As filed with the Securities and Exchange Commission on February 24, 2005


                                                 Securities Act File No. 33-8058
                                        Investment Company Act File No. 811-4802
================================================================================

                       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. 23                   [X]
                             AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940   [X]
                        AMENDMENT NO. 24                          [X]
               (CHECK APPROPRIATE BOX OR BOXES)


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

               MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND OF
                      MERRILL LYNCH 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 MUNICIPAL INTERMEDIATE TERM FUND OF
                      MERRILL LYNCH 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        MERRILL LYNCH INVESTMENT MANAGERS, L.P.
         787 SEVENTH AVENUE                         P.O BOX 9011
   NEW YORK, NEW YORK 10019-6018            PRINCETON, NEW JERSEY 08543-9011
  ATTENTION: FRANK P. BRUNO, ESQ.


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

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

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

IF APPROPRIATE, CHECK THE FOLLOWING BOX:


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

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

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

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




Prospectus


February 24, 2005



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

   MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
   OF MERRILL LYNCH 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

[GRAPHIC OMITTED]

     KEY FACTS
     --------------------------------------------------------------------------

     Merrill Lynch Municipal Intermediate Term Fund at a Glance ........... 3

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

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



[GRAPHIC OMITTED]

     DETAILS ABOUT THE FUND
     --------------------------------------------------------------------------

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

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



[GRAPHIC OMITTED]

     YOUR ACCOUNT
     --------------------------------------------------------------------------

     Pricing of Shares ................................................... 17

     How to Buy, Sell, Transfer and Exchange Shares ...................... 24

     Participation in Fee-Based Programs ................................. 31



[GRAPHIC OMITTED]

     MANAGEMENT OF THE FUND
     --------------------------------------------------------------------------

     Merrill Lynch Investment Managers, L.P. ............................. 34

     Financial Highlights ................................................ 36



[GRAPHIC OMITTED]

     FOR MORE INFORMATION
     --------------------------------------------------------------------------

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

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



                 MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND





MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND AT A GLANCE
--------------------------------------------------------------------------------

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The investment objective of the Fund is to provide shareholders with a high
level of income exempt from Federal income taxes.


WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?


The Fund invests primarily in a portfolio of INVESTMENT GRADE MUNICIPAL BONDS.
These may be obligations of a variety of issuers including states, territories
and possessions of the United States, including the District of Columbia, and
their political subdivisions, agencies and instrumentalities. Under normal
circumstances, the Fund will invest at least 80% of its assets in municipal
bonds. When choosing investments, Fund management considers various factors,
including the credit quality of issuers, yield analysis, maturity analysis and
call features of the obligations. Under normal conditions, the Fund's weighted
average maturity will be between three and 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 bond
markets, the relevant indices or other funds with similar investment objectives
and investment strategies. 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 .


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.

[SIDEBAR]
[GRAPHIC OMITTED]

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 Investors Services, Inc.,
Standard & Poor's or Fitch Ratings.

MUNICIPAL BOND -- a debt obligation issued by or on behalf of a governmental
entity or other qualifying issuer that pays interest that, in the opinion of
bond counsel to the issuer, is excludable from gross income for Federal income
tax purposes (except that the interest may be includable in taxable income for
purposes of the Federal Alternative Minimum tax).

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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                               3



[GRAPHIC OMITTED]

     Key Facts


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

         o  Are looking for income exempt from Federal income tax

         o  Want a professionally managed and diversified 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 changes in interest
            rates or adverse changes in the price of bonds in general






                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM 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]

 11.79%   3.07%   8.31%   6.19%  -2.38%  9.67%   3.17%   10.06%   4.59%   2.73%

 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
5.27% (quarter ended September 30, 2002) and the lowest return for a quarter
was -2.43% (quarter ended June 30, 1999). The year-to-date return as of
December 31, 2004 was 2.73%.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                               5



[GRAPHIC OMITTED]

     Key Facts

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         TEN
(FOR THE PERIODS ENDED DECEMBER 31, 2004)                            YEAR       YEARS        YEARS
------------------------------------------------------------------------------------------------------

 Merrill Lynch Municipal Intermediate Term Fund -- Class A#:
 Return Before Taxes##                                               1.92%       6.01%        5.76%
------------------------------------------------------------------------------------------------------
 Merrill Lynch Municipal Intermediate Term Fund -- Class B:
 Return Before Taxes##                                               1.74%       6.00%        5.64%
 Return After Taxes on Distributions##                               1.66%       5.89%        5.52%
 Return After Taxes on Distributions and Sale of Fund Shares##       2.46%       5.65%        5.39%
------------------------------------------------------------------------------------------------------
 Merrill Lynch Municipal Intermediate Term Fund -- Class C:
 Return Before Taxes##                                               1.75%       6.00%        5.64%
------------------------------------------------------------------------------------------------------
 Merrill Lynch Municipal Intermediate Term Fund -- Class I#:
 Return Before Taxes ##                                              2.02%       6.11%        5.86%
------------------------------------------------------------------------------------------------------
 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. Historical performance information for each
  class includes the prior designated class.

## 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 MUNICIPAL INTERMEDIATE TERM 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)       1.00%(c)          None            None            1.00%(c)
---------------------------------------------------------------------------------------------------------------------
  Maximum deferred sales charge (load) (as
  a percentage of original purchase price or
  redemption proceeds, whichever is lower)            None(d)          1.00%(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%            0.30%           0.30%             None
---------------------------------------------------------------------------------------------------------------------
  Other expenses (including transfer agency
  fees)(g)                                            0.27%            0.28%           0.27%            0.27%
---------------------------------------------------------------------------------------------------------------------
  Total Annual Fund Operating Expenses                0.92%            1.13%           1.12%            0.82%
---------------------------------------------------------------------------------------------------------------------
  Less Contractual Fee Waiver(e)                     (0.05%)          (0.05%)         (0.05%)          (0.05%)
---------------------------------------------------------------------------------------------------------------------
  Net Total Annual Fund Operating Expenses(e)         0.87%            1.08%           1.07%            0.77%
---------------------------------------------------------------------------------------------------------------------


(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.


[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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                               7



[GRAPHIC OMITTED]

     Key Facts

(continued from previous page)


(e)  Effective June 1, 2004, the Manager has contractually agreed to waive 0.05%
     of its management fee resulting in an annual fee equal 0.50% of the average
     daily net assets of the Fund. This arrangement has a one year term and is
     renewable. In addition, 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 contractual waiver and reimbursement into
     account, the Net Total Annual Fund Operating Expenses would be 0.86%,
     1.07%, 1.06% and 0.76% for Classes A, B, C and I, respectively.

(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                     $188         $385         $599         $1,215
--------------------------------------------------------------------------------
 Class B                     $210         $379         $617         $1,370
--------------------------------------------------------------------------------
 Class C                     $209         $351         $612         $1,359
--------------------------------------------------------------------------------
 Class I                     $178         $354         $546         $1,099
--------------------------------------------------------------------------------



EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:


                            1 YEAR       3 YEARS#    5 YEARS#      10 YEARS#
--------------------------------------------------------------------------------
 Class A                     $188         $385         $599         $1,215
--------------------------------------------------------------------------------
 Class B                     $110         $354         $617         $1,370
--------------------------------------------------------------------------------
 Class C                     $109         $351         $612         $1,359
--------------------------------------------------------------------------------
 Class I                     $178         $354         $546         $1,099
--------------------------------------------------------------------------------




#    These expenses do not reflect the continuation of the contractual waiver of
     0.05% of the 0.55% management fee by the Manager beyond the first year. As
     stated in note (e) to the Fees and Expenses table above, this arrangement
     has a one year term and is renewable.


                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
8


[GRAPHICS OMITTED]

Details About the Fund


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

The Fund's investment objective is to provide shareholders with a high level of
income exempt from Federal income taxes.


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


The Fund invests primarily in investment grade municipal bonds. Municipal bonds
may be obligations of a variety of issuers including governmental entities, or
other qualifying issuers. Issuers may be states, territories and possessions of
the United States, including the District of Columbia, and their political
subdivisions, agencies and instrumentalities. Municipal bonds also include
short-term tax-exempt obligations like municipal notes and variable rate demand
obligations. The Fund expects, under normal circumstances, to maintain a
dollar-weighted average maturity of three to ten years; however there is no
limit on the remaining maturity of each individual municipal bond investment by
the Fund.



Under normal circumstances, the Fund will invest at least 80% of its assets in
municipal bonds. The Fund may invest in either fixed rate or variable rate
obligations. Under normal circumstances, at least 80% of the Fund's assets will
be invested in investment grade 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).

     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.


[SIDEBAR]
ABOUT THE PORTFOLIO MANAGER


William R. Bock has been a Vice President and the Portfolio Manager of the Fund
since 1995. Mr. Bock has been a Director of Merrill Lynch Investment Managers
since 2005, and a Vice President of Merrill Lynch Investment Managers from 1989
to 2005. He has been a manager in the Tax-exempt Fixed Income management group
since 1989.


ABOUT THE MANAGER

The Fund is managed by Merrill Lynch Investment Managers.
[END SIDEBAR]



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                               9



[GRAPHIC OMITTED]

     Details About the Fund


[SIDEBAR]
JUNK BONDS -- fixed-income securities rated below investment grade by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's and Fitch Ratings, or unrated securities that Fund management believes
are of comparable quality.
[END SIDEBAR]



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 ("JUNK") BONDS. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.


For temporary periods, or to provide liquidity, the Fund may invest up to 20%
of its total assets in short-term taxable money market obligations. However, as
a termporary measure for defensive purposes, the Fund may invest without
limitation in short term taxable money market obligations. Short term taxable
investments may limit the potential for tax exempt income on your shares.


The Fund may use derivative instruments 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's investments may include private activity bonds that may subject
certain shareholders to a Federal alternative minimum tax.

The Fund may also invest its uninvested cash balances in affiliated money
market funds.


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.

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



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
10



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.

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.


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.

PRIVATE ACTIVITY BONDS -- Municipalities and other public authorities issue
Private Activity 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.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              11



[GRAPHIC OMITTED]

     Details About the Fund


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 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



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
12



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.

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 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.

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.

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.

VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations ("VRDOs")
are floating rate securities that combine an interest in a long term



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              13



[GRAPHIC OMITTED]

     Details About the Fund


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.


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 MUNICIPAL INTERMEDIATE TERM FUND
14



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.

INDEXED AND INVERSE 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 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.

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.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              15



[GRAPHIC OMITTED]

     Details About the Fund

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.

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.

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.



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 MUNICIPAL INTERMEDIATE TERM FUND
16


[GRAPHIC OMITTED]

    Your Account


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 Pricing(SM) 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 0.10% per
year and an account maintenance fee of 0.20% 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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                              17



[GRAPHIC OMITTED]

   Your Account

The table below summarizes key features of the Select Pricing(SM) System.



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

Availability            Generally available        Limited availability        Limited availability        Limited to certain
                        through selected           through Merrill Lynch.      through Merrill Lynch.      eligible investors
                        securities dealers and     Generally available         Generally available         including:
                        other financial            through selected            through selected            o  Current Class I
                        intermediaries.            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?   Yes. Payable at time of    No. Entire purchase price   No. Entire purchase price   Yes. Payable at time of
                        purchase. Lower sales      is invested in shares of    is invested in shares of    purchase. Lower sales
                        charges available for      the Fund.                   the Fund.                   charges available for
                        larger investments.                                                                larger investments.
----------------------  -------------------------- --------------------------- --------------------------- ------------------------
Deferred Sales Charge?  No. (May be charged for    Yes. Payable if you         Yes. Payable if you         No. (May be charged
                        purchases over $1          redeem within three         redeem within one year      for purchases over
                        million that are           years of purchase.          of purchase.                $1 million that are
                        redeemed within one                                                                redeemed within one
                        year).                                                                             year.)
----------------------  -------------------------- --------------------------- --------------------------- ------------------------
Account Maintenance     0.10% Annual Account       0.20% Annual Account        0.20% Annual Account        No.
and Distribution Fees?  Maintenance Fee.           Maintenance Fee.            Maintenance Fee.
                        No Distribution Fee.       0.10% Annual                0.10% Annual
                                                   Distribution Fee.           Distribution Fee.
----------------------  -------------------------- --------------------------- --------------------------- ------------------------
Conversion to Class A    N/A                       Yes, automatically after    No.                         No.
shares?                                            approximately ten years.
------------------------------------------------------------------------------------------------------------------------------------




                 MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
18



[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]



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 $100,000          1.00%             1.01%             0.95%
--------------------------------------------------------------------------------
 $100,000 but less
 than $250,000               0.75%             0.76%             0.70%
--------------------------------------------------------------------------------
 $250,000 but less
 than $500,000               0.50%             0.50%             0.45%
--------------------------------------------------------------------------------
 $500,000 but less
 than $1,000,000             0.30%             0.30%             0.27%
--------------------------------------------------------------------------------
 $1,000,000 and over##       0.00%             0.00%             0.00%
--------------------------------------------------------------------------------



#    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 0.20% of the lesser of the
     original cost of the shares being redeemed or your redemption proceeds. A
     sales charge of 0.20% will be charged on purchases of $1,000,000 or more of
     Class A or Class I shares by certain employer sponsored retirement or
     savings 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 Pricing(SM) 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.

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



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              19



[GRAPHIC OMITTED]

     Your Account

C and/or Class I shares of the Fund or any other Select Pricing 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

     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



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
20



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
three 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 0.10% and account maintenance fees of 0.20% 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 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.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              21



[GRAPHIC OMITTED]

     Your Account

The Distributor currently pays a sales concession of 1.00% 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 0.20% 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 0.10% Class C shares distribution fee and the
annual 0.20% Class C shares 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 three years after purchase, you may be
charged a deferred sales charge. The amount of the charge is set forth in the
following schedule:


          YEARS SINCE PURCHASE       SALES CHARGE#
          ------------------------------------------
            0 -- 1                        1.00%
          ------------------------------------------
            1 -- 2                        0.50%
          ------------------------------------------
            2 -- 3                        0.25%
          ------------------------------------------
            3 and thereafter              0.00%
          ------------------------------------------



 # 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 before December 1, 2002, the one 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.


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


     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



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
22



          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 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


                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              23



[GRAPHIC OMITTED]

     Your Account


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 MUNICIPAL INTERMEDIATE TERM FUND
24






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

 Buy Shares     First, select the share class     Refer to the Select Pricing(SM) System table in this Prospectus. Be
                appropriate for you               sure 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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                              25



[GRAPHIC OMITTED]


   Your Account





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 MUNICIPAL INTERMEDIATE TERM FUND
26







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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                              27



[GRAPHIC OMITTED]

     Your Account

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 Trustees, 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 MUNICIPAL INTERMEDIATE TERM FUND
28



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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                              29



[GRAPHIC OMITTED]

     Your Account


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.



[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]



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.


                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
30



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. 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.

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.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              31



[GRAPHIC OMITTED]

     Your Account


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.


[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]



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 (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.

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 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.


                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
32



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 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.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              33


[GRAPHIC OMITTED]

     Management of the Fund


MERRILL LYNCH INVESTMENT MANAGERS, L.P.
--------------------------------------------------------------------------------

Merrill Lynch Investment Managers, 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. For the fiscal year ended October 31, 2004,
the Manager received a fee, net of the contractual waiver that went into effect
June 1, 2004, at the annual rate of 0.53% of the Fund's average daily net
assets.

Merrill Lynch Investment Managers, L.P. was organized as an investment adviser
in 1976 and offers investment advisory services to more than 50 registered
investment companies. Merrill Lynch Investment Managers, L.P. and its
affiliates had approximately $489 billion in investment company and other
portfolio assets under management as of January 2005.

From time to time a manager, analyst, or other employee of the Manager or its
affiliates may express views regarding a particular asset class, company,
security, industry, or market sector. The views expressed by any such person are
the views of only that individual as of the time expressed and do not
necessarily represent the views of the Manager or any other person within the
Merrill Lynch organization. Any such views are subject to change at any time
based upon market or other conditions and the Manager disclaims any
responsibility to update such views. These views may not be relied on as
investment advice and, because investment decisions for the Fund are based on
numerous factors, may not be relied on as an indication of trading intent on
behalf of the Fund.

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 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.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
34



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 MUNICIPAL INTERMEDIATE TERM FUND
                                                                              35


[GRAPHIC OMITTED]

   Management of the Fund


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 October 31,
                                           ----------------------------------------------------------------
Increase (Decrease) in Net Asset Value         2004         2003         2002         2001         2000
-----------------------------------------------------------------------------------------------------------

 Per Share Operating Performance:
-----------------------------------------------------------------------------------------------------------
 Net asset value, beginning of year           $10.71       $10.69       $10.60       $10.04        $9.74
-----------------------------------------------------------------------------------------------------------
 Investment income -- net                        .39#         .40#         .39          .42          .43
-----------------------------------------------------------------------------------------------------------
 Realized and unrealized gain -- net             .08          .09          .13          .56          .30
-----------------------------------------------------------------------------------------------------------
 Total from investment operations                .47          .49          .52          .98          .73
-----------------------------------------------------------------------------------------------------------
 Less dividends and distributions:
 Investment income -- net                       (.39)        (.40)        (.39)        (.42)        (.43)
 Realized gain -- net                           (.03)        (.07)        (.04)          --           --
-----------------------------------------------------------------------------------------------------------
 Total dividends and distributions              (.42)        (.47)        (.43)        (.42)        (.43)
-----------------------------------------------------------------------------------------------------------
 Net asset value, end of year                 $10.76       $10.71       $10.69       $10.60       $10.04
-----------------------------------------------------------------------------------------------------------
 Total Investment Return:##
-----------------------------------------------------------------------------------------------------------
 Based on net asset value per share             4.47%        4.68%        5.05%        9.98%        7.69%
-----------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
-----------------------------------------------------------------------------------------------------------
 Expenses, net of waiver and
 reimbursement                                   .89%         .95%         .99%        1.01%         .90%
-----------------------------------------------------------------------------------------------------------
 Expenses                                        .92%         .97%        1.00%        1.01%         .90%
-----------------------------------------------------------------------------------------------------------
 Investment income -- net                       3.66%        3.70%        3.73%        4.10%        4.37%
-----------------------------------------------------------------------------------------------------------
 Supplemental Data:
-----------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)       $55,128     $51,786      $45,563      $40,269      $34,930
-----------------------------------------------------------------------------------------------------------
 Portfolio turnover                            211.00%     214.92%      201.37%      169.70%      210.04%
-----------------------------------------------------------------------------------------------------------



                                                                       Class B
                                           ---------------------------------------------------------------
                                                           For the Year Ended October 31,
                                           ---------------------------------------------------------------
Increase (Decrease) in Net Asset Value        2004         2003         2002         2001         2000
-----------------------------------------------------------------------------------------------------------

 Per Share Operating Performance:
-----------------------------------------------------------------------------------------------------------
 Net asset value, beginning of year          $10.71       $10.69       $10.60       $10.04       $9.75
-----------------------------------------------------------------------------------------------------------
 Investment income -- net                       .37#         .38#         .37          .40         .41
-----------------------------------------------------------------------------------------------------------
 Realized and unrealized gain -- net            .08          .09          .13          .56         .29
-----------------------------------------------------------------------------------------------------------
 Total from investment operations               .45          .47          .50          .96         .70
-----------------------------------------------------------------------------------------------------------
 Less dividends and distributions:
 Investment income -- net                      (.37)        (.38)        (.37)        (.40)       (.41)
 Realized gain -- net                          (.03)        (.07)        (.04)          --          --
-----------------------------------------------------------------------------------------------------------
 Total dividends and distributions             (.40)        (.45)        (.41)        (.40)       (.41)
-----------------------------------------------------------------------------------------------------------
 Net asset value, end of year                $10.76       $10.71       $10.69       $10.60      $10.04
-----------------------------------------------------------------------------------------------------------
 Total Investment Return:##
-----------------------------------------------------------------------------------------------------------
 Based on net asset value per share            4.24%        4.46%        4.83%        9.75%       7.35%
-----------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
-----------------------------------------------------------------------------------------------------------
 Expenses, net of waiver and
 reimbursement                                 1.10%        1.17%        1.21%        1.22%       1.12%
-----------------------------------------------------------------------------------------------------------
 Expenses                                      1.13%        1.18%        1.21%        1.22%       1.12%
-----------------------------------------------------------------------------------------------------------
 Investment income -- net                      3.45%        3.48%        3.53%        3.89%       4.16%
-----------------------------------------------------------------------------------------------------------
 Supplemental Data:
-----------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)     $21,623      $28,678      $37,155      $37,875     $46,571
-----------------------------------------------------------------------------------------------------------
 Portfolio turnover                          211.00%      214.92%      201.37%      169.70%     210.04%
-----------------------------------------------------------------------------------------------------------


 # Based on average shares outstanding.

## Total investment returns exclude the effects of sales charges.


                 MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
36


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




                                                                       Class C
                                           ---------------------------------------------------------------
                                                           For the Year Ended October 31,
                                           ---------------------------------------------------------------
Increase (Decrease) in Net Asset Value         2004         2003        2002         2001         2000
----------------------------------------------------------------------------------------------------------

 Per Share Operating Performance:
----------------------------------------------------------------------------------------------------------
 Net asset value, beginning of year           $10.71      $10.69       $10.59       $10.04       $9.74
----------------------------------------------------------------------------------------------------------
 Investment income -- net                        .37#        .38#         .37          .40         .41
----------------------------------------------------------------------------------------------------------
 Realized and unrealized gain -- net             .08         .09          .14          .55         .30
----------------------------------------------------------------------------------------------------------
 Total from investment operations                .45         .47          .51          .95         .71
----------------------------------------------------------------------------------------------------------
 Less dividends and distributions:
 investment income -- net                       (.37)       (.38)        (.37)        (.40)       (.41)
 Realized gain -- net                           (.03)       (.07)        (.04)          --          --
----------------------------------------------------------------------------------------------------------
 Total dividends and distributions              (.40)       (.45)        (.41)        (.40)       (.41)
----------------------------------------------------------------------------------------------------------
 Net asset value, end of year                 $10.76      $10.71       $10.69       $10.59      $10.04
----------------------------------------------------------------------------------------------------------
 Total Investment Return:##
----------------------------------------------------------------------------------------------------------
 Based on net asset value per share             4.25%       4.46%        4.93%        9.64%       7.45%
----------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
----------------------------------------------------------------------------------------------------------
 Expenses, net of waiver and
 reimbursement                                  1.10%       1.15%        1.20%        1.22%       1.12%
----------------------------------------------------------------------------------------------------------
 Expenses                                       1.12%       1.17%        1.20%        1.22%       1.12%
----------------------------------------------------------------------------------------------------------
 Investment income -- net                       3.46%       3.50%        3.47%        3.89%       4.16%
----------------------------------------------------------------------------------------------------------
 Supplemental Data:
----------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)      $28,767     $28,974      $10,276       $2,462      $3,744
----------------------------------------------------------------------------------------------------------
 Portfolio turnover                           211.00%     214.92%      201.37%      169.70%     210.04%
----------------------------------------------------------------------------------------------------------



                                                                       Class I
                                           ---------------------------------------------------------------
                                                           For the Year Ended October 31,
                                           ---------------------------------------------------------------
Increase (Decrease) in Net Asset Value         2004         2003         2002         2001         2000
----------------------------------------------------------------------------------------------------------

 Per Share Operating Performance:
----------------------------------------------------------------------------------------------------------
 Net asset value, beginning of year            $10.71       $10.69       $10.60       $10.05       $9.75
----------------------------------------------------------------------------------------------------------
 Investment income -- net                         .40#         .40#         .40          .43         .44
----------------------------------------------------------------------------------------------------------
 Realized and unrealized gain -- net              .08          .10          .13          .55         .30
----------------------------------------------------------------------------------------------------------
 Total from investment operations                 .48          .50          .53          .98         .74
----------------------------------------------------------------------------------------------------------
 Less dividends and distributions:
 investment income -- net                        (.40)        (.41)        (.40)        (.43)       (.44)
 Realized gain -- net                            (.03)        (.07)        (.04)          --          --
----------------------------------------------------------------------------------------------------------
 Total dividends and distributions               (.43)        (.48)        (.44)        (.43)       (.44)
----------------------------------------------------------------------------------------------------------
 Net asset value, end of year                  $10.76       $10.71       $10.69       $10.60      $10.05
----------------------------------------------------------------------------------------------------------
 Total Investment Return:##
----------------------------------------------------------------------------------------------------------
 Based on net asset value per share              4.57%        4.77%        5.16%        9.98%       7.80%
----------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
----------------------------------------------------------------------------------------------------------
 Expenses, net of waiver and
 reimbursement                                    .79%         .85%         .89%         .90%        .80%
----------------------------------------------------------------------------------------------------------
 Expenses                                         .82%         .87%         .90%         .90%        .80%
----------------------------------------------------------------------------------------------------------
 Investment income -- net                        3.76%        3.80%        3.84%        4.21%       4.47%
----------------------------------------------------------------------------------------------------------
 Supplemental Data:
----------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)       $78,777      $44,372      $34,066      $35,538     $51,675
----------------------------------------------------------------------------------------------------------
 Portfolio turnover                            211.00%      214.92%      201.37%      169.70%     210.04%
----------------------------------------------------------------------------------------------------------




 # Based on average shares outstanding.

## Total investment returns exclude the effects of sales charges.



                           MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                                                                              37



                      [THIS PAGE INTENTIONALLY LEFT BLANK]

















                 MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
38


                              [FLOW CHART OMITTED]



                                                                  POTENTIAL
                                                                  INVESTORS
                                                         OPEN AN ACCOUNT (TWO OPTIONS)
                        1                                                                                       2

                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 32246-6484

                                                                                                         MAILING ADDRESS
                                                                                                          P.O. Box 45289
                                                                                                 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 Fund shares.

                     COUNSEL                                                                                CUSTODIAN

          SIDLEY AUSTIN BROWN & WOOD LLP                           THE FUND                            STATE STREET BANK
                787 Seventh Avenue                                                                     AND TRUST COMPANY
          New York, New York 10019-6018                     THE BOARD OF TRUSTEES                         P.O. Box 351
                                                              OVERSEES THE FUND.                  Boston, Massachusetts 02101
        Provides legal advice to the Fund.
                                                                                            Holds the Fund's assets for safekeeping.

              INDEPENDENT REGISTERED                        ACCOUNTING SERVICES                            MANAGER
              PUBLIC ACCOUNTING FIRM                             PROVIDER
                                                                                                   MERRILL LYNCH INVESTMENT
              DELOITTE & TOUCHE LLP                         STATE STREET BANK                           MANAGERS, L.P.
              750 College Road East                         AND TRUST COMPANY
           Princeton, New Jersey 08540                    500 College Road East                     ADMINISTRATIVE OFFICES
                                                       Princeton, New Jersey 08540                  800 Scudders Mill Road
               Audits the financial                                                              Plainsboro, New Jersey 08536
             statements of the Fund.                   Provides certain accounting
                                                          services to the Fund.                        MAILING ADDRESS
                                                                                                        P.O. Box 9011
                                                                                               Princeton, New Jersey 08543-9011

                                                                                                       TELEPHONE NUMBER
                                                                                                        1-800-637-3863

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


                 MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND



[MERRILL LYNCH LOGO OMITTED]  Investment Managers

Prospectus

February 24, 2005


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


       MERRILL LYNCH MUNICIPAL
       INTERMEDIATE TERM FUND
       OF MERRILL LYNCH 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.


[GRAPHIC OMITTED]

www.mlim.ml.com


[GRAPHIC OMITTED]

www.mercury.ml.com


For More Information



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 obtain
a free copy at www.mutualfunds.ml.com or 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 #811-4802


Code #10435-0205

(Copyright)  Merrill Lynch Investment Managers, L.P.


                      STATEMENT OF ADDITIONAL INFORMATION


                MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
                    OF MERRILL LYNCH 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 Municipal Intermediate
Term Fund (the "Fund") a series of Merrill Lynch Municipal Series Trust (the
"Trust") is not a prospectus and should be read in conjunction with the
Prospectus of the Fund, dated February 24, 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.









               MERRILL LYNCH INVESTMENT MANAGERS, L.P. -- MANAGER


                     FAM DISTRIBUTORS, INC. -- DISTRIBUTOR


   The date of this Statement of Additional Information is February 24, 2005



                               TABLE OF CONTENTS

PART I


Investment Objectives and Policies ...................................... I-2
Investment Restrictions ................................................. I-3
Information on Trustees and Officers .................................... I-4
Management and Advisory Arrangements .................................... I-8
Information on Sales Charges and Distribution Related Expenses ......... I-10
Computation of Offering Price Per Share ................................ I-12
Portfolio Transactions and Brokerage ................................... I-13
Fund Performance ....................................................... I-13
Additional Information ................................................. I-14
Financial Statements ................................................... I-14



PART II


Investment Risks and Considerations .................................... II-1
Management and Other Service Arrangements ............................. II-41
Purchase of Shares .................................................... II-49
Redemption of Shares .................................................. II-58
Shareholder Services .................................................. II-60
Pricing of Shares ..................................................... II-65
Portfolio Transactions and Brokerage .................................. II-67
Dividends and Taxes ................................................... II-70
Performance Data ...................................................... II-75
Proxy Voting Policies and Procedures .................................. II-77
General Information ................................................... II-80
Appendix A .............................................................. A-1




   PART I: INFORMATION ABOUT MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND


Part I of this Statement of Additional Information sets forth information about
Merrill Lynch Municipal Intermediate Term Fund. 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 a high
level of income exempt from Federal income taxes. The Fund seeks to achieve its
objective by investing primarily in a portfolio of 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"). Under normal circumstances, the Fund will invest at least
80% of its net assets in Municipal Bonds. For this purpose, net assets include
any borrowings for investment purposes. The investment objective of the Fund
and its policy of investing at least 80% of its net assets in Municipal Bonds
are fundamental policies of the Fund and may not be changed without the
approval of a majority of the Fund's outstanding shares. The Fund is classified
as a diversified fund under the Investment Company Act of 1940, as amended (the
"Investment Company Act").


Under normal circumstances, it is generally anticipated that the Fund's
weighted average maturity will be three to ten years. Generally, as is the case
with any investment grade fixed-income obligations, Municipal Bonds with longer
maturities tend to produce higher yields. Under normal conditions, however,
such yield-to-maturity increases tend to decline in the longer maturities
(i.e., the slope of the yield curve flattens). At the same time, due to their
longer exposure to interest rate risk, prices of longer-term obligations are
subject to greater market fluctuations as a result of changes in interest
rates. Based on the foregoing premises, Merrill Lynch Investment Managers, L.P.
("MLIM" or the "Manager") believes that the yield and price volatility
characteristics of an intermediate term portfolio generally offer an attractive
trade-off between return and risk. There may be market conditions, however,
where an intermediate term portfolio may be less attactive due to the fact that
the Municipal Bond yield curve changes from time to time depending on supply
and demand forces, monetary and tax policies and investor expectations. As a
result, there may be situations where investments in individual Municipal Bonds
with longer remaining maturities may be more attractive than individual
intermediate term Municipal Bonds. In the event of any sustained market
conditions that make it less desirable to maintain an intermediate term average
portfolio maturity, the Board of Trustees of the Trust may consider changing
the investment policies of the Fund with respect to average portfolio maturity.


Under normal circumstances, at least 80% of the Municipal Bonds purchased by
the Fund will be what are commonly referred to as "investment grade"
securities, which are obligations rated at the time of purchase within the four
highest quality ratings as determined by either Moody's Investors Service, Inc.
("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's ("S&P")
(currently AAA,AA,A and BBB) or Fitch 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 category may be considered to have
speculative characteristics.

The Fund may also invest in variable rate demand obligations ("VRDOs") and
VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax-exempt obligations held by a financial institution. The
Fund's hedging strategies, which are described in more detail under "Financial
Futures Transactions and Options," are not fundamental policies and may be
modified by the Trustees


                                      I-2


of the Trust without the approval of the Fund's shareholders. The Fund is also
authorized to invest in indexed and inverse floating rate obligations for
hedging purposes and to enhance income.

For temporary periods or to provide liquidity, the Fund has the authority to
invest as much as 20% of its total assets in taxable money market obligations
with a maturity of one year or less ("Temporary Investments"). In addition, the
Fund reserves the right as a defensive measure to invest temporarily a greater
portion of its assets in Temporary Investments, when, in the opinion of the
Manager, prevailing market or financial conditions warrant. These investments
will yield taxable income. From time to time, the Fund may also itemize taxable
capital gains.


II.    INVESTMENT RESTRICTIONS


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

(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 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may borrow up to an additional 5%
of its total assets for temporary purposes, (iii) the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law. The Fund may not pledge its assets other
than to secure such borrowings or, to the extent permitted by the Fund's
investment policies as set forth in its Prospectus and Statement of Additional
Information, as they may be



                                      I-3


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, 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 may be amended from
time to time, and without registering as a commodity pool operator under the
Commodity Exchange Act.

Under its 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 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 sub-classifications 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 independent



                                      I-4



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
Board of the Trust 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 October 31, 2004.

Cynthia A. Montgomery and Edward D. Zinbarg are the members of the Trust's
Nominating Committee. 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 three times during the fiscal year ended October 31, 2004.


  BIOGRAPHICAL INFORMATION


Certain biographical and other information relating to the non-interested
Trustees 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, Fund Asset Management, L.P. ("FAM"), or their affiliates
("MLIM/FAM-advised funds") and other public directorships.






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

Ronald W. Forbes     Trustee       Trustee since   Professor Emeritus of Finance, School of       49 registered   None
(64)*                              1986            Business, State University of New York at      investment
                                                   Albany since 2000 and Professor thereof from   companies
                                                   1989 to 2000; International Consultant,        consisting of
                                                   Urban Institute, Washington, D.C. from 1995    49 portfolios
                                                   to 1999.

Cynthia A.           Trustee       Trustee since   Professor, Harvard Business School since       49 registered   Newell
Montgomery (52)**                  1994            1989; Associate Professor, J.L. Kellogg        investment      Rubbermaid,Inc.
                                                   Graduate School of Management,                 companies       (manufacturing)
                                                   Northwestern University from 1985 to 1989;     consisting of
                                                   Associate Professor, Graduate School of        49 portfolios
                                                   Business Administration, University of
                                                   Michigan from 1979 to 1985; Director,
                                                   Harvard Business School of Publishing since
                                                   2005.

Jean Margo Reid      Trustee       Trustee since   Self-employed consultant since 2001; Counsel   49 registered   None
(59)                               2004            of Alliance Capital Management (investment     investment
                                                   adviser) in 2000; General Counsel, Director    companies
                                                   and Secretary of Sanford C. Bernstein & Co.,   consisting of
                                                   Inc. (investment adviser/broker-dealer) from   49 portfolios
                                                   1997 to 2000; Secretary, Sanford C. Bernstein
                                                   Fund, Inc. from 1994 to 2000; Director and
                                                   Secretary of SCB, Inc. since 1998; Director
                                                   and Secretary of SCB Partners, Inc. since
                                                   2000; and Director of Covenant House from
                                                   2001 to 2004.



                                       I-5






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

Roscoe S. Suddarth  Trustee       Trustee since   President, Middle East Institute, from 1995 to   49 registered   None
(69)                              2000            2001; Foreign Service Officer, United States     investment
                                                  Foreign Service, from 1961 to 1995; Career       companies
                                                  Minister, from 1989 to 1995; Deputy              consisting of
                                                  Inspector General, U.S. Department of State,     49 portfolios
                                                  from 1991 to 1994; U.S. Ambassador to the
                                                  Hashemite Kingdom of Jordan, from 1987 to 1990.

Richard R. West     Trustee       Trustee since   Professor of Finance from 1984 to 1995, Dean     49 registered   Bowne & Co.,
(67)                              1986            from 1984 to 1993 and since 1995 Dean            investment      Inc. (financial
                                                  Emeritus of New York University's Leonard N.     companies       printers);
                                                  Stern School of Business Administration.         consisting of   Vornado Realty
                                                                                                   49 portfolios   Trust (real
                                                                                                                   estate
                                                                                                                   company);
                                                                                                                   Alexander's,
                                                                                                                   Inc. (real estate
                                                                                                                   company).

Edward D. Zinbarg   Trustee       Trustee since   Self-employed financial consultant since 1994;   49 registered   None
(70)                              2000            Executive Vice President of the Prudential       investment
                                                  Insurance Company of America from 1988 to        companies
                                                  1994; Former Director of Prudential              consisting of
                                                  Reinsurance Company and former Trustee of        49 portfolios
                                                  the Prudential Foundation.



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

 # 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.

 * Chairman of the Audit Committee.

** Chairman of the Board and the Nominating Committee.


Certain biographical and other information relating to the Trustee who is an
officer and "interested person" of the Trust as defined in the Investment
Company Act and to the other officers 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 MLIM/FAM-advised funds overseen and
other public directorships:






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

Robert C. Doll, Jr.  President     Trustee and       President of MLIM/FAM-advised funds since        114 registered   None
(50)*                and Trustee   President**       2005; President of MLIM and FAM since            investment
                                   since 2005        2001; Co-Head (Americas Region) thereof          companies
                                                     from 2000 to 2001 and Senior Vice President      consisting of
                                                     from 1999 to 2001; President and Director of     150 portfolios
                                                     Princeton Services, Inc. ("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      Vice          Vice President    First Vice President of MLIM and FAM since       124 registered   None
(44)                 President     since 1993 and    1997 and Treasurer thereof since 1999; Senior    investment
                     and           Treasurer since   Vice President and Treasurer of Princeton        companies
                     Treasurer     1999              Services since 1999 and Director since 2004;     consisting of
                                                     Vice President of FAMD since 1999; Vice          163 portfolios
                                                     President of MLIM and FAM from 1990 to
                                                     1997; Director of Taxation of MLIM from
                                                     1990 to 2001.



                                       I-6






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

Kenneth A.           Senior Vice   Senior Vice       Managing Director of MLIM since 2000; First      38 registered    None
Jacob (51)           President     President since   Vice President of MLIM from 1997 to 2000;        investment
                                   2002              Vice President of MLIM from 1984 to 1997.        companies
                                                                                                      consisting of
                                                                                                      50 portfolios

John Loffredo (41)   Senior Vice   Senior Vice       Managing Director of MLIM since 2000; First      38 registered    None
                     President     President since   Vice President of MLIM from 1997 to 2000;        investment
                                   2002              Vice President of MLIM from 1991 to 1997.        companies
                                                                                                      consisting of
                                                                                                      50 portfolios

William R.           Vice          Vice President    Director of MLIM since 2005; Vice President      4 registered     None
Bock (69)            President     since 1995        of MLIM from 1989 to 2005.                       investment
                     and                                                                              companies
                     Portfolio                                                                        consisting of 4
                     Manager                                                                          portfolios

Jeffrey Hiller (53)  Chief         Chief             Chief Compliance Officer of the                  125 registered   None
                     Compliance    Compliance        MLIM/FAM-advised funds and First Vice            investment
                     Officer       Officer since     President and Chief Compliance Officer of        companies
                                   2004              MLIM (Americas Region) since 2004; Global        consisting of
                                                     Director of Compliance at Morgan Stanley         164 portfolios
                                                     Investment 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  Secretary     Secretary since   Secretary of MLIM, FAM, FAMD and                 124 registered   None
(44)                               2004              Princeton Services since 2004; Director (Legal   companies
                                                     Advisory) of MLIM since 2002; Vice President     consisting of
                                                     of MLIM from 1999 to 2002; Attorney              163 portfolios
                                                     associated with MLIM since 1997.




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

 #   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 Trust.

 *   Mr. Doll is an "interested person," as defined in the Investment Company
     Act, of the Trust based on his positions with MLIM, FAM, Princeton Services
     and Princeton Administrators..

**   As a Trustee, Mr. Doll serves until his successor is elected and qualified
     or 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 charter or by
     statute.


  SHARE OWNERSHIP


Information relating to each Trustee's share ownership in the Fund and in all
registered funds in the 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:
  Ronald W. Forbes           $10,001-$50,000                 Over $100,000
  Cynthia A. Montgomery               None                   Over $100,000
  Jean Margo Reid                     None                   Over $100,000
  Roscoe S. Suddarth                  None                   Over $100,000
  Richard R. West                     None                   Over $100,000
  Edward D. Zinbarg                   None                   Over $100,000



                                       I-7


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

As of February 4, 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


The Fund pays each non-interested Trustee a combined fee of $2,800 per year for
service on the Board and the Audit Committee plus $150 per in-person Board
meeting attended and $150 per in-person Audit Committee meeting attended. The
Chairman of the Board and the Audit Committee receives an additional fee of
$1,000 per year. The Fund reimburses each non-interested Trustee for his or her
out-of-pocket expenses relating to attendance at Board and Audit Committee
meetings.

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





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

Ronald W. Forbes##         $3,016                      None             $284,833
Cynthia A. Montgomery      $2,100                      None             $248,833
Jean Margo Reid*             $467                      None             $142,733
Charles C. Reilly##,**       $450                      None                 $0
Kevin A. Ryan+             $2,100                      None             $181,317
Roscoe S. Suddarth         $2,100                      None             $248,833
Richard R. West            $2,100                      None             $248,833
Edward D. Zinbarg          $2,100                      None             $248,833



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

 #   For the number of MLIM/FAM-advised funds from which each Trustee receives
     compensation, see chart beginning on p. I-5.

##   Chairman of the Board and the Audit Committee. Mr. Reilly served as
     Co-Chairman of the Audit Committee from November 1, 2003 to December 31,
     2003.

 *   Ms. Reid became a Trustee effective August 19, 2004.

**   Mr. Reilly retired as a Trustee effective January 1, 2004.

 +   Mr. Ryan retired as a Trustee effective January 1, 2005.


IV.    MANAGEMENT AND ADVISORY ARRANGEMENTS


The Trust on behalf of the Fund, has entered into a management agreement with
MLIM (the "Management Agreement"). Pursuant to the Management Agreement, the
Manager receives for its services to the Fund monthly compensation at the annual
rate of 0.55% of the Fund's average daily net assets following discussions with
the non-interested Trustees, the Manager has agreed to waive 0.05% of the
management fee effective June 1, 2004.

The table below sets forth information about the total management fees paid by
the Fund to the Manager and the amount waived by the Manager for the periods
shown.





 FISCAL YEAR ENDED OCTOBER 31,     MANAGEMENT FEE     MANAGEMENT FEE WAIVED#
-------------------------------   ----------------   -----------------------

             2004                     $955,503               $37,324
             2003                     $751,955                  $0
             2002                     $646,770                  $0



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

#    In fiscal years 2004, 2003 and 2002, the Manager reimbursed an additional
     amount of $15,158, $19,953 and $2,024, respectively, of the Fund's
     management fee in connection with the Fund's investment in an affiliated
     money market fund.



                                      I-8


At each quarterly meeting of the Board of Trustees, the Board of Trustees
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.

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 -- 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 that William Bock, the Fund's
portfolio manager, has over fifteen years of experience investing in municipal
bonds. The Board also noted that, in connection with the Fund's investments in
municipal bonds, the Manager may need to assess the quality of such 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 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 on their experience with credit analysis and risk management performed
by the Manager.

The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager, including oversight of the Fund's day-to-day
operations and oversight of Fund accounting. The Manager and its affiliates
provide compliance and administrative services to the Fund and all the
MLIM/FAM-advised funds, as well as to a number of third party fund groups. The
Trustees, based on their experience as directors/trustees of other investment
companies managed by the Manager and its affiliates as well as of the Fund,
also focused on the quality of the Manager's compliance and administrative
staff. The Board noted that, in addition to the analysts and compliance
personnel dedicated to the tax-exempt fixed income management group, the
Manager has a separate administrative, legal and compliance staff to ensure a
high level of quality in the compliance and administrative services provided to
the Fund. The Trustees concluded, based on their experience as Board members,
that the compliance and administrative services provided by the Manager were of
a sufficiently high quality to benefit the Fund.

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, information concerning the profitability of the Fund to the
Manager 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 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
advisory fee rate at a common asset level that was below the median of the nine
funds being compared. The Board of Trustees also found that the Fund's actual
advisory 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 somewhat (0.085%) above the median in its category prior to the
contractual 0.05% management fee waiver agreed to by the Manager. The Board
also compared the Fund's total expenses to those of other, similarly managed
funds and concluded that the Fund's expenses were somewhat above (0.099%) the
median of the funds being compared. The Board also noted that the Fund had
historical performance that was in the first or second quartile of the funds in
the applicable group for all periods measured and above the average of the
performance universe. 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.


                                      I-9



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 advisory fee rate schedule, which includes an
agreement to waive a portion of the Fund's management fee rate, was reasonable
in relation to the services provided and that no changes are currently
necessary. The non-interested Trustees were represented by independent counsel
who assisted them in their deliberations, in executive sessions during which
they considered and approved the Management Agreement for an additional one year
period until May 17, 2005.


TRANSFER AGENCY SERVICES

The table below sets forth information about the total amounts paid by the Fund
to the transfer agent for the periods indicated.




 FISCAL YEAR ENDED OCTOBER 31,     TRANSFER AGENT FEE
-------------------------------   -------------------

              2004                       $118,961
              2003                       $112,732
              2002                       $106,328



ACCOUNTING SERVICES


The table below shows the amounts 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 OCTOBER 31,     PAID TO STATE STREET     PAID TO THE MANAGER
-------------------------------   ----------------------   --------------------

              2004                       $99,808                  $4,403
              2003                       $90,212                  $3,149
              2002                       $86,131                  $8,827



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-10


  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 OCTOBER 31,      COLLECTED       DISTRIBUTOR           LYNCH              SHARES
---------------------------------------   -------------   ---------------   -----------------   ---------------

                  2004                       $11,572         $437              $11,135                $0
                  2003                       $11,581         $617              $10,964                $0
                  2002                       $ 9,672         $638              $ 9,034                $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 OCTOBER 31,      COLLECTED       DISTRIBUTOR           LYNCH              SHARES
---------------------------------------   -------------   ---------------   -----------------   ---------------

                  2004                       $1,476             $86               $1,390              $0
                  2003                       $1,370             $63               $1,307              $0
                  2002                       $1,124             $41               $1,083              $0



  CLASS B AND C SALES CHARGES INFORMATION





                                                    CLASS B SHARES#
                                          ------------------------------------
                                           CDSCS RECEIVED        CDSCS PAID
 FOR THE FISCAL YEAR ENDED OCTOBER 31,     BY DISTRIBUTOR     TO MERRILL LYNCH
---------------------------------------   ----------------   -----------------

                  2004                         $16,930            $16,930
                  2003                         $24,997            $24,997
                  2002                         $11,259            $11,259







                                                     CLASS C SHARES
                                          ------------------------------------
                                           CDSCS RECEIVED        CDSCS PAID
 FOR THE FISCAL YEAR ENDED OCTOBER 31,     BY DISTRIBUTOR     TO MERRILL LYNCH
---------------------------------------   ----------------   -----------------

                  2004                         $9,190             $9,190
                  2003                         $8,682             $8,682
                  2002                         $  434             $  434



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

#    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 October 31, 2004, direct cash distribution revenues for the period since
the commencement of operations of Class B shares exceeded direct cash
distribution expenses by $5,107,885 (20.19% of Class B average daily net assets
at that date). As of October 31, 2004, direct cash distribution revenues for
the period since the commencement of operations of Class C shares exceeded
direct cash distribution expenses by $103,905 (.33% of Class C average daily
net assets at that date).

For the fiscal year ended October 31, 2004, the Fund paid the Distributor
$54,680 pursuant to the Class A Distribution Plan (based on average daily net
assets subject to such Class A Distribution Plan of approximately $55.0
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 October 31, 2004, the Fund paid the Distributor $76,418 pursuant to the
Class B Distribution Plan (based on average daily net assets subject to such
Class B Distribution Plan of approximately $25.6 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 October 31, 2004, the Fund paid the Distributor $93,943 pursuant to the
Class C Distribution Plan (based on average daily net assets subject to such
Class C



                                      I-11



Distribution Plan of approximately $31.5 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 October 31, 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 OCTOBER 31, 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 26, 1986
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2004

Under NASD Rule as Adopted       $389,549    $23,688     $58,790    $82,478       $5,435       $77,043        $22

Under Distributor's Voluntary
Maximum                          $389,549    $23,688     $ 2,606    $26,294       $5,435       $20,859        $22

CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2004

Under NASD Rule as Adopted       $ 39,893    $ 2,705     $   396    $ 3,101       $  111       $ 2,990        $30



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

#    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 shares outstanding on October 31, 2004 is set forth below.




                                      I-12






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

Net Assets                                $55,127,794        $21,622,824          $28,767,372          $78,777,271

Number of Shares Outstanding               5,124,811         2,009,423            2,674,124             7,319,630

Net Asset Value Per
Share (net assets divided
by number of shares outstanding)          $    10.76         $   10.76            $   10.76            $    10.76

Sales Charge (for Class A and Class I
Shares: 1.00 % of offering price;
1.01 % of net asset value per share)#            .11                --##                 --##                 .11

Offering Price                            $    10.87         $   10.76            $   10.76            $    10.87



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

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

## Class B and Class C shares are not subject to an initial sales charge but
   may be subject to a CDSC on redemption of shares. See "Purchase of Shares
   -- Deferred Sales Charge Alternatives -- Class B and Class C Shares" in
   Part II of 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 OCTOBER 31,       COMMISSIONS PAID      TO MERRILL LYNCH
-------------------------------   ---------------------   -----------------

              2004                       $17,280                $15,312
              2003                       $12,194                $ 6,246
              2002                       $ 2,622                $     0




For the fiscal year ended October 31, 2004, the brokerage commissions paid to
Merrill Lynch represented 88.61% of the aggregate brokerage commissions paid
and involved 78.71% of the Fund's dollar amount of transactions involving
payments of commissions during the year.



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 October 31, 2004              3.42%               3.24%              3.25%              3.52%
Five Years Ended October 31, 2004            6.14%               6.11%              6.13%              6.22%
Ten Years Ended October 31, 2004             5.70%               5.58%              5.58%              5.81%



                                      I-13






                                                             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 October 31, 2004              3.33%               3.15%              3.16%              3.43%
Five Years Ended October 31, 2004            6.05%               6.02%              6.04%              6.13%
Ten Years Ended October 31, 2004             5.60%               5.48%              5.47%              5.70%







                                                             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 October 31, 2004              3.51%               3.33%              3.34%              3.61%
Five Years Ended October 31, 2004            5.81%               5.75%              5.77%              5.89%
Ten Years Ended October 31, 2004             5.47%               5.34%              5.34%              5.58%



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

#    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 14, 1986 under the laws of
Massachusetts. The Trust is an open-end management investment company comprised
of one series, which may be a separate portfolio offering shares to selected
groups of purchasers. The Trustees are authorized to create an unlimited number
of series and, with respect to the 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 Fund is currently the only series of the Trust.
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 February 4, 2005:







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

MR. HENRY J. RIBLET     800 Scudders Mill Road, Plainsboro, NJ       6.24 % of Class A
                        08536



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-14


                                    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
Infaltion 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, Pennsylvania Municipal Bond
and Municipal Investment Accumulation are collectively referred to herein as
the "Municipal Funds."


Each Fund is organized either as a Maryland corporation or a Massachusettes
business trust. In each jurisdiction, nomenclature varies. For ease and clarity
of presentation, shares of common stock and shares of beneficial interest are
referrred to herein as "shares" or "Common Stock," holders of shares or Common
Stock are referrred 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 or Declaration of Trust 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 or a
portion 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 Feeder Fund. All investments are
generally made at the level of the Master Portfolio. 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 Portfolio in which it invests. For simplicity, this Statement of
Additional Information uses the term "Fund" to include both a Feeder Fund and
its Master Portfolio.



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



                                      II-1


identified as making each type of investment or using each investment strategy
(each, a "Covered Fund"). 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-
                                                                          BOND FUND -            BOND FUND -        INTERMEDIATE
                                                                    CORE BOND PORTFOLIO    HIGH INCOME PORTFOLIO   TERM PORTFOLIO
                                                                    -------------------    ---------------------   --------------

144 A Securities                                                                X                       X                 X
Asset Backed Securities                                                         X                       X                 X
Borrowing and Leverage                                                          X                       X                 X
Convertible Securities                                                          X                       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                 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                 X
Types of Options                                                                X                       X                 X
Futures                                                                         X                       X                 X
Foreign Exchange Transactions                                                   X                       X                 X
Forward Foreign Exchange Transactions                                           X                       X                 X
Currency Futures                                                                X                       X                 X
Currency Options                                                                X                       X                 X
Limitations on Currency Hedging                                                 X                       X                 X
Risk Factors in Hedging Foreign Currency Risks                                  X                       X                 X
Risk Factors in Derivatives                                                     X                       X                 X
Credit Risk                                                                     X                       X                 X
Currency Risk                                                                   X                       X                 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                                                                                   X
Dollar Rolls                                                                    X                       X                 X
Foreign Investment Risks                                                        X                       X                 X
Foreign Market Risk                                                             X                       X                 X
Foreign Economy Risk                                                            X                       X                 X
Currency Risk and Exchange Risk                                                 X                       X                 X
Government Supervision and Regulation / Accounting Standards                    X                       X                 X
Certain Risks of Holding Fund Assets Outside the United States                  X                       X                 X
Settlement Risk                                                                 X                       X                 X
Illiquid or Restricted Securities                                               X                       X                 X
Inflation-indexed Bonds                                                         X                       X                 X
Investment in Emerging Markets                                                  X                       X                 X
Restriction on Certain Investments
Investment in Other Investment Companies                                        X                       X                 X
Junk Bonds                                                                      X                       X                 X
Mortgage-Related Securities                                                     X                       X                 X
Mortgage Backed Securities                                                      X                       X                 X
Mortgage Pass-Through Securities                                                X                       X                 X
Collateralized Mortgage Obligations ("CMOs")                                    X                       X                 X
Adjustable Rate-Mortgage Securities                                             X                       X                 X
CMO Residulas                                                                   X                       X                 X
Stripped Mortgage Backed Securities                                             X                       X                 X
Tiered Index Bonds                                                              X                       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
Repurchase Agreements and Purchase and Sale Contracts                           X                       X                 X
Reverse Repurchase Agreements                                                   X                       X                 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
                                                                      MUNICIPAL BOND -        LIMITED           MUNICIPAL BOND -
                                                                     INSURED PORTFOLIO   MATURITY PORTFOLIO    NATIONAL PORTFOLIO
                                                                     -----------------   ------------------    ------------------

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                        X                  X                      X
Convertible Securities
Corporate Loans                                                               X                  X                      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
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
Types of Options                                                              X                  X                      X
Futures                                                                       X                  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                      X
Credit Risk                                                                   X                  X                      X
Currency Risk
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
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                      X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                      X                  X                      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                  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")
Repurchase Agreements and Purchase and Sale Contracts                         X                  X                      X
Reverse Repurchase Agreements                                                 X                  X                      X




                                                                           MUNICIPAL             FLORIDA            NEW JERSEY
                                                                         INTERMEDIATE           MUNICIPAL           MUNICIPAL
                                                                             TERM                 BOND                 BOND
                                                                         ------------           ---------           ----------

144 A Securities
Asset Backed Securities
Borrowing and Leverage                                                         X                   X                     X
Convertible Securities
Corporate Loans
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
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
Types of Options                                                               X                   X                     X
Futures                                                                        X                   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                     X
Credit Risk                                                                    X                   X                     X
Currency Risk
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
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                     X
Inflation-indexed Bonds
Investment in Emerging Markets
Restriction on Certain Investments
Investment in Other Investment Companies                                       X                   X                     X
Junk Bonds                                                                     X                   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                     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")
Repurchase Agreements and Purchase and Sale Contracts                          X                   X                     X
Reverse Repurchase Agreements                                                  X                   X                     X




                                                                           NEW YORK            PENNSYLVANIA
                                                                           MUNICIPAL            MUNICIPAL              REAL
                                                                              BOND                 BOND             INVESTMENT
                                                                           ---------           ------------         ----------

144 A Securities                                                                                                         X
Asset Backed Securities                                                                                                  X
Borrowing and Leverage                                                          X                    X                   X
Convertible Securities                                                                                                   X
Corporate Loans
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
Credit Default Swap Agreements                                                  X                    X                   X
Credit Linked Securities                                                        X                    X                   X
Total Return Swap Agreements                                                    X                    X                   X
Hybrid Instruments                                                                                                       X
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
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
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                   X
Inflation-indexed Bonds                                                                                                  X
Investment in Emerging Markets                                                                                           X
Restriction on Certain Investments
Investment in Other Investment Companies                                        X                    X                   X
Junk Bonds                                                                      X                    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                    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")                                                                                  X
Repurchase Agreements and Purchase and Sale Contracts                           X                    X                   X
Reverse Repurchase Agreements                                                   X                    X                   X


                                                                            SHORT TERM       U.S. GOVERNMENT    U.S. HIGH     WORLD
                                                                          U.S. GOVERNMENT        MORTGAGE         YIELD       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
Corporate Loans                                                                                                      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")                                                         X           X
Certificates                                                                     X                 X
Types of Options                                                                 X                 X                 X           X
Futures                                                                          X                 X                 X           X
Foreign Exchange Transactions                                                                                        X           X
Forward Foreign Exchange Transactions                                                                                X           X
Currency Futures                                                                                                     X           X
Currency Options                                                                                                     X           X
Limitations on Currency Hedging                                                                                      X           X
Risk Factors in Hedging Foreign Currency Risks                                                                       X           X
Risk Factors in Derivatives                                                      X                 X                 X           X
Credit Risk                                                                      X                 X                 X           X
Currency Risk                                                                                                        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
Dollar Rolls                                                                     X                 X                 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           X
Inflation-indexed Bonds                                                          X                 X                 X           X
Investment in Emerging Markets                                                                                                   X
Restriction on Certain Investments                                                                                               X
Investment in Other Investment Companies                                         X                 X                 X           X
Junk Bonds                                                                                                           X           X
Mortgage-Related Securities                                                      X                 X                             X
Mortgage Backed Securities                                                       X                 X                             X
Mortgage Pass-Through Securities                                                 X                 X                             X
Collateralized Mortgage Obligations ("CMOs")                                     X                 X                             X
Adjustable Rate-Mortgage Securities                                              X                 X                             X
CMO Residulas                                                                    X                 X                             X
Stripped Mortgage Backed Securities                                              X                 X                             X
Tiered Index Bonds                                                               X                 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 -
                                                                        BOND FUND -            BOND FUND -          INTERMEDIATE
                                                                    CORE BOND PORTFOLIO    HIGH INCOME PORTFOLIO   TERM PORTFOLIO

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





                                                                       CALIFORNIA            INFLATION           LOW
                                                                         INSURED             PROTECTED         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                X
Zero Coupon Securities                                                                           X                X


                                                                                          MUNICIPAL BOND
                                                                    MUNICIPAL BOND -     LIMITED MATURITY    MUNICIPAL BOND -
                                                                   INSURED PORTFOLIO        PORTFOLIO       NATIONAL 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                   X                  X
Zero Coupon Securities


                                                                      MUNICIPAL              FLORIDA           NEW JERSEY
                                                                 INTERMEDIATE TERM       MUNICIPAL BOND       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                 X
Zero Coupon Securities


                                                                       NEW YORK            PENNSYLVANIA           REAL
                                                                    MUNICIPAL BOND        MUNICIPAL BOND       INVESTMENT

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


                                                                   SHORT TERM        U.S. GOVERNMENT     U.S. HIGH      WORLD
                                                                 U.S. GOVERNMENT        MORTGAGE           YIELD       INCOME

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




                                      II-4



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 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.


                                      II-5


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.


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 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



                                      II-6



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 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,


                                      II-7



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.

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.


                                      II-8


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
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



                                      II-9



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.

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



                                     II-10



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
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,



                                     II-11



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 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.

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 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



                                     II-12



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.

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 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



                                     II-13



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 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



                                     II-14



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.

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



                                     II-15



("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.

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



                                     II-16



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 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



                                     II-17



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.

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



                                     II-18



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 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



                                     II-19



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.

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



                                     II-20



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.

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



                                     II-21



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.

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.



                                     II-22



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.

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



                                     II-23



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.

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.



                                     II-24



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 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



                                     II-25



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 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



                                     II-26



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.

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,



                                     II-27


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.

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.


                                     II-28


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 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.


                                     II-29


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. 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


                                     II-30


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 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



                                     II-31



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 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



                                     II-32



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 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



                                     II-33



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.

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



                                     II-34



supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.

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.


SUITABILITY (ALL FUNDS)

                                     II-35


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.

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



                                     II-36



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
the 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.

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.

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



                                     II-37



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 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



                                     II-38



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.

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.

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 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



                                     II-39



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 to be a "commodity pool" under the regulations
of the Commodity Futures Trading Commission.

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.

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 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.



                                     II-40



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.

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.

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 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.



MANAGEMENT AND OTHER SERVICE ARRANGEMENTS


DIRECTORS AND OFFICERS

See Part I, Section III "Information on Directors and Officers," --
Biographical Information," -- Share


                                     II-41


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.

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



                                     II-42



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 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


                                     II-43



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
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.

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. 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


                                     II-44


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.

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



                                     II-45



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 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.



                                     II-46



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.

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 polices and procedure, 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-47



addition, as noted, an attorney in the Manager's Legal Department must
determine that disclosure of Confidential Information is for a legitimate
business purpose and is in the best interests of the Fund's shareholders, and
that any conflicts of interest created by release of the Confidential
Information have been addressed by the Manager's 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 law
or regulation. 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 -- E.I. Dupont de
  Nemours and Company, Inc.
Consultants for pension plans that invest in MLIM/FAM-advised funds -- Rocaton
Investment Advisors, LLC; Mercer Investment Consulting; Watson Wyatt Investment
Consulting; Towers Perrin HR Services

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 on a yearly basis 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



                                     II-48


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.

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 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."


PURCHASE OF SHARES


Each Fund offers multiple classes of shares under the Merrill Lynch Select
Pricing(SM) 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 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.


                                     II-49



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.

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 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 Blueprint(SM) Program. Class A shares of certain Funds are offered
to participants in the Merrill Lynch Blueprint(SM) 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


                                     II-50


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 Blueprint(SM) 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 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.


                                     II-51


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.

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).



                                     II-52



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 Access(SM) 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 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


                                     II-53


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 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



                                     II-54



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


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 Pricing(SM) 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



                                     II-55



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 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


                                     II-56


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.

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.


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
 YEARS SINCE PURCHASE       OF DOLLAR AMOUNT
     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.

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.



                                     II-57



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 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.
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 a Fund if certain conditions are met. In
addition, Class I shares of each Select Pricing Fund 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 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 Fund's
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.



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


                                     II-58


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 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.


                                     II-59


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.


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



                                     II-60


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 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.



                                     II-61



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.

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.



                                     II-62



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. 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.



                                     II-63


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 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


                                     II-64



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.

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.


                                     II-65



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 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



                                     II-66



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 transactionsand
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 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)



                                     II-67


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.

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.



                                     II-68



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.


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



                                     II-69


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 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


                                     II-70


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 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



                                     II-71



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.


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


                                     II-72



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 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



                                     II-73



"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.

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.


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


                                     II-74



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 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.



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


                                     II-75


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.


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


                                     II-76


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, 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


                                     II-77


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.

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


                                     II-78


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.

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


                                     II-79


     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.



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



                                     II-80


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


CODE # 10152-0205



                            PART C. OTHER INFORMATION

ITEM 22.  EXHIBITS.




  EXHIBIT
  NUMBER              DESCRIPTION
------------          ---------------------------------------------------------------------------------------

      1(a)     --     Declaration of Trust of the Registrant, dated August 14, 1986.(a)
       (b)     --     Instrument establishing Merrill Lynch Municipal Intermediate Term Fund (the
                      "Fund") as a series of the Registrant. (a)
       (c)     --     Amendment to Declaration of Trust, dated October 3, 1988. (a)
       (d)     --     Instrument establishing Class A and Class B shares of beneficial interest of the Fund.
                      (a)
       (e)     --     Certificate of Amendment to Series Designation, changing the name of the Fund to
                      Merrill Lynch Municipal Intermediate Term Fund, dated November 15, 1993. (b)
       (f)     --     Amendment to Declaration of Trust and Establishment and Designation of Classes,
                      dated October 17, 1994. (a)
       (g)     --     Certificate of Amendment to Declaration of Trust dated December 4, 2000.
       (h)     --     Amended and Restated Establishment and Designation of Classes dated March 18, 2003.
      2        --     By-Laws of the Registrant. (c)
      3        --     Portion of the Declaration of Trust, Establishment and Designation and By-Laws of
                      the Registrant defining the rights of holders of shares of the Fund as a series of the
                      Registrant. (d)
      4(a)     --     Form of Management Agreement between the Registrant and Merrill Lynch
                      Investment Managers, L.P. (the "Manager"). (c)
       (b)     --     Supplement to Management Agreement between the Registrant and the Manager. (p)
      5        --     Form of Distribution Agreement between the Registrant and FAM Distributors, Inc.
                      (the "Distributor"). (h)
      6        --     None.
      7        --     Form of Custody Agreement between the Registrant and State Street Bank and Trust
                      Company. (e)
      8(a)     --     Form of Unified Transfer Agency, Dividend Disbursing Agency and Shareholder
                      Servicing Agency Agreement between the Registrant and Financial Data Services,
                      Inc.(f)
       (b)(1)  --     Amended and Restated Credit Agreement between the Registrant and a syndicate of
                      banks. (g)
       (b)(2)  --     Form of Second Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties. (l)
       (b)(3)  --     Form of Third Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties. (m)
       (b)(4)  --     Form of Fourth Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties. (j)
       (b)(5)  --     Form of Fifth Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties. (q)
       (c)     --     Form of Administrative Services Agreement between the Fund and State Street Bank
                      and Trust Company. (k)
      9        --     Opinion of Brown & Wood LLP, counsel for the Registrant. (a)
     10        --     Consent of Deloitte & Touche LLP, independent registered public accounting firm for
                      the Registrant.
     11        --     None.
     12        --     Certificate of the Manager. (a)
     13(a)     --     Amended and Restated Class A Distribution Plan. (n)
       (b)     --     Form of Amended and Restated Class B Distribution Plan. (i)
       (c)     --     Form of Amended and Restated Class C Distribution Plan. (i)
     14        --     Revised Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3. (n)
     15        --     Code of Ethics. (o)
     16        --     Power of Attorney. (r)


                                      C-1


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

(a)  Filed on February 28, 1995 as an Exhibit to Post-Effective Amendment No. 12
     to the Registrant's Registration Statement on Form N-1A under the
     Securities Act of 1933, as amended (the "Securities Act")(File No.
     33-8058)(the "Registration Statement").
(b)  Filed on February 24, 1994 as an Exhibit to Post-Effective Amendment No. 9
     to the Registration Statement.
(c)  Filed on February 26, 1996 as an Exhibit to Post-Effective Amendment No. 13
     to the Registration Statement.
(d)  Reference is made to Article II, (Section 2.3) and Articles V, VI, VIII,
     IX, X and XI of the Registrant's Declaration of Trust, as amended by the
     Amendments to Declaration of Trust, to the Certificates of Establishment
     and Designation and amendments filed as Exhibit 1 to the Registration
     Statement; and to Articles I, V and VI of the Registrant's By-Laws, filed
     as Exhibit 2 to the Registration Statement.
(e)  Incorporated by reference to Exhibit 7 to Post-Effective Amendment No. 10
     to the Registration Statement on Form N-1A of Merrill Lynch Maryland
     Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
     (File No. 33-49873), filed on October 30, 2001.
(f)  Incorporated by reference to Exhibit 8(a)(1) 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.
(g)  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.
(h)  Incorporated by reference to Exhibit 5 to Post-Effective Amendment No. 10
     to the Registration Statement on Form N-1A of Merrill Lynch Americas Income
     Fund, Inc. (File No. 33-64398), filed on June 21, 2000.
(i)  Incorporated by reference to Exhibit 13 to Post-Effective Amendment No. 10
     to the Registration Statement on Form N-1A of Merrill Lynch Americas Income
     Fund, Inc. (File No. 33-64398), filed on June 21, 2000.
(j)  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.
(k)  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.
(l)  Incorporated by reference to Exhibit (b)(2) of the Issuer Tender Offer
     Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc.
     (File No. 333-15973), filed on December 14, 2001.
(m)  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. 333-15973), filed on December 13, 2002.
(n)  Incorporated by reference to Exhibits 13(a) and 14 to Post-Effective
     Amendment No. 36 to the Registration Statement on Form N-1A to Merrill
     Lynch Pacific Fund, Inc. (File No. 2-56978), filed on April 17, 2003.
(o)  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.
(p)  Filed on February 11, 2004 as an Exhibit to Post-Effective Amendment No. 22
     to the Registration Statement.
(q)  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.
(r)  Incorporated by reference to Exhibit 16 to Post-Effective Amendment No. 21
     to the Registration Statement on Form N-1A of Merrill Lynch Global
     Allocation Fund, Inc. (File No. 33-22462), filed on February 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 Registrant's Declaration of Trust provides as follows:


"The Trust shall indemnify each of its Trustees, officers, employees, and agents
(including persons who serve at its request as directors, officers or trustees
of another organization in which it has any interest as a shareholder, creditor
or otherwise) against all liabilities and expenses (including amounts paid in
satisfaction of judgments, in compromise, as fines and penalties, and as counsel
fees) reasonably incurred by him in connection with the defense or disposition
of any action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while in office or
thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however that as to any
matter disposed of by a compromise payment by such person, pursuant to a consent
decree or otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the effect
that if either the matter of willful misfeasance, gross negligence or reckless
disregard of duty, or, the matter of good faith and reasonable belief as to the
best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any other Person
under these

                                      C-2



provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in connection
with indemnification under this Section 5.3, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust in the
event it is subsequently determined that he is not entitled to such
indemnification."

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

In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act, 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 Securities Act may
be permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

ITEM 25.  BUSINESS AND OTHER CONNECTIONS OF THE MANAGER.


Merrill Lynch Investment Managers, L.P. ("MLIM" 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.

Fund Asset Management, L.P. ("FAM"), 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


                                      C-3



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, New York 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 and/or Board member of
all or substantially all 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 FAM

Princeton Services      General Partner                        General Partner of FAM

Robert C. Doll, Jr.     President                              President of MLIM/FAM-advised funds;
                                                               President of FAM; 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
                                                               FAM; 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 FAM; Senior Vice President,
                                                               General Counsel and Director of
                                                               Princeton Services; President and
                                                               Director of FAMD

Alice A. Pellegrino     Secretary                              Secretary of FAM, 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 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


                                      C-4


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 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 -- Merrill
Lynch Investment Managers" 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 meets all the requirements
for the effectiveness of this Post-Effective Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and the State of New
Jersey, on February 24, 2005.

                               MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND OF
                               MERRILL LYNCH 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*
 ---------------------------------
         (Donald C. Burke)              Vice President and Treasurer

         Ronald W. Forbes*
 ---------------------------------
        (Ronald W. Forbes)              Trustee

      Cynthia A. Montgomery*
 ---------------------------------
      (Cynthia A. Montgomery)           Trustee

         Jean Margo Reid*
 ---------------------------------
         (Jean Margo Reid)              Trustee

        Roscoe S. Suddarth*
 ---------------------------------
       (Roscoe S. Suddarth)             Trustee

         Richard R. West*
 ---------------------------------
         (Richard R. West)              Trustee

        Edward D. Zinbarg*
 ---------------------------------
        (Edward D. Zinbarg)             Trustee




     *By: /s/ Donald C. Burke
 ---------------------------------
(Donald C. Burke, Attorney-In-Fact)                            February 24, 2005


                                      C-6