section 17(j)
of the Investment Company Act that restricts securities trading in the personal
accounts of investment professionals and others who normally come into
possession of information regarding the Fund's portfolio transactions. The Code
of Ethics can be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-202-942-8090. The Code of Ethics is also
available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov, and copies may be obtained, after paying a duplicating fee,
by e-mail at publicinfo@sec.gov or by writing the SEC's Public Reference
Section, Washington, DC 20549-0102.

The Manager and its affiliates will not purchase securities or other property
from, or sell securities or other property to, the Fund, except that the Fund
may in accordance with rules adopted under the Investment Company Act engage in
transactions with accounts that are affiliated with the Fund as a result of
common officers, Directors, or investment advisers. These transactions would be
effected in circumstances in which the Manager determined that it would be
appropriate for the Fund to purchase and another client to sell, or the Fund to
sell and another client to purchase, the same security or instrument on the
same day.

Present and future activities of Merrill Lynch, including the Manager, in
addition to those described in this section, may give rise to additional
conflicts of interest.


PURCHASE OF SHARES


Each Fund offers multiple classes of shares under the Merrill Lynch Select
PricingSM System ("Select Pricing System"): Class A and Class I shares are sold
to investors choosing the initial sales charge alternatives and Class B and
Class C shares are sold to investors choosing the deferred sales charge
alternatives. Prior to April 14, 2003, for all Funds except Small Cap Growth
and International Value, Class I shares were designated "Class A" and Class A
shares were designated "Class D." In addition, certain Funds offer Class R
shares, which are available only to certain retirement plans and are sold
without a sales charge. Please see your Fund's Prospectus to determine whether
it offers Class R shares. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."

The Select Pricing System is used by more than 50 registered investment
companies advised by the Managers. Funds that use the Select Pricing System are
referred to herein as "Select Pricing Funds."



The applicable offering price for purchase orders is based on the net asset
value of the Fund next determined after receipt of the purchase order by a
dealer or other financial intermediary ("Selling Dealer") that has been
authorized by the Distributor by contract to accept such orders. As to purchase
orders received by Selling Dealers prior to the close of business on the New
York Stock Exchange ("NYSE") (generally, the NYSE closes at 4:00 p.m. Eastern
time), on the day the order is placed, which includes orders received

                                     II-49


after the close of business on the previous day, the applicable offering price
is based on the net asset value determined as of the close of business on the
NYSE on that day. If the purchase orders are not received by the Selling Dealer
before the close of business on the NYSE, such orders are deemed received on the
next business day.

The Fund or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may resume offering of shares from time to time. Any
order may be rejected by the Fund or the Distributor. Neither the Distributor,
the securities dealers nor other financial intermediaries are permitted to
withhold placing orders to benefit themselves by a price change.

Initial Sales Charge Alternatives -- Class A and Class I Shares

Investors who prefer an initial sales charge alternative may elect to purchase
Class A shares or, if an eligible investor, Class I shares.  Investors choosing
the initial sales charge alternative who are eligible to purchase Class I shares
should purchase Class I shares rather than Class A shares because there is an account
maintenance fee imposed on Class A 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 who do not qualify for reduced initial sales
charges and who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class I shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B, Class C
or Class R shares may exceed the initial sales charges and, in the case of Class A
shares, the account maintenance fee.  Although some investors who previously
purchased Class I shares may no longer be eligible to purchase Class I shares of
other Select Pricing Funds, those previously purchased Class I shares, together with
Class A, Class B and Class C share holdings, will count toward a right of accumulation
that may qualify the investor for a reduced initial sales charge on new initial sales
charge purchases.  In addition, the ongoing Class B, Class C and Class R shares account
maintenance and distribution fees will cause Class B, Class C and Class R shares to
have higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares.  The ongoing Class A account maintenance fees will cause
Class A shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class I 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 I shares of a Fund,
refers to (i) a single purchase by an individual, (ii) concurrent purchases by an
individual, his or her spouse and their children under the age of 21 years purchasing
shares for his, her or their own account, and (iii) single purchases by a trustee or
other fiduciary purchasing shares for a single trust estate or single fiduciary account
although more than one beneficiary may be involved.  The term "purchase" also includes
purchases by any "company," as that term is defined in the Investment Company Act,
but does not include (i) purchases by any company that has not been in existence for
at least six months, (ii) a company that has no purpose other than the purchase of
shares of a Fund or shares of other registered investment companies at a discount, or
(iii) any group of individuals whose sole organizational nexus is that its participants
are credit cardholders of a company, policyholders of an insurance company, customers
of either a bank or broker-dealer or clients of an investment adviser.

Eligible Class I Investors.  Class I shares are offered to a limited group of investors.
Investors who currently own Class I shares in a shareholder account are entitled to
purchase additional Class I shares of a Fund in that account.  Certain employer-sponsored
retirement or savings plans, including eligible 401(k) plans, may purchase Class I
shares at net asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by the Manager or any of its
affiliates.  Class I shares are available at net asset value to corporate warranty
insurance reserve fund programs and



                                     II-50



U.S. branches of foreign banking institutions provided that the program or bank
has $3 million or more initially invested in Select Pricing Funds. Also eligible
to purchase Class I shares at net asset value are participants in certain
investment programs including TMASM Managed Trusts to which Merrill Lynch Trust
Company provides discretionary trustee services, collective investment trusts
for which Merrill Lynch Trust Company serves as trustee, certain other trusts
managed by banks, thrifts or trust companies, and certain purchases made in
connection with certain fee-based programs. In addition, Class I shares are
offered at net asset value to ML & Co. and its subsidiaries and their directors
and employees and to members of the Boards of investment companies advised by
MLIM, FAM or their affiliates and to employees or customers of selected
securities dealers that meet certain qualifications. Class I shares of Bond Fund
are also available at net asset value to institutional investors that purchase
more than $50 million of that Funds shares. Certain persons who acquired shares
of certain closed-end funds advised by MLIM or FAM in their initial offerings
who wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in shares of a Fund also may purchase Class I shares of
the Fund if certain conditions are met. In addition, Class I shares of certain
Select Pricing Funds are offered at net asset value to shareholders of certain
continuously offered closed-end funds advised by MLIM or FAM who wish to
reinvest the net proceeds from the sale of a certain of their shares of common
stock pursuant to a tender offer conducted by such funds. See "Purchase of
Shares -- Closed-End Fund Reinvestment Options."

See Part I, Section V "Information on Sales Charges and Distribution Related Expenses
-- Class A and Class I Sales Charge Information" of each Funds Statement of Additional
Information for information about amounts paid to the Distributor in connection with
Class A and Class I shares for the periods indicated.

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



REDUCED INITIAL SALES CHARGES

Certain investors may be eligible for a reduction in or waiver of a sales load
due to the nature of the investors and/or the reduced sales efforts necessary
to obtain their investments.


Reinvested Dividends. No sales charges are imposed upon shares issued as a
result of the automatic reinvestment of dividends.


Rights of Accumulation. Eligible investors may purchase shares of a 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 a Fund
and of any other Select Pricing Funds. The purchaser or the purchaser's
securities dealer or other financial intermediary must provide the Distributor
at the time of purchase with sufficient information to confirm qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit sharing or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.

Letter of Intent. Reduced sales charges are applicable to purchases aggregating
$25,000 or more ($100,000 or more for Bond Fund -- Intermediate Term Portfolio
and Municipal Bond -- Limited Maturity Portfolio) of Class A or Class I shares
of a Fund or any Select Pricing Funds made within a 13 month period pursuant to
a Letter of Intent. The Letter of Intent is not available to employee benefit
plans for which affiliates of the Manager provide plan participant
record-keeping services. The Letter of Intent is not a binding obligation to
purchase any amount of Class A or Class I shares. If you bought Class A or
Class I


                                     II-51



shares prior to signing a Letter of Intent, those shares may be included under a
subsequent Letter of Intent executed within 90 days of the purchase if you
inform the Distributor in writing of your intent within the 90-day period. The
value (at cost or maximum offering price, whichever is higher) of Class A and
Class I shares of a Select Pricing Fund presently held on the date of the first
purchase under the Letter of Intent may be included as a credit toward the
completion of such Letter, but the reduced sales charge will be applied only to
new purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intent , you will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the reduced sales charge and
the applicable sales charge. Class A or Class I shares equal to at least 5.00%
of the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intent must be at least 5.00% of the dollar amount
of such Letter. You may be entitled to further reduced sales charges under a
right of accumulation for purchases made during the term of a Letter. You will
not, however, be entitled to further reduced sales charges on any purchases made
before the execution of the Letter.


The value of any shares you redeem prior to termination or completion of the
Letter of Intent will be deducted from the total purchases made under such
Letter. An exchange from the Summit Cash Reserves Fund ("Summit"), a series of
Financial Institutions Series Trust, into a Fund that imposes a sales charge
will count toward completing a Letter of Intent from the Fund.

Merrill Lynch BlueprintSM Program. Class A shares of certain Funds are offered
to participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class I shares of a Fund may
purchase additional Class I shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, trade associations and benefit plans. Investors
purchasing Class A or Class I shares of a Fund through Blueprint will acquire
the shares at net asset value plus a sales charge calculated in accordance with
the Blueprint sales charge schedule. Under this schedule, purchases of up to
$300 are subject to a sales charge of 4.25%; purchases of $300.01 up to $5,000
are subject to a sales charge of 3.25% plus $3; and purchases of $5,000.01 or
more are subject to the standard sales charge rates disclosed in the
Prospectus. In addition, Class A or Class I shares of each Fund are offered at
net asset value plus a sales charge of .50% of 1% for corporate or group IRA
programs purchasing shares through Blueprint.

Class A and Class I shares are offered at net asset value to participants in
Blueprint through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.

Shareholder services, including the exchange privilege, available to Class A,
Class B and Class I investors through Blueprint may differ from those available
to other Class A, Class B or Class I investors. Orders for purchases and
redemptions of Class A, Class B or Class I shares of a Fund may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There are no minimum initial or subsequent
purchase requirements for participants who are part of an automatic investment
plan. Additional information concerning purchases through Blueprint, including
any annual fees and transaction charges, is available from Merrill Lynch,
Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441,
New Brunswick, New Jersey 08989-0441.

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


Purchase Privileges of Certain Persons. Directors of each Fund, members of the
Boards of other funds advised by the Manager or an affiliate, ML & Co. and its
subsidiaries and their directors and employees and




                                     II-52



any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class I shares at net asset value. A Fund realizes economies of scale
and reduction of sales-related expenses by virtue of the familiarity of these
persons with the Fund. Employees, Directors, and Board members of other funds
wishing to purchase shares of a Fund must satisfy the Fund's suitability
standards. Class A shares are also available at net asset value to investors
that, for regulatory reasons, are required to transfer investment positions from
a non-U.S. registered investment company advised by MLIM, FAM or their
affiliates to a U.S. registered MLIM/FAM-advised fund.

Acquisition of Certain Investment Companies. Class A shares may be offered at
net asset value 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.


Purchases Through Certain Financial Intermediaries. Reduced sales charges may
be applicable for purchases of Class A or Class I shares of a Fund through
certain financial advisors, selected securities dealers and other financial
intermediaries that meet and adhere to standards established by the Manager
from time to time.

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 a Fund.


The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for the reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, these 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 A
shares of the Fund after a conversion period of approximately ten years, and,
thereafter, investors will be subject to lower ongoing fees.


Merrill Lynch compensates financial advisers and other financial intermediaries
for selling Class B and Class C shares at the time of purchase from its own
funds. Proceeds from the CDSC (as defined below) and the distribution fee are
paid to the Distributor and are used by the Distributor to defray the expenses
of securities dealers or other financial intermediaries (including Merrill
Lynch) related to providing distribution-related services to each Fund in
connection with the sale of the Class B and Class C shares. The combination of
the CDSC and the ongoing distribution fee facilitates the ability of each Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. See "Distribution Plans" below. Imposition of the CDSC
and the distribution fee on Class B and Class C shares is limited by the NASD
asset-based sales charge rule. See "Limitations on the Payment of Deferred
Sales Charges" below.

Contingent Deferred Sales Charges -- Class B Shares. If you redeem Class B
shares within six years of purchase (three years for Bond Fund - Intermediate
Term Portfolio, Municipal Bond - Limited Maturity Portfolio and Municipal
Intermediate Term), you may be charged a contingent deferred sales charge
("CDSC") at the rates indicated in the Prospectus and below. The CDSC will be
calculated in a manner that results in the lowest applicable rate being
charged. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends. The order of redemption will be first of shares held
for over six years or three years, as applicable, in the case of Class B
shares, next of shares acquired pursuant to reinvestment of dividends, and
finally of shares in the order of those held longest. The same order of
redemption will apply if you transfer shares from your account to another
account.



                                     II-53


The following table sets forth the schedule that applies to the Class B CDSC
for all Funds except Bond Fund - Intermediate Term Portfolio, Municipal Bond -
Limited Maturity Portfolio, and Municipal Intermediate Term:






                                                     CDSC AS A PERCENTAGE
                   YEARS SINCE PURCHASE                OF DOLLAR AMOUNT
                       PAYMENT MADE                  SUBJECT TO CHARGE #
                  ----------------------            ---------------------

                          0 -- 1                    4.0%
                          1 -- 2                    4.0%
                          2 -- 3                    3.0%
                          3 -- 4                    3.0%
                          4 -- 5                    2.0%
                          5 -- 6                    1.0%
                     6 and thereafter                       None



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

 #  For Class B shares purchased before December 1, 2002, the four-year CDSC
   schedule in effect at that time will apply.

To provide an example, assume an investor purchased 100 shares at $10 per share
(at a cost of $1,000) and in the third year after purchase, the net asset value
per share is $12 and, during such time, the investor has acquired 10 additional
shares upon dividend reinvestment. If at such time the investor makes his or
her first redemption of 50 shares (proceeds of $600), 10 shares will not be
subject to a CDSC because they were issued through dividend reinvestment. With
respect to the remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 3.00% (the applicable rate in the third year after purchase).



The following table sets forth the schedule that applies to the Class B CDSC
for Bond Fund - Intermediate Term Portfolio, Municipal Bond - Limited Maturity
Portfolio, and Municipal Intermediate Term:





                                                         CDSC AS A PERCENTAGE
                                                           OF DOLLAR AMOUNT
YEARS SINCE PURCHASE PAYMENT MADE                         SUBJECT TO CHARGE#
-----------------------------------                     ---------------------

0 -- 1                                                           1.00%
1 -- 2                                                           0.50%
2 -- 3                                                           0.25%
3 and thereafter                                                None



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

 #  For Class B shares purchased before December 1, 2002, the one-year CDSC
schedule in effect at that time will apply.



The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder (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
or, if later, reasonably promptly following completion of probate. The Class B
CDSC also may be waived on redemptions of shares by certain eligible 401(a) and
401(k) plans. The CDSC may also be waived for any Class B shares that are
purchased by eligible 401(k) or eligible 401(a) plans that are rolled over into
a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC may be waived for any Class
B shares that were acquired and held at the time of the redemption in an
Employee AccessSM Account available through employers providing eligible 401(k)
plans. The Class B CDSC may also be waived for any Class B shares that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by MLIM Private Investors and held in such
account at the time of redemption. The Class B CDSC may also be waived or its
terms may be modified in connection with certain fee-based programs. The Class
B CDSC may also be waived in connection with involuntary termination of an


                                     II-54




account in which Fund shares are held or for withdrawals through the Merrill
Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account
value at the time the plan is established, or on redemptions made in connection
with the payment of account custodial fees. See "Shareholder Services --
Fee-Based Programs" and "-- Systematic Withdrawal Plans."


Class B shareholders of a Fund exercising the exchange privilege described
under "Shareholder Services -- Exchange Privilege" will continue to be subject
to that 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.

Class B shares of certain Funds are offered through Blueprint only to members
of certain affinity groups with a waiver of the CDSC upon redemption.

Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements.
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class B shares with a waiver of the CDSC upon
redemption, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the Plan. Such
Class B shares will convert into Class A shares approximately ten years after
the plan purchases the first share of any Select Pricing Fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at 1-800-237-7777.

Conversion of Class B Shares to Class A Shares. Approximately ten years after
purchase (the "Conversion Period"), Class B shares of each Fund will convert
automatically into Class A shares of that Fund. The conversion will occur at
least once each month (on the "Conversion Date") on the basis of the relative
net asset value of the shares of the two classes on the Conversion Date,
without the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class A shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes.

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

In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert
approximately ten years after initial purchase. If you exchange 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 on to the holding period for the shares
acquired. The Conversion Period also may be modified for investors that
participate in certain fee-based programs. See "Shareholder Services --
Fee-Based Programs."


If you own shares of a Fund that, in the past, issued stock certificates and
you hold such stock certificates, you must deliver any certificates for Class B
shares of the Fund to be converted to the Transfer Agent at least one week
prior to the Conversion Date applicable to those shares. If the Transfer Agent
does not receive the certificates at least one week prior to the Conversion
Date, your Class B shares will convert to Class A shares on the next scheduled
Conversion Date after the certificates are delivered.


Contingent Deferred Sales Charges -- Class C Shares

Class C shares that are redeemed within one year of purchase may be subject to
a 1.00% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether a Class C CDSC is



                                     II-55


applicable to a redemption, the calculation will be determined in the manner
that results in the lowest possible rate being charged. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of dividends.
It will be assumed that the redemption is first of shares held for over one year
or shares acquired pursuant to reinvestment of dividends and then of shares held
longest during the one-year period. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held, for withdrawals
through the Merrill Lynch Systematic Withdrawal Plan, and in connection with
the redemption of Class C shares by certain retirement plans or on redemptions
made in connection with the payment of account custodial fees. See "Shareholder
Services -- Systematic Withdrawal Plan."

See Part I, Section V "Information on Sales Charges and Distribution Related
Expenses -- Class B and Class C Sales Charge Information" of each Fund's
Statement of Additional Information for information about amounts paid to the
Distributor in connection with Class B and C shares for the periods indicated.

CLASS R SHARES

Certain of the Funds offer Class R shares as described in each such Fund's
Prospectus. Class R shares are available only to certain retirement plans.
Class R shares are not subject to an initial sales charge or a contingent
deferred sales charge but are subject to an ongoing distribution fee of 0.25%
per year and an ongoing account maintenance fee of 0.25% per year. Distribution
fees are used to support the Fund's marketing and distribution efforts, such as
compensating financial advisers and other financial intermediaries, advertising
and promotion. Account maintenance fees are used to compensate securities
dealers and other financial intermediaries for account maintenance activities.
If Class R shares are held over time, these fees may exceed the maximum sales
charge that an investor would have paid as a shareholder of one of the other
share classes.

REDEMPTION FEE

Certain Funds charge a 2.00% redemption fee on the proceeds (calculated at
market value) of a redemption (either by sale or exchange) of Fund shares made
within 30 days of purchase. The redemption fee is paid to the Fund and is
intended to offset the trading costs, market impact and other costs associated
with short-term trading into and out of the Fund. The redemption fee is imposed
to the extent that the number of Fund shares redeemed within 30 days exceeds
the number of Fund shares that have been held for more than 30 days. For
redemptions of Fund shares acquired by exchange, your holding period for the
shares exchanged will not be tacked on to the holding period for the Fund shares
acquired in determining whether to apply the redemption fee. The redemption fee
will not apply in the following circumstances:

      o  Redemptions resulting from death or disability

      o  Redemptions through a Systematic Withdrawal Plan

      o  Redemptions of shares purchased through an Automatic Investment Plan

      o  Redemptions of shares acquired through dividend reinvestment

      o  Redemptions of shares held in certain omnibus accounts, including
         retirement plans qualified under Sections 401(a) or 401(k) of the
         Internal Revenue Code of 1986, as amended, or plans administered as
         college savings plans under Section 529 of the Internal Revenue Code

      o  Redemptions of shares held through advisory fee-based programs that the
         Distributor determines are not designed to facilitate short-term
         trading

                                     II-56




CLOSED-END FUND REINVESTMENT OPTIONS


Class I shares of each Fund are offered at net asset value to shareholders of
certain closed-end funds advised by a Manager who purchased their shares prior
to October 21, 1994 (the date the Select PricingSM System commenced operations)
and wish to reinvest the net proceeds from a sale of such shares in Class I
shares, if the conditions set forth below are satisfied. Alternatively,
shareholders of closed-end funds who purchased shares on or after October 21,
1994 and wish to reinvest the net proceeds from a sale of those shares may
purchase Class I shares (if eligible to buy Class I shares) or Class A shares
of each Fund at net asset value if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds must be immediately reinvested in Class I or Class A shares. Second,
the closed-end fund shares must either have been acquired in that fund's
initial public offering or represent dividends paid on 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 reinvestment option.


Subject to the conditions set forth below, shares of each Fund are offered at
net asset value to shareholders of certain continuously offered closed-end
funds advised by a Manager (an "Eligible Fund") who wish to reinvest the net
proceeds from a sale of eligible shares. Upon exercise of this reinvestment
option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will
receive Class I shares of a Fund and shareholders of Merrill Lynch Senior
Floating Rate Fund II, Inc. will receive Class C shares of a Fund.

In order to exercise this reinvestment option, a shareholder of an Eligible
Fund must sell his or her shares back to the Eligible Fund in connection with a
tender offer conducted by the Eligible Fund and reinvest the proceeds
immediately in the designated class of shares of a Fund. This option is
available only with respect to shares as to which no Early Withdrawal Charge
(as defined in the Eligible Fund's prospectus) is applicable. Purchase orders
from Eligible Fund shareholders who wish to exercise this reinvestment option
will be accepted only on the day that the related tender offer terminates and
will be effected at the net asset value of the designated class of shares of a
Fund on such day. The Class C CDSC may be waived upon redemption of Class C
shares purchased by an investor pursuant to this closed-end fund reinvestment
option. This waiver is subject to the requirement that the investor has held
the tendered shares for a minimum of one year and to such other conditions as
are set forth in the prospectus for the related closed-end fund.

DISTRIBUTION PLANS


The distribution plan for each of the Class A, Class B, Class C and Class R
shares of the Select Pricing Funds (each, a "Plan") provides that a Fund pays
the Distributor an account maintenance fee, accrued daily and paid monthly, at
an annual rate based on the average daily net assets of the Fund attributable
to



shares of the relevant class. This fee compensates the Distributor, Merrill
Lynch, a selected securities dealer or other financial intermediary (pursuant
to a sub-agreement) for account maintenance activities with respect to Class A,
Class B, Class C and Class R shares of the Select Pricing Funds.

The Plan for each of the Class B, Class C and Class R shares also provides that
the Fund pays the Distributor a distribution fee, accrued daily and paid
monthly, at an annual rate based on the average daily net assets of the Fund
attributable to the shares of the relevant class. This fee compensates the
Distributor, Merrill Lynch, a selected securities dealer or other financial
intermediary (pursuant to a sub-agreement) for providing shareholder and
distribution services and bearing certain distribution-related expenses of the
Fund, including payments to financial advisers or other financial
intermediaries for selling Class B, Class C and Class R shares of the Fund.

Each Fund's Plans are subject to the provisions of Rule 12b-1 under the
Investment Company Act. In their consideration of a Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Plan to the Fund and the related class of shareholders. In
approving


                                     II-57



a Plan in accordance with Rule 12b-1, the non-Interested Directors
concluded that there is reasonable likelihood that the Plan will benefit the
Fund and its related class of shareholders.

Each Plan provides that, so long as the Plan remains in effect, the
non-interested Directors then in office will select and nominate other
non-interested Directors. Each Plan can be terminated at any time, without
penalty, by the vote of a majority of the non-interested Directors or by the
vote of the holders of a majority of the outstanding related class of voting
securities of a Fund. A Plan cannot be amended to increase materially the
amount to be spent by the Fund without the approval of the related class of
shareholders. All material amendments are required to be approved by the vote
of Directors, including a majority of the non-interested Directors who have no
direct or indirect financial interest in the Plan, cast in person at a meeting
called for that purpose. Rule 12b-1 further requires that each Fund preserve
copies of each Plan and any report made pursuant to such plan for a period of
not less than six years from the date of the Plan or such report, the first two
years in an easily accessible place.

Among other things, each Plan provides that the Directors will review quarterly
reports of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of
expenses incurred. As a result, distribution-related revenues from the Plans
may be more or less than distribution-related expenses of the related class.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration quarterly.
Distribution-related revenues consist of the account maintenance fees, the
distribution fees and the CDSCs. Distribution-related expenses consist of
financial adviser compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
marketing expenses and interest expense. The distribution-related revenues paid
with respect to one 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.

See Part I, Section V "Information on Sales Charges and Distribution Related
Expenses" of each Fund's Statement of Additional Information for information
relating to the fees paid by your Fund to the Distributor under each
Distribution Plan during the Fund's most recent fiscal year.


LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
borne by Class R shares, and the distribution fee and the CDSC borne by the
Class B and Class C shares. This limitation does not apply to the account
maintenance fee. The maximum sales charge rule is applied separately to each
class and limits the aggregate of distribution fee payments and CDSCs payable
by a Fund to (1) 6.25% of eligible gross sales of Class B, Class C and Class R
shares, computed separately (excluding 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, no Fund will 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, each
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.


                                     II-58


See Part I, Section V "Information on Sales Charges and Distribution Related
Expenses -- Limitation on the Payment of Deferred Sales Charge" of each Select
Pricing Fund's Statement of Additional Information for comparative information
as of your Fund's most recent fiscal year end with respect to the Class B,
Class C and, if applicable, Class R shares of your Fund.

REDEMPTION OF SHARES


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

The right to redeem shares may be suspended for more than seven days only (i)
for any period during which trading on the NYSE is restricted as determined by
the Securities and Exchange Commission (the "Commission") or during which the
NYSE is closed (other than customary weekend and holiday closings), (ii) 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, or (iii) for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.


Each Fund has entered into a joint committed line of credit with other
investment companies advised by the Manager and a syndicate of banks that is
intended to provide the Fund with a temporary source of cash to be used to meet
redemption requests from shareholders in extraordinary or emergency
circumstances.

REDEMPTION


If you hold shares with the Transfer Agent you may redeem such shares without
charge by writing to the Fund's Transfer Agent, Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be sent to Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484. If you hold share
certificates issued by your Fund, the letter must be accompanied by
certificates for the shares. Redemption requests should not be sent to the
Fund. A redemption request 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 may
require a guarantee by an "eligible guarantor institution" as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), whose
existence and validity may be verified by the Transfer Agent through the use of
industry publications. In the event a signature guarantee is required,
notarized signatures are not sufficient. In general, signature guarantees are
waived on redemptions of less than $50,000 as long as the following
requirements are met: (i) the request contains the signature(s) of all persons
in whose name(s) shares are recorded on the Transfer Agent's register; (ii) the
check is mailed to the stencil address of record on the Transfer Agent's
register and (iii) the stencil address has not changed within 30 days. Certain
rules may apply regarding certain types of accounts, including but not limited
to UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship, contra
broker transactions and institutional accounts. 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.


You may also redeem shares held with the Transfer Agent by calling
1-800-MER-FUND. You must be the shareholder of record and the request must be
for an amount less than $50,000. Before telephone requests will be honored,
signature approval from all shareholders of record on the account must be
obtained. The




                                     II-59


shares being redeemed must have been held for at least 15 days.
Telephone redemption requests will not be honored if: (i) the accountholder is
deceased, (ii) the proceeds are to be sent to someone other than the
shareholder of record, (iii) funds are to be wired to the client's bank
account, (iv) a systematic withdrawal plan is in effect, (v) the request is by
an individual other than the accountholder of record, (vi) the account is held
by joint tenants who are divorced, (vii) the address on the account has changed
within the last 30 days or share certificates have been issued on the account,
or (viii) to protect against fraud, if the caller is unable to provide the
account number, the name and address registered on the account and the social
security number registered on the account. The Funds or the Transfer Agent may
temporarily suspend telephone transactions at any time.

If you redeem shares directly with the Transfer Agent, payments will generally
be mailed within seven days of receipt of the proper notice of redemption. A
Fund may delay the mailing of a redemption check until good payment (that is,
cash, Federal funds or certified check drawn on a U.S. bank) has been collected
for the purchase of Fund shares, which will usually not exceed 10 days. If your
account is held directly with the Transfer Agent and contains a fractional
share balance following a redemption, the fractional share balance will be
automatically redeemed by the Fund.

REPURCHASE


A Fund normally will accept orders to repurchase shares from Selling Dealers
for their customers. Shares will be priced at the net asset value of the fund
next determined after receipt of the repurchase order by a Selling Dealer that
has been authorized by the Distributor by contract to accept such orders. As to
repurchase orders received by Selling Dealers prior to the close of business on
the NYSE (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the
order is placed, which includes orders received after the close of business on
the previous day, the repurchase price is the net asset value determined as of
the close of business on the NYSE on that day. If the orders for repurchase are
not received by the Selling Dealer before the close of business on the NYSE,
such orders are deemed received on the next business day.



These repurchase arrangements are for your convenience and do not involve a
charge by the Fund (other than any applicable CDSC or redemption fee).
Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge for transmitting the
notice of repurchase to the Fund. Each Fund reserves the right to reject any
order for repurchase. A shareholder whose order for repurchase is rejected by a
Fund, however, may redeem shares as set out above.


REINSTATEMENT PRIVILEGE - CLASS A AND CLASS I SHARES


If you redeemed Class A or Class I shares of a Fund, you may reinstate your
account by buying Class A or Class I shares, as the case may be, of the Fund at
net asset value without a sales charge up to the dollar amount you redeemed.
You may exercise the reinstatement privilege by sending a notice of exercise
along with a check for the amount to be reinstated to the Transfer Agent or by
contacting your financial adviser or other financial intermediary within 30
days after the date the redemption request 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.



SHAREHOLDER SERVICES



Each Fund offers one or more of the shareholder services described below that
are designed to facilitate investment in its shares. You can obtain more
information about these services from each Fund, by calling the telephone
number on the cover page, or from the Distributor, your financial adviser, your
selected securities dealer or other financial intermediary. Certain of these
services are available only to U.S. investors.



                                     II-60


INVESTMENT ACCOUNT


If your account is maintained at the Transfer Agent (an "Investment Account")
you will receive statements, at least quarterly, from the Transfer Agent. These
statements will serve as confirmations for automatic investment purchases and
the reinvestment of dividends. The statements also will show any other activity
in your Investment Account since the last statement. You also will receive
separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of dividends. If your
Investment Account is held at the Transfer Agent you may make additions to it
at any time by mailing a check directly to the Transfer Agent. You may also
maintain an account through a selected securities dealer or other financial
intermediary. If you transfer shares out of an account maintained with a
selected securities dealer or other financial intermediary, an Investment
Account in your name may be opened automatically at the Transfer Agent.

You may transfer Fund shares from a selected securities dealer or other
financial intermediary to another securities dealer or other financial
intermediary that has entered into an agreement with the Distributor. Certain
shareholder services may not be available for the transferred shares. After the
transfer, you may purchase additional shares of Funds owned before the
transfer. All future trading of these assets must be coordinated by the new
firm. If you wish to transfer your shares to a securities dealer or other
financial intermediary that has not entered into an agreement with the
Distributor, you must either (i) redeem your shares, paying any applicable CDSC
or (ii) continue to maintain an Investment Account at the Transfer Agent for
those shares. You also may request that the new securities dealer or other
financial intermediary maintain the shares in an account at the Transfer Agent
registered in the name of the securities dealer or other financial intermediary
for your benefit whether the securities dealer or other financial intermediary
has entered into a selected dealer agreement or not.

If you are considering transferring a tax-deferred retirement account, such as
an individual retirement account, from one selected securities dealer to
another securities dealer or other financial intermediary, you should be aware
that if the new firm will not take delivery of shares of the Fund, you must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or you must continue to maintain
a retirement account at the original selected securities dealer for those shares.



EXCHANGE PRIVILEGE


U.S. shareholders of Class A, Class B, Class C and Class I shares of each Fund
have an exchange privilege with certain other Select Pricing Funds and Summit,
which is a money market fund advised by FAM specifically designated for
exchange by shareholders of Select Pricing Funds. In order to qualify for the
exchange privilege, the shares you wish to exchange are required to have a net
asset value of at least $100 and must have been held by you for at least 15
days. Before effecting an exchange, you should obtain a currently effective
prospectus of the fund into which you wish to make the exchange. Exercise of
the exchange privilege is treated as a sale of the exchanged shares and a
purchase of the acquired shares for Federal income tax purposes.


Exchanges of Class A and Class I Shares. You may exchange Class A or Class I
shares of a Fund for Class I shares of a second Select Pricing Fund if you hold
any Class I shares of the second fund in your account at the time of the
exchange or are eligible to purchase Class I shares of the second fund;
otherwise, you will receive Class A shares of the second fund. Class A shares
are exchangeable with shares of the same class of other Select Pricing Funds.


Exchanges of Class A or Class I shares outstanding ("outstanding Class A or
Class I shares") for Class A or Class I shares of a second Select Pricing Fund,
or for Class A shares of Summit ("new Class A or Class I shares") are effected
on the basis of relative net asset value per Class A or Class I share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding


                                     II-61



Class A or Class I shares and the sales charge payable at the time of the exchange
on the new Class A or Class I shares. With respect to outstanding Class A or
Class I shares received in a previous exchange, the "sales charge previously paid"
will include the aggregate of the sales charges paid with respect to such Class A
or Class I shares in the initial purchase and any subsequent exchange. Class A
or Class I shares issued pursuant to dividend reinvestment are not subject to a
sales charge. For purposes of the exchange privilege, however, these shares will
be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class I shares on which the dividend was
paid. Based on this formula, Class A and Class I shares of a Fund generally may
be exchanged into the Class A or Class I shares, respectively, of a second Fund
with a reduced sales charge or without a sales charge. If you held the
outstanding Class A or Class I shares used in the exchange for 30 days or less,
you may also be charged a redemption fee at the time of the exchange.

Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offer to exchange their Class B or Class C shares for Class B or Class C
shares, respectively, of certain other Select Pricing Funds or for Class B
shares of Summit ("new Class B or Class C shares") on the basis of relative net
asset value per Class B or Class C share, without the payment of any CDSC that
might otherwise be due on the redemption of the outstanding shares. Certain
Select Pricing Funds impose different CDSC schedules. If you exchange your
Class B shares for shares of a fund with a different CDSC schedule, the higher
schedule will apply. For purposes of computing the CDSC that may be payable on
a disposition of the new Class B or Class C shares, the holding period for the
exchanged Class B or Class C shares is "tacked" to the holding period of the
new Class B or Class C shares. The length of the CDSC period of certain equity
funds advised by MLIM, FAM or their affiliates ("equity funds") was extended
from four years to six years on June 1, 2001. A shareholder who purchased a
Fund's Class B shares on or after June 1, 2001, and who wishes to exchange
those shares for Class B shares of an equity fund will be subject to the equity
fund's six-year CDSC schedule. For example, if you exchange Class B shares of a
Fund purchased on or after June 1, 2001 for those of an equity fund after
having held the Fund's Class B shares for two and a half years, the 3.00%
CDSC that generally would apply to a redemption would not apply to the
exchange. Four years later if you decide to redeem the Class B shares of the
equity 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 Class B
shares to the four-year holding period for the equity fund Class B shares, you
will be deemed to have held the equity fund shares for more than six years. If
you purchased Class B shares prior to June 1, 2001 and wish to exchange those
shares for Class B shares of an equity fund, you will continue to be subject to
the four-year CDSC schedule in effect prior to June 1, 2001 and will have your
holding period "tacked" to the holding period for the new Class B shares. If
you purchased a Fund's Class B shares prior to December 1, 2002 and wish to
exchange those shares for Class B shares of another fixed income fund, you will
continue to be subject to the four-year CDSC schedule (one year for Bond Fund -
Intermediate Term Portfolio, Municipal Bond - Limited Maturity Portfolio and
Municipal Intermediate Term) in effect for fixed income funds prior to December
1, 2002 and your holding period "tacked" to the holding period for the new
Class B shares. If you held the outstanding Class B or Class C shares used in
the exchange for 30 days or less, you may also be charged a redemption fee at
the time of the exchange.

Exchanges for Shares of a Money Market Fund. You may exchange Class A and Class
I shares of a Fund for Class A shares of Summit and Class B and Class C shares
of a Fund for Class B shares of Summit. You may exchange Class A shares of
Summit back into Class A or Class I shares of a Fund. You may exchange Class B
shares of Summit back into Class B or Class C shares of a Fund and, in the
event of such an exchange, the period of time that you held Class B shares of
Summit will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and toward satisfaction of any Conversion Period
with respect to Class B shares. Class B shares of Summit will be subject to a
distribution fee at an annual rate of 0.75% of average daily net assets of such
Class B shares. Please see your financial adviser or other financial
intermediary for further information.



                                     II-62



Prior to October 12, 1998, exchanges from certain Select Pricing Funds into a
money market fund were directed to certain money market funds advised by the
Manager other than Summit ("Other Money Funds"). If you exchanged Select
Pricing Fund shares for Other Money Funds and subsequently wish to exchange
Other Money Fund shares for shares of a Select Pricing Fund ("Acquired Fund"),
you will be subject to the CDSC schedule applicable to the Acquired Fund
shares, if any. The holding period for Other Money Fund shares will not count
toward satisfaction of the holding period requirement for reduction of the CDSC
imposed on Acquired Fund shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period. However, the time you held the
fund shares originally exchanged for Other Money Fund shares will count towards
the holding period of the Class B or C shares of the Acquired Fund for purposes
of reducing the CDSC or satisfying the Conversion Period.

Exchanges by Participants in Certain Programs. The exchange privilege is
modified with respect to certain participants in mutual fund advisory programs
and other fee-based programs sponsored by the Manager, an affiliate of the
Manager, or selected securities dealers or other financial intermediaries that
have an agreement with the Distributor. See "Fee -- Based Programs" below.

Exercise of the Exchange Privilege. To exercise the exchange privilege, you
should contact your financial adviser, who will advise each Fund of the
exchange. If you do not hold share certificates, you may exercise the exchange
privilege by wire through your securities dealer or other financial
intermediary. Each Fund reserves the right to require a properly completed
exchange application.

You may also request exchanges by calling the Transfer Agent at 1-800-637-3863
if your account is held with the Transfer Agent for amounts up to $50,000. The
request must be from the shareholder of record. Before telephone requests will
be honored, signature approval from all shareholders of record must be
obtained. The shares being exchanged must have been held for at least 15 days.
Telephone requests for an exchange will not be honored if: (i) the
accountholder is deceased, (ii) the request is by an individual other than the
accountholder of record, (iii) the account is held by joint tenants who are
divorced or the address on the account has changed within the last 30 days, or
(iv) if the caller is unable to provide the account number, the name and address
registered on the account and the social security number registered on the account.
Each Fund or the Transfer Agent may temporarily suspend telephone transactions at
any time.


This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. Each Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain Funds may
suspend the continuous offering of their shares to the general public at any
time and may 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. The exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.

FEE-BASED PROGRAMS


Certain fee-based programs offered by the Manager or its affiliates of a
selected securities dealer or other financial intermediaries that has an
agreement with the Distributor, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"), may permit
the purchase of Class I shares at net asset value. Under specified
circumstances, participants in certain Programs may exchange their shares in
the Program for Class I shares. Initial or deferred sales charges otherwise due
in connection with such exchanges may be waived or modified, as may the
Conversion Period applicable to the deposited shares. Termination of
participation in a Program may result in the redemption of shares or the
automatic exchange of shares to another class at net asset value. Shareholders
that participate in a fee based program generally have two options at
termination. The program can be terminated and the shares liquidated or the
program can be terminated and the shares held in an account. In general, when
shares are held whatever share class was held in the program can be held after
termination. Shares that have been held for less than specified periods within
the program may be subject to a fee upon redemption.


                                     II-63



Shareholders that held Class A or Class I shares in the program are eligible to
purchase additional shares of the respective share class of the fund, but may be
subject to upfront sales charges. Additional purchases of Class I shares are
eligible only if you have an existing position at the time of purchase or are
otherwise eligible for Class I shares.


RETIREMENT AND EDUCATION SAVINGS PLANS


Individual retirement accounts and other retirement and education savings plans
are available from your financial intermediary. Under these plans, investments
may be made in a Fund (other than a Municipal Fund) and certain of the other
mutual funds sponsored by MLIM or its affiliates as well as in other
securities. There may be fees associated with investing through these plans.
Information with respect to these plans is available on request from your
financial intermediary.


Dividends received in each of the plans referred to above are exempt from
Federal taxation until distributed from the plans and, in the case of Roth IRAs
and education savings plans, may be exempt from taxation when distributed as
well. Investors considering participation in any retirement or education
savings plan should review specific tax laws relating to the plan and should
consult their attorneys or tax advisers with respect to the establishment and
maintenance of any such plan.

AUTOMATIC INVESTMENT PLANS


You may make additions to an Investment Account through a service known as the
Automatic Investment Plan. Under the Automatic Investment Plan, a Fund is
authorized, on a regular basis, to provide systematic additions to your
Investment Account through charges of $50 or more to your regular bank account
by either pre-authorized checks or automated clearing house debits. If you buy
shares of a Fund through Blueprint, no minimum charge to your bank account is
required. Alternatively, if you maintain a cash management account you may
arrange to have periodic investments made in a Fund. Contact your financial
intermediary for more information.


AUTOMATIC DIVIDEND REINVESTMENT PLAN


Unless you provide specific instructions as to the method of payment, dividends
will be automatically reinvested, without sales charge, in additional full and
fractional shares of the same Fund. You may, at any time, elect to have
dividends paid in cash, rather than reinvested in shares of a Fund (provided
that, if a payment on an account maintained at the Transfer Agent would amount
to $10.00 or less, the payment will automatically be reinvested in additional
shares). If your account is maintained with the Transfer Agent, you may contact
the Transfer Agent in writing or by telephone (1-800-637-3863). For other
accounts, you should contact your financial adviser, selected securities dealer
or other financial intermediary. Your instructions will be effected ten days
after the receipt by the Transfer Agent of such notice. A Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed dividend checks.
Cash payments can also be deposited directly in the shareholder's bank account.



SYSTEMATIC WITHDRAWAL PLANS


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


At the time of each withdrawal payment, sufficient shares are redeemed from
your account to provide the withdrawal payment specified by you. You may
specify the dollar amount and class of shares to be redeemed. Redemptions will
be made at net asset value as determined as of the close of business on the
NYSE on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is


                                     II-65


applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the net asset value determined as of the close of business on the
NYSE on the following business day. The check for the withdrawal payment will be
mailed or the direct deposit will be made, on the next business day following
redemption. When you make systematic withdrawals, dividends and distributions on
all shares in the Investment Account are reinvested automatically in Fund shares.
Your systematic withdrawal plan may be terminated at any time, without charge or
penalty, by you, a Fund, the Transfer Agent or the Distributor.


The maximum number of Class B or Class C shares that can be redeemed from an
Investment Account annually will not exceed 10% of the value of shares of such
class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that might be due on such redemption of
Class B or Class C shares will be waived. Shares redeemed pursuant to a
systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are normally redeemed. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares." Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class A shares, you must make a new election to join
the systematic withdrawal program with respect to the Class A shares. If you
wish to change the amount being withdrawn in a systematic withdrawal plan, you
should contact your financial adviser or other financial intermediary.


Withdrawal payments should not be considered as dividends. Withdrawals
generally are treated as sales of shares and may result in taxable gain or
loss. If periodic withdrawals continuously exceed reinvested dividends, the
shareholder's original investment may be reduced correspondingly. Purchases of
additional shares concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities. A Fund will not
knowingly accept purchase orders for shares of a Fund from investors who
maintain a systematic withdrawal plan with respect to that Fund 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.



Alternatively, if your shares are held within a cash management account or
retirement account you may elect to have shares redeemed on periodic basis as
determined by the program. The proceeds of systematic redemptions will be
posted to your account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A systematic redemption
program may not be available if Fund shares are being purchased within the
account pursuant to the automatic investment program. For more information
shareholders should contact their financial adviser or other financial
intermediary.



PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

The net asset value of each class of shares of each Fund is determined once
daily Monday through Friday as of the close of business on the NYSE on each day
the NYSE is open for trading based on prices at the time of closing. The NYSE
generally closes at 4:00 p.m. Eastern time. Any assets or liabilities initially
expressed in terms of foreign currencies are translated into U.S. dollars at
the prevailing market rates as quoted by one or more banks or dealers on the
day of valuation. The NYSE is not open for trading on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.

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


                                     II-65


The principal asset of each Feeder Fund will normally be its interest in an
underlying Master Portfolio. The value of that interest is based on the net
assets of the Master Portfolio, which are comprised of the value of the
securities held by the Master Portfolio plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses of the Master Portfolio). Expenses of a
Master Portfolio, including the investment advisory fees, are accrued daily.
The net asset value of a Feeder Fund is equal to the value of the Feeder Fund's
proportionate interest in the net assets of the Master Portfolio plus any cash
or other assets, minus all liabilities (including accrued expenses) of the
Feeder Fund. To determine a Feeder Fund's net asset value per share, the Feeder
Fund's net asset value is divided by the total number of shares outstanding of
the Feeder Fund at such time (on a class by class basis), rounded to the
nearest cent. Expenses, including fees payable to the Administrator and
Distributor, are accrued daily.

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


Securities that are held by a Fund that are traded on stock exchanges or NASDAQ
National Market are valued at the last sale price or official close price on
the exchange, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price for long
positions, and at the last available ask price for short positions. In cases
where equity securities are traded on more than one exchange, the securities
are valued on the exchange designated as the primary market by or under the
authority of the Board of Directors of the Fund. Long positions traded in the
OTC market, NASDAQ Small Cap or Bulletin Board are valued at the last available
bid price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Directors of the Fund. Short positions traded
in the OTC market are valued at the last available ask price. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.

Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market,
the last ask price. Options purchased are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Swap agreements are valued daily based upon
quotations from market makers. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their last sale price as of the
close of such exchanges. Obligations with remaining maturities of 60 days or
less are valued at amortized cost unless the Manager believes that this method
no longer produces fair valuations. Repurchase agreements are valued at cost
plus accrued interest.

Each Fund employs pricing services to provide certain securities prices for the
Fund. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of a Fund, including valuations furnished
by the



                                     II-66


pricing services retained by the Fund, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of a Fund under the general supervision of the Fund's Board of
Directors. Such valuations and procedures will be reviewed periodically by the
Board of Directors of the Fund.

Generally, trading in foreign securities, as well as U.S. Government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the NYSE. The values of such securities
used in computing the net asset value of a Fund's shares are determined as of
such times. Foreign currency exchange rates also are generally determined prior
to the close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of a Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by a Fund's Board of Directors or by the Manager using a pricing
service and/or procedures approved by a Fund's Board of Directors.

For funds organized in a master-feeder structure, each investor in a Master
Portfolio may add to or reduce its investment in the Master Portfolio on each
day the NYSE is open for trading. The value of each investor's (including a
Feeder Fund's) interest in a Master Portfolio will be determined after the
close of business on the NYSE by multiplying the net asset value of the Master
Portfolio by the percentage, effective for that day, which represents that
investor's share of the aggregate interests in the Master Portfolio. Any
additions or withdrawals to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in a Master
Portfolio will then be recomputed as the percentage equal to the fraction (i)
the numerator of which is the value of such investor's investment in the Master
Portfolio as of the time of determination on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the investor's
investment in the Master Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Master


Portfolio as of such time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Master Portfolio by all investors in the Master Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in a Master Portfolio after the close of business of the NYSE or the
next determination of net asset value of the Master Portfolio.

COMPUTATION OF OFFERING PRICE PER SHARE

See Part I, Section VI "Computation of Offering Price" of each Fund's Statement
of Additional Information for an illustration of the computation of the
offering price for Class A, Class B, Class C, Class I, and, if applicable,
Class R shares of your Fund. or for shares of Municipal Investment
Accumulation.


PORTFOLIO TRANSACTIONS AND BROKERAGE



Transactions in Portfolio Securities


Subject to policies established by the Board of each Fund, the Manager is
primarily responsible for the execution of a Fund's portfolio transactions and
the allocation of brokerage. The Manager does not execute transactions through
any particular broker or dealer, but seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
operational facilities of the firm and the firm's risk and skill in positioning
blocks of securities. While the Manager generally seeks reasonable trade
execution costs, a Fund does not necessarily pay the lowest spread or
commission available. Subject to applicable legal requirements, the Manager may
select a broker based partly upon brokerage or research services provided to
the Manager and its clients, including a Fund. In return for such services the
Manager may


                                     II-67


cause a Fund to pay a higher commission than other brokers would
charge if the Manager determines in good faith that the commission is
reasonable in relation to the services provided.


In the case of Feeder Funds, because each Feeder Fund generally invests
exclusively in beneficial interests of a Master Portfolio, it is expected that
all transactions in portfolio securities will be entered into by the Master
Portfolio.


Section 28(e) of the Exchange Act ("Section 28(e)") permits a Manager, under
certain circumstances, to cause an account to pay a broker a commission for
effecting a transaction that exceeds the amount another broker or dealer would
have charged for effecting the same transaction in recognition of the value of
brokerage and research services provided by that broker or dealer. This
includes commissions paid on riskless principal transactions under certain
conditions. Brokerage and research services include (1) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities; (2) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
the performance of accounts; and (3) effecting securities transactions and
performing functions incidental to securities transactions (such as clearance,
settlement, and custody). The Manager believes that access to independent
investment research is beneficial to its investment decision-making processes
and, therefore, to a Fund.


To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information that assists in the
valuation of investments. Examples of research-oriented services for which the
Manager might pay with Fund commissions include research reports and other
information on the economy, industries, groups of securities, individual
companies, statistical information, political developments, technical market
action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. Except as noted immediately below,
research services furnished by brokers may be used in servicing some or
all client accounts and not all services may be used in connection with the
account that paid commissions to the broker providing such services. In some
cases, research information received from brokers by mutual fund management
personnel, or personnel principally responsible for the Manager's individually
managed portfolios, is not necessarily shared by and between such personnel.
Any investment advisory or other fees paid by a Fund to the Manager are not
reduced as a result of the Manager's receipt of research services. In some
cases the Manager may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs the Manager makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used
for research purposes may be paid for with client commissions, while the
Manager will use its own funds to pay for the percentage of the service that is
used for non-research purposes. In making this good faith allocation, the
Manager faces a potential conflict of interest, but the Manager believes that
its allocation procedures are reasonably designed to ensure that it
appropriately allocates the anticipated use of such services to their research
and non-research uses.

From time to time, a Fund may purchase new issues of securities in a fixed
price offering. In these situations, the broker may be a member of the selling
group that will, in addition to selling securities, provide the Manager with
research services. The NASD has adopted rules expressly permitting these types
of arrangements under certain circumstances. Generally, the broker will provide
research "credits" in these situations at a rate that is higher than that which
is available for typical secondary market transactions. These arrangements may
not fall within the safe harbor of Section 28(e).


The Manager does not consider sales of shares of the mutual funds it advises as
a factor in the selection of brokers or dealers to execute portfolio
transactions for a Fund; however, whether or not a particular broker a dealer
sells shares of the mutual funds advised by the Manager neither qualifies nor
disqualifies such broker or dealer to execute transactions for those mutual
funds.



                                     II-68


Each Fund anticipates that its brokerage transactions involving foreign
securities generally will be conducted primarily on the principal stock
exchanges of the applicable country. Foreign equity securities may be held by a
Fund in the form of Depositary Receipts, or other securities convertible into
foreign equity securities. Depositary Receipts may be listed on stock
exchanges, or traded in over-the-counter markets in the United States or
Europe, as the case may be. American Depositary Receipts, like other securities
traded in the United States, will be subject to negotiated commission rates.
Because the shares of each Fund are redeemable on a daily basis in U.S.
dollars, each Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. Under present conditions, it is not believed
that these considerations will have significant effect on a Fund's portfolio
strategies.


See Part I, Section VII "Portfolio Transactions and Brokerage " of each Fund's
Statement of Additional Information for information about the brokerage
commissions paid by your Fund, including commissions paid to Merrill Lynch, if
any, for the periods indicated.

Each Fund may invest in certain securities traded in the OTC market and intends
to deal directly with the dealers who make a market in the particular
securities, except in those circumstances in which better prices and execution
are available elsewhere. Under the Investment Company Act, persons affiliated
with a Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Funds will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of a Fund may serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, a Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of the Fund that either comply with
rules adopted by the Commission or with interpretations of the Commission staff.


The Municipal Funds recently received an exemptive order under which they may
purchase investment grade Municipal Bonds through group orders from an
underwriting syndicate of which Merrill Lynch is a member subject to conditions
set forth in such order (the "Group Order Exemptive Order"). A group order is
an order for securities held in an underwriting syndicate for the account of
all members of the syndicate, and in proportion to their respective
participation in the syndicate. Under another exemptive order, the Municipal
Funds may effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order. Please see Part I, Section VII "Portfolio Transactions and Brokerage" of
each Fund's Statement of Additional Information for information regarding
transactions executed by your Fund pursuant to these exemptive orders.

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


                                     II-69



Each Fund has received an exemptive order from the Commission permitting it to
lend portfolio securities to Merrill Lynch or its affiliates. Pursuant to that
order, each Fund also has retained an affiliated entity of the Manager as the
securities lending agent (the "lending agent") for a fee, including a fee based
on a share of the returns on investment of cash collateral. Please see Part I,
Section VII "Portfolio Transactions and Brokerage" of each Fund's Statement of
Additional Information for information on the securities lending fees paid the
lending agent by your Fund. In connection with securities lending activities,
the lending agent may, on behalf of a Fund, invest cash collateral received by
the Fund for such loans, among other things, in a private investment company
managed by the lending agent or in registered money market funds advised by the
Manager or its affiliates, or in a private investment company managed by the
lending agent. If a Fund acquires shares in either the private investment
company or an affiliated money market fund, shareholders would bear both their
proportionate share of the Fund's expenses, and indirectly, the expense of such
other entities. However, in accordance with the exemptive order, the manager to
the private investment company will not charge any advisory fees with respect
to shares purchased by a Fund. Such shares also will not be subject to a sales
load, redemption fee, distribution fee or service fee, or in the case of the
shares of an affiliated money market fund, the payment of any such sales load,
redemption fee, distribution fee or service fee will be offset by the Manager's
waiver of a portion of its advisory fee.


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


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


Because of different objectives or other factors, a particular security may be
bought for one or more funds or clients advised by the Manager or its
affiliates (collectively, "clients") when one or more clients of the Manager or
its affiliates are selling the same security. If purchases or sales of
securities arise for consideration at or about the same time that would involve
a Fund or other clients or funds for which the Manager or an affiliate act as
investment manager, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or 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.

Portfolio Turnover

While a Fund generally does not expect to engage in trading for short term
gains, it will effect portfolio transactions without regard to holding period
if, in Fund management's judgment, such transactions are advisable in light of
a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. The portfolio
turnover rate is calculated by dividing the lesser of a Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or


                                     II-70



sales of U.S. government securities and all other securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. A high rate of portfolio turnover
results in certain tax consequences, such as increased capital gain dividends
and/or ordinary income dividends and in correspondingly greater transaction
costs in the form of dealer spreads and brokerage commissions, which are borne
directly by a Fund.


DIVIDENDS AND TAXES

DIVIDENDS

Each Fund intends to distribute substantially all of its net investment income,
if any. Dividends from such net investment income are paid as set forth in each
Fund's prospectus. Each Fund will also distribute all net realized capital
gains, if any, to its shareholders at least annually. From time to time, a Fund
may declare a special distribution at or about the end of the calendar year in
order to comply with Federal tax requirements that certain percentages of its
ordinary income and capital gains be distributed during the year. If in any
fiscal year, a Fund has net income from certain foreign currency transactions,
such income will be distributed at least annually.

For information concerning the manner in which dividends may be reinvested
automatically in shares of each Fund, see "Shareholder Services -- Automatic
Dividend Reinvestment Plan." Shareholders may also elect in writing to receive
any such dividends in cash. Dividends are taxable to shareholders, as discussed
below, whether they are reinvested in shares of the Fund or received in cash.
The per share dividends on Class A, Class B, Class C and Class R shares will be
lower than the per share dividends on Class I shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable to Class B
and Class C shares, the account maintenance fees applicable to Class A shares,
and the account maintenance and distribution fees applicable to Class R shares.
Similarly, the per share dividends on Class B, Class C and Class R shares will be
lower than the per share dividends on Class A shares as a result of the distribution
fees and higher transfer agency fees applicable to Class B and Class C shares and
the distribution fees applicable to Class R shares, and the per share dividends
on Class B and Class C shares will be lower than the per share dividends on Class
R shares as a result of the distribution fees and higher transfer agency fees
applicable to Class B and Class C shares.

TAXES


Each Fund intends to qualify, or continue to qualify, for the special tax
treatment afforded to regulated investment companies ("RICs") under the Code.
As long as a Fund so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax on the part of its net ordinary income and net
realized capital gains that it distributes to Class A, Class B, Class C and
Class I shareholders (together, the "shareholders"). Each Fund intends to
distribute substantially all of such income and gains. If, in any taxable year,
a Fund fails to qualify as a RIC under the Code, such Fund would be taxed in
the same manner as an ordinary corporation and all distributions from earnings
and profits (as determined under U.S. Federal income tax principles) to its
shareholders would be taxable as ordinary dividend income eligible for the
maximum 15% tax rate for non-corporate shareholders and the dividends-received
deduction for corporate shareholders. However, a Municipal Fund's distributions
derived from income on tax-exempt obligations, as defined herein, would no
longer qualify for treatment as exempt interest.

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
the previous years. While each Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of a Fund's taxable income
and capital gains will be distributed to achieve this objective. In such event,
a Fund will be liable for the tax only on the amount by which it does not meet
the foregoing distribution


                                     II-71


requirements. Because the required distributions are based on the taxable income
of a RIC, the excise tax generally will not apply to the tax-exempt income of the
Municipal Funds.

Dividends paid by a Fund from its ordinary income or from an excess of net
short-term capital gains over net long term capital losses (together referred
to as "ordinary income dividends") are taxable to shareholders as ordinary
income. Distributions made from an excess of net long term capital gains over
net short term capital losses (including gains or losses from certain
transactions in futures and options) ("capital gain dividends") are taxable to
shareholders as long term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Recently enacted legislation reduces the tax
rate on certain dividend income and long-term capital gain applicable to
non-corporate shareholders for taxable years ending in or prior to 2008. Under
these new rules, a certain portion of ordinary income dividends constituting
"qualified dividend income" when paid by a RIC to non-corporate shareholders
may be taxable to such shareholders at long term capital gain rates. However,
to the extent a Fund's distributions are derived from income on debt
securities, certain types of preferred stock treated as debt for federal income
tax purposes and short-term capital gain, such distributions will not
constitute "qualified dividend income." Thus, ordinary income dividends paid by
the Funds generally will not be eligible for taxation at the reduced rates.


Ordinary income and capital gain dividends are taxable to shareholders even if
they are reinvested in additional shares of a Fund. Distributions by a Fund,
whether from ordinary income or capital gains, generally will not be eligible
for the dividends received deduction. If a Fund pays a dividend in January that
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which the dividend was declared.


For the Select Pricing Funds no gain or loss will be recognized by Class B
shareholders on the conversion of their Class B shares into Class A shares. A
shareholder's tax basis in the Class A shares acquired upon
conversion will be the same as the shareholder's tax basis in the converted
Class B shares, and the holding period of the acquired Class A shares will
include the holding period for the converted Class B shares.

If a shareholder of a Select Pricing Fund exercises an exchange privilege
within 90 days of acquiring the shares of a Fund, then the loss that the
shareholder recognizes on the exchange will be reduced (or the gain increased)
to the extent any sales charge paid on the exchanged shares reduces any sales
charge the shareholder would have owed upon the 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 a Fund will be disallowed if
such 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 on which the shares are disposed of. In such
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.


Certain Funds may invest in zero coupon U.S. Treasury bonds and other debt
securities that are issued at a discount or provide for deferred interest. Even
though a Fund receives no actual interest payments on these securities, it will
be deemed to receive income equal, generally, to a portion of the excess of the
face value of the securities over their issue price ("original issue discount")
each year that the securities are held. Since the original issue discount
income earned by a Fund in a taxable year may not be represented by cash
income, it may have to dispose of securities, which it might otherwise have
continued to hold, or borrow to generate cash in order to satisfy its
distribution requirements. In addition, a Fund's investment in foreign
currencies or foreign currency denominated or referenced debt securities,
certain asset-backed securities and contingent payment and inflation-indexed
debt instruments also may increase or accelerate the Fund's recognition of
income, including the recognition of taxable income in excess of cash generated
by such investments.



                                     II-72


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


Under certain provisions of the Code, some shareholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amount withheld generally may be allowed as a refund or a
credit against a shareholder's Federal income tax liability, provided that the
required information is timely forwarded to the IRS.

Dividends and interest received by a Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
foreign countries and the U.S. may reduce or eliminate such taxes. Shareholders
of certain Funds that invest more than 50% of the value of their assets at the
close of a taxable year in foreign securities may be able to claim U.S. foreign
tax credits with respect to such foreign taxes paid by the Fund, subject to
certain requirements and limitations contained in the Code. For example,
certain retirement accounts and certain tax-exempt organizations cannot claim
foreign tax credits on investments in foreign securities held in a Fund. In
addition, a foreign tax credit may be claimed with respect to withholding tax
on a dividend only if the shareholder meets certain holding period
requirements. A Fund also must meet these holding period requirements, and if a
Fund fails to do so, it will not be able to "pass through" to shareholders the
ability to claim a credit or a deduction for the related foreign taxes paid by
the Fund. Further, to the extent that a Fund engages in securities lending with
respect to security paying income subject to foreign taxes, it may not be able
to pass through to its shareholders the ability to take a foreign tax credit.
If a Fund satisfies the applicable requirements, such Fund will be eligible to
file an election with the Internal Revenue Service pursuant to which shareholders
of the Fund will be required to include their proportionate shares of such foreign
taxes in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from a Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. A Fund will report annually to its shareholders the
amount per share of such foreign taxes and other information needed to claim
the foreign tax credit. For this purpose, a Fund will allocate foreign source
income among each class of shareholders according to a method similar to that
described above for the allocation of dividends eligible for the
dividends-received deduction and dividends taxable at the maximum 15% tax rate.

Certain transactions entered into by the Funds are subject to special tax rules
of the Code that may, among other things, (a) affect the character of gains and
losses realized, (b) disallow, suspend or otherwise limit the allowance of
certain losses or deductions, and (c) accelerate the recognition of income
without a corresponding receipt of cash (with which to make the necessary
distributions to satisfy distribution requirements applicable to RICs).
Operation of these rules could, therefore, affect the character, amount and
timing of distributions to shareholders. Special tax rules also may require a
Fund to mark to market certain types of positions in its portfolio (i.e., treat
them as sold on the last day of the taxable year), and may result in the
recognition of income without a corresponding receipt of cash. Funds engaging
in transactions affected by these provisions intend to monitor their
transactions, make appropriate tax



                                     II-73



elections and make appropriate entries in their books and records to lessen the
effect of these tax rules and avoid any possible disqualification for the special
treatment afforded RICs under the Code.

PASSIVE FOREIGN INVESTMENT COMPANIES

If a Fund purchases shares of an investment company (or similar investment
entity) organized under foreign law, the Fund will generally be treated as
owning shares in a passive foreign investment company ("PFIC") for U.S. Federal
income tax purposes. A Fund may be subject to U.S. Federal income tax, and an
interest charge (at the rate applicable to tax underpayments) on tax liability
treated as having been deferred with respect to certain distributions from such
a company and on gain from the disposition of the shares of such a company
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its shareholders. However,
a Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, a Fund would recognize
as ordinary income any increase in the value of such shares as of the close of
the taxable year over their adjusted tax basis and as ordinary loss any
decrease in such value but only to the extent of previously recognized
"mark-to-market" gains. By making the mark-to-market election, a Fund could
avoid imposition of the interest charge with respect to excess distributions
from PFICs, but in any particular year might be required to recognize income in
excess of the distributions it received from PFICs.


Municipal Funds

Each Municipal Fund intends to qualify 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 a 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 I shareholders (together the "shareholders"). Exempt-interest dividends
are dividends or any part thereof paid by a Fund that are attributable to
interest on tax-exempt obligations and designated by the Fund 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. A Fund will allocate
interest from tax-exempt obligations (as well as ordinary income, capital gains
and tax preference items discussed below) among the Class A, Class B, Class C
and Class I shareholders according to a method (which it believes is consistent
with the Commission rule permitting the issuance and sale of multiple classes
of shares) that is based upon the gross income that is allocable to the Class
A, Class B, Class C and Class I shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe.


Exempt-interest dividends will be excludable from a shareholder's gross income
for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Shareholders are advised to consult their tax
advisers with respect to whether exempt-interest dividends retain the exclusion
under Code Section 103(a) if a shareholder would be treated as a "substantial
user" or "related person" under Code Section 147(a) with respect to property
financed with the proceeds of an issue of PABs, if any, held by a Fund.


All or a portion of a Fund's gains from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of a Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Any loss upon the sale or exchange of Fund shares held for six months or less
will be disallowed to


                                     II-74


the extent of any exempt-interest dividends received by the shareholder. In addition,
any such loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain dividends received by the
shareholder.


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

Each Municipal Fund may engage in interest rate swaps. The Federal income tax
rules governing the taxation of interest rate swaps are not entirely clear and
may require a Fund to treat payments received under such arrangements as
ordinary income and to amortize payments made under certain circumstances.
Because payments received by a Fund in connection with swap transactions will
be taxable rather than tax-exempt, they may result in increased taxable
distributions to shareholders.

Please see Part I of your Fund's Statement of Additional Information for
certain state tax information relevant to an investment in California Insured,
Florida Municipal Bond, New Jersey Municipal Bond, New York Municipal Bond and
Pennsylvania Municipal Bond, as well as information on economic conditions
within each applicable state.



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

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

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

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

In the case of a Feeder Fund, such Fund is entitled to look to the underlying
assets of the Master Portfolio in which it has invested for purposes of
satisfying various qualification requirements of the Code applicable to RICs.
Each Master Portfolio is classified as a partnership for U.S. Federal income
tax purposes. If applicable tax provisions were to change, then the Board of a
Feeder Fund will determine, in its discretion, the appropriate course of action
for the Feeder Fund. One possible course of action would be to withdraw the
Feeder Fund's investments from the Master Portfolio and to retain an investment
manager to manage the Feeder Fund's assets in accordance with the investment
policies applicable to the Feeder Fund.




                                     II-75


PERFORMANCE DATA

From time to time a Fund may include its average annual total return and other
total return data, and if applicable, yield and tax-equivalent yield in
advertisements or information furnished to present or prospective shareholders.
Total return, yield and tax-equivalent yield each is based on a Fund's
historical performance and is not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C, Class I and Class R shares in accordance with a formula specified by
the Commission.

Quotations of average annual total return, before tax, 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 before taxes is computed assuming
all dividends 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 I shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares but does not take into account taxes payable on
dividends or on redemption.


Quotations of average annual total return, after taxes, on dividends for the
specified periods are computed by finding the average annual compounded rates
of return that would equate the initial amount invested to the ending value of
such investment at the end of each period assuming payment of taxes on
dividends received during such period. Average annual total return after taxes
on dividends is computed assuming all dividends, less the taxes due on such
dividends, 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 I shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares. The taxes due on dividends are calculated by
applying to each dividend the highest applicable marginal Federal individual
income tax rates in effect on the reinvestment date for that dividend. The
rates used correspond to the tax character of each dividend. The taxable amount
and tax character of each dividend are specified by each Fund on the dividend
declaration date, but may be adjusted to reflect subsequent recharacterizations
of distributions. The applicable tax rates may vary over the measurement period.
The effects of state and local taxes are not reflected. Applicable tax credits,
such as foreign credits, are taken into account according to Federal law. The
ending value is determined assuming complete redemption at the end of the
applicable periods with no tax consequences associated with such redemption.



Quotations of average annual total return, after taxes, on both dividends and
redemption for the specified periods are computed by finding the average annual
compounded rates of return that would equate the initial amount invested to the
ending value of such investment at the end of each period assuming payment of
taxes on dividends received during such period as well as on complete
redemption. Average annual total return after taxes on distributions and
redemption is computed assuming all dividends, less the taxes due on such
dividends, 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 I shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares and assuming, for all classes of shares, complete
redemption and payment of taxes due on such redemption. The ending value is
determined assuming complete redemption at the end of the applicable periods,
subtracting capital gains taxes resulting from the redemption and adding the
presumed tax benefit from capital losses resulting from redemption. The taxes
due on dividends and on the deemed redemption are calculated by applying the
highest applicable marginal Federal individual income tax rates in effect on
the reinvestment and/or the redemption date. The rates used correspond to the
tax character of each component of each dividend and/or the redemption payment.
The applicable tax rates may vary over the measurement period. The effects of
state and local taxes are not reflected.



                                     II-76



A 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 investment of $1,000 or some other amount, 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.

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.


See Part I, Section VIII "Fund Performance" of each Fund's Statement of
Additional Information for performance information for the Class A, Class B,
Class C, Class I and, if applicable, Class R shares of your Fund for the
periods indicated.

A Fund's total return will vary depending on market conditions, the securities
comprising a Fund's portfolio, a Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The
value of an investment in a Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.

In order to reflect the reduced sales charges in the case of Class A or Class I
shares or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by a 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 waiver and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.


On occasion, a Fund may compare its performance to, among other things, the
Fund's benchmark index indicated in the Prospectus, the Value Line Composite
Index, the Dow Jones Industrial Average, or to other published indices, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Inc. ("MorningStar"), Money Magazine, U.S. News & World Report, BusinessWeek,
Forbes Magazine, Fortune Magazine or other industry publications. When
comparing its performance to a market index, a Fund may refer to various
statistical measures derived from the historic performance of a Fund and the
index, such as standard deviation and beta. As with other performance data,
performance comparisons should not be considered indicative of a Fund's
relative performance for any future period. In addition, from time to time a
Fund may include the Fund's Morningstar risk-adjusted performance ratings
assigned by Morningstar in advertising or supplemental sales literature. From
time to time a Fund may quote in advertisements or other materials other
applicable measures of Fund performance and may also make reference to awards
that may be given to the Manager. Certain Funds may also compare their
performance to composite indices developed by Fund Management.


A Fund may provide information designed to help investors understand how the
Fund is seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market, political or
other conditions, descriptive information or general principles of investing
such as asset allocation, diversification and risk tolerance, discussion of a
Fund's portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Fund's performance or portfolio composition to
that of other funds or types of investments, indices relevant to the comparison
being made,


                                     II-77


or to a hypothetical or model portfolio. A Fund may also quote
various measures of volatility and benchmark correlation in advertising and
other materials, and may compare these measures to those of other funds or
types of investments.


PROXY VOTING POLICIES AND PROCEDURES


Each Fund's Board of Directors has delegated to the Manager authority to vote
all proxies relating to the Fund's portfolio securities. The Manager has
adopted policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the account of
one or more of its clients, including a Fund. Pursuant to these Proxy Voting
Procedures, the Manager's primary objective when voting proxies is to make
proxy voting decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Manager believes is most likely
to enhance the economic value of the securities held by the Fund. The Proxy
Voting Procedures are designed to ensure that the Manager considers the
interests of its clients, including the Funds, and not the interests of the
Manager, when voting proxies and that real (or perceived) material conflicts
that may arise between the Manager's interest and those of the Manager's
clients are properly addressed and resolved.


In order to implement the Proxy Voting Procedures, the Manager has formed a
Proxy Voting Committee (the "Committee"). The Committee is comprised of the
Manager's Chief Investment Officer (the "CIO"), one or more other senior
investment professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel the CIO deems
appropriate. The Committee will also include two non-voting representatives
from the Manager's legal department appointed by the Manager's General Counsel.
The Committee's membership shall be limited to full-time employees of the
Manager. No person with any investment banking, trading, retail brokerage or
research responsibilities for the Manager's affiliates may serve as a member of
the Committee or participate in its decision making (except to the extent such
person is asked by the Committee to present information to the Committee, on
the same basis as other interested knowledgeable parties not affiliated with
the Manager might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy voting
authority to the Manager and seeks to ensure that all votes are consistent with
the best interests of those clients and are free from unwarranted and
inappropriate influences. The Committee establishes general proxy voting
policies for the Manager and is responsible for determining how those policies
are applied to specific proxy votes, in light of each issuer's unique
structure, management, strategic options and, in certain circumstances,
probable economic and other anticipated consequences of alternate actions. In
so doing, the Committee may determine to vote a particular proxy in a manner
contrary to its generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping requirements
related to proxy voting are fulfilled.

The Committee may determine that the subject matter of a recurring proxy issue
is not suitable for general voting policies and requires a case-by-case
determination. In such cases, the Committee may elect not to adopt a specific
voting policy applicable to that issue. The Manager believes that certain proxy
voting issues require investment analysis -- such as approval of mergers and
other significant corporate transactions -- akin to investment decisions, and
are, therefore, not suitable for general guidelines. The Committee may elect to
adopt a common position for the Manager on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager to make
individual decisions on how best to maximize economic value for a Fund (similar
to normal buy/sell investment decisions made by such portfolio managers). While
it is expected that the Manager will generally seek to vote proxies over which
the Manager exercises voting authority in a uniform manner for all the
Manager's clients, the Committee, in conjunction with a Fund's portfolio
manager, may determine that the Fund's specific circumstances require that its
proxies be voted differently.



                                     II-78


To assist the Manager in voting proxies, the Committee has retained
Institutional Shareholder Services ("ISS"). ISS is an independent adviser that
specializes in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to the Manager by ISS
include in-depth research, voting recommendations (although the Manager is not
obligated to follow such recommendations), vote execution, and recordkeeping.
ISS will also assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.

The Manager's Proxy Voting Procedures also address special circumstances that
can arise in connection with proxy voting. For instance, under the Proxy Voting
Procedures, the Manager generally will not seek to vote proxies related to
portfolio securities that are on loan, although it may do so under certain
circumstances. In addition, the Manager will vote proxies related to securities
of foreign issuers only on a best efforts basis and may elect not to vote at
all in certain countries where the Committee determines that the costs
associated with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such action is
in the best interests of a Fund.

From time to time, the Manager may be required to vote proxies in respect of an
issuer where an affiliate of the Manager (each, an "Affiliate"), or a money
management or other client of the Manager (each, a "Client") is involved. The
Proxy Voting Procedures and the Manager's adherence to those procedures are
designed to address such conflicts of interest. The Committee intends to
strictly adhere to the Proxy Voting Procedures in all proxy matters, including
matters involving Affiliates and Clients. If, however, an issue representing a
non-routine matter that is material to an Affiliate or a widely known Client is
involved such that the Committee does not reasonably believe it is able to
follow its guidelines (or if the particular proxy matter is not addressed by
the guidelines) and vote impartially, the Committee may, in its discretion for
the purposes of ensuring that an independent determination is reached, retain
an independent fiduciary to advise the Committee on how to vote or to cast
votes on behalf of the Manager's clients.

In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the powers of the Committee shall pass to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do not
include contact with the Client and whose job evaluations would not be affected
by the Manager's relationship with the Client (or failure to retain such
relationship). The subcommittee shall determine whether and how to vote all
proxies on behalf of the Manager's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the applicable portfolio
managers, provided that, if the subcommittee determines to alter the Manager's
normal voting guidelines or, on matters where the Manager's policy is
case-by-case, does not follow the voting recommendation of any proxy voting
service or other independent fiduciary that may be retained to provide research
or advice to the Manager on that matter, no proxies relating to the Client may
be voted unless the Secretary, or in the Secretary's absence, the Assistant
Secretary of the Committee concurs that the subcommittee's determination is
consistent with the Manager's fiduciary duties.

In addition to the general principles outlined above, the Manager has adopted
voting guidelines with respect to certain recurring proxy issues that are not
expected to involve unusual circumstances. These policies are guidelines only,
and the Manager may elect to vote differently from the recommendation set forth
in a voting guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any time upon
the request of a Committee member and may be amended or deleted upon the vote
of a majority of Committee members present at a Committee meeting at which
there is a quorum.


                                     II-79


The Manager has adopted specific voting guidelines with respect to the
following proxy issues:

      o  Proposals related to the composition of the Board of Directors of
         issuers other than investment companies. As a general matter, the
         Committee believes that a company's Board of Directors (rather than
         shareholders) is most likely to have access to important, nonpublic
         information regarding a company's business and prospects, and is
         therefore best-positioned to set corporate policy and oversee
         management. The Committee, therefore, believes that the foundation of
         good corporate governance is the election of qualified, independent
         corporate directors who are likely to diligently represent the
         interests of shareholders and oversee management of the corporation in
         a manner that will seek to maximize shareholder value over time. In
         individual cases, the Committee may look at a nominee's history of
         representing shareholder interests as a director of other companies or
         other factors, to the extent the Committee deems relevant.

      o  Proposals related to the selection of an issuer's independent auditors.
         As a general matter, the Committee believes that corporate auditors
         have a responsibility to represent the interests of shareholders and
         provide an independent view on the propriety of financial reporting
         decisions of corporate management. While the Committee will generally
         defer to a corporation's choice of auditor, in individual cases, the
         Committee may look at an auditors' history of representing shareholder
         interests as auditor of other companies, to the extent the Committee
         deems relevant.

      o  Proposals related to management compensation and employee benefits. As
         a general matter, the Committee favors disclosure of an issuer's
         compensation and benefit policies and opposes excessive compensation,
         but believes that compensation matters are normally best determined by
         an issuer's board of directors, rather than shareholders. Proposals to
         "micro-manage" an issuer's compensation practices or to set arbitrary
         restrictions on compensation or benefits will, therefore, generally not
         be supported.

      o  Proposals related to requests, principally from management, for
         approval of amendments that would alter an issuer's capital structure.
         As a general matter, the Committee will support
         requests that enhance the rights of common shareholders and oppose
         requests that appear to be unreasonably dilutive.

      o  Proposals related to requests for approval of amendments to an issuer's
         charter or by-laws. As a general matter, the Committee opposes poison
         pill provisions.

      o  Routine proposals related to requests regarding the formalities of
         corporate meetings.


      o  Proposals related to proxy issues associated solely with holdings of
         investment company shares. As with other types of companies, the
         Committee believes that a fund's Board of Directors (rather than its
         shareholders) is best positioned to set fund policy and oversee
         management. However, the Committee opposes granting Boards of Directors
         authority over certain matters, such as changes to a fund's investment
         objective, which the Investment Company Act envisions will be approved
         directly by shareholders.


      o  Proposals related to limiting corporate conduct in some manner that
         relates to the shareholder's environmental or social concerns. The
         Committee generally believes that annual shareholder meetings are
         inappropriate forums for discussion of larger social issues, and
         opposes shareholder resolutions "micromanaging" corporate conduct or
         requesting release of information that would not help a shareholder
         evaluate an investment in the corporation as an economic matter. While
         the Committee is generally supportive of proposals to require corporate
         disclosure of matters that seem relevant and material to the economic
         interests of shareholders, the Committee is generally not supportive of
         proposals to require disclosure of corporate matters for other
         purposes.


Information about how a Fund voted proxies relating to securities held in the
Fund's portfolio during the most recent 12 month period ended June 30 is
available without charge (1) at www.mutualfunds.ml.com and (2) on the
Commission's web site at http://www.sec.gov.



                                     II-80


GENERAL INFORMATION

DESCRIPTION OF SHARES


Shareholders of a Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and
generally on other matters submitted to the vote of shareholders of the Fund.
Shareholders of a class that bears distribution and/or account maintenance
expenses have exclusive voting rights with respect to matters relating to such
distribution and account maintenance expenditures (except that Class B
shareholders may vote upon any material changes to such expenses charged under
the Class A Distribution Plan). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the Directors of a Fund, in which event the
holders of the remaining shares would be unable to elect any person as a
Director.

Each Fund does not intend to hold annual meetings of shareholders in any year
in which the Investment Company Act does not require shareholders to act upon
any of the following matters: (i) election of Directors; (ii) approval of a
management agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent accountants. Shares issued are fully
paid and non-assessable and have no preemptive rights. Redemption and
conversion rights are discussed elsewhere herein and in each Fund's Prospectus.
Each share of Class A, Class B, Class C, Class I and Class R Common Stock is
entitled to participate equally in dividends and distributions declared by a
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities.


For Funds organized as Maryland corporations, the by-laws of the Fund require
that a special meeting of shareholders be held upon the written request of a
minimum percentage of the outstanding shares of the Fund entitled to vote at
such meeting, if they comply with applicable Maryland law.


Certain Funds are organized as Delaware statutory trusts.



See Part I, Section IX "Additional Information -- Description of Shares" of
each Fund's Statement of Additional Information for additional capital stock
information for your Fund.


ADDITIONAL INFORMATION


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


See Part I, Section IX "Additional Information -- Principal Shareholders"
section of each Fund's Statement of Additional Information for information on
the holders of 5% or more of any class of shares of your Fund.



                                     II-81


                                   APPENDIX A

                          DESCRIPTION OF BOND RATINGS


DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") 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 payments and principal security
        appear adequate for the present, but certain protective elements may be lacking or
        may be characteristically unreliable over any great length of time. Such bonds lack
        outstanding investment characteristics and in fact have speculative characteristics as
        well.

Ba      Bonds which are rated Ba are judged to have speculative elements; their future cannot
        be considered as well assured. Often the protection of interest 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: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.


DESCRIPTION OF MOODY'S U.S. SHORT-TERM RATINGS




MIG 1/VMIG 1     This designation denotes superior credit quality. Excellent protection is afforded by
                 established cash flows, highly reliable liquidity support, or demonstrated broad-based
                 access to the market for refinancing.


                                      A-1





MIG 2/VMIG 2     This designation denotes strong credit quality. Margins of protection are ample,
                 although not as large as in the preceding group.

MIG 3/VMIG 3     This designation denotes acceptable credit quality. Liquidity and cash-flow protection
                 may be narrow, and market access for refinancing is likely to be less well-established.

SG               This designation denotes speculative-grade credit quality. Debt instruments in this
                 category may lack sufficient margins of protection.



DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS /DEMAND OBLIGATION 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 supporting institutions) have a superior ability for
repayment of short term promissory obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization 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 supporting institutions) have a strong ability for
repayment of short term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.

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


Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.



DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
                                 ("STANDARD &

POOR'S"), DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.

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

The issue credit ratings are based on current information furnished by the
obligors 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 based on other circumstances.

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

I. Likelihood of payment - 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;


                                      A-2


II. Nature of and provisions of the obligation;

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

LONG TERM ISSUE CREDIT RATINGS




AAA                 An obligation rated "AAA" has the highest rating assigned by Standard & Poor's.
                    Capacity to meet its financial commitment on the obligation is extremely strong.

AA                  An obligation rated "AA" differs from the highest rated issues only in small degree.
                    The Obligor's capacity to meet its financial commitment on the obligation is very
                    strong.

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

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

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

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

c                   The 'c' subscript is used to provide additional information to investors that the bank
                    may terminate its obligation to purchase tendered bonds if the long term credit rating
                    of the issuer is below an investment-grade level and/or the issuer's bonds are deemed
                    taxable.

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

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

r                   This symbol is attached to the ratings of instruments with significant noncredit risks.
                    It highlights risks to principal or volatility of expected returns which are not
                    addressed in the credit rating.

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


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 COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment

                                      A-3


of debt having an original maturity of no more than 365 days. Ratings are
graded into several categories, ranging from "A-1" for the highest-quality
obligations to "D" for the lowest. These categories are as follows:





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

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

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

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

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

D       A short-term obligation rated "D" is in payment default. The "D" rating category is
        used when 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 will also be
        used upon the filing of a bankruptcy petition or the taking of a similar action if
        payments on an obligation are jeopardized.

c       The "c" subscript is used to provide additional information to investors that the bank
        may terminate its obligation to purchase tendered bonds if the long term credit rating
        of the issuer is below an investment-grade level and/or the issuer's bonds are deemed
        taxable.

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

*       Continuance of the ratings is contingent upon Standard & Poor's receipt of an
        executed copy of the escrow agreement or closing.

r       The "r" highlights derivative, hybrid, and certain other obligations that Standard &
        Poor's believes may experience high volatility or high variability in expected returns as
        a result of noncredit risks. Examples of such obligations are securities with principal
        or interest return indexed to equities, commodities, or currencies; certain swaps and
        options, and interest-only and principal-only mortgage securities. The absence of an
        "r" symbol should not be taken as an indication that an obligation will exhibit no
        volatility or variability in total return.



                                      A-4


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 or 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 factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long term debt rating. The following criteria will be used in making
that assessment.


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


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


Note rating symbols are as follows:




SP-1     Strong capacity to pay principal and interest. An issue determined to possess a very
         strong capacity to pay debt service is given a plus (+) designation.

SP-2     Satisfactory capacity to pay principal and interest with some vulnerability to adverse
         financial and economic changes over the term of the notes.

SP-3     Speculative capacity to pay principal and interest.


DESCRIPTION OF FITCH RATINGS' ("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 rating represents
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 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 guarantees unless otherwise indicated.


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


Fitch 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 other reasons.




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


                                      A-5





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.

DESCRIPTION OF FITCH'S 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 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 that, 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.

D, DD, DDD     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.


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 "DDD," "DD," or "D" categories.


                                      A-6


DESCRIPTION OF FITCH'S SHORT TERM RATINGS
Fitch's short term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and investment notes.


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


Fitch short term ratings are as follows:




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

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

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

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

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

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

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

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.

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.


Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.




                                      A-7




                                   APPENDIX B

                    ECONOMIC AND OTHER CONDITIONS IN NEW YORK

The following information is a brief summary of factors affecting the economy of
New York City (the "City") or New York State (the "State" or "New York") and
does not purport to be a complete description of such factors. Other factors
will affect issuers. The summary is based primarily upon the most recent
publicly available offering statements relating to debt offerings of state and
local issuers and other financial and demographic information, and it does not
reflect recent developments since the dates of such offering statements and
other information. The Fund has not independently verified this information.

The State, some of its agencies, instrumentalities and public authorities and
certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York municipal bonds in which the Fund invests.

NEW YORK CITY

General. More than any other municipality, the fiscal health of the City has a
significant effect on the fiscal health of the State.

The Mayor is responsible for preparing the City's financial plan which relates
to the City and certain entities that receive funds from the City, including the
financial plan for the 2005 through 2008 fiscal years submitted to the New York
State Financial Control Board (the "Control Board") on June 29, 2004 (the "June
Financial Plan") and Modification No. 05-1 to the June Financial Plan submitted
to the Control Board on October 21, 2004 (together, the "2005-2008 Financial
Plan," "Financial Plan" or "City Financial Plan"). The City's projections set
forth in the City Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize.

For each of the 1981 through 2004 fiscal years, the City's General Fund had an
operating surplus, before discretionary and other transfers, and achieved
balanced operating results as reported in accordance with then applicable
generally accepted accounting principles ("GAAP"), after discretionary and other
transfers. For the 2004 fiscal year, the City's General Fund had an operating
surplus of $1.928 billion, before discretionary and other transfers. General
Fund total revenues for the 2004 fiscal year were approximately $47.29 billion.
The City has been required to close substantial gaps between forecast revenues
and forecast expenditures in order to maintain balanced operating results. There
can be no assurance that the City will continue to maintain balanced operating
results as required by State law without proposed tax or other revenue increases
or reductions in City services or entitlement programs, which could adversely
affect the City's economic base.

As required by law, the City prepares a four-year annual financial plan, which
is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's current Financial Plan
projects budget balance in the 2005 fiscal year and budget gaps for each of the
2006 through 2008 fiscal years. A pattern of current year balance and projected
subsequent year budget gaps has been consistent through the entire period since
1982, during which the City has achieved an excess of revenues over
expenditures, before discretionary transfers, for each fiscal year.

World Trade Center Attack. On September 11, 2001, two hijacked passenger
jetliners flew into the World Trade Center, resulting in a substantial loss of
life, destruction of the World Trade Center and damage to other buildings in the
vicinity. Trading on the major New York stock exchanges was suspended until
September 17, 2001, and business in the financial district was interrupted.

Recovery, clean up and repair efforts have resulted in substantial expenditures.
The City has been largely reimbursed by the federal government for all of its
direct costs for response and remediation of the World Trade Center site. In
addition, the State authorized the New York City Transitional Finance Authority

                                       B-1


("TFA") to have outstanding $2.5 billion of bonds ("Recovery Bonds") and notes
("Recovery Notes") to pay costs related to or arising from the September 11
attack ("Recovery Costs"), of which the TFA currently has outstanding
approximately $2 billion. It is not possible to quantify at present with any
certainty the long-term impact of the September 11 attack on the City and its
economy.

City's Financing Program. Implementation of the Financial Plan is dependent upon
the City's ability to market its securities successfully. Implementation of the
Financial Plan is also dependent upon the ability to market the securities of
other financing entities, including the New York City Municipal Water Finance
Authority (the "Water Authority") which issues debt secured by water and sewer
revenues. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The success of projected
public sales of City, Water Authority and other bonds and notes will be subject
to prevailing market conditions. Future developments concerning the City and
public discussion of such developments, as well as prevailing market conditions,
may affect the market for outstanding City general obligation bonds and notes.

2005-2008 Financial Plan. For the 2004 fiscal year, the City's General Fund had
an operating surplus of $1.928 billion, before discretionary and other
transfers, and achieved balanced operating results in accordance with GAAP,
after discretionary and other transfers. The 2004 fiscal year is the
twenty-fourth consecutive year that the City has achieved an excess of revenues
over expenditures, before discretionary and other transfers, and balanced
operating results, after discretionary and other transfers.

The City's expense and capital budgets for the 2005 fiscal year were adopted on
June 25, 2004. The June Financial Plan, which was consistent with the City's
expense and capital budgets for the 2005 fiscal year, projected revenues and
expenditures for the 2005 fiscal year balanced in accordance with GAAP, and
projected gaps of $3.7 billion, $4.5 billion and $3.7 billion for fiscal years
2006, 2007 and 2008, respectively.

On October 21, 2004, the City submitted to the Control Board a modification to
the June Financial Plan. The Financial Plan projects revenues and expenditures
for the 2005 fiscal year balanced in accordance with GAAP, and projects gaps of
$3.0 billion, $4.2 billion and $3.3 billion in fiscal years 2006 through 2008,
respectively. The Financial Plan includes an out-year gap-closing program to
reduce expenditures and increase revenues by a total of $3.0 billion in fiscal
years 2005 and 2006, and $1.9 billion and $1.7 billion in fiscal years 2007 and
2008, respectively.

Changes in projected revenues since the June Financial Plan include: (i)
increases in projected tax revenues of $577 million, $589 million, $544 million
and $524 million in fiscal years 2005 through 2008, respectively, resulting
primarily from increases in real property transaction and property tax revenues,
and increases in baseline projections of non-property taxes as a result of
strong fiscal year 2004 collections, partially offset by decreases in personal
income, business income and sales taxes as a result of lower forecast securities
industry profits in calendar year 2004; (ii) increases in non-tax revenues of
$33 million in fiscal year 2005, reflecting primarily increased investment
earnings; and (iii) reductions in anticipated State assistance of $201 million,
$196 million, $94 million and $77 million in fiscal years 2005 through 2008.
Changes in projected expenditures since the June Financial Plan, include: (i)
increased energy costs of $40 million in fiscal year 2005 and $65 million in
each of fiscal years 2006 through 2008; (ii) increases in education spending of
$87 million in fiscal year 2005; and (iii) decreases in debt service costs of
$72 million and $27 million in fiscal years 2005 and 2006, respectively, and
increases in debt service costs of $39 million and $48 million in fiscal years
2007 and 2008, respectively.

The Financial Plan also reflects legislation enacted by the State Legislature
pursuant to which the Local Government Assistance Corporation ("LGAC") is to
make available to the City or its assignee $170 million annually until 2034. The
City has assigned the $170 million annual payment to the Sales Tax Asset
Receivable Corporation ("STAR Corp."), a local development corporation created
to issue bonds to finance the cost of debt service on bonds of the Municipal
Assistance Corporation for The City of New

                                       B-2


York ("MAC") otherwise payable from City sales tax revenues. On September 22,
2004 the first $170 million annual payment was received by STAR Corp. which
completed its financing on November 4, 2004. The proceeds of the STAR Corp.
financing were used to provide MAC with an amount sufficient to defease its
outstanding debt and to provide the City with $631 million, which represents the
amount of MAC debt service for fiscal year 2004 and a portion of MAC debt
service for fiscal year 2005. The economic impact on the City's budget of the
STAR Corp. financing is to make available to the City approximately $1.0 billion
in fiscal year 2005 and $500 million annually in fiscal years 2006 through 2008
by



eliminating future retention of City revenues by MAC for its debt service and
reimbursing the City for revenues already retained in the 2004 and 2005 fiscal
years.

The Financial Plan makes provision for wage increases for all City employees for
the 2002 through 2005 round of bargaining consistent with the settlement with
District Council 37 of the American Federation of State, County and Municipal
Employees ("DC 37").

Assumptions. The Financial Plan is based on numerous assumptions, including the
condition of the City's and the region's economies and the concomitant receipt
of economically sensitive tax revenues in the amounts projected. The Financial
Plan is subject to various other uncertainties and contingencies relating to,
among other factors, the effects on the City economy of the September 11 attack,
the extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 2005 through 2008 fiscal years; realization of
projected interest earnings for pension fund assets and current assumptions with
respect to wages for City employees affecting the City's required pension fund
contributions; the willingness and ability of the State to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City; the ability of HHC and other such entities to maintain balanced
budgets; the willingness of the federal government to provide the amount of
federal aid contemplated in the Financial Plan; the impact on City revenues and
expenditures of federal and State welfare reform and any future legislation
affecting Medicare or other entitlement programs; adoption of the City's budgets
by the City Council in substantially the forms submitted by the Mayor; the
ability of the City to implement cost reduction initiatives, and the success
with which the City controls expenditures; the impact of conditions in the real
estate market on real estate tax revenues; and the ability of the City and other
financing entities to market their securities successfully in the public credit
markets. (See "Certain Reports" within).

Personal Service Costs. The Financial Plan projects that the authorized number
of City-funded full-time and full-time equivalent employees whose salaries are
paid directly from City funds, as opposed to federal or State funds or water and
sewer funds, will increase slightly from an estimated level of 253,383 on June
30, 2005 to an estimated level of 254,226 by June 30, 2008.

Intergovernmental Aid. For its normal operations, the City depends on aid from
the State both to enable the City to balance its budget and to meet its cash
requirements. There can be no assurance that there will not be delays or
reductions in State aid to the City from amounts currently projected; that State
budgets will be adopted by the April 1 statutory deadline, or interim
appropriations will be enacted; or that any such reductions or delays will not
have adverse effects on the City's cash flow or expenditures. In addition, the
federal budget negotiation process could result in a reduction or a delay in the
receipt of federal grants, which could have adverse effects on the City's cash
flow or revenues.

Certain Reports. From time to time, the Control Board staff, the Office of the
State Deputy Comptroller ("OSDC"), the City Comptroller, the Independent Budget
Office ("IBO") and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the

                                       B-3


City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services. It is
reasonable to expect that reports and statements will continue to be issued and
to engender public comment.

On July 15, 2004, the City Comptroller released a report on the adopted budget
for fiscal year 2005 and the June Financial Plan. The report concluded that the
City has adopted a fiscal year 2005 budget that is likely to end the year in
balance, with reserves available to the City which appear to be sufficient to
offset risks identified by the City Comptroller. However, the report noted that
the subsequent years of the June Financial Plan continue to contain
multi-billion dollar deficits because the City's expenses continue to outpace
the growth of its revenues.

In his report, the City Comptroller identified net risks of $516 million, $524
million, $471 million and $301 million in fiscal years 2005 through 2008,
respectively, which, when added to the gaps in the June Financial Plan, result
in gaps of $516 million, $4.2 billion, $5.0 billion and $4.0 billion in fiscal
years 2005 through 2008, respectively. The risks and possible resources set
forth in the City Comptroller's report include: (i) the possibility that taxes
could be less than projected in the June Financial Plan by $146 million, $190,
million and $137 million in fiscal years 2005 through 2007, respectively, and
greater than projected in the June Financial Plan by $33 million in fiscal year
2008; (ii) possible increased overtime expenditures of $121 million in fiscal
year 2005 and $75 million in each of fiscal years 2006 through 2008; and (iii) a
possible $200 million annual shortfall in State gap-closing assistance assumed
in the June Financial Plan for fiscal years 2005 through 2008, which reflects
shortfalls in assistance in the Governor's Executive Budget and which depends
upon the results of the State budget negotiation process.

In addition to the risks identified in the report, the report noted that the
Chief Actuary intends to recommend several changes in the actuarial methods and
assumptions used in the computation of the City's pension contributions starting
in fiscal year 2005, but that it is too early to assess the financial impact of
these projected changes. With respect to the recent DC 37 labor settlement, the
report noted that the productivity savings in the third year of the contract are
not certain. In addition the report noted that the June Financial Plan assumes
that wage increases for all City employees will be patterned after DC 37
agreement, and that every percentage point over the DC 37 wage increase for
teachers and uniformed employees will cost the City $145 million in fiscal year
2005 and $153 million by fiscal year 2008. With respect to education spending,
the report noted that a key unresolved issue is the preparation of the State's
plan to meet a court order which requires the State to develop a plan by July
30, 2004 to reform its education aid formulas that would provide more equitable
education funding to high needs districts, such as the City. The report stated
that the resolution of this issue will likely lead to a significant increase in
education funding for both the State and the City. In addition, the report noted
that HHC faces projected operating deficits of $394 million in fiscal year 2005
and over $500 million in each of the subsequent years, reflecting HHC's slow
revenue growth and rising cost structure. Finally, with respect to the economy,
the report noted that the risks to the economy continue to be a rise in oil
prices, large trade and budget deficits and the war in Iraq.

On December 8, 2004, the staff of the OSDC issued a report on the Financial
Plan. The report noted that while the Financial Plan projected a net increase in
tax revenues, large budget gaps reopen in the later years of the Financial Plan
because the City continues to have a structural imbalance between revenues and
expenditures, due to expenditures growing at a faster rate than revenues. The
report identified net risks of $140 million, $611 million, $710 million and $653
million for fiscal years 2005 through 2008, respectively, which, when added to
the gaps projected in the Financial Plan, would result in gaps of $140 million,
$3.6 billion, $4.9 billion and $4.0 billion in fiscal years 2005 through 2008,
respectively. The risks to the Financial Plan identified in the report include:
(i) assumed productivity savings totaling $95 million in fiscal year 2005 and
approximately $300 million annually in subsequent fiscal years if the City is
unable to apply the terms of the DC 37 agreement to the unions that represent
teachers and uniformed


                                       B-4


employees; (ii) possible additional Medicaid costs of $130 million in fiscal
year 2006 and $200 million in each of fiscal years 2007 and 2008; (iii) possible
increased spending for uniformed agency overtime of $100 million in each of
fiscal years 2006 through 2008; and (iv) possible increased spending for
education totaling $200 million annually in fiscal years 2005 through 2008,
respectively. The report noted that such risks could be offset by smaller
pension fund contributions of $30 million, $75 million, $135 million and $210
million in fiscal years 2005 through 2008, respectively, due to
higher-than-planned investment earnings in 2004.

In addition, the report noted other risks and potential offsets including the
possibility that the City will be required to reduce by $121 million in fiscal
year 2005, and approximately $60 million annually in fiscal years 2006 through
2008, respectively, the projected TSRs with respect to outstanding TSASC bonds
that would otherwise accrue to the City's budget and the payment of future wage
increases without productivity savings at the projected inflation rate resulting
in potential costs of $220 million, $700 million and $1.2 billion in fiscal
years 2006 through 2008, respectively. The report identified offsets of $250
million in fiscal year 2005 from savings from prior years' expenses and $300
million in each of fiscal years 2005 through 2008 from the City's general
reserve.

The report further noted the existence of a number of issues that could have a
significant impact on the City during the Financial Plan period, including the
possible need for additional education spending to comply with the need to
address the Court of Appeals ruling that the current State education
distribution formula provides insufficient funding to the City, the possibility
of larger wage increases for teachers and uniformed City employees in current
negotiations than projected in the Financial Plan and the impact of financial
difficulties at HHC and MTA. With respect to the possible need for additional
education spending, the report noted that a panel appointed by the trial court
hearing a challenge to the State education distribution formula had recommended
that the State implement a funding plan that would phase in over a four-year
period beginning next year an increase of $5.6 billion for City schools as well
as provide for an additional $9.2 billion over a five year period for capital
projects for City schools. The panel stated that the State legislature should
determine how these additional costs are split between the State and the City
but that the burden placed on the City cannot be arbitrary or unreasonable. In a
previous report, OSDC stated that there was a risk that the City could be
required to increase its funding for education but that the amount at risk could
not be quantified. The report also expressed concern that rising interest rates,
large federal deficits and other factors, including the impact of international
events, could effect the strength of the City's economy.

The report noted that these risks should not interfere with the City's ability
to maintain budget balance during fiscal year 2005 because of the availability
of reserves and other resources.

On July 12, 2004, the staff of the Control Board issued a report reviewing the
June Financial Plan. In its report, the staff noted that the City has adopted a
fiscal year 2005 budget that is likely to end the year in balance, and that
those risks identified in the report for fiscal year 2005 which materialize
could be offset by available resources, such as the $300 million general reserve
and the write-off of prior year payables. In its report, the staff identified
net risks of $660 million, $478 million, $643 million and $734 million for
fiscal years 2005 through 2008, respectively, which, when combined with the gaps
projected in the June Financial Plan, result in estimated gaps of $660 million,
$4.2 billion, $5.2 billion and $4.4 billion for fiscal years 2005 through 2008,
respectively. These risks include: (i) the assumed receipt of $50 million of
federal aid in fiscal year 2005 and $400 million of State aid in each of fiscal
years 2005 through 2008; (ii) the possibility that overtime could be greater
than expected by $260 million, $253 million, $343 million and $434 million in
fiscal years 2005 through 2008, respectively; and (iii) the proposed sale of
land to the Battery Park City Authority for $150 million in fiscal year 2005.
The report further noted that these risks could be partially offset by greater
than projected non-property tax revenues of $150 million and $100 million in
fiscal years 2005 and 2006, respectively, and by increased miscellaneous
revenues of $50 million in fiscal year 2005, $75 million in fiscal year 2006 and
$100 million in each of fiscal years 2007 and 2008.


                                       B-5


In addition to the risks identified in the report, the report noted that there
are other uncertainties that cannot yet be quantified. The report noted that the
recent labor settlements reached by the City, as well as any anticipated
settlements with the uniformed services and the teacher's union, will have
expired by fiscal year 2006 and that there is no money set aside in the June
Financial Plan for future contracts. In addition, the report noted that the
State has not yet finalized a plan for education resources required by the New
York State Court of Appeals to be implemented by July 30, 2004, which could
impact the City's budget. The report also noted that the City has increased its
capital program to reflect new priorities, which will increase debt service.

Seasonal Financing Requirements. The City since 1981 has fully satisfied its
seasonal financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. To finance its projected cash
flow needs, the City issued $1.5 billion of short term obligations in fiscal
years 2004, 2003 and 2002, and $750 million of short term obligations in fiscal
years 2001 and 2000. The delay in the adoption of the State's budget in certain
past fiscal years has required the City to issue short-term notes in amounts
exceeding those expected early in such fiscal years. The City does not expect
that it will issue any short-term obligations during fiscal year 2005.

Outstanding Indebtedness. As of September 30, 2004 the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$30,783 billion and $1.758 billion of outstanding net long term debt.

Water, Sewer and Waste. The New York City Municipal Water Finance Authority
("Water Authority") is authorized to issue bonds to finance capital investment
in the City's water and sewer system. Pursuant to State law, debt service on
this indebtedness is secured by water and sewer fees paid by users of the water
and sewer system. Such fees are revenues of the Water Board, which holds a lease
interest in the City's water and sewer system. After providing for debt service
on obligations of the Water Authority and certain incidental costs, the revenues
of the Water Board are paid to the City to cover the City's costs of operating
the water and sewer system and as rental for the system. The City's capital
improvement program applicable to the City's water and sewer system covering
fiscal years 2004 through 2013, projects City-funded water and sewer investment
(which is expected to be financed with proceeds of Water Authority debt) at
approximately $16.9 billion. The City's capital commitment plan for fiscal years
2005 through 2008 reflects total anticipated City-funded water and sewer
commitments of $7.8 billion which are expected to be financed with the proceeds
of Water Authority debt.

Since 1993, the United States Environmental Protection Agency ("USEPA") has
issued filtration avoidance determinations ("FADs") pursuant to which the City
is not required to filter water from the Catskill and Delaware Systems. The
current FAD extends until further determination is made, now scheduled for April
2007. The City has estimated that if filtration of the Catskill/Delaware water
supply system is ultimately required, the construction expenditures required
could be between $3 billion and $4 billion.

Litigation. The City is a defendant is a significant number of lawsuits. While
the ultimate outcome and fiscal impact, if any, on the City of the proceedings
and claims are not currently predictable, adverse determinations in certain of
them might have a material adverse effect upon the City's ability to carry out
the City Financial Plan. The City has estimated that its potential future
liability on account of outstanding claims against it as of June 30, 2004
amounted to approximately $4.4 billion.

NEW YORK STATE

The New York Economy. The September 11th terrorist attack had a more devastating
impact on the New York economy than on any other state. However, there is
evidence that the New York economy has emerged from recession and that the
State's current economic expansion, estimated to have begun in August 2003, will
be sustainable. The continued strengthening of the New York economy will help to
sustain the housing market, but not at the pace of growth observed in 2004. With
the pickup in equity market


                                       B-6



activity toward the end of 2004, the profit outlook for the finance industry is
brightening, although the level of profits for the year is not expected to match
that of 2003. Bonus growth is expected to slow to 15 percent resulting in total
New York wage growth of 4.9 percent for 2005, reduced modestly from 5.7 percent
in 2004. State nonagricultural employment is projected to rise 1.1 percent in
2005, a significant improvement compared with 0.4 percent growth for 2004, but
below projected growth of 1.8 percent for the nation.

New York is the third most populous state in the nation and has a relatively
high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's financial activities, information,
education, and health services employment, and a very small share of the
nation's farming and mining activity. The services sector accounts for more than
four of every ten nonagricultural jobs in New York and has a noticeably higher
proportion of total jobs than does the test of the nation. Manufacturing
employment continues to decline in New York, as in most other states, and New
York's economy is less reliant on this sector than in the past. As defined under
NAICS, the trade, transportation and utilities sector accounts for the largest
component of state nonagricultural employment, but only the fourth largest when
measured by income share. New York City is the nation's leading center of
banking and finance and as a result, this is far more important in the State
than in the nation as a whole. Although this sector accounts for under one-tenth
of all nonagricultural jobs in the State, it contributes about one-fifth of
total wages. Farming is an important part of the economy in rural areas,
although it constitutes a very minor part of total State output. Federal, State
and local governments together comprise the second largest sector in terms of
nonagricultural jobs, with the bulk of the employment accounted for by local
governments. The State is likely to be less affected than the nation as a whole
during an economic recession that is concentrated in manufacturing and
construction, but likely to be more affected by any economic downturn that is
concentrated in the services sector.

Economic and Demographic Trends. In the calendar years 1990 through 1998, the
State's rate of economic growth was somewhat slower than that of the nation. In
particular, during the 1990-91 recession and post-recession period, the economy
of the State, and that of the rest of the Northeast, was more heavily damaged
than that of the nation as a whole and had been slower to recover. However, the
situation subsequently improved. In 1999, for the first time in 13 years, the
employment growth rate of the State surpassed the national growth rate, and, in
2000, the rates were essentially the same. In 2001, the September 11th attack
resulted in a slowdown in New York that was more severe than in the nation as a
whole. Although the State unemployment rate was higher than the national rate
from 1991 to 2000, the gap between them has narrowed in recent years.

Recent Events. The State ended its 2003-2004 fiscal year in balance on a cash
basis, with a reported closing balance in the General Fund of $1.1 billion. The
State's current fiscal year began on April 1, 2004 and ends on March 31, 2005.
The State released its Annual Information Statement, dated September 19, 2004
(the "Annual Information Statement") which reflected the Legislative Budget
Agreement for 2004-2005 and subsequent vetoes by the Governor. The State has
released its second quarterly update to its Annual Information Statement, dated
January 25, 2005 (the "January Update"), which reflects the Governor's Executive
Budget for the 2005-2006 fiscal year and other changes to its financial plan
projections. The State Financial Plan, as updated in the January Update,
projects balance on a cash basis for the 2004-2005 fiscal year, with a closing
balance in the General Fund of $1.2 billion.

The net impact of the revenue and spending revisions reduces the projected
budget gaps to $4.2 billion in 2005-2006 and $5.8 billion in 2006-2007. The
Governor's Executive Budget recommends closing the $4.2 billion gap primarily
through (i) $2.8 billion in net initiatives for permanent spending restraint
(including $3.1 billion in cost containment in high-growth programs such as
Medicaid, pensions and debt service, which savings initiatives allow targeted
new investments of $313 million); (ii) $533 million in net revenue actions
(reflecting $779 million of increased resources including a sales tax exemption
on clothing purchases under $250 and elimination of tax loopholes to promote tax
equity, and new tax cuts

                                       B-7


of $246 million to accelerate the phase-out of a temporary 2003 personal income
tax surcharge); and (iii) $856 million in nonrecurring actions, including
commencing recent discretionary funding changes for the State and Local
Retirement System, use of the 2004-2005 surplus, asset sales and fund sweeps.
The State Division of the Budget ("DOB") projects that the recommendations would
produce net recurring savings of roughly $3 billion annually, reducing the
2006-2007 and 2007-2008 budget gaps to about $2.7 billion.

The January Update and the Annual Information Statement identify a number of
risks, costs that could materialize as a result of adverse rulings in pending
litigation; federal disallowances or other federal actions that could produce
adverse effects on the State's projections of receipts and disbursements; and
risks relating to the national and local economies, including increases in
energy prices, national security concerns and financial sector performance.

The Legislature and the State Comptroller will review the Governor's Executive
Budget and are expected to comment on it. There can be no assurance that the
Legislature will enact the Governor's Executive Budget into law, or that the
State's adopted budget projections will not differ materially and adversely from
the projections set forth in the Governor's Executive Budget.

Special Considerations. Many complex political, social, and economic forces
influence the State's economy and finances, which may in turn affect the State
Financial Plan. These forces may affect the State unpredictably from fiscal year
to fiscal year and are influenced by governments, institutions, and events that
are not subject to the State's control. The Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and State economies. The DOB has stated that its belief that its
current receipts and spending estimates related to the performance of the State
and national economies are reasonable. However, there can be no assurance that
actual results will not differ materially and adversely from the current
forecast.

The State projects that balances in its principal reserves to guard against
unbudgeted risks will total $885 million in 2005-2006. The reserves include $864
million in the Tax Stabilization Reserve Fund after a maximum deposit of $70
million in 2004-2005, and $21 million in the Contingency Reserve Fund for
litigation. To permanently improve the State's reserve levels, the Governor
again will submit legislation in 2005-2006 to increase the maximum size of the
State's rainy day fund from 2 percent to 5 percent of General Fund spending.
Absent enactment of this legislation, the General Fund has reached its statutory
maximum balance of 2 percent with the 2004-2005 annual deposit.

The DOB can provide no assurance that the Legislature will adopt a budget for
2005-2006, before the fiscal year begins on April 1, 2005. Furthermore, DOB can
provide no assurance that, when the Legislature does enact a budget, it will not
differ materially and adversely from the 2005-2006 Executive Budget Financial
Plan projections set forth by the Governor on January 18, 2005.

The State Comptroller is the administrative head of the New York State and Local
Retirement Systems (the "Systems"), and Trustee of the assets of those Systems.
If the proposed pension legislation to authorize the Comptroller to delay the
impact of the actuarial funding changes described above (which the Governor's
Executive Budget relies on to provide $321 million in savings in the 2005-2006
fiscal year) are authorized by the State Legislature, the changes would have to
be reviewed and approved by the State Comptroller to ensure that such changes
(i) do not violate the State Constitution and (ii) are consistent with his
fiduciary responsibilities to System members and beneficiaries. If the
Comptroller does not implement the changes, the proposed appropriation for the
State's pension contribution would be insufficient to cover its pension
obligation for the 2005-2006 fiscal year.

In addition, the State is a defendant in several court cases that could
ultimately result in costs to the State Financial Plan. The most significant is
the Campaign for Fiscal Equity v. State of New York, in which

                                       B-8


the New York State Court of Appeals held that, with respect to education in New
York City, the State was not in compliance with a State constitutional mandate
requiring the provision of a sound basic education to children. The court
directed that by July 30, 2004, the State must have determined the actual cost
of providing a sound basic education in the City and enacted appropriate
reforms. The State did not implement a compliance plan by the deadline, and on
August 3, 2004 the State Supreme Court issued an order appointing a three member
panel to report on the measures taken by the State to bring the State's funding
mechanism into Constitutional compliance and to identify the areas, if any, in
which such compliance is lacking. The panel's report was released on November
30, 2004. It recommends additional operational funding of $5.63 billion per year
for education in the City, phased in over four years beginning with $1.41
billion in fiscal year 2006, and additional spending on capital improvements for
education in the City, over five years, of $9.179 billion. The report recommends
that, in the first instance, the State legislature should allocate the
responsibility for providing such funds between the State and the City. The
State Supreme Court has not yet acted in response to the report. The City has
maintained that the State is responsible for providing all required incremental
education funding but the State has proposed that the City cover a substantial
portion of such funding.

The Governor's Executive Budget proposes a combination of traditional school aid
and a new Sound Basic Education ("SBE") aid program as part of a comprehensive
five-year plan to comply with the Court's order. The Governor's Executive Budget
recommends a $526 million school aid increase for the 2005-2006 school year
comprised of $201 million in traditional school aid and $325 million in the new
SBE aid program. Funding for statewide SBE grants to school districts is
projected to grow to over $2 billion annually by 2009-2010, financed with
revenues generated from existing and future video lottery terminals ("VLTs").
New York City would receive approximately 60 percent of the annual SBE aid.
Eight VLT facilities are authorized under the current law, but two major
facilities located at Yonkers and Aqueduct Raceways have not yet begun
operations. These two facilities are expected to produce the majority of the
growth of VLT receipts.

The federal government is currently auditing Medicaid claims submitted since
1993 under the school supportive health services program. At this point, these
audits have not been finalized, and, as a result, the liability of the State and
school districts for any disallowances cannot be determined. Federal regulations
include an appeals process that could postpone repayment of any disallowances.
The current Financial Plan assumes the Federal government will fully reimburse
these costs.

In addition, a portion of Federal Medicaid payments related to School Supportive
Health Services have been deferred by the Federal Centers for Medicare and
Medicaid Services pending finalization of audits. Since the State has continued
to reimburse local school districts for these costs, these Federal deferrals, if
not resolved, could negatively impact the Financial Plan. Alternatively, if the
State suspends reimbursement, local governments could be adversely affected.

Prior Fiscal Years.

The DOB reported a 2003-2004 General Fund surplus of $308 million. Total
receipts, including transfers from other funds, were $42.3 billion.
Disbursements, including transfers to other funds, totaled $42.1 billion.

The General Fund ended the 2003-2004 fiscal year with a balance of $1.1 billion,
which included dedicated balances of $794 million in the Tax Stabilization
Reserve Fund ("TSRF") (after an $84 million deposit at the close of 2003-2004),
$21 million in the Contingency Reserve Fund ("CRF") and $262 million in the
Community Projects Fund ("CPF"), which pays primarily for legislative "member
items." The closing fund balance excludes $1.2 billion on deposit in the refund
reserve account at the end of the 2003-2004 fiscal year.

The State ended the 2002-2003 fiscal year with available General Fund cash
resources of $1.01 billion. The General Fund cash balance at year-end totaled
$815 million and the refund reserve account had


                                       B-9


$200 million in resources not budgeted for other purposes. The General Fund
balance was comprised of $710 million in the TSRF, $20 million in the CRF to pay
costs related to litigation against the State, and $85 million in the CPF. The
closing balance excluded $627 million on deposit in the refund reserve account
at the end of the 2002-2003 fiscal year. The refund reserve account is used to
pay for tax refunds across fiscal years and to help accomplish other Financial
Plan objectives, including the movement of resources from one year to the next.
Changes to the refund reserve affect the level of reported personal income tax
receipts.

General Fund receipts and transfers from other funds totaled $37.4 billion in
2002-2003, a decrease of $2.3 billion from the forecast set forth in the revised
2002-2003 Financial Plan dated February 28, 2003 (the "February Financial
Plan"). The February Financial Plan had counted on $1.9 billion in revenues from
the tobacco settlement sale. General Fund disbursements and transfers to other
funds totaled $37.6 billion, a decrease of $2.2 billion from the February
Financial Plan. The substantial decline resulted from the deferral of $1.9
billion in payments originally scheduled for 2002-2003 and $253 million in
one-time savings. After adjusting for the payment deferrals, General Fund
disbursements would have totaled $39.5 billion in 2002-2003 (a decrease of $1.7
billion or 4 percent from 2001-2002 results).

The State ended its 2001-2002 fiscal year on March 31, 2002 in balance on a cash
basis. There was no General Fund surplus reported by DOB. After year-end
adjustments related to the refund reserve account, the closing balance in the
General Fund was $1.03 billion, a decrease of $67 million from the 2000-2001
fiscal year. Of this balance, $710 million was held in the TSRF (after a deposit
of $83 million in fiscal year 2001-2002), $157 million in the CRF, $159 million
in the CPF, and $5 million in the Universal Pre-kindergarten Fund. The closing
fund balance excludes $1.68 billion on deposit in the refund reserve account at
the end of the 2001-2002 fiscal year. General Fund receipts, including transfers
from other funds, totaled $41.14 billion for the 2001-2002 fiscal year, an
increase of $1.26 billion (3.3 percent) over fiscal year 2000-2001 results.
General Fund disbursements, including transfers to other funds, totaled $41.22
billion for the 2001-2002 fiscal year, an increase of $1.52 billion (3.8
percent) from the 2000-2001 fiscal year.

State Retirement Systems. The New York State and Local Retirement Systems (the
"Systems") provide coverage for public employees of the State and its localities
(except employees of New York City and teachers, who are covered by separate
plans). The Systems comprise the New York State and Local Employees Retirement
System and the New York State and Local Police and Fire Retirement System. The
Comptroller is the administrative head of the Systems. State employees made up
about 33 percent of the membership during the 2003-2004 fiscal year. There were
2,835 other public employers participating in the Systems, including all cities
and counties (except New York City), most towns, villages and school districts
(with respect to non-teaching employees) and a large number of local authorities
of the State.

As of March 31, 2004, 641,721 persons were members and 328,355 pensioners or
beneficiaries were receiving benefits. The State Constitution considers
membership in any State pension or retirement system to be a contractual
relationship, the benefits of which shall not be diminished or impaired. Members
cannot be required to begin making contributions or make increased contributions
beyond what was required when membership began.

Assets and Liabilities. Assets are held exclusively for the benefit of members,
pensioners and beneficiaries. Investments for the Systems are made by the
Comptroller as trustee of the Common Retirement Fund, a pooled investment
vehicle. The Office of State Comptroller ("OSC") reports the net assets
available for benefits as of March 31, 2004 were $120.8 billion (including $1.4
billion in receivables), an increase of $23.4 billion or 24.1 percent from the
2002-2003 level of $97.4 billion, reflecting, in large part, equity market
performance. OSC reports that the present value of anticipated benefits for
current members, retirees, and beneficiaries as of April 1, 2003 was $130.5
billion (including $46.1 billion for current retirees and beneficiaries), an
increase of $3.5 billion or 2.8 percent from the April 1, 2002 level of $127
billion.

                                       B-10


The funding method used by the Systems anticipates that the net assets, plus
future actuarially determined contributions, will be sufficient to pay for the
anticipated benefits of current members, retirees and beneficiaries. Actuarially
determined contributions are calculated using actuarial assets and the present
value of anticipated benefits. Actuarial assets differ from net assets in that
they are calculated using a five-year smoothing method for valuing equity
investments and using amortized cost instead of market value for bonds and
mortgages. Actuarial assets decreased from $125.2 billion on April 1, 2002 to
$106.7 billion on April 1, 2003.

Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating the LGAC, a public benefit
corporation empowered to issue long term obligations to fund certain payments to
local governments traditionally funded through the State's annual seasonal
borrowing. The legislation also dedicated revenues equal to the first one
percent of the State sales and use tax to pay debt service on these bonds. As of
June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, completing the program. The impact of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing.

The legislation also imposed a limitation on the annual seasonal borrowing of
the State, except in cases where the Governor and the legislative leaders have
certified the need for additional seasonal borrowing, based on emergency or
extraordinary factors or factors unanticipated at the time of adoption of the
budget, and provided a schedule for eliminating it over time. Any seasonal
borrowing is required by law to be eliminated by the fourth year after the limit
was first exceeded (i.e., no tax and revenue anticipation note seasonal
borrowing in the fifth year). This provision limiting the State's seasonal
borrowing practices was included as a covenant with LGAC's bondholders in the
resolution authorizing such bonds.

The impact of the LGAC reforms, as well as other changes in revenue and spending
patterns, is that the State has been able to meet its cash flow needs throughout
the fiscal year without relying on short term seasonal borrowings.

Legislation enacted in 2003 currently requires LGAC to certify $170 million
annually to provide an incentive for the State to seek an annual appropriation
to provide local assistance payments to New York City or its assignee. In May
2004, LGAC amended its resolution authorizing such bonds to make clear that any
failure to certify or make payments to the City or its assignee has no impact on
LGAC's own bondholders; and that if any such act or omission were to occur with
respect to any possible bonds issued by the City or its assignee, that act or
omission would not constitute an event of default with respect to LGAC bonds.

Financing Activities. For purposes of analyzing the financial condition of the
State, debt may be classified as "State-supported debt" and "State-related
debt." "State-supported debt" includes general obligation debt, to which the
full faith and credit of the State has been pledged, as well as lease-purchase
and contractual-obligations of public authorities and municipalities, where the
State's legal obligation to make payments to those public authorities and
municipalities is subject to annual appropriations made by the State
Legislature. "State-related debt" includes State-supported debt, as well as
State-guaranteed debt (to which the full faith and credit of the State has been
pledged), moral obligation financings and certain contingent-contractual
obligation financings, where debt service is expected to be paid from other
sources and State appropriations are contingent in that they may be made and
used only under certain circumstances.

As of March 31, 2004, the total amount of outstanding general obligation debt
was $3.8 billion.

The Debt Reform Act of 2000, which applies to all new State-supported debt
issued on and after April 1, 2000, imposes phased-in caps on new debt
outstanding and new debt service costs. The cap on new



                                       B-11


State-supported debt outstanding began at 0.75 percent of personal income in
2000-2001 and will gradually increase until it is fully phased in at 4 percent
of personal income in 2010-11. Similarly, the cap on new State-supported debt
service costs began at 0.75 percent of total governmental funds receipts in
2000-2001 and will gradually increase until it is fully phased in at 5 percent
in 2013-14.

The Debt Reform Act requires that the limitations on the issuance of
State-supported debt and debt service costs be calculated by October 31 of each
year and reported in the quarterly Financial Plan Update most proximate to such
date. If the calculations for new State-supported debt outstanding and debt
service costs are less than the State-supported debt outstanding and debt
service costs permitted under the Debt Reform Act, new State-supported debt may
continue to be issued. However, if either the debt outstanding or the debt
service cap is met or exceeded, the State would be precluded from contracting
new State-supported debt until the next annual cap calculation is made and
State-supported debt is found to be within the appropriate limitations. The
prohibition on issuing new State-supported debt if the caps are met or exceeded
provides an incentive to treat the debt caps as absolute limits that should not
be reached, and therefore DOB intends to manage subsequent capital plans and
issuance schedules under these limits.

Pursuant to the provisions of the Debt Reform Act, the most recent annual
calculation of the limitations imposed by the Debt Reform Act was reported in
the Financial Plan Update most proximate to October 31, 2003. For the 2003-2004
fiscal year, both caps are set at 1.98%. For the 2004-2005 fiscal year, both
caps are set at 2.32%. On November 16, 2004, the State reported that it was in
compliance with both debt caps, with new debt outstanding at 1.55% of personal
income and debt service at 0.84% of total governmental receipts. The Annual
Information Statement states that DOB expects that debt outstanding and debt
service costs for the 2004-2005 fiscal year will also be within the statutory
caps.

Public Authorities--General. As of December 31, 2003, there were 18 public
authorities that had outstanding debt of $100 million or more, and the aggregate
outstanding debt, including refunding bonds, of these State public authorities
was $104.9 billion, only a portion of which constitutes State-supported or
State-related debt.

Litigation. Adverse developments in legal proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced State
Financial Plan. There can be no assurance that adverse decisions in legal
proceedings against the State would not exceed the amount of all potential State
Financial Plan resources available for the payment of judgments, and could
therefore affect the ability of the State to maintain a balanced State Financial
Plan.

The State is a defendant in several court cases that could ultimately result in
costs to the State Financial Plan. The most significant litigation is the State
Court of Appeals ruling that the State's financing system for New York City
public schools is unconstitutional. (See "Special Considerations" within).

Other Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional oversight or financial assistance is not
included in the projections of the State's receipts and disbursements for the
State's financial plans.

Grants to Local Governments. Grants to Local Governments include financial aid
to local governments and non-profit organizations, as well as entitlement
payments to individuals. Local assistance spending is projected to be $30.6
billion in 2005-2006, an increase of $454 million from the current year. Growth
in school aid ($321 million), CUNY operating costs (mainly for salary growth and
increases in fixed costs) and CUNY/SUNY community college enrollment growth
($163 million), and welfare (due mainly to caseload increases) ($89 million) are
partially offset by savings from Medicaid cost containment, TAP reforms, a
patient income revenue reclassification, among other actions. Local assistance
spending is projected to total $33 billion in 2006-2007 and $36.9 billion in
2007-2008. Medicaid, welfare and school aid are primarily responsible for the
projected annual growth.


                                       B-12







CODE #  10343-0105




                           PART C. OTHER INFORMATION


ITEM 22.  EXHIBITS.






   EXHIBIT
   NUMBER             DESCRIPTION
------------          ---------------------------------------------------------------------------------------

      1(a)     --     Declaration of Trust of Merrill Lynch Multi-State Municipal Series Trust (the
                      "Trust"), dated August 2, 1985.(a)
       (b)     --     Amendment to Declaration of Trust, dated September 18, 1987.(b)
       (c)     --     Amendment to Declaration of Trust, dated December 21, 1987.(b)
       (d)     --     Amendment to Declaration of Trust, dated October 3, 1988.(a)
       (e)     --     Amendment to Declaration of Trust, dated October 17, 1994 and instrument
                      establishing Class C and Class D shares of beneficial interest.(a)
       (f)     --     Amendment to Declaration of Trust, dated February 27, 2002.(h)
       (g)     --     Instrument establishing Merrill Lynch New York Municipal Bond Fund (the "Fund")
                      as a series of the Trust.(a)
       (h)     --     Instrument establishing Class A and Class B shares of beneficial interest of the
                      Fund.(a)
       (i)     --     Certificate of Establishment and Designation of Classes, dated March 18, 2003.(q)
      2        --     By-Laws of the Trust.(b)
      3        --     Portions of the Declaration of Trust, Certificate of Establishment and Designation
                      and By-Laws of the Trust defining the rights of holders of the Fund as a series of the
                      Trust.(c)
      4        --     Management Agreement between the Trust and Fund Asset Management, L.P.(p)
      5        --     Form of Unified Distribution Agreement between the Trust and FAM Distributors.
                      Inc.(e)
      6        --     None.
      7        --     Form of Custody Agreement between the Trust and State Street Bank and Trust
                      Company.(f)
      8(a)     --     Unified Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
                      Agency Agreement between the Trust and Financial Data Services, Inc.(g)
     (b)(1)    --     Amended and Restated Credit Agreement between the Trust, on behalf of the Fund,
                      and a syndicate of banks.(i)
     (b)(2)    --     Form of Second Amended and Restated Credit Agreement between the Trust, on
                      behalf of the Fund, a syndicate of banks and certain other parties.(m)
     (b)(3)    --     Form of Third Amended and Restated Credit Agreement between the Trust, on behalf
                      of the Fund, a syndicate of banks and certain other parties.(n)
     (b)(4)    --     Form of Fourth Amended and Restated Credit Agreement between the Trust, on
                      behalf of the Fund, a syndicate of banks and certain other parties.(l)
     (b)(5)    --     Form of Fifth Amended and Restated Credit Agreement between the Trust, on behalf
                      of the Fund, a syndicate of banks and certain other parties.(s)
       (c)     --     Form of Administrative Services Agreement between the Fund and State Street Bank
                      and Trust Company.(j)
       (d)     --     Form of Securities Lending Agency Agreement.(o)
      9        --     Opinion of Brown & Wood LLP, counsel for the Fund.(k)
     10        --     Consent of Deloitte & Touche LLP, independent registered public accounting firm for
                      the Registrant.
     11        --     None.
     12        --     Certificate of Fund Asset Management, L.P.(b)
     13(a)     --     Amended and Restated Class A Distribution Plan of the Trust. (d)
       (b)     --     Form of Class B Distribution Plan of the Trust.(e)
       (c)     --     Form of Class C Distribution Plan of the Trust.(e)
     14        --     Revised Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(d)
     15        --     Code of Ethics.(r)



                                      C-1






   EXHIBIT
    NUMBER             DESCRIPTION
-------------          --------------------------------------------

       16(a)    --     Power of Attorney.(t)
         (b)    --     Power of Attorney (Robert C. Doll, Jr.) (u)



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


(a)--  Filed on January 31, 1995 as an Exhibit to Post-Effective Amendment No.
       12 to the Fund's Registration Statement on Form N-1A (File No. 2-99473)
       under the Securities Act of 1933, as amended, (the "Registration
       Statement").
(b)--  Filed on January 25, 1996 as an Exhibit to Post-Effective Amendment No.
       13 to the Registration Statement.
(c)--  Reference is made to Article II, Section 2.3 and Articles V, VI, VIII,
       IX, X and XI of the Trust's Declaration of Trust, as amended, to the
       Certificates of Establishment and Designation establishing the Fund as a
       series of the Trust and establishing Class A and Class B shares of
       beneficial interest of the Fund, filed as Exhibits 1 to the Registration
       Statement; and to Articles I, V and VI of the Trust's By-Laws, filed as
       Exhibit 2 to the Registration Statement.
(d)--  Incorporated by reference to Exhibits 13(a) and 14 to Post-Effective
       Amendment No. 36 to the Registration Statement on Form N-1A of Merrill
       Lynch Pacific Fund, Inc. (File No. 2-56978), filed on April 17, 2003.
(e)--  Incorporated by reference to Exhibits 5 and 13 to the Registration
       Statement on Form N-1A of Merrill Lynch Mid Cap Growth Fund, Inc. (File
       No. 333-42020), filed on July 21, 2000.
(f)--  Incorporated by reference to Exhibit 7 to Post-Effective Amendment No. 10
       to the Registration Statement on Form N-1A under the Securities Act of
       1933 of Merrill Lynch Maryland Municipal Bond Fund, a series of the Trust
       (File No. 33-49873), filed on October 30, 2001.
(g)--  Incorporated by reference to Exhibit 8(a)(1) to Post-Effective Amendment
       No. 35 to the Registration Statement on Form N-1A under the Securities
       Act of 1933 of Merrill Lynch Bond Fund, Inc. (File No. 2-62329), filed on
       January 14, 2005.
(h)--  Incorporated by reference to Exhibits 1(f) and 8(a)(2) to Post-Effective
       Amendment No. 13 to the Registration Statement on Form N-1A under the
       Securities Act of 1933 of Merrill Lynch Florida Municipal Bond Fund, a
       series of the Trust (File No. 333-39555), filed on November 15, 2002.
(i)--  Incorporated by reference to Exhibit (b) to the Issuer Tender Offer
       Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc.
       (File No. 333-15973), filed on December 14, 2000.
(j)--  Incorporated by reference to Exhibit 8(d) to Post-Effective Amendment No.
       1 to the Registration Statement on Form N-1A of Merrill Lynch Focus
       Twenty Fund, Inc. (File No. 333-89775), filed on March 20, 2001.
(k)--  Filed on September 25, 1985 as an Exhibit to Pre-Effective Amendment No.
       1 to the Registration Statement. Refiled on December 30, 1999 as an
       Exhibit to Post-Effective Amendment No. 18 to the Registration Statement
       pursuant to Electronic Data Gathering, Analysis and Retrieval (EDGAR)
       requirements.
(l)--  Incorporated by reference to Exhibit 8(c)(4) to Post-Effective Amendment
       No. 8 to the Registration Statement on Form N-1A of Merrill Lynch Global
       Growth Fund, Inc. (File No. 333-32899), filed on December 4, 2003.
(m)--  Incorporated by reference to Exhibit (b)(2) to the Issuer Tender Offer
       Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc.
       (File No. 333-39837), filed on December 14, 2001.
(n)--  Incorporated by reference to Exhibit (b)(3) to the Issuer Tender Offer
       Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc.
       (File No. 333-39837), filed on December 13, 2002.
(o)--  Incorporated by reference to Exhibit 8(f) to Post-Effective Amendment No.
       5 to the Registration Statement on Form N-1A of Merrill Lynch Global
       Technology Fund, Inc. (File No. 333-48929), filed on July 24, 2002.
(p)--  Filed on January 27, 2003 as an Exhibit to Post-Effective Amendment No.
       21 to the Registration Statement.
(q)--  Incorporated by reference to Exhibit 1(i) to Post-Effective Amendment No.
       14 to the Registration Statement on Form N-1A of Merrill Lynch Florida
       Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
       (File No. 33-39555), filed on November 19, 2003.
(r)--  Incorporated by reference to Exhibit 15 to Pre-Effective Amendment No. 1
       to the Registration Statement on Form N-1A of Merrill Lynch Inflation
       Protected Fund (File No. 333-110936), filed on January 22, 2004.
(s)--  Incorporated by reference to Exhibit 8(c)(5) to Post-Effective Amendment
       No. 35 to the Registration Statement on Form N-1A of Merrill Lynch Bond
       Fund, Inc. (File No. 2-62329), filed on January 14, 2005.
(t)--  Incorporated by reference to Exhibit 16 to Post-Effective Amendment No. 4
       to the Registration Statement on Form N-1A of Merrill Lynch Focus Twenty
       Fund, Inc. (File No. 333-89775) filed on March 26, 2004.
(u)--  Incorporated by reference to Exhibit 16(c) to Post-Effective Amendment
       No. 35 to the Registration Statement on Form N-1A of Merrill Lynch Bond
       Fund, Inc. (File No. 2-62329) filed on January 14, 2005.


ITEM 23.  PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.


The Registrant does not control and is not under common control with any other
person.




ITEM 24.  INDEMNIFICATION.

Section 5.3 of the Trust'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


                                      C-2


civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having
been such a trustee, officer, employee or agent, except with respect to any
matter as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise payment by
such person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter of
good faith and reasonable belief as to the best interests of the Trust, had
been adjudicated, it would have been adjudicated in favor of such person. The
rights accruing to any Person under these provisions shall not exclude any
other right to which he may be lawfully entitled; provided that no person may
satisfy any right in indemnity or reimbursement granted herein or in Section
5.1 or to which he may be otherwise entitled except out of the property of the
Trust, and no Shareholder shall be personally liable to any Person with respect
to any claim for indemnity or reimbursement or otherwise. The Trustees may make
advance payments in connection with indemnification under this Section 5.3,
provided that the indemnified person shall have given a written undertaking to
reimburse the Trust in the event it is subsequently determined that he is not
entitled to such indemnification."

Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended (the "Investment
Company Act"), may be concerned, such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount which it
is ultimately determined that he is entitled to receive from the Trust 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 Trust 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 Trust's
disinterested, non-party Trustees, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts that
the recipient of the advance ultimately will be found entitled to
indemnification.

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

Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Trust and the
principal underwriter pursuant to the foregoing provisions or otherwise, the
Trust 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 Trust
of expenses incurred or paid by a Trustee, officer, or controlling person of
the Trust 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 Trust 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.


                                      C-3


ITEM 25.  BUSINESS AND OTHER CONNECTIONS OF THE MANAGER.


Fund Asset Management, L.P. ("FAM" or the "Manager") acts as investment adviser
for a number of affiliated open-end and closed-end registered investment
companies, and also acts as sub-adviser to certain other portfolios.

Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate of the Manager,
acts as investment adviser for a number of affiliated open-end and closed-end
registered investment companies.

The address of each of these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665. The address of FAM, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of FAM Distributors, Inc. ("FAMD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, NY 10080. The
address of the Fund's transfer agent, Financial Data Services, Inc. ("FDS"), is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.

Set forth below is a list of each executive officer and partner of the Manager
indicating each business, profession, vocation or employment of a substantial
nature in which each such person or entity has been engaged for at least the
last two fiscal years for his, her or its own account or in the capacity of
director, officer, partner or trustee. Additionally, Mr. Burke is Vice
President and Treasurer of all or substantially all of the investment companies
advised by FAM, MLIM or their affiliates, and Mr. Doll is an officer of one or
more of such companies.







                                POSITION(S) WITH THE                   OTHER SUBSTANTIAL BUSINESS,
NAME                                   MANAGER                     PROFESSION, VOCATION OR EMPLOYMENT
---------------------   ------------------------------------   ------------------------------------------

ML & Co.                Limited Partner                        Financial Services Holding Company;
                                                               Limited Partner of MLIM
Princeton Services      General Partner                        General Partner of MLIM
Robert C. Doll, Jr.     President                              President of MLIM; Co-Head (Americas
                                                               Region) of MLIM from 1999 to 2001;
                                                               President and Director of Princeton
                                                               Services; President of Princeton
                                                               Administrators, L.P.; Chief Investment
                                                               Officer of OppenheimerFunds, Inc., in
                                                               1999 and Executive Vice President
                                                               thereof from 1991 to 1999
Donald C. Burke         First Vice President and Treasurer     First Vice President and Treasurer of
                                                               MLIM; Senior Vice President, Director
                                                               and Treasurer of Princeton Services; Vice
                                                               President of FAMD
Andrew J. Donohue       Senior Vice President and General      Senior Vice President and General
                        Counsel                                Counsel of MLIM; Senior Vice President,
                                                               General Counsel and Director of
                                                               Princeton Services; President and
                                                               Director of FAMD
Alice A. Pellegrino     Secretary                              Secretary of MLIM, Princeton Services
                                                               and FAMD



ITEM 26.  PRINCIPAL UNDERWRITERS.


(a) FAMD acts as the principal underwriter for each of the following open-end
registered investment companies including the Registrant: Financial
Institutions Series Trust, Mercury Basic Value Fund, Inc., Mercury Funds II,
Merrill Lynch Balanced Capital Fund, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Bond Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Disciplined Equity Fund, Inc., Merrill Lynch Equity Dividend Fund, Merrill
Lynch EuroFund, Merrill Lynch Focus Twenty Fund, Inc., Merrill Lynch Focus
Value



                                      C-4



Fund, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Funds
for Institutions Series, Merrill Lynch Global Allocation Fund, Inc., Merrill
Lynch Global Financial Services Fund, Inc., Merrill Lynch Global Growth Fund,
Inc., Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch Inflation Protected
Fund, Merrill Lynch International Fund of Mercury Funds, Inc., Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Large Cap Series Funds, Inc., Merrill
Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Natural Resources
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Principal Protected
Trust, Merrill Lynch Ready Assets Trust, Merrill Lynch Real Investment Fund,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short Term U.S. Government Fund, Inc., Merrill Lynch Value Opportunities
Fund, Inc., Merrill Lynch U.S. Government Mortgage Fund, Merrill Lynch U.S.
High Yield Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utilities and Telecommunications
Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World
Income Fund, Inc. and The Asset Program, Inc. FAMD also acts as the principal
underwriter for the following closed-end registered investment companies:
Merrill Lynch Senior Floating Rate Fund, Inc., and Merrill Lynch Senior
Floating Rate Fund II, Inc.


(b) Set forth below is information concerning each director and officer of
FAMD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081.






                         POSITION(S) AND OFFICE(S)      POSITION(S) AND OFFICE(S)
NAME                             WITH FAMD                   WITH REGISTRANT
---------------------   ---------------------------   -----------------------------

Andrew J. Donohue       President and Director        None
Michael G. Clark        Director                      None
Thomas J. Verage        Director                      None
Donald C. Burke         Vice President                Vice President and Treasurer
John Fosina             Treasurer                     None
Daniel Dart             Director                      None
Jerry W. Miller         Director                      None
Alice A. Pellegrino     Secretary                     Secretary



(c) Not applicable.


ITEM 27.  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 (The "Investment
Company Act") and the rules thereunder are maintained at the offices of the
Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536-9011), and its
transfer agent, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).



ITEM 28.  MANAGEMENT SERVICES.


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



ITEM 29.  UNDERTAKINGS.

Not applicable.

                                      C-5


                                   SIGNATURES



Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Plainsboro, and the State of New Jersey, on
January 28, 2005.




                        MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST



                          (Registrant)


                        By: /s/ Donald C. Burke

                        (Donald C. Burke, Vice President and Treasurer)


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





                SIGNATURE                  TITLE

        Robert C. Doll, Jr.*               President (Principal Executive
---------------------------------
        (Robert C. Doll, Jr.)              Officer) and Trustee

        Donald C. Burke*                   Vice President and Treasurer (Principal
---------------------------------          Financial and Accounting Officer)
        (Donald C. Burke)

        James H. Bodurtha*
---------------------------------
       (James H. Bodurtha)                 Trustee
       Joe Grills*
---------------------------------
       (Joe Grills)                        Trustee
        Herbert I. London*
---------------------------------
        (Herbert I. London)                Trustee
       Roberta Cooper Ramo*
---------------------------------
      (Roberta Cooper Ramo)                Trustee
       Robert S. Salomon *
---------------------------------
        (Robert S. Salomon)                Trustee
       Stephen B. Swensrud *
---------------------------------
       (Stephen B. Swensrud)               Trustee

      *By: /s/ Donald C. Burke
---------------------------------
   (Donald C. Burke, Attorney-In-Fact)                                            January 28, 2005




                                      C-6



                                 EXHIBIT INDEX


EXHIBIT
NUMBER         DESCRIPTION
------         -----------

10             Consent of Deloitte & Touche LLP, Independent Registered Public
               Accounting Firm for the Fund