485APOS 1 file001.htm FORM 485APOS




    As filed with the Securities and Exchange Commission on February 14, 2005


                                                Securities Act File No. 33-22462
                                        Investment Company Act File No. 811-5576

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

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

                   MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
               (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 GLOBAL ALLOCATION FUND, INC.

                             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: THOMAS R. SMITH, JR., ESQ.


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

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


              [ ] immediately upon filing pursuant to paragraph (b)

              [ ] on (date) pursuant to paragraph (b)

              [X] 60 days after filing pursuant to paragraph (a)(1)

              [ ] on (date) pursuant to paragraph (a)(1)

              [ ] 75 days after filing pursuant to paragraph (a)(2)

              [ ] on (date) pursuant to paragraph (a)(2) of Rule 485.

IF APPROPRIATE, CHECK THE FOLLOWING BOX:

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

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

  TITLE OF SECURITIES BEING REGISTERED: Common Stock, par value $.10 per share.

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

PROSPECTUS

February 25, 2005

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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
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Merrill Lynch Global Allocation Fund, Inc. at a Glance ............... 3

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

Fees and Expenses .................................................... 8

[GRAPHIC OMITTED]

DETAILS ABOUT THE FUND
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How the Fund Invests ................................................ 11

Investment Risks .................................................... 13

[GRAPHIC OMITTED]

YOUR ACCOUNT
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Pricing of Shares ................................................... 27

How to Buy, Sell, Transfer and Exchange Shares ...................... 36

Participation in Fee-Based Programs ................................. 45

[GRAPHIC OMITTED]

MANAGEMENT OF THE FUND
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Merrill Lynch Investment Managers, L.P. ............................. 48

Financial Highlights ................................................ 50

[GRAPHIC OMITTED]

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

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

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

[GRAPHIC OMITTED]
Key Facts

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. AT A GLANCE
--------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The investment objective of the Fund is to provide high TOTAL INVESTMENT RETURN
through a fully managed investment policy utilizing United States and foreign
EQUITY SECURITIES, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends.

(sidebar)
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.

TOTAL INVESTMENT RETURN -- the combination of capital appreciation and
investment income.

EQUITY SECURITIES -- common stock, preferred stock, securities convertible into
common stock or securities or other instruments whose price is linked to the
value of common stock.

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)

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests in a portfolio of equity, debt and money market securities.
Generally, the Fund's portfolio will include both equity and debt securities. At
any given time, however, the Fund may emphasize either debt securities or equity
securities. In selecting equity investments, the Fund mainly seeks securities
that Fund management believes are undervalued. The Fund may buy debt securities
of varying maturities. The Fund may invest in high yield or "JUNK" bonds. When
choosing investments, Fund management considers various factors, including
opportunities for equity or debt investments to increase in value, expected
dividends and interest rates. The Fund generally seeks diversification across
markets, industries and issuers as one of its strategies to reduce volatility.

Generally, the Fund will invest primarily in the securities of corporate and
governmental issuers located in North and South America, Europe, Australia and
the Far East. The Fund may emphasize foreign securities when Fund management
expects these investments to outperform U.S. securities. When choosing
investment markets, Fund management considers various factors, including
economic and political conditions, potential for economic growth and possible
changes in currency exchange rates.

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 because a particular
stock or bond market in which the Fund invests is rising or falling. In
addition, there are specific factors that may affect the value of a particular
investment. Also, Fund management may select securities that underperform the
markets, the relevant indices or other funds with similar investment objectives
and investment strategies. Changes in the value of the Fund's debt investments
may also occur in response to interest rate movements -- generally, when
interest rates go up, the value of debt securities goes down. If the value of
the Fund's investments goes down, you may lose money.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 3

[GRAPHIC OMITTED]
Key Facts

The Fund's investments in debt securities are also subject to CREDIT RISK and
CALL AND REDEMPTION RISK. In addition, high yield bonds may be volatile and
subject to LIQUIDITY and LEVERAGE RISK and heightened credit risk.

(sidebar)
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.

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 sell

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.

CURRENCY RISK -- the risk that changes in the exchange rate between currencies
will adversely affect the value (in U.S. dollar terms) of an investment.
(end sidebar)

The Fund may invest a substantial portion of its assets in foreign securities.
Foreign investing involves special risks -- including foreign CURRENCY RISK and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.

WHO SHOULD INVEST?

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

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

o Are looking for capital appreciation for long term goals, but
also seek some current income

o Want a professionally managed portfolio without the
administrative burdens of direct investments in equity and debt
securities

o Are willing to accept the risk that your investment may fluctuate
over the short term

o Are looking for exposure to a variety of foreign markets

o Are willing to accept the risks of foreign investing in order to
seek high total investment return

o Are prepared to receive taxable distributions of ordinary income
and capital gains

4 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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 Financial Times Stock
Exchange (FTSE) World Index, a broad measure of market performance, and other
broad based indices. 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.

[BAR CHART OMITTED]

22.39% 14.95% 10.34% -0.42% 26.47% 7.83% 1.01% -8.66% 34.97% 13.36%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
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
17.85% (quarter ended June 30, 2003) and the lowest return for a quarter was
-14.39% (quarter ended September 30, 2002). The year-to-date return as of
December 31, 2004 was 13.36%.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 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.

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

Merrill Lynch Global Allocation Fund, Inc. -- Class A#:
Return Before Taxes## 8.28% 8.43% 11.78%
--------------------------------------------------------------------------------------------------------------
Merrill Lynch Global Allocation Fund, Inc. -- Class B:
Return Before Taxes## 9.36% 8.48% 11.69%*
Return After Taxes on Distributions## 8.41% 6.80% 8.91%*
Return After Taxes on Distributions and Sale of Fund Shares## 6.31% 6.34% 8.55%*
--------------------------------------------------------------------------------------------------------------
Merrill Lynch Global Allocation Fund, Inc. -- Class C:
Return Before Taxes## 12.32% 8.76% 11.52%
--------------------------------------------------------------------------------------------------------------
Merrill Lynch Global Allocation Fund, Inc. -- Class I#:
Return Before Taxes## 8.50% 8.72% 12.07%
--------------------------------------------------------------------------------------------------------------
Merrill Lynch Global Allocation Fund, Inc. -- Class R:
Return Before Taxes## 13.95% -- 23.53%**
--------------------------------------------------------------------------------------------------------------
8.55%/
Financial Times Stock Exchange (FTSE) World Index+ 16.06% -1.27% 27.90%++
--------------------------------------------------------------------------------------------------------------
12.07%/
Standard & Poor's (S&P) 500 Index++ 10.88% -2.30% 17.62%++++
--------------------------------------------------------------------------------------------------------------
Financial Times Stock Exchange (FTSE) World Index (ex-US) 6.22%/
Equities++ 21.75% 0.15% 34.93%++
--------------------------------------------------------------------------------------------------------------
6.97%/
Merrill Lynch Treasury Index GAO5++ 2.40% 7.24% 3.04%++++
--------------------------------------------------------------------------------------------------------------
7.33%/
Citigroup Non-US Dollar World Govt Bond Index++ 12.14% 8.77% 16.02%++++
--------------------------------------------------------------------------------------------------------------

# 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.

* Class B shares automatically conert to Class A shares after approximately
eight years. All returns for periods greater than eight years reflect this
conversion.

** Class inception date is January 3, 2003.

+ The FTSE World Index is a broad-based capitalization-weighted index
comprised of 2,200 equities from 24 countries in 12 regions, including the
United States. Performance does not reflect the deduction of fees, expenses
or taxes. Past performance is not predictive of future performance.

++ Ten years and since January 31, 2003.

6 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

(continued from previous page)

++ The S&P 500 Index is a widely recognized, unmanaged index of common stock
prices. The FTSE World Index (ex-U.S.) Equities is an unmanaged
capitalization-weighted index comprised of 1,630 companies in 28 countries,
excluding the United States. The Merrill Lynch Treasury Index GA05 is an
unmanaged index designed to track the total return of the current coupon
five-year U.S. Treasury bond. The Citigroup Non-US Dollar World Govt Bond
Index (formerly the Salomon Brothers World Government Bond Index (ex-U.S.))
is an unmanaged, market capitalization-weighted index that tracks ten
government bond indices, excluding the United States. Performance of an
index does not reflect the deduction of fees, expenses or taxes. Past
performance is not predictive of future performance.

++++ Ten years and since January 3, 2003.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 7

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Key Facts

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

The Fund offers five 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.

(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)

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 CLASS
YOUR INVESTMENT):(a) CLASS A B(b) CLASS C CLASS I CLASS R
-----------------------------------------------------------------------------------------------------------------------

Maximum Sales Charge (load) imposed
on purchases (as a percentage of
offering price) 5.25%(c) None None 5.25%(c) None
-----------------------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load)
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower) None(d) 4.00%(c) 1.00%(c) None(d) None
-----------------------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed
on dividend reinvestments None None None None None
-----------------------------------------------------------------------------------------------------------------------
Redemption Fee(e) 2.00% 2.00% 2.00% 2.00% 2.00%
-----------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None None
-----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS):
-----------------------------------------------------------------------------------------------------------------------

MANAGEMENT FEE(f) 0.75% 0.75% 0.75% 0.75% 0.75%
------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12B-1)
FEES(g) 0.25% 1.00% 1.00% None 0.50%
------------------------------------------------------------------------------------------------------------------------
Other expenses (including transfer
agency fees)(h) 0.18% 0.20% 0.21% 0.19% 0.20%
------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating
Expenses(f) 1.18% 1.95% 1.96% 0.94% 1.45%
------------------------------------------------------------------------------------------------------------------------

(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 eight
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.

8 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

(continued from previous page)

(e) A redemption fee may be charged on redemptions of Fund shares made within
30 days of purchase. See "Your Account -- Pricing of Shares -- Redemption
Fee."

(f) The Manager has agreed to voluntarily waive a portion of the management
fee. The Manager may discontinue or reduce this waiver of fees at any time
without notice. For the fiscal year ended October 31, 2004, the Manager
received a fee, net of voluntary waiver, at an annual rate of 0.69% of the
Fund's average daily net assets. After taking into account this fee waiver,
the Total Annual Fund Operating Expense ratios were 1.13% for Class A,
1.89% for Class B, 1.90% for Class C, 0.88% for Class I and 1.38% for Class
R shares.

(g) 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, Class C or Class R 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.

(h) 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 $639 $880 $1,140 $1,882
---------------------------------------------------
Class B $598 $912 $1,252 $2,075#
---------------------------------------------------
Class C $299 $615 $1,057 $2,285
---------------------------------------------------
Class I $616 $809 $1,018 $1,619
---------------------------------------------------
Class R $148 $459 $792 $1,735
---------------------------------------------------

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 9

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Key Facts

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

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

Class A $639 $880 $1,140 $1,882
----------------------------------------------------
Class B $198 $612 $1,052 $2,075#
----------------------------------------------------
Class C $199 $615 $1,057 $2,285
----------------------------------------------------
Class I $616 $809 $1,018 $1,619
----------------------------------------------------
Class R $148 $459 $792 $1,735
----------------------------------------------------

# Assumes conversion to Class A shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table shown on the previous
page.

10 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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Details About
the Fund

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

The Fund's investment objective is to provide high total investment return
through a fully managed investment policy utilizing United States and foreign
equity securities, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends. In other words, the
Fund seeks to achieve a combination of capital growth and income.

(sidebar)
ABOUT THE PORTFOLIO MANAGEMENT TEAM

The Fund is managed by members of a team of investment professionals who
participate in the team's research process and stock selection. Dennis W.
Stattman is primarily responsible for the day-to-day management of the Fund.
Mr. Stattman has been the Fund's senior portfolio manager since 2002. He was
senior co-portfolio manager of the Fund from 2000 to 2002 and an associate
portfolio manager of the Fund from 1999 to 2000. Mr. Stattman has been a
Managing Director of Merrill Lynch Investment Managers since 1998. Dan Chamby
has been the Fund's associate portfolio manager since 2004.

ABOUT THE MANAGER

The Fund is managed by Merrill Lynch Investment Managers.
(end sidebar)

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

The Fund seeks to achieve its objective by investing in both equity and debt
securities, including money market securities and other short-term securities or
instruments, of issuers located around the world. There is no limit on the
percentage of assets the Fund can invest in a particular type of security.
Generally, the Fund seeks diversification across markets, industries and issuers
as one of its strategies to reduce volatility. The Fund has no geographic limits
on where its investments may be located. This flexibility allows Fund management
to look for investments in markets around the world that it believes will
provide the best relative asset allocation to meet the Fund's objective.

Fund management uses the Fund's investment flexibility to create a portfolio of
assets that, over time, tends to be relatively balanced between equity and debt
securities and that is widely diversified among many individual investments.
While the Fund can, and does, look for investments in all the markets of the
world, it will typically invest a majority of its assets in the securities of
companies and governments located in North and South America, Europe, Australia
and the Far East. In making investment decisions, Fund management tries to
identify the long term trends and changes that could benefit particular markets
and/or industries relative to other markets and industries. Fund management
will consider such factors as the rate of economic growth, natural resources,
capital reinvestment and the social and political environment when selecting
the markets. In deciding between equity and debt investments, Fund management
looks at a number of factors, including the relative opportunity for capital
appreciation, capital recovery risk, dividend yields and the level of interest
rates paid on debt securities of different maturities.

Fund management may also, from time to time, identify certain real assets, such
as real estate or precious metals, that Fund management believes will increase
in value because of economic trends and cycles or political or other

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 11

[GRAPHIC OMITTED]
Details About the Fund

events. The Fund may invest a portion of its assets in securities related to
those real assets such as stock, bonds or convertible bonds issued by real
estate investment trusts.

EQUITY SECURITIES -- The Fund can invest in all types of equity securities,
including common stock, preferred stock, warrants and stock purchase rights of
companies of any market capitalization. In selecting stocks and other
securities that are convertible into stocks, Fund management emphasizes stocks
that it believes are undervalued. Fund management places particular emphasis on
companies with below average price/earnings ratios or that may pay above
average dividends. Fund management may also seek to invest in the stock of
smaller or emerging growth companies that it expects will provide a higher
total return than other equity investments. Investing in smaller or emerging
growth companies involves greater risk than investing in more established
companies.

DEBT SECURITIES -- The Fund can invest in all types of debt securities,
including U.S. and foreign government bonds, corporate bonds and convertible
bonds, mortgage and asset backed securities, and securities issued or
guaranteed by certain international organizations such as the World Bank.

The Fund may invest up to 35% of its total assets in "junk" bonds, corporate
loans and distressed securities. Junk bonds are bonds that are rated below
investment grade by independent rating agencies or are bonds that are not rated
but which Fund management considers to be of comparable quality. Corporate
loans are direct obligations of U.S. or foreign corporations that are purchased
by the Fund in the secondary market. Distressed securities are securities that
are in default on payments of interest or principal at the time the Fund buys
the securities or are issued by a bankrupt entity. These securities offer the
possibility of relatively higher returns but are significantly riskier than
higher rated debt securities. Fund management will invest in these securities
only when it believes that they will provide an attractive total return,
relative to their risk, as compared to higher quality debt securities.

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

SHORT-TERM SECURITIES OR INSTRUMENTS -- The Fund can invest in high quality
short-term U.S. dollar or non-U.S. dollar denominated fixed income securities
or other instruments, such as U.S. or foreign government securities, commercial

12 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

paper and money market instruments issued by U.S. or foreign commercial banks
or depository institutions. Fund management may increase the Fund's investment
in these instruments in times of market volatility or when it believes that it
is prudent or timely to be invested in lower yielding but less risky
securities. Large investments in such securities or instruments may prevent the
Fund from achieving its investment objective.

DERIVATIVES -- The Fund may use derivatives, including options, futures,
indexed securities, inverse securities, swaps and forward contracts both to
seek to increase the return of the Fund and to hedge (or protect) the value of
its assets against adverse movements in currency exchange rates, interest rates
and movements in the securities markets. Derivatives are financial instruments
whose value is derived from another security, a commodity (such as oil or gas),
a currency or an index such as the S&P 500 Index. The use of options, futures,
indexed securities, inverse securities, swaps and forward contracts can be
effective in protecting or enhancing the value of the Fund's assets. While
these instruments involve certain risks, the Fund will not engage in certain
strategies that are considered highly risky and speculative.

The Fund may invest in securities that provide a return based on fluctuations
in a stock or other financial index. For example, the Fund may invest in a
security that increases in value with the price of a particular securities
index. In some cases, the return of the security may be inversely related to
the price of the index. This means that the value of the security will rise as
the price of the index falls and vice versa. Although these types of securities
can make it easier for the Fund to access certain markets or hedge risks of
other assets held by the Fund, these securities are subject to the risks
related to the underlying index or other assets.

The Fund may also lend its portfolio securities, may hold non-U.S. dollar cash
investments, and may invest 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.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 13

[GRAPHIC OMITTED]
Details About the Fund

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

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

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

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

FOREIGN SECURITIES RISK -- Securities traded on foreign markets have often
(though not always) performed differently from securities traded in the United
States. However, such investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money. In
particular, the Fund is subject to the risk that because there may be fewer
investors on foreign exchanges and a smaller number of securities traded each
day, it may make it difficult for the Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up and down more
than prices of securities traded in the United States.

Foreign Economy Risk -- The economies of certain foreign markets may not
compare favorably with the economy of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources
and balance of payments position. Certain foreign economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a

14 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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 instruments in their capital markets or in certain
industries. Any of these actions could severely affect securities prices,
impair the 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 the Fund's operations.

Other potential foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing 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.

Currency Risk -- Securities and other instruments in which the Fund invests may
be denominated or quoted in currencies other than the U.S. dollar. For this
reason, changes in foreign currency exchange rates affect the value of the
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 strong 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 do not supervise and regulate stock exchanges, brokers and the sale
of securities to the same extent as in 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 material non-public 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.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 15

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Details About the Fund

Certain Risks of Holding Fund Assets Outside the United States -- The 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 of their operations. Also, the laws of
certain countries limit the Fund's ability to recover its assets if a foreign
bank, depository or issuer of a security, or any of their agents, goes bankrupt.
In addition, it is often more expensive for the 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 the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than for investment companies invested 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 and clearance procedures and trade regulations also may involve
certain risks (such as delays in payment for or delivery of securities) not
typically associated with 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.

At times, settlements in certain foreign countries have not kept pace with the
number of securities transactions. These problems may make it difficult for the
Fund to carry out transactions. If the 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 the Fund cannot settle or is delayed in settling a
sale of securities, it may lose money if the value of the security then
declines or, if it has contracted to sell the security to another party, the
Fund could be liable for any losses incurred.

EMERGING MARKETS RISK -- Many of the markets in which the Fund may invest
generally are considered to be emerging markets. The risks of foreign
investments are usually much greater for emerging markets. Investments in
emerging markets may be considered speculative. Emerging markets include those
in countries defined as emerging or developing by the World Bank, the
International Finance Corporation or the United Nations. Emerging markets are
riskier because they develop unevenly and may never fully develop. They are
more likely to experience hyperinflation and currency devaluations, which

16 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

adversely affect returns to U.S. investors. In addition, the securities markets
in many of these countries have far lower trading volumes and less liquidity
than developed markets. Since these markets are often small, they may be more
likely to suffer sharp and frequent price changes or long term price depression
because of adverse publicity, investor perceptions or the actions of a few
large investors. In addition, traditional measures of investment value used in
the United States, such as price to earnings ratios, may not apply to certain
small markets.

Many emerging markets have histories of political instability and abrupt changes
in policies. As a result, their governments are more likely to take actions that
are hostile or detrimental to private enterprise or foreign investment than
those of more developed countries. Certain emerging markets may also face other
significant internal or external risks, including the risk of war, and ethnic,
religious and racial conflicts. In addition, governments in many emerging market
countries participate to a significant degree in their economies and securities
markets, which may impair investment and economic growth.

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.

JUNK BONDS -- Although junk bonds generally pay higher rates of interest than
investment grade bonds, junk bonds are high risk investments that may cause
income and principal losses for the Fund. The major risks in junk bond
investments include:

o Junk bonds may be issued by less creditworthy companies. 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.

o Prices of junk bonds are subject to extreme price fluctuations.
Adverse changes in an issuer's industry and general economic
conditions may have a greater impact on the prices of junk bonds
than on other higher rated fixed income securities.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 17

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Details About the Fund

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

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 the Fund's securities than is
the case with securities trading in a more liquid market.

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

CORPORATE LOANS -- Commercial banks and other financial institutions or
institutional investors 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 rates of U.S. banks. As a
result, the value of corporate loan investments is generally less exposed to
the adverse effects of shifts in market interest rates than investments that
pay a fixed rate of interest. However, because the trading market for certain
corporate loans may be less developed than the secondary market for bonds and
notes, the Fund may experience difficulties in selling its corporate loans.
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, the Fund may not recover
its investment or recovery may be delayed. By investing in a corporate loan,
the Fund may become a member of the syndicate.

18 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

The corporate loans in which the Fund invests are subject to the risk of loss of
principal and income. Although borrowers frequently provide collateral to secure
repayment of these obligations they do not always do so. If they do provide
collateral, the value of the collateral may not completely cover the borrower's
obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit the Fund's
rights to its collateral. In addition, the value of collateral may erode during
a bankruptcy case. In the event of a bankruptcy, the holder of a corporate loan
may not recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.

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

DEPOSITARY RECEIPTS -- The Fund may invest in securities of foreign issuers in
the form of depositary receipts or other securities that are convertible into
securities of foreign issuers. American Depositary Receipts are receipts
typically issued by an American bank or trust company that evidence underlying
securities issued by a foreign corporation. European Depositary Receipts (issued
in Europe) and Global Depositary Receipts (issued throughout the world) each
evidence a similar ownership arrangement. The Fund may invest in unsponsored
Depositary Receipts. The issuers of unsponsored Depositary Receipts are not
obligated to disclose information that is, in the United States, considered
material. Therefore, there may be less information available regarding these
issuers and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts are generally
subject to the same risks as the foreign securities that they evidence or into
which they may be converted.

SMALL CAP AND EMERGING GROWTH SECURITIES -- Small cap or emerging growth
companies may have limited product lines or markets. They may be less
financially secure than larger, more established companies. They may depend on
a small number of key personnel. If a product fails or there are other adverse
developments, or if management changes, the Fund's investment in a small cap or
emerging growth company may lose substantial value.

The securities of small cap or emerging growth companies generally trade in
lower volumes and are subject to greater and more unpredictable price changes
than larger cap securities or the market as a whole. In addition, small cap

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 19

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Details About the Fund

securities may be particularly sensitive to changes in interest rates, borrowing
costs and earnings. Investing in small cap and emerging growth securities
requires a longer term view.

WARRANTS -- A warrant gives the Fund the right to buy a quantity of stock. The
warrant specifies the amount of underlying stock, the purchase (or "exercise")
price, and the date the warrant expires. The Fund has no obligation to exercise
the warrant and buy the stock. A warrant has value only if the Fund can either
exercise it or sell it before it expires. If the price of the underlying stock
does not rise above the exercise price before the warrant expires, the warrant
generally expires without any value and the Fund loses any amount it paid for
the warrant. Thus, investments in warrants may involve substantially more risk
than investments in common stock. Warrants may trade in the same markets as
their underlying stock; however, the price of the warrant does not necessarily
move with the price of the underlying stock.

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

SECURITIES LENDING -- The Fund may lend securities with a value up to 33 1/3% of
its total assets to financial institutions that provide cash or securities
issued or guaranteed by the U.S. Government as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, the Fund may lose money and there may be a
delay in recovering the loaned securities. The Fund could also lose money if it
does not recover the securities and/or the value of the collateral falls,
including the value of investments made with cash collateral. These events could
trigger adverse tax consequences to the Fund.

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:

20 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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.

Currency risk -- the risk that changes in the exchange rate between
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 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.

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.

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 21

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Details About the Fund

INDEXED AND INVERSE SECURITIES -- The Fund may invest in securities the
potential return of which is directly related to changes in an underlying index,
known as indexed securities. The return on indexed securities will rise when the
underlying index rises and fall when the index falls. The Fund may also invest
in securities whose return is inversely related to changes in an interest rate
or index ("inverse securities"). In general, the return on inverse securities
will decrease when the underlying index or interest rate goes up and increase
when that index or interest rate goes down. Certain indexed and inverse
securities have greater sensitivity to changes in interest rates or equity index
levels than other securities, and the Fund's investment in such instruments may
decline significantly in value if interest rates or equity index levels move in
a way Fund management does not anticipate.

CONVERTIBLE SECURITIES -- Convertible securities generally are debt securities
or preferred stock that may be converted into common stock. Convertibles
typically pay current income as either interest (debt security convertibles) or
dividends (preferred stock). A convertible's value usually reflects both the
stream of current income payments and the market value of the underlying common
stock. The market value of a convertible performs like that of a regular debt
security; that is, if market interest rates rise, the value of a convertible
usually falls. In addition, convertible securities are subject to the risk that
the issuer will not be able to pay interest or dividends when due, and their
market value may change based on changes in the issuer's credit rating or the
market's perception of the issuer's creditworthiness. Since it derives a portion
of its value from the common stock into which it may be converted, a convertible
security is also subject to the same types of market and issuer risk as apply to
the underlying common stock.

ASSET BACKED SECURITIES -- Asset-backed securities are fixed income securities
that represent an interest in an underlying pool of assets, such as credit card
receivables. Like traditional fixed income securities, the value of asset-backed
securities typically increases when interest rates fall and decreases when
interest rates rise. Certain asset-backed securities may also be subject to the
risk of prepayment. In a period of declining interest rates, borrowers may pay
what they owe on the underlying assets more quickly than anticipated. Prepayment
reduces the yield to maturity and the average life of the asset-backed
securities. In addition, when the Fund reinvests the proceeds of a prepayment it
may receive a lower interest rate. Asset-backed securities may also be subject
to extension risk, that is, the risk that, in a period of rising interest rates,

22 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

prepayments may occur at a slower rate than expected. As a result, the average
duration of the Fund's bond portfolio may increase. The value of longer-term
securities generally changes more in response to changes in interest rates than
shorter-term securities.

MORTGAGE BACKED SECURITIES -- Mortgage-backed securities represent the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated and the Fund has to invest
the proceeds in securities with lower yields. This risk is known as "prepayment
risk." When interest rates rise, certain types of mortgage-backed securities
will be paid off more slowly than originally anticipated and the value of these
securities will fall. This risk is known as extension risk.

Because of prepayment risk and extension risk, mortgage-backed securities react
differently to changes in interest rates than other fixed income securities.
Small movements in interests rates (both increases and decreases) may quickly
and significantly reduce the value of certain mortgage-backed securities.

DISTRESSED SECURITIES -- The Fund may invest in distressed securities.
Distressed securities are speculative and involve substantial risks. Generally,
the Fund will invest in distressed securities when Fund management believes
they offer significant potential for higher returns or can be exchanged for
other securities that offer this potential. However, there can be no assurance
that the Fund will achieve these returns or that the issuer will make an
exchange offer or adopt a plan of reorganization. The Fund will generally not
receive interest payments on the distressed securities and may incur costs to
protect its investment. In addition, distressed securities involve the
substantial risk that principal will not be repaid. Distressed securities and
any securities received in an exchange for such securities may be subject to
restrictions on resale.

SOVEREIGN DEBT -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign governmental entities. These
investments are subject to the risk that a governmental entity may delay or
refuse to pay interest or repay principal on its sovereign debt, due, for
example, to cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of the governmental entity's debt
position in

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 23

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Details About the Fund

relation to the economy or the failure to put in place economic reforms required
by the International Monetary Fund or other multilateral agencies. If a
governmental entity defaults, it may ask for more time in which to pay or for
further loans. There is no legal process for collecting sovereign debts that a
government does not pay nor are there bankruptcy proceedings through which all
or part of the sovereign debt that a governmental entity has not repaid may be
collected.

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.

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.

PRECIOUS METAL RELATED SECURITIES -- Prices of precious metals and of precious
metal related securities historically have been very volatile. The high
volatility of precious metal prices may adversely affect the financial
condition of companies involved with precious metals. The production and sale
of precious metals by governments or central banks or other larger holders can
be affected by various economic, financial, social and political factors, which
may be unpredictable and may have a significant impact on the prices of
precious metals. Other factors that may affect the prices of precious metals
and securities related to them include changes in inflation, the outlook for
inflation and changes in industrial and commercial demand for precious metals.

24 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

REAL ESTATE RELATED SECURITIES -- The main risk of real estate related
securities is that the value of the underlying real estate may go down. Many
factors may affect real estate values. These factors include both the general
and local economies, the amount of new construction in a particular area, the
laws and regulations (including zoning and tax laws) affecting real estate and
the costs of owning, maintaining and improving real estate. The availability of
mortgages and changes in interest rates may also affect real estate values. If
the Fund's real estate related investments are concentrated in one geographic
area or in one property type, the Fund will be particularly subject to the
risks associated with that area or property type.

REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security at a mutually
agreed-upon time and price. A purchase and sale contract is similar to a
repurchase agreement, but purchase and sale contracts provide that the
purchaser receives any interest on the security paid during the period. If a
repurchase agreement or purchase and sale contract is not denominated in U.S.
dollars, the Fund's return may be affected by currency fluctuations. If the
other party to a repurchase agreement or purchase and sale contract defaults on
its obligation under the agreement, the Fund may suffer delays and incur costs
or lose money in exercising its rights under the agreement. If the seller fails
to repurchase the security in either situation and the market value declines,
the Fund may lose money.

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

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

Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 25

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Details About the Fund

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.

RULE 144A SECURITIES -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market, but carry the risk that the
active trading market may not continue.

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.

26 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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Your Account

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

The Fund offers five 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 0.25% 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, Class C or Class R shares, you will invest the full
amount of your purchase price, but you will be subject to a distribution fee of
0.75% per year for Class B shares and Class C shares, and 0.25% per year for
Class R shares and an account maintenance fee of 0.25% per year for all three
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.

If you redeem shares of any class within 30 days of purchase, you will
generally be charged a redemption fee unless certain conditions are met.

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 27

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Your Account

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

CLASS A CLASS B
-----------------------------------------------------------------------

Availability Generally available Generally available
through selected through selected
securities dealers security dealers and
and other financial other financial
intermediaries. intermediaries.
-----------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at No. Entire purchase
time of purchase. price is invested in
Lower sales charges shares of the Fund.
available for larger
investments.
-----------------------------------------------------------------------
Deferred Sales Charge? No. (May be Yes. Payable if you
charged for redeem within six
purchases over $1 years of purchase.
million that are
redeemed within
one year.)
-----------------------------------------------------------------------

CLASS C CLASS I CLASS R
-----------------------------------------------------------------------------------------

Availability Generally available Limited to certain Available only to
through selected eligible investors certain retirement
security dealers and including: plans.
other financial
intermediaries. o Current Class I
shareholders

o Certain
Retirement
Plans

o Participants in
certain programs
sponsored by
affiliates of the
Manager or selected
securities
dealers or other
financial
intermediaries

o Certain
employees and
affiliates of the
Manager or its
affiliates,
selected
securities
dealers and
other financial
intermediaries.
-----------------------------------------------------------------------------------------
Initial Sales Charge? No. Entire purchase Yes. Payable at No. Entire
price is invested in time of purchase. purchase price is
shares of the Fund. Lower sales charges invested in shares
available for larger of the Fund.
investments.
-----------------------------------------------------------------------------------------
Deferred Sales Charge? Yes. Payable if you No. (May be No.
redeem within one charged for
year of purchase. purchases over $1
million that are
redeemed within
one year.)
-----------------------------------------------------------------------------------------

28 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

CLASS A CLASS B
-----------------------------------------------------------------------

Account Maintenance 0.25% Annual 0.25% Annual
and Distribution Fees? Account Account
Maintenance Fee. Maintenance Fee.
No Distribution 0.75% Annual
Fee. Distribution Fee.
-----------------------------------------------------------------------
Redemption Fee? Yes. Payable if you Yes. Payable if you
redeem your shares redeem your shares
within 30 days of within 30 days of
purchase. purchase.
-----------------------------------------------------------------------
Conversion to Class A N/A Yes, automatically
shares? after approximately
eight years.
-----------------------------------------------------------------------

CLASS C CLASS I CLASS R
---------------------------------------------------------------------------------------------

Account Maintenance 0.25% Annual No. 0.25% Annual
and Distribution Fees? Account Account
Maintenance Fee. Maintenance Fee.
0.75% Annual 0.25% Annual
Distribution Fee. Distribution Fee.
---------------------------------------------------------------------------------------------
Redemption Fee? Yes. Payable if you Yes. Payable if you Yes. Payable if you
redeem your shares redeem your shares redeem your
within 30 days of within 30 days of shares within 30
purchase. purchase. days of purchase.
---------------------------------------------------------------------------------------------
Conversion to Class A No. No. No.
shares?
---------------------------------------------------------------------------------------------

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 29

[GRAPHIC OMITTED]
Your Account

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.

(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)

DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT# OFFERING PRICE
--------------------------------------------------------------------------------

Less than $25,000 5.25% 5.54% 5.00%
--------------------------------------------------------------------------------
$25,000 but less
than $50,000 4.75% 4.99% 4.50%
--------------------------------------------------------------------------------
$50,000 but less
than $100,000 4.00% 4.17% 3.75%
--------------------------------------------------------------------------------
$100,000 but less
than $250,000 3.00% 3.09% 2.75%
--------------------------------------------------------------------------------
$250,000 but less
than $1,000,000 2.00% 2.04% 1.80%
--------------------------------------------------------------------------------
$1,000,000 and over## None None None
--------------------------------------------------------------------------------

# Rounded to the nearest one-hundredth percent.

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

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

30 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

In order to receive a reduced sales charge, at the time you purchase shares of
the Fund or any other Select Pricing Fund, you should inform your financial
adviser or other financial intermediary of any other Class A, Class B, Class C
and/or Class I shares of the Fund or any other Select 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 Employer-sponsored retirement or savings plans that meet certain
eligibility requirements

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 31

[GRAPHIC OMITTED]
Your Account

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

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 0.25% account maintenance
fee, while Class I shares are not. The Distributor normally pays the annual
0.25% 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 800-637-3863.

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

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within six
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% for both classes of shares
each year under distribution plans that the Fund has adopted under Rule

32 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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.

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

The Distributor currently pays dealers a sales concession of 1.00% of the
purchase price of Class C shares from its own resources at the time of sale.
The Distributor pays the annual 0.75% Class C shares distribution fee and the
annual 0.25% 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 six years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:

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

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 33

[GRAPHIC OMITTED]
Your Account

# 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. Shares purchased prior to June 1, 2001 will be subject to the
four-year contingent deferred sales charge schedule then in effect. 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 Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old

o Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and certain retirement plan rollovers

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

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

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

Your Class B shares convert automatically into Class A shares approximately
eight 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

34 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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 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,
withdrawals through a Systematic Withdrawal Plan and redemptions of Class C
shares by certain retirement plans.

Class C shares do not offer a conversion privilege.

CLASS R SHARES

Class R shares are available only to certain retirement plans. If you buy Class
R shares, you will pay neither an initial sales charge nor a contingent
deferred sales charge. However, Class R shares are subject to a distribution
fee of 0.25% per year and an account maintenance fee of 0.25% per year. 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. Class R shares do not offer a conversion
privilege.

The Distributor currently pays the annual 0.25% Class R shares distribution fee
and annual 0.25% Class R shares account maintenance fee as an ongoing
concession and as a service fee, respectively, to dealers on a monthly basis.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 35

[GRAPHIC OMITTED]
Your Account

Redemption Fee

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

o Redemptions resulting from death or disability

o Redemptions through a Systematic Withdrawal Plan

o Redemptions of shares purchased through an Automatic Investment
Plan

o Redemptions of shares acquired through dividend reinvestment

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

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

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.

36 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

To learn more about buying, selling, transferring or exchanging shares through
the Transfer Agent, call 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 retirement plans or Uniform Gifts or Transfers to
Minors Act accounts.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 37

[GRAPHIC OMITTED]
Your Account

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.
appropriate for you Be 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:
o $250 for certain fee-based programs
o $100 for retirement plans
(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
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 retirement plans have a minimum additional
purchase of $1 and 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.
--------------------------------------------------------------------------------------------------------------------

38 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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
800-637-3863 for details.
-------------------------------------------------------------------------------------------------------------------------------

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 39

[GRAPHIC OMITTED]
Your Account

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 or retirement 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
held the exchanged shares for 30 days or less you may also be
charged a redemption fee. 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 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.
-------------------------------------------------------------------------------------------------------------------------------

40 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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 Directors, 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 also generally charges a 2.00% redemption fee on redemptions made
within 30 days of the purchase or exchange of shares. 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.

Because the Fund may invest a substantial portion of its assets in foreign
securities that may trade in markets that close some time before the time at
which the Fund calculates its net asset value, the Fund is subject to the risks
of time zone arbitrage -- a market timing strategy that seeks to take advantage
of changes

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 41

[GRAPHIC OMITTED]
Your Account

in the value of the Fund's portfolio holdings during the period between the
close of the markets in which the Fund's portfolio securities primarily trade
and the close of the New York Stock Exchange. For this reason, the Fund may, at
times, fair value its portfolio securities in order to deter such market timing.
See "Your Account -- How Shares are Priced."

The Fund applies these policies to all shareholders (except that there are
certain conditions under which the redemption fee will not be assessed -- See
"Your Account -- Pricing of Shares -- Redemption Fee"). 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 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.

42 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.

(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)

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 Exchange. 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 Exchange. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
Exchange that may not be reflected in the computation of a Fund's net asset
value. If market quotations are not readily available or, in the Manager's
judgment, do not accurately reflect fair value for a security or if a
security's value has been materially affected by events occurring after the
close of the market on which the security is principally traded, that security
may be valued by another method that the Board of Directors believes accurately
reflects the fair value.

The Fund generally values fixed income portfolio securities using market prices
provided by an independent pricing service approved by the Fund's Board of
Directors. 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 Directors believes
more accurately reflects the fair value. 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 that value of a particular security.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 43

[GRAPHIC OMITTED]
Your Account

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 by the Manager that materially
affect the Fund's net asset value are subject to review, approval or
ratification, as appropriate, by the Board. In determining whether current
market prices are readily available or reliable, the Manager monitors the
information it receives in the ordinary course of its investment management
responsibilities for significant events that it believes in good faith will
affect the market prices of the securities of issuers held by the Fund. Those
may include events affecting specific issuers (for example, a halt in trading of
the securities of an issuer on an exchange during the trading day or a company
announcement) or events affecting securities markets generally (for example,
market volatility or a natural disaster).

If, after the close of the principal market on which a security held by the
Fund is traded and before the time as of which the Fund's net asset value is
calculated that day, a significant event occurs that the Manager learns of and
believes in the exercise of its judgment will cause a material change in the
value of that security from the closing price of the security on the principal
market on which it is traded, the Manager will use its best judgment to
determine a fair value for that security. The Manager believes that foreign
securities values may be affected by volatility that occurs in U.S. markets on
a trading day after the close of foreign securities markets. The fair valuation
procedures, therefore, include a procedure whereby foreign securities prices
may be "fair valued" by an independent pricing service approved by the Board of
Directors to take those factors into account.

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.

44 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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, Class C or Class R shares, and Class R shares will have a
higher net asset value than Class B or Class C shares. Also, dividends paid on
Class A, Class I and Class R shares will generally be higher than dividends
paid on Class B and Class C shares because Class A, Class I and Class R shares
have lower expenses.

PARTICIPATION IN FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

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

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

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 45

[GRAPHIC OMITTED]
Your Account

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

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

The Fund will distribute net investment income, if any, 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 without a sales charge 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. Although this cannot
be predicted with any certainty, the Fund anticipates that the majority of its
dividends, if any, will consist of capital gains. Capital gains may be taxable
to you at different rates depending on how long the Fund held the assets sold.

(sidebar)
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income 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)

You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, you generally will be treated as having sold your shares and any
gain on the transaction may be subject to tax. Certain dividend income,
including dividends received from qualifying foreign corporations, and
long-term capital gain are eligible for taxation at a reduced rate that applies
to individual shareholders. To the extent that the Fund's distributions are
derived from dividends received from nonqualifying foreign corporations and
short-term capital gain, such distribuitons generally will not be eligible for
taxation at the reduced rate.

If you are neither a lawful permanent resident nor a citizen of the United
States or if you are a foreign entity, the Fund's ordinary income dividends
will generally be subject to a 30% U.S. withholding tax, unless a lower treaty
rate applies.

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund
if certain requirements are met.

46 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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 the number you have provided is incorrect.

This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.

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

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

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 47

[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 Directors. The Manager has the responsibility for making all
investment decisions for the Fund. The Manager has a sub-advisory agreement
with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the
Manager may pay a fee for services it receives. The Manager receives for its
services to the Fund a fee at an annual rate of 0.75% of the average daily net
assets of the Fund. The Manager has agreed to voluntarily waive a portion of
the fee so that the Manager receives a fee at the annual rate of 0.75% of the
average daily net assets of the Fund for the first $2.5 billion; 0.70% of the
average daily net assets from $2.5 billion to $5.0 billion; 0.65% of the
average daily net assets from $5.0 billion to $7.5 billion; 0.625% of the
average daily net assets from $7.5 billion to $10 billion; and 0.60% of the
average daily net assets above $10 billion. The Manager may discontinue or
reduce this waiver of fees at any time without notice. For the fiscal year
ended October 31, 2004, the Manager received a fee, net of the voluntary
waiver, at the annual rate of 0.69% 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 Asset Management U.K. Limited was organized
as an investment adviser in 1986 and acts as sub-adviser to more than 50
registered investment companies. Merrill Lynch Investment Managers, L.P. and
its affiliates had approximately $496 billion in investment company and other
portfolio assets under management as of December 2004.

CONFLICTS OF INTEREST

The investment activities of the Manager and its affiliates in the management
of, or their interest in, their own accounts and other accounts they manage, may
present conflicts of interest that could disadvantage the Fund and its
shareholders. The Manager provides investment management services to other funds
and discretionary managed accounts that follow an investment program similar to
that of the Fund. Merrill Lynch (including, for these purposes, the Manager,
Merrill Lynch & Co., Inc. and their affiliates, directors, partners, trustees,
managing members, officers and employees), is a diversified global financial
services firm involved with a broad spectrum of financial services and asset
management activities that may, for example, engage in the ordinary course of
business in activities in which its interests or the interests of its clients

48 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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.

Under a securities lending program approved by the Fund's Board of Directors,
the Fund has retained an affiliate of the Manager to serve as the securities
lending agent for the Fund to the extent that the Fund engages in the
securities lending program. For these services, the lending agent may receive a
fee from the Fund, including a fee based on the returns earned on the Fund's
investment of the cash received as collateral for the loaned securities. In
addition, Merrill Lynch is among the entities to which the Fund may lend its
portfolio securities under the securities lending program.

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 GLOBAL ALLOCATION FUND, INC. 49

[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 , 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 $14.27 $11.17 $12.50 $14.30 $14.77
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net# .23 .28 .35 .39 .44
-------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) --
net 1.72 3.23 (1.19) (.20) .90
-------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.95 3.51 (.84) .19 1.34
-------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net (.47) (.41) (.48) (.30) (.68)
-------------------------------------------------------------------------------------------------------------------------
In excess of investment income -- net -- -- -- -- --##
-------------------------------------------------------------------------------------------------------------------------
Realized gain -- net -- -- (.01) (1.69) (1.13)
-------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.47) (.41) (.49) (1.99) (1.81)
-------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $15.75 $14.27 $11.17 $12.50 $14.30
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
-------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 13.90% 32.10% (7.08)% 1.27% 9.86%
-------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.13% 1.18% 1.19% 1.19% 1.13%
-------------------------------------------------------------------------------------------------------------------------
Expenses 1.18% 1.22% 1.22% 1.24% 1.18%
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.54% 2.28% 2.85% 2.92% 3.11%
-------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $3,442,396 $2,675,367 $2,051,843 $1,846,554 $1,406,264
-------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42.58% 45.28% 58.42% 44.87% 53.75%
-------------------------------------------------------------------------------------------------------------------------

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 $13.99 $10.96 $12.25 $14.04 $14.52
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net# .11 .19 .25 .27 .33
-------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) --
net 1.69 3.15 (1.16) (.19) .88
-------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.80 3.34 (.91) .08 1.21
-------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net (.35) (.31) (.37) (.18) (.56)
-------------------------------------------------------------------------------------------------------------------------
In excess of investment income -- net -- -- -- -- --##
-------------------------------------------------------------------------------------------------------------------------
Realized gain -- net -- -- (.01) (1.69) (1.13)
-------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.35) (.31) (.38) (1.87) (1.69)
-------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $15.44 $13.99 $10.96 $12.25 $14.04
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
-------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 13.08% 31.05% (7.75)% .47% 9.05%
-------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
-------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.89% 1.96% 1.96% 1.96% 1.90%
-------------------------------------------------------------------------------------------------------------------------
Expenses 1.95% 2.00% 2.00% 2.00% 1.95%
-------------------------------------------------------------------------------------------------------------------------
Investment income -- net .75% 1.52% 2.04% 2.08% 2.40%
-------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $2,159,322 $2,094,428 $1,787,415 $2,650,313 $3,611,061
-------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42.58% 45.28% 58.42% 44.87% 53.75%
-------------------------------------------------------------------------------------------------------------------------

# Based on average shares outstanding.
## Amount is less than $(.01) per share.

* Total investment returns exclude the effects of sales charges.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
50

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 $13.66 $10.72 $12.02 $13.83 $14.33
--------------------------------------------------------------------------------------------------------------------
Investment income -- net# .11 .17 .25 .27 .32
--------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) --
net 1.65 3.10 (1.14) (.19) .87
--------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.76 3.27 (.89) .08 1.19
--------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
--------------------------------------------------------------------------------------------------------------------
Investment income -- net (.38) (.33) (.40) (.20) (.56)
--------------------------------------------------------------------------------------------------------------------
In excess of investment income -- net -- -- -- -- --##
--------------------------------------------------------------------------------------------------------------------
Realized gain -- net -- -- (.01) (1.69) (1.13)
--------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.38) (.33) (.41) (1.89) (1.69)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $15.04 $13.66 $10.72 $12.02 $13.83
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
--------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 13.08% 31.03% (7.76)% .42% 9.07%
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
--------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.90% 1.96% 1.96% 1.97% 1.91%
--------------------------------------------------------------------------------------------------------------------
Expenses 1.96% 2.00% 2.00% 2.01% 1.95%
--------------------------------------------------------------------------------------------------------------------
Investment income -- net .78% 1.45% 2.10% 2.12% 2.36%
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,698,382 $865,342 $521,679 $346,124 $312,568
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42.58% 45.28% 58.42% 44.87% 53.75%
--------------------------------------------------------------------------------------------------------------------

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 $14.31 $11.20 $12.53 $14.33 $14.79
--------------------------------------------------------------------------------------------------------------------
Investment income -- net# .27 .32 .38 .42 .48
--------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) --
net 1.72 3.23 (1.19) (.20) .90
--------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.99 3.55 (.81) .22 1.38
--------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
--------------------------------------------------------------------------------------------------------------------
Investment income -- net (.50) (.44) (.51) (.33) (.71)
--------------------------------------------------------------------------------------------------------------------
In excess of investment income -- net -- -- -- -- --##
--------------------------------------------------------------------------------------------------------------------
Realized gain -- net -- -- (.01) (1.69) (1.13)
--------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.50) (.44) (.52) (2.02) (1.84)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $15.80 $14.31 $11.20 $12.53 $14.33
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
--------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 14.21% 32.42% (6.83)% 1.52% 10.20%
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
--------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .88% .94% .94% .94% .88%
--------------------------------------------------------------------------------------------------------------------
Expenses .94% .97% .98% .98% .93%
--------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.79% 2.55% 3.09% 3.14% 3.40%
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
--------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,893,248 $1,370,866 $1,168,632 $1,284,915 $1,224,613
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover 42.58% 45.28% 58.42% 44.87% 53.75%
--------------------------------------------------------------------------------------------------------------------

# Based on average shares outstanding.
## Amount is less than $(.01) per share.

* Total investment returns exclude the effects of sales charges.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 51

[GRAPHIC OMITTED]
Management of the Fund

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

CLASS R
------------------------------------------
FOR THE PERIOD
FOR THE YEAR JANUARY 3, 2003#
ENDED OCTOBER TO OCTOBER 31,
31, 2004 2003
INCREASE (DECREASE) IN NET ASSET VALUE ---------------- -------------------

PER SHARE OPERATING PERFORMANCE:
------------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.04 $11.43
------------------------------------------------------------------------------------------------
Investment income -- net## .21 .08
------------------------------------------------------------------------------------------------
Realized and unrealized gain -- net 1.66 2.71
------------------------------------------------------------------------------------------------
Total from investment operations 1.87 2.79
------------------------------------------------------------------------------------------------
Less dividends from investment income -- net (.47) (.18)
------------------------------------------------------------------------------------------------
Net asset value, end of period $15.44 $14.04
------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
------------------------------------------------------------------------------------------------
Based on net asset value per share 13.60% 24.57%**
------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.38% 1.42%+
------------------------------------------------------------------------------------------------
Expenses 1.45% 1.47%+
------------------------------------------------------------------------------------------------
Investment income -- net 1.35% 1.93%+
------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $20,482 $341
------------------------------------------------------------------------------------------------
Portfolio turnover 42.58% 45.28%++
------------------------------------------------------------------------------------------------

# Commencement of operations.

## Based on average shares outstanding.

* Total investment returns exclude the effects of sales charges.

** Aggregate total investment return.
+ Annualized

++ Percentage shown is for the year ended October 31, 2003.

52 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

[THIS PAGE INTENTIONALLY LEFT BLANK]

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. 53

[THIS PAGE INTENTIONALLY LEFT BLANK]

54 MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

[FLOWCHART OMITTED]

-------------------------------------
POTENTIAL
INVESTORS

Open an account (two options)
-------------------------------------
---------------------------------- ----------------------------------
FINANCIAL ADVISER TRANSFER AGENT
OR SECURITIES DEALER
FINANCIAL DATA SERVICES, INC.
Advises shareholders on ADMINISTRATIVE OFFICES
their Fund investments. 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
THE FUND
SIDLEY AUSTIN BROWN & WOOD LLP The Board of Directors BROWN BROTHERS HARRIMAN & CO.
787 Seventh Avenue oversees the Fund. 40 Water Street
New York, New York 10019-6018 ------------------------------------- Boston, Massachusetts 02109
Provides legal advice to the Fund. Holds the Fund's assets
---------------------------------- for safekeeping.
----------------------------------

------------------------------------- ----------------------------------
ACCOUNTING SERVICES MANAGER
PROVIDER
MERRILL LYNCH INVESTMENT
STATE STREET BANK MANAGERS, L.P.
---------------------------------- AND TRUST COMPANY ADMINISTRATIVE OFFICES
INDEPENDENT REGISTERED 500 College Road East 800 Scudders Mill Road
PUBLIC ACCOUNTING FIRM Princeton, New Jersey 08540 Plainsboro, New Jersey 08536

Audits the financial Provides certain accounting MAILING ADDRESS
statements of the Fund. services to the Fund. P.O. Box 9011
---------------------------------- ------------------------------------- Princeton, New Jersey 08543-9011

TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.

MERRILL LYNCH ASSET
MANAGEMENT U.K. LIMITED

33 King William Street
London EC4R 9AS, England
Sub-Adviser to the Fund.
----------------------------------

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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
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
800-637-3863.

STATEMENT OF ADDITIONAL INFORMATION

The Statement of Additional Information contains further information about the
Fund. The portions of the Statement of Additional Information relating to the
Fund are incorporated by reference into (legally considered part of) this
Prospectus. The portions of the Statement of Additional Information that do not
relate to the Fund are not incorporated by reference, are not part of this
Prospectus, and should not be relied on by investors in the Fund. You may
request a free copy by writing to the Fund at Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32231-5289 or by calling 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 #811-5576

Code #10810-0205

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

Prospectus
February 25, 2005

MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC.

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

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

[MERRILL LYNCH LOGO] Investment Managers

www.mlim.ml.com
--------------------------------------------------------------------------------
MERCURY Advisors
A Division of MERRILL LYNCH INVESTMENT MANAGERS
www.mercury.ml.com



                       STATEMENT OF ADDITIONAL INFORMATION


                   MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

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


This Statement of Additional Information of Merrill Lynch Global Allocation
Fund, Inc. (the "Fund") is not a prospectus and should be read in conjunction
with the Prospectus of the Fund, dated February 25, 2005, which has been filed
with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling 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
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 25, 2005




                                TABLE OF CONTENTS


PART I
Investment Objectives and Policies ...................................... I-2
Investment Restrictions ................................................. I-4
Information on Directors and Officers ................................... I-6
Management and Advisory Arrangements .................................... I-9
Information on Sales Charges and Distribution Related Expenses ......... I-12
Computation of Offering Price Per Share ................................ I-14
Portfolio Transactions and Brokerage ................................... I-15
Fund Performance ....................................................... I-15
Additional Information ................................................. I-16
Financial Statements ................................................... I-17


PART II
Investment Risks and Considerations .................................... II-1
Management and Other Service Arrangements ............................. II-34
Purchase of Shares .................................................... II-42
Redemption of Shares .................................................. II-51
Shareholder Services .................................................. II-53
Pricing of Shares ..................................................... II-57
Portfolio Transactions and Brokerage .................................. II-59
Dividends and Taxes ................................................... II-62
Performance Data ...................................................... II-67
Proxy Voting Policies and Procedures .................................. II-69
General Information ................................................... II-72
Appendix A .............................................................. A-1



      PART I: INFORMATION ABOUT MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.


Part I of this Statement of Additional Information sets forth information about
Merrill Lynch Global Allocation Fund, Inc. It includes information about the
Fund's Board of Directors, 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 Fund's investment objective is to provide high total investment return
through a fully managed investment policy utilizing United States and foreign
equity securities, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends. This objective is a
fundamental policy of the Fund and may not be changed without the approval of a
majority of the Fund's outstanding voting securities as defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Fund operates as a diversified fund as defined under the Investment Company Act.

The Fund will invest in a portfolio of U.S. and foreign equity, debt and money
market securities, and other short-term securities or instruments. The
composition of the portfolio among these securities and markets will be varied
from time to time by Merrill Lynch Investment Managers, L.P. ("MLIM" or the
"Manager") in response to changing market and economic trends. This fully
managed investment approach provides the Fund with the opportunity to benefit
from anticipated shifts in the relative performance of different types of
securities and different capital markets. For example, at times the Fund may
emphasize investments in equity securities in anticipation of significant
advances in stock markets and at times may emphasize debt securities in
anticipation of significant declines in interest rates. Similarly, the Fund may
emphasize foreign markets in its security selection when such markets are
expected to outperform, in U.S. dollar terms, the U.S. markets. The Fund will
seek to identify longer-term structural or cyclical changes in the various
economies and markets of the world that are expected to benefit certain capital
markets and certain securities in those markets to a greater extent than other
investment opportunities. The Fund may invest in individual securities, baskets
of securities or particular measurements of value or rate (an "index"), such as
an index of the price of treasury securities or an index representative of
short-term interest rates. The Fund may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.


In determining the allocation of assets among capital markets, the Manager will
consider, among other factors, the relative valuation, condition and growth
potential of the various economies, including current and anticipated changes in
the rates of economic growth, rates of inflation, corporate profits, capital
reinvestment, resources, self-sufficiency, balance of payments, governmental
deficits or surpluses and other pertinent financial, social and political
factors which may affect such markets. In allocating among equity, debt and
money market securities within each market, the Manager also will consider the
relative opportunity for capital appreciation of equity and debt securities,
dividend yields and the level of interest rates paid on debt securities of
various maturities.

In selecting securities denominated in foreign currencies, the Manager will
consider, among other factors, the effect of movement in currency exchange rates
on the U.S. dollar value of such securities. An increase in the value of a
currency will increase the total return to the Fund of securities denominated in
such currency. Conversely, a decline in the value of the currency will reduce
the total return. The Manager may seek to hedge all or a portion of the Fund's
foreign securities through the use of forward foreign currency contracts,
currency options, futures contracts and options thereon.


                                      I-2



While there are no prescribed limits on the geographical allocation of the
Fund's assets, the Manager anticipates that it will invest primarily in the
securities of corporate and governmental issuers domiciled or located in North
and South America, Europe, Australia and the Far East. In addition, the Manager
anticipates that a portion of the Fund's assets normally will be invested in the
U.S. securities markets and the other major capital markets. Under normal
conditions, the Fund's investments will be denominated in at least three
currencies or multinational currency units. However, the Fund reserves the right
to invest substantially all of its assets in U.S. markets or U.S.
dollar-denominated obligations when the Manager believes market conditions
warrant such investment. Similarly, there are no prescribed limits on the
allocation of the Fund's assets among equity, debt and money market securities.
Therefore, at any given time, the Fund's assets may be primarily invested in
equity, debt or money market securities or in any combination thereof. However,
the Manager anticipates that the Fund's portfolio generally will include both
equity and debt securities.


Within the portion of the Fund's portfolio allocated to equity securities, the
Manager will seek to identify the securities of companies and industry sectors
that are expected to provide high total return relative to alternative equity
investments. The Fund generally will seek to invest in securities the Manager
believes to be undervalued. Undervalued issues include securities selling at a
discount from the price-to-book value ratios and price/earnings ratios computed
with respect to the relevant stock market averages. The Fund may also consider
as undervalued securities selling at a discount from their historic
price-to-book value or price/earnings ratios, even though these ratios may be
above the ratios for the stock market averages. Securities offering dividend
yields higher than the yields for the relevant stock market averages or higher
than such securities' historic yield may also be considered to be undervalued.
The Fund may also invest in the securities of small and emerging growth
companies when such companies are expected to provide a higher total return than
other equity investments. Such companies are characterized by rapid historical
growth rates, above-average returns on equity or special investment value in
terms of their products or services, research capabilities or other unique
attributes. The Manager will seek to identify small and emerging growth
companies that possess superior management, marketing ability, research and
product development skills and sound balance sheets.

There may be periods when market and economic conditions exist that favor
certain types of tangible assets as compared to other types of investments. For
example, the value of precious metals can be expected to benefit from such
factors as rising inflationary pressures or other economic, political or
financial uncertainty or instability. Real estate values, which are influenced
by a variety of economic, financial and local factors, tend to be cyclical in
nature. During periods when the Manager believes that conditions favor a
particular real asset as compared to other investment opportunities, the Fund
may emphasize investments related to that asset, such as investments in precious
metal-related securities or real estate-related securities as described below.
The Fund may invest up to 25% of its total assets in any particular industry
sector.

The debt securities in which the Fund may invest include securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities, by
foreign governments (including foreign states, provinces and municipalities) and
agencies or instrumentalities thereof and debt obligations issued by U.S. and
foreign entities. Such securities may include mortgage-backed securities issued
or guaranteed by governmental entities or by private issuers. In addition, the
Fund may invest in debt securities issued or guaranteed by international
organizations designed or supported by multiple governmental entities (which are
not obligations of the U.S. Government or foreign governments) to promote
economic reconstruction or development ("supranational entities"), such as the
International Bank for Reconstruction and Development (the "World Bank").

U.S. Government securities include: (i) U.S. Treasury obligations (bills, notes
and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the United
States; and (ii) obligations issued or guaranteed by U.S. Government agencies or


                                      I-3


instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and some
of which are backed only by the credit of the issuer itself (e.g., obligations
of the Student Loan Marketing Association).

The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Manager. The Manager does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities.

The debt securities in which the Fund may invest are primarily those that are
rated investment grade by Standard & Poor's ("S&P") or Moody's Investors
Service, Inc. ("Moody's") or that possess, in the Manager's judgment, similar
credit characteristics. Debt securities ranked in the fourth highest rating
category, while considered "investment grade," have more speculative
characteristics and are more likely to be downgraded than securities rated in
the three highest rating categories. The Fund may invest up to 35% of its assets
in debt securities that are rated below investment grade (below BBB by S&P or
below Baa by Moody's) or that are considered by the Manager to be of comparable
credit quality. The Manager considers the ratings assigned by S&P and Moody's as
one of several factors in its independent credit analysis of issuers.

The average maturity of the Fund's portfolio of debt securities will vary based
on the Manager's assessment of pertinent economic market conditions. As with all
debt securities, changes in market yields will affect the value of such
securities. Prices generally increase when interest rates decline and decrease
when interest rates rise. Prices of longer term securities generally fluctuate
more in response to interest rate changes than do shorter term securities.

Money market securities in which the Fund may invest consist of short-term
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities; commercial paper, including variable amount master demand
notes, rated at least "A" by S&P or "Prime" by Moody's; and repurchase
agreements, purchase and sale contracts, and money market instruments issued by
commercial banks, domestic savings banks, and savings and loan associations with
total assets of at least $1 billion. The obligations of commercial banks may be
issued by U.S. banks, foreign branches of U.S. banks ("Eurodollar" obligations)
or U.S. branches of foreign banks ("Yankeedollar" obligations).

II.  INVESTMENT RESTRICTIONS

The Fund has adopted restrictions and policies relating to the investment of the
Fund's assets and its activities. Certain of the 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
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares). The Fund has
also adopted certain non-fundamental investment restrictions, which may be
changed by the Board of Directors 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) 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).


                                      I-4


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

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

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

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

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

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

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

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

(a) Purchase securities of other investment companies, except to the extent
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 does intend to engage, from time to
time, in short sales "against the box" and in short sales that are covered by
securities immediately convertible or exchangeable into the security that is
being sold short.

(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 Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be liquid
by the Fund's Board of Directors are not subject to the limitations set forth in
this investment restriction.


                                      I-5


(d) Notwithstanding fundamental investment restriction (6) above, borrow amounts
in excess of 10% of its total assets, taken at market value and then only from
banks as a temporary measure for extraordinary or emergency purposes, such as
the redemption of Fund shares. The Fund will not purchase securities while
borrowings exceed 5% (taken at market value) of its total assets.

In addition, the Fund may not cease to operate as a diversified investment
company, as defined under the Investment Company Act, without approval of a
majority of the Fund's outstanding voting securities.


Except with respect to restriction (6), 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 (1) above, the Fund uses the
classifications and sub-classifications of Morgan Stanley Capital International
as a guide to identify industries.


III. INFORMATION ON DIRECTORS AND OFFICERS

The Board of Directors of the Fund consists of seven individuals, six of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act (the "non-interested Directors"). The Directors 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 Director is a member of the Fund's Audit and Oversight
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,
and to oversee matters relating to the Fund's legal and regulatory compliance.
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 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 Fund 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.

Each non-interested Director is also a member of the Fund's Nominating
Committee. The principal responsibilities of the Nominating Committee are to
identify individuals qualified to serve as non-interested Directors of the Fund
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 Fund's non-interested Directors, the Nominating Committee may consider
nominations for the office of Director made by Fund shareholders as it deems
appropriate. Fund shareholders who wish to recommend a nominee should send
nominations to the Secretary of the Fund that include biographical information
and set forth the qualifications of the proposed nominee. The Nominating
Committee met three times during the Fund's fiscal year ended October 31, 2004.


                                      I-6


     BIOGRAPHICAL INFORMATION

Certain biographical and other information relating to the non-interested
Directors 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 DIRECTOR   THE FUND      TIME SERVED                DURING PAST FIVE YEARS           OVERSEEN        DIRECTORSHIPS
--------------------- ------------- ---------------- ------------------------------------------ --------------- -------------------

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

Cynthia A.            Director      Director since   Professor, Harvard Business School since   49 registered   Newell
Montgomery (52)                     2000             1989; Associate Professor, J.L. Kellogg    investment      Rubbermaid,Inc.
                                                     Graduate School of Management,             companies       (manufacturing)
                                                     Northwestern University from 1985 to       consisting of
                                                     1989; Associate Professor, Graduate        49 portfolios
                                                     School of Business Administration,
                                                     University of Michigan from 1979 to
                                                     1985; Director, Harvard Business School
                                                     of Publishing since 2005.

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

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

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

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




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

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

##   Each Director serves until his or her successor is elected and qualified,
     or until his or her death, resignation, or removal as provided in the
     Fund'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.


Certain biographical and other information relating to the Director who is an
officer and "interested person" of the Fund as defined in the Investment Company
Act and to the other officers of the Fund is set


                                      I-7


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                FUND          SERVED                         DURING PAST FIVE YEARS        OVERSEEN         DIRECTORSHIPS
---------------------- ------------- ----------------- ------------------------------------------ ---------------- --------------

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

Dennis W.              Vice          Vice President    Managing Director of MLIM since 1998;      3 registered     None
Stattman(50)           President     since 2001        Vice President of MLIM from 1989 to        investment
                       and                             1998.                                      companies
                       Portfolio                                                                  consisting of 3
                       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     companies
                                     2004              of MLIM (Americas Region) since 2004;      consisting of
                                                       Global Director of Compliance at Morgan    164 portfolios
                                                       Stanley 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   Director (Legal Advisory) of MLIM since    124 registered   None
 (44)                                2004              2002; Vice President of MLIM from 1999     companies
                                                       to 2002; Attorney associated with MLIM     consisting of
                                                       since 1997; Secretary of MLIM, FAM, FAMD   163 portfolios
                                                       and Princeton Services since 2004.


------------
 #   The address of each Director 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
     Directors of the Fund.

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

**   As a Director, Mr. Doll serves until his successor is elected and
     qualified, until December 31 of the year in which he turns 72, or until his
     death, resignation, or removal as provided in the Fund's by-laws or charter
     or by statute.

     SHARE OWNERSHIP


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



                                      I-8





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

Interested Director:
  Robert C. Doll, Jr.             $10,001-$50,000             Over $100,000
Non-Interested Directors:
  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             $50,001-$100,000             Over $100,000
  Richard R. West                  Over $100,000              Over $100,000
  Edward D. Zinbarg                Over $100,000              Over $100,000



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

As of February 4, 2005, the Directors 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 Directors of the Fund or their
immediate family members owned beneficially or of record any securities in
Merrill Lynch & Co., Inc. ("ML & Co.").

     COMPENSATION OF DIRECTORS


The Fund pays each non-interested Director a combined fee of $4,000 per year for
service on the Board and the Audit Committee plus $625 per in-person Board
meeting attended and $625 per in-person Audit Committee meeting attended. The
Chairman of the Audit Committee receives an additional fee of $1,000 per year.
The Fund reimburses each non-interested Director 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
Directors 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##         $9,917                      None             $284,833
Cynthia A. Montgomery      $9,000                      None             $248,833
Jean Margo Reid*           $  667                      None             $142,733
Charles C. Reilly##,**     $2,083                      None             $      0
Kevin A. Ryan+             $9,000                      None             $181,316
Roscoe S. Suddarth         $9,000                      None             $248,833
Richard R. West            $9,000                      None             $248,833
Edward D. Zinbarg          $9,000                      None             $248,833



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

 #   For the number of MLIM/FAM-advised funds from which each Director receives
     compensation, see chart beginning on p. I-3.

##   Chairman of 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 Director effective August 19, 2004.

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

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


IV.  MANAGEMENT AND ADVISORY ARRANGEMENTS

The Fund has entered into a management agreement with the Manager (the
"Management Agreement"), pursuant to which the Manager receives for its services
to the Fund monthly compensation at the annual


                                      I-9



rate of 0.75% of the average daily net assets of the Fund. The Manager has
voluntarily agreed to waive a portion of that fee so that the Manager receives
from the Fund a monthly fee based upon the average daily net assets of the Fund
at the following annual rates: 0.75% of the average daily net assets not
exceeding $2.5 billion; 0.70% of the average daily net assets exceeding $2.5
billion but not exceeding $5.0 billion; 0.65% of the average daily net assets
exceeding $5.0 billion but not exceeding $7.5 billion; 0.625% of the average
daily net assets exceeding $7.5 billion but not exceeding $10 billion; and 0.60%
of the average daily net assets exceeding $10 billion.


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




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

              2004                  $61,748,399            $4,707,822
              2003                  $44,763,513            $2,218,468
              2002                  $46,330,129            $2,427,350



The Manager has also entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.")
pursuant to which MLAM U.K. provides investment advisory services to the Manager
with respect to the Fund.

The table below sets forth information about the total sub-advisory fees paid by
the Manager to MLAM U.K. for the periods indicated.




 FISCAL YEAR ENDED OCTOBER 31,     SUB-ADVISORY FEE
-------------------------------   -----------------

              2004                    $6,754,809
              2003                    $5,656,757
              2002                    $6,163,963




At each quarterly meeting of the Board and the Audit Committee, the Board of
Directors of the Fund receives, reviews and evaluates information concerning the
nature, extent and quality of the personnel of, and the services provided by,
the Manager, MLAM U.K. and their 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 and Sub-Advisory Agreement is considered, the evaluation process with
respect to the Manager and MLAM U.K. is an ongoing one. In this regard, the
Board's and the Audit Committee's consideration of the Management Agreement and
Sub-Advisory Agreement included deliberations at other quarterly meetings in
addition to the annual renewal meeting.

In connection with the Board's consideration of the Management Agreement and
Sub-Advisory 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 reviewed
information regarding access to research services from brokers to which the
Manager may have allocated Fund brokerage in a "soft dollar" arrangement. The
Board also received from Lipper Inc. information concerning the performance of
the Fund compared to certain other non-MLIM/FAM-advised open-end funds that
invest primarily in a balanced portfolio of equity securities and fixed income
securities of U.S. issuers and non-U.S. issuers, and information comparing the
Fund's fee rate for advisory and administrative services and ratios for
management expenses, investment-related expenses and total expenses to those of
other non-MLIM/FAM-advised open-end funds deemed comparable by Lipper Inc. The
Board considered the compensation paid to the Manager and MLAM U.K., and the
services provided to the Fund by the Manager under the Management Agreement and
by MLAM U.K. under the Sub-Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund,



                                      I-10



the Manager and its affiliates provide 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 also considered the direct and indirect
benefits to the Manager and MLAM U.K. from their relationship with the Fund.
Based on their experience as Directors of the Fund and as directors of other
MLIM/FAM-advised funds, the Board members 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 in equity and fixed income securities of issuers located
within and outside the United States, among them other MLIM/FAM-advised open-end
funds that have investment objectives and strategies similar to those of the
Fund. The Board considered the amount of equity and 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 has over
twenty-five years experience investing in both equity and fixed income
securities. The Board also noted that Mr. Stattman, the Fund's senior portfolio
manager, has more than fifteen years experience investing in equity and fixed
income securities of U.S. and foreign issuers. 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 Directors based their conclusions on their experience as
directors of other open-end investment companies managed by the Manager that
invest in equity and fixed income securities and on their experience with the
security analysis and risk management performed by the Manager.

The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and MLAM U.K., including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager, MLAM U.K.
and their 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 Directors, 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 dedicated to the Fund's
management team and the analysts and compliance personnel dedicated to the
equity and fixed income management groups, 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 Directors
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 reviewing the Management Agreement, the Board evaluated the Fund's fee rate
for advisory and administrative services and the Fund's historical performance
as compared to the rate of other non-MLIM/FAM-advised comparable open-end funds
as provided by Lipper Inc. In particular, the Board noted that the Fund had a
contractual management fee rate at a common asset level that was slightly above
(0.029%) the median of the eight funds in the expense group. The Board also
found that the Fund's actual management fee rate -- which includes advisory and
administrative services and the effects of any fee waivers -- as a percentage of
total assets at a common asset level was below the median of the funds in its
category. The Board also compared the Fund's total expenses to those of other,
similarly managed funds and concluded that its overall expenses were below the
median of the group. The Board also noted that the Fund's historical performance
was in the first quartile and among the top ten funds in its performance
universe for all periods measured compared to that of other similarly managed
open-end funds. The Board also requested, received and considered profitability
information related to the management revenues from the Fund. Based upon the
information reviewed and its discussions, the Board concluded that the advisory
fee rate schedule was reasonable in relation to the services provided by the
Manager and MLAM U.K. to the Fund as well as the costs incurred and benefits to
be gained by



                                      I-11



the Manager, MLAM U.K. and their affiliates in providing such services. The
Board also found the management fee and total expense ratio to be reasonable in
comparison to the fees charged by other comparable funds of similar size.

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


     TRANSFER AGENCY SERVICES

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




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

              2004                    $11,741,645
              2003                    $10,849,492
              2002                    $10,431,220



     ACCOUNTING SERVICES

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




 FISCAL YEAR ENDED        PAID TO       PAID TO THE
     OCTOBER 31        STATE STREET       MANAGER
-------------------   --------------   ------------

        2004            $1,413,117       $172,498
        2003            $1,052,176       $137,119
        2002            $1,121,254       $125,292



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.

     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                     $3,630,550        $256,262          $3,374,288           $12,115
                  2003                     $1,066,176        $ 72,382          $  993,794           $ 3,720
                  2002                     $  707,975        $ 44,300          $  663,675           $ 4,258




                                      I-12





                                                                     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                      $107,844          $8,822             $99,022             $15,850
                  2003                      $ 60,182          $4,804             $55,378             $ 8,744
                  2002                      $ 62,809          $4,675             $58,134             $ 1,195



     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                       $1,565,362         $1,565,362
                  2003                       $1,379,044         $1,379,044
                  2002                       $1,487,836         $1,487,836






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

                  2004                         $243,756           $243,756
                  2003                         $177,000           $177,000
                  2002                         $172,536           $172,536



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

#    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 $598,089,874 (27.18% 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 $35,503,114 (2.69% of Class C 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 R shares
exceeded direct cash distribution expenses by $30,867 (.33% of Class R average
daily net assets at that date).

For the fiscal year ended October 31, 2004, the Fund paid the Distributor
$7,787,740 pursuant to the Class A Distribution Plan (based on average daily net
assets subject to such Class A Distribution Plan of approximately $3.1 billion),
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 $21,434,488 pursuant to the Class B
Distribution Plan (based on average daily net assets subject to such Class B
Distribution Plan of approximately $2.2 billion), 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 $12,987,872 pursuant to
the Class C Distribution Plan (based on average daily net assets subject to such
Class C Distribution Plan of approximately $1.3 billion), all of which was paid
to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended October 31, 2004, the Fund paid the Distributor $46,973 pursuant to the
Class R Distribution Plan (based on average daily net assets subject to such
Class R Distribution Plan of approximately $9.5 million), all of which was paid
to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class R shares.



                                      I-13


     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, Class C and Class R 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                                                FEE AT
                                   ELIGIBLE     AGGREGATE    INTEREST     MAXIMUM        AMOUNTS      AGGREGATE     CURRENT
                                     GROSS        SALES     ON UNPAID      AMOUNT       PREVIOUSLY      UNPAID     NET ASSET
                                    SALES#      CHARGES##    BALANCE*     PAYABLE        PAID TO       BALANCE       LEVEL+
                                -------------- ----------- ----------- -------------  DISTRIBUTOR**  ----------- -------------

CLASS B SHARES, FOR THE PERIOD
FEBRUARY 3, 1989
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2004
Under NASD Rule as Adopted
Under Distributor's Voluntary
Maximum
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2004
Under NASD Rule as Adopted
CLASS R SHARES, FOR THE PERIOD
JANUARY 3, 2003
(COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2004
Under NASD Rule as Adopted



------------
 #   Purchase price of all eligible Class B, Class C and Class R 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, Class C and
     Class R shares).

VI.  COMPUTATION OF OFFERING PRICE PER SHARE


An illustration of the computation of the offering price for Class A, Class B,
Class C, Class I and Class R 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-14





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

Net Assets                                 $3,442,395,840  $2,159,321,524   $1,698,381,936  $1,893,247,711 $20,482,442
Number of Shares Outstanding                 218,531,901     139,879,732      112,948,445     119,830,101   1,326,235
Net Asset Value Per Share (net assets
divided by number of shares outstanding)        $15.75          $15.44           $15.04          $15.80      $15.44
Sales Charge (for Class A and Class I
Shares: 5.25% of offering price; 5.54%
of net asset value per share)#                    .87             ##               ##             .88           *
Offering Price                                  $16.62          $15.44           $15.04          $16.68      $15.44



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


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

##   Class B and Class C shares are not subject to an initial sales charge but
     may be subject to a CDSC on redemption of shares. See Part II of this
     Statement of Additional Information "Purchase of Shares -- Deferred Sales
     Charge Alternatives -- Class B and Class C Shares".

 *   Class R shares are not subject to any sales charge.


VII. PORTFOLIO TRANSACTIONS AND BROKERAGE

See "Portfolio Transactions and Brokerage" in Part II of 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                $7,772,668              $532,940
              2003                $8,929,722              $796,609
              2002                $9,543,307              $808,109




For the fiscal year ended October 31, 2004, the brokerage commission paid to
Merrill Lynch represented 6.86% of the aggregate brokerage commissions paid and
involved 4.30% of the Fund's dollar amount of transactions involving payment of
brokerage commissions during the year.

For the fiscal years ended October 31, 2004, 2003 and 2002, the Fund's lending
agent received $85,386, $451,750 and $654,214, respectively, in securities
lending agent fees from the Fund.

The value of the Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the Investment Company Act) if
any portion of such holdings were purchased during the fiscal year ended October
31, 2004 are as follows:





    REGULAR BROKER / DEALER        DEBT (D) / EQUITY (E)     AGGREGATE HOLDINGS (000'S)
-------------------------------   -----------------------   ---------------------------

J.P. Morgan Chase & Co.                      E              $16,405
Morgan Stanley                               E              $13,794
Credit Suisse Group                          E              $11,603
USB AG                                       E              $ 9,657
The Goldman Sachs Group, Inc.                E              $ 2,460
Lehman Brothers Holdings Inc.                E              $ 2,054
The Goldman Sachs Group, Inc.                D              $   169
Lehman Brothers Holdings Inc.                D              $   143



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, Class I and Class R
shares of the Fund for the periods indicated expressed as a percentage based on
a hypothetical $1,000 investment.


                                      I-15





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

One Year Ended October 31, 2004            7.92%       9.08%       12.08%         8.21%      13.60%
Five Years Ended October 31, 2004          8.07%       8.12%        8.40%         8.35%         --
Ten Years Ended October 31, 2004          10.68%      10.60%       10.42%        10.97%         --
Inception (January 3, 2003) to October
31, 2004                                     --          --           --            --       20.96%






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

One Year Ended October 31, 2004           6.75%       8.13%        11.03%        6.95%       12.32%
Five Years Ended October 31, 2004         5.55%       5.86%         6.08%        5.74%          --
Ten Years Ended October 31, 2004          7.61%       7.77%         7.56%        7.80%          --
Inception (January 3, 2003) to October
31, 2004                                    --          --            --           --        19.89%






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

One Year Ended October 31, 2004           5.09%       5.85%        7.80%       5.27%        8.78%
Five Years Ended October 31, 2004         5.40%       5.64%        5.84%       5.58%          --
Ten Years Ended October 31, 2004          7.39%       7.51%        7.33%       7.57%          --
Inception (January 3, 2003) to October
31, 2004                                    --          --           --          --        17.34%



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

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

##   Class B shares automatically convert to Class A shares after approximately
     eight years. All returns for periods greater than eight years reflect this
     conversion.


IX.  ADDITIONAL INFORMATION

     DESCRIPTION OF SHARES


The Fund was incorporated under Maryland law on June 9, 1988. It has an
authorized capital of 5,550,000,000 shares of Common Stock, par value $0.10 per
share, divided into five classes, designated Class A, Class B, Class C, Class I
and Class R Common Stock. Class A consists of 450,000,000 shares, Class B
consists of 1,500,000,000 shares, Class C consists of 700,000,000 shares, Class
I consists of 900,000,000 shares and Class R consists of 2,000,000,000 shares.
Shares of Class A, Class B, Class C, Class I and Class R Common Stock represent
an interest in the same assets of the Fund and are identical in all respects
except that the Class A, Class B, Class C and Class R shares bear certain
expenses related to the account maintenance and/or distribution of such shares
and have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution expenditures (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class A Distribution Plan). The Board of Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.


                                      I-16



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

MERRILL LYNCH TRUST CO., FSB#     800 Scudders Mill Road, Plainsboro, NJ     13.97% of Class I
TTEE FBO MERRILL LYNCH            08536
MERRILL LYNCH TRUST CO., FSB#     800 Scudders Mill Road, Plainsboro, NJ     6.13% of Class I
TTEE FBO MERRILL LYNCH            08536
MERRILL LYNCH TRUST CO., FSB#     800 Scudders Mill Road, Plainsboro, NJ     5.87% of Class I
TTEE FBO MCI                      08536
FRONTIER TRUST CO. FBO TTEE#      800 Scudders Mill Road, Plainsboro, NJ     6.62% of Class R
PALMETTO ORTHOPEDIC               08536




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


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 800-637-3863 between 8:30 a.m.
and 5:30 p.m. Eastern time on any business day.


                                    I-17



                                     PART II


Part II of this Statement of Additional Information contains information about
the following funds: Merrill Lynch Balanced Capital Fund, Inc. ("Balanced
Capital"); Merrill Lynch Basic Value Fund, Inc. ("Basic Value"); Merrill Lynch
Developing Capital Markets Fund, Inc. ("Developing Capital Markets"); Merrill
Lynch Disciplined Equity Fund, Inc. ("Disciplined Equity"); Merrill Lynch Equity
Dividend Fund ("Equity Dividend"); Merrill Lynch EuroFund ("EuroFund"); Merrill
Lynch Focus Twenty Fund, Inc. ("Focus Twenty"); Merrill Lynch Focus Value Fund,
Inc. ("Focus Value"); Merrill Lynch Fundamental Growth Fund, Inc. ("Fundamental
Growth"); Merrill Lynch Global Allocation Fund, Inc. ("Global Allocation");
Merrill Lynch International Fund ("ML International"), and Merrill Lynch Small
Cap Growth Fund ("Small Cap Growth"), each a series of Mercury Funds, Inc.;
Merrill Lynch Global Financial Services Fund, Inc. ("Global Financial
Services"); Merrill Lynch Global Growth Fund, Inc. ("Global Growth"); Merrill
Lynch Global SmallCap Fund, Inc. ("Global SmallCap"); Merrill Lynch Global
Technology Fund, Inc. ("Global Technology"); Merrill Lynch Global Value Fund,
Inc. ("Global Value"); Merrill Lynch Healthcare Fund, Inc. ("Healthcare");
Merrill Lynch International Value Fund of Mercury Funds II; Merrill Lynch Large
Cap Growth Fund, Merrill Lynch Large Cap Value Fund and Merrill Lynch Large Cap
Core Fund, each a series of Merrill Lynch Large Cap Series Funds, Inc.
(collectively, "Large Cap Series Funds"); Merrill Lynch Latin America Fund, Inc.
("Latin America"); Merrill Lynch Mid Cap Value Opportunities Fund ("Mid Cap
Value Opportunities") of The Asset Program, Inc.; Merrill Lynch Natural
Resources Trust ("Natural Resources"); Merrill Lynch Pacific Fund, Inc.
("Pacific"); Merrill Lynch Value Opportunities Fund, Inc. ("Value
Opportunities"); and Merrill Lynch Utilities and Telecommunications Fund, Inc.
("Utilities & Telecommunications").


Throughout this Statement of Additional Information, each of the above listed
funds may be referred to as a "Fund" or collectively as the "Funds."


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


                                      II-1



in Part I of each Fund's Statement of Additional Information for a complete
description of each Fund's investment policies and risks. Information contained
in this section about the risks and considerations associated with a Fund's
investments and/or investment strategies applies only to those Funds
specifically identified as making each type of investment or using each
investment strategy (each, a "Covered Fund"). 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





                                                                      BALANCED CAPITAL  BASIC VALUE  DEVELOPING CAPITAL MARKETS

144 A Securities                                                             X              X                    X
Asset-Backed Securities                                                      X
Asset-Based Securities
Precious Metal Related Securities                                            X                                   X
Borrowing and Leverage                                                       X              X                    X
                           Convertible Securities                            X              X                    X
Corporate Loans
Debt Securities                                                              X                                   X
Depositary Receipts                                                          X              X                    X
Derivatives                                                                  X              X                    X
Hedging                                                                      X              X                    X
Indexed and Inverse Securities                                               X              X                    X
Swap Agreements                                                              X              X                    X
Credit Default Swap Agreements                                               X
Credit Linked Securities                                                     X
Total Return Swap Agreements                                                 X
Options on Securities and Securities Indices                                 X              X                    X
Call Options                                                                 X              X                    X
Put Options                                                                  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
Foreign Investment Risk                                                      X              X                    X
Foreign Market Risk                                                          X              X                    X
Foreign Economy Risk                                                         X              X                    X
Currency Risk and Exchange Risk                                              X              X                    X
Governmental 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
Initial Public Offering                                                      X              X                    X
Investment in Other Investment Companies                                     X              X                    X
Investment in Emerging Markets                                               X                                   X
Restrictions on Certain Investments                                          X                                   X
Risk of Investing in Asia-Pacific Countries                                                                      X
Restrictions on Foreign Investments in Asia-Pacific Countries                                                    X
Risks of Investments in Russia
Junk Bonds                                                                   X                                   X
Mortgage Backed Securities                                                   X
Real Estate Related Securities                                               X              X                    X
Real Estate Investment Trusts ("REITS")                                      X              X
Repurchase Agreements and Purchase and Sale Contracts                        X              X                    X
Securities Lending                                                           X              X                    X
Securities of Smaller or Emerging Growth Companies                           X              X                    X
Short Sales                                                                                                      X
Sovereign Debt                                                               X                                   X
Standby Commitment Agreements                                                X              X                    X
Stripped Securities                                                          X                                   X
Supranational Entities                                                       X
Utility Industries                                                           X              X                    X
Electric
Telecommunications
Gas
Water
Warrants                                                                     X              X                    X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                 X              X                    X
Zero Coupon Bonds                                                            X




                                                                      DISCIPLINED EQUITY  EQUITY DIVIDEND  EUROFUND  FOCUS TWENTY

144 A Securities                                                              X                 X             X           X
Asset-Backed Securities
Asset-Based Securities
Precious Metal Related Securities                                             X                 X             X           X
Borrowing and Leverage                                                        X                 X             X
                           Convertible Securities                             X                 X             X           X
Corporate Loans
Debt Securities                                                                                 X                         X
Depositary Receipts                                                           X                 X             X           X
Derivatives                                                                   X                 X             X           X
Hedging                                                                       X                 X             X           X
Indexed and Inverse Securities                                                X                 X             X           X
Swap Agreements                                                               X                 X             X           X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                  X                 X             X           X
Call Options                                                                  X                 X             X           X
Put Options                                                                   X                 X             X           X
Types of Options                                                              X                 X             X           X
Futures                                                                       X                 X             X           X
Foreign Exchange Transactions                                                 X                 X             X           X
Forward Foreign Exchange Transactions                                         X                 X             X           X
Currency Futures                                                              X                 X             X           X
Currency Options                                                              X                 X             X           X
Limitations on Currency Hedging                                               X                 X             X           X
Risk Factors in Hedging Foreign Currency Risks                                X                 X             X           X
Risk Factors in Derivatives                                                   X                 X             X           X
Credit Risk                                                                   X                 X             X           X
Currency Risk                                                                 X                 X             X           X
Leverage Risk                                                                 X                 X             X           X
Liquidity Risk                                                                X                 X             X           X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                           X                 X             X           X
Distressed Securities
Foreign Investment Risk                                                       X                 X             X           X
Foreign Market Risk                                                           X                 X             X           X
Foreign Economy Risk                                                          X                 X             X           X
Currency Risk and Exchange Risk                                               X                 X             X           X
Governmental Supervision and Regulation / Accounting Standards                X                 X             X           X
Certain Risks of Holding Fund Assets Outside the United States                X                 X             X           X
Settlement Risk                                                               X                 X             X           X
Illiquid or Restricted Securities                                             X                 X             X           X
Initial Public Offering                                                       X                 X             X           X
Investment in Other Investment Companies                                      X                 X             X           X
Investment in Emerging Markets                                                                                X
Restrictions on Certain Investments                                                                           X
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia
Junk Bonds
Mortgage Backed Securities
Real Estate Related Securities                                                X                 X             X           X
Real Estate Investment Trusts ("REITS")                                                         X
Repurchase Agreements and Purchase and Sale Contracts                         X                 X             X           X
Securities Lending                                                            X                 X             X           X
Securities of Smaller or Emerging Growth Companies                            X                 X             X           X
Short Sales                                                                   X                                           X
Sovereign Debt
Standby Commitment Agreements                                                 X                 X             X           X
Stripped Securities
Supranational Entities                                                                          X
Utility Industries                                                            X                 X             X           X
Electric
Telecommunications
Gas
Water
Warrants                                                                      X                 X             X           X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                  X                 X             X           X
Zero Coupon Bonds




                                                                      FOCUS VALUE  FUNDAMENTAL GROWTH  GLOBAL ALLOCATION

144 A Securities                                                          X                X                  X
Asset-Backed Securities                                                                                       X
Asset-Based Securities                                                                                        X
Precious Metal Related Securities                                         X                X                  X
Borrowing and Leverage                                                    X                X                  X
                           Convertible Securities                         X                X                  X
Corporate Loans                                                                                               X
Debt Securities                                                           X                X                  X
Depositary Receipts                                                       X                X                  X
Derivatives                                                               X                X                  X
Hedging                                                                   X                X                  X
Indexed and Inverse Securities                                            X                X                  X
Swap Agreements                                                           X                X                  X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                              X                X                  X
Call Options                                                              X                X                  X
Put Options                                                               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
Foreign Investment Risk                                                   X                X                  X
Foreign Market Risk                                                       X                X                  X
Foreign Economy Risk                                                      X                X                  X
Currency Risk and Exchange Risk                                           X                X                  X
Governmental 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
Initial Public Offering                                                   X                X                  X
Investment in Other Investment Companies                                  X                X                  X
Investment in Emerging Markets                                            X                                   X
Restrictions on Certain Investments                                       X                                   X
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia
Junk Bonds                                                                X                                   X
Mortgage Backed Securities                                                                                    X
Real Estate Related Securities                                            X                X                  X
Real Estate Investment Trusts ("REITS")                                   X                                   X
Repurchase Agreements and Purchase and Sale Contracts                     X                X                  X
Securities Lending                                                        X                X                  X
Securities of Smaller or Emerging Growth Companies                        X                X                  X
Short Sales                                                                                                   X
Sovereign Debt                                                            X                                   X
Standby Commitment Agreements                                             X                X                  X
Stripped Securities                                                                                           X
Supranational Entities                                                                                        X
Utility Industries                                                        X                X                  X
Electric
Telecommunications
Gas
Water
Warrants                                                                  X                X                  X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                              X                X                  X
Zero Coupon Bonds




                                                                      GLOBAL FINANCIAL SERVICES  GLOBAL GROWTH  GLOBAL SMALLCAP

144 A Securities                                                                 X                    X               X
Asset-Backed Securities                                                                                               X
Asset-Based Securities
Precious Metal Related Securities                                                                     X               X
Borrowing and Leverage                                                           X                    X               X
                           Convertible Securities                                X                    X               X
Corporate Loans
Debt Securities                                                                  X                                    X
Depositary Receipts                                                              X                    X               X
Derivatives                                                                      X                    X               X
Hedging                                                                          X                    X               X
Indexed and Inverse Securities                                                   X                    X               X
Swap Agreements                                                                  X                    X               X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                     X                    X               X
Call Options                                                                     X                    X               X
Put Options                                                                      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
Foreign Investment Risk                                                          X                    X               X
Foreign Market Risk                                                              X                    X               X
Foreign Economy Risk                                                             X                    X               X
Currency Risk and Exchange Risk                                                  X                    X               X
Governmental 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
Initial Public Offering                                                          X                    X               X
Investment in Other Investment Companies                                         X                    X               X
Investment in Emerging Markets                                                   X                    X               X
Restrictions on Certain Investments                                              X                    X               X
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia                                                   X
Junk Bonds                                                                       X                                    X
Mortgage Backed Securities                                                       X
Real Estate Related Securities                                                   X                    X               X
Real Estate Investment Trusts ("REITS")                                                                               X
Repurchase Agreements and Purchase and Sale Contracts                            X                    X               X
Securities Lending                                                               X                    X               X
Securities of Smaller or Emerging Growth Companies                               X                    X               X
Short Sales                                                                                                           X
Sovereign Debt                                                                   X                                    X
Standby Commitment Agreements                                                    X                    X               X
Stripped Securities
Supranational Entities                                                           X                                    X
Utility Industries                                                               X                    X               X
Electric
Telecommunications
Gas
Water
Warrants                                                                         X                    X               X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                     X                    X               X
Zero Coupon Bonds




                                                                      GLOBAL TECHNOLOGY  GLOBAL VALUE  HEALTHCARE

144 A Securities                                                             X                X            X
Asset-Backed Securities
Asset-Based Securities
Precious Metal Related Securities                                                             X
Borrowing and Leverage                                                       X                X            X
                           Convertible Securities                            X                X            X
Corporate Loans
Debt Securities                                                                               X            X
Depositary Receipts                                                          X                X            X
Derivatives                                                                  X                X            X
Hedging                                                                      X                X            X
Indexed and Inverse Securities                                               X                X            X
Swap Agreements                                                              X                X            X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                 X                X            X
Call Options                                                                 X                X            X
Put Options                                                                  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
Foreign Investment Risk                                                      X                X            X
Foreign Market Risk                                                          X                X            X
Foreign Economy Risk                                                         X                X            X
Currency Risk and Exchange Risk                                              X                X            X
Governmental 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
Initial Public Offering                                                      X                X            X
Investment in Other Investment Companies                                     X                X            X
Investment in Emerging Markets                                               X                X            X
Restrictions on Certain Investments                                          X                X            X
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia                                                                X
Junk Bonds
Mortgage Backed Securities
Real Estate Related Securities                                               X                X            X
Real Estate Investment Trusts ("REITS")                                                       X
Repurchase Agreements and Purchase and Sale Contracts                        X                X            X
Securities Lending                                                           X                X            X
Securities of Smaller or Emerging Growth Companies                           X                X            X
Short Sales                                                                  X
Sovereign Debt                                                                                             X
Standby Commitment Agreements                                                X                X            X
Stripped Securities
Supranational Entities
Utility Industries                                                           X                X            X
Electric
Telecommunications
Gas
Water
Warrants                                                                     X                X            X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                 X                X            X
Zero Coupon Bonds


                                                                      ML INTERNATIONAL  INTERNATIONAL VALUE

144 A Securities                                                             X                  X
Asset-Backed Securities
Asset-Based Securities
Precious Metal Related Securities                                            X                  X
Borrowing and Leverage                                                       X                  X
                           Convertible Securities                            X                  X
Corporate Loans                                                                                 X
Debt Securities                                                              X                  X
Depositary Receipts                                                          X                  X
Derivatives                                                                  X                  X
Hedging                                                                      X                  X
Indexed and Inverse Securities                                               X                  X
Swap Agreements                                                              X                  X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                 X                  X
Call Options                                                                 X                  X
Put Options                                                                  X                  X
Types of Options                                                             X                  X
Futures                                                                      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
Credit Risk                                                                  X                  X
Currency Risk                                                                X                  X
Leverage Risk                                                                X                  X
Liquidity Risk                                                               X                  X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                          X                  X
Distressed Securities
Foreign Investment Risk                                                      X                  X
Foreign Market Risk                                                          X                  X
Foreign Economy Risk                                                         X                  X
Currency Risk and Exchange Risk                                              X                  X
Governmental 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
Initial Public Offering                                                      X                  X
Investment in Other Investment Companies                                     X                  X
Investment in Emerging Markets                                               X                  X
Restrictions on Certain Investments                                          X                  X
Risk of Investing in Asia-Pacific Countries                                                     X
Restrictions on Foreign Investments in Asia-Pacific Countries                                   X
Risks of Investments in Russia
Junk Bonds                                                                   X
Mortgage Backed Securities
Real Estate Related Securities                                               X                  X
Real Estate Investment Trusts ("REITS")                                      X                  X
Repurchase Agreements and Purchase and Sale Contracts                        X                  X
Securities Lending                                                           X                  X
Securities of Smaller or Emerging Growth Companies                           X                  X
Short Sales
Sovereign Debt                                                               X                  X
Standby Commitment Agreements                                                X                  X
Stripped Securities                                                                             X
Supranational Entities
Utility Industries                                                           X                  X
Electric
Telecommunications
Gas
Water
Warrants                                                                     X                  X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                 X                  X
Zero Coupon Bonds




                                                                      LARGE CAP SERIES FUNDS  LATIN AMERICA

144 A Securities                                                                X                  X
Asset-Backed Securities
Asset-Based Securities
Precious Metal Related Securities                                               X                  X
Borrowing and Leverage                                                          X                  X
                           Convertible Securities                               X                  X
Corporate Loans
Debt Securities                                                                 X                  X
Depositary Receipts                                                             X                  X
Derivatives                                                                     X                  X
Hedging                                                                         X                  X
Indexed and Inverse Securities                                                  X                  X
Swap Agreements                                                                 X                  X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                    X                  X
Call Options                                                                    X                  X
Put Options                                                                     X                  X
Types of Options                                                                X                  X
Futures                                                                         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
Credit Risk                                                                     X                  X
Currency Risk                                                                   X                  X
Leverage Risk                                                                   X                  X
Liquidity Risk                                                                  X                  X
Additional Risk Factors of OTC Transactions; Limitations on the use
 of OTC Derivatives                                                             X                  X
Distressed Securities
Foreign Investment Risk                                                         X                  X
Foreign Market Risk                                                             X                  X
Foreign Economy Risk                                                            X                  X
Currency Risk and Exchange Risk                                                 X                  X
Governmental 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
Initial Public Offering                                                         X                  X
Investment in Other Investment Companies                                        X                  X
Investment in Emerging Markets                                                                     X
Restrictions on Certain Investments                                                                X
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia
Junk Bonds                                                                                         X
Mortgage Backed Securities
Real Estate Related Securities                                                  X                  X
Real Estate Investment Trusts ("REITS")                                                            X
Repurchase Agreements and Purchase and Sale Contracts                           X                  X
Securities Lending                                                              X                  X
Securities of Smaller or Emerging Growth Companies                                                 X
Short Sales                                                                                        X
Sovereign Debt                                                                                     X
Standby Commitment Agreements                                                   X                  X
Stripped Securities
Supranational Entities
Utility Industries                                                              X                  X
Electric
Telecommunications
Gas
Water
Warrants                                                                        X                  X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                    X                  X
Zero Coupon Bonds




                                                                      MID CAP VALUE OPPORTUNITIES  NATURAL RESOURCES  PACIFIC

144 A Securities                                                                X                         X             X
Asset-Backed Securities
Asset-Based Securities                                                                                    X
Precious Metal Related Securities                                               X                         X             X
Borrowing and Leverage                                                          X                         X             X
                           Convertible Securities                               X                         X             X
Corporate Loans
Debt Securities                                                                 X                         X             X
Depositary Receipts                                                             X                         X             X
Derivatives                                                                     X                         X             X
Hedging                                                                         X                         X             X
Indexed and Inverse Securities                                                  X                         X             X
Swap Agreements                                                                 X                         X             X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                    X                         X             X
Call Options                                                                    X                         X             X
Put Options                                                                     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
Foreign Investment Risk                                                         X                         X             X
Foreign Market Risk                                                             X                         X             X
Foreign Economy Risk                                                            X                         X             X
Currency Risk and Exchange Risk                                                 X                         X             X
Governmental 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
Initial Public Offering                                                         X                         X             X
Investment in Other Investment Companies                                        X                         X             X
Investment in Emerging Markets                                                  X                                       X
Restrictions on Certain Investments                                             X                                       X
Risk of Investing in Asia-Pacific Countries                                                                             X
Restrictions on Foreign Investments in Asia-Pacific Countries                                                           X
Risks of Investments in Russia
Junk Bonds                                                                                                              X
Mortgage Backed Securities
Real Estate Related Securities                                                  X                         X             X
Real Estate Investment Trusts ("REITS")
Repurchase Agreements and Purchase and Sale Contracts                           X                         X             X
Securities Lending                                                              X                         X             X
Securities of Smaller or Emerging Growth Companies                              X                         X             X
Short Sales                                                                     X
Sovereign Debt                                                                                                          X
Standby Commitment Agreements                                                   X                         X             X
Stripped Securities
Supranational Entities                                                                                    X             X
Utility Industries                                                              X                         X             X
Electric
Telecommunications
Gas                                                                                                       X
Water                                                                                                     X
Warrants                                                                        X                         X             X
When Issued Securities, Delayed Delivery Securities and Forward
 Commitments                                                                    X                         X             X
Zero Coupon Bonds
















                                                                      SMALLCAP GROWTH    UTILITIES AND TELECOMMUNICATIONS

144 A Securities                                                               X                         X
Asset-Backed Securities
Asset-Based Securities
Precious Metal Related Securities                                              X
Borrowing and Leverage                                                         X                         X
                           Convertible Securities                              X                         X
Corporate Loans
Debt Securities                                                                X                         X
Depositary Receipts                                                            X                         X
Derivatives                                                                    X                         X
Hedging                                                                        X                         X
Indexed and Inverse Securities                                                 X                         X
Swap Agreements                                                                X                         X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                   X                         X
Call Options                                                                   X                         X
Put Options                                                                    X                         X
Types of Options                                                               X                         X
Futures                                                                        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
Credit Risk                                                                    X                         X
Currency Risk                                                                  X                         X
Leverage Risk                                                                  X                         X
Liquidity Risk                                                                 X                         X
Additional Risk Factors of OTC Transactions; Limitations on the use
  of OTC Derivatives                                                           X                         X
Distressed Securities
Foreign Investment Risk                                                        X                         X
Foreign Market Risk                                                            X                         X
Foreign Economy Risk                                                           X                         X
Currency Risk and Exchange Risk                                                X                         X
Governmental 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
Initial Public Offering                                                        X                         X
Investment in Other Investment Companies                                       X                         X
Investment in Emerging Markets                                                                           X
Restrictions on Certain Investments                                                                      X
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia
Junk Bonds                                                                     X                         X
Mortgage Backed Securities
Real Estate Related Securities                                                 X
Real Estate Investment Trusts ("REITS")                                        X
Repurchase Agreements and Purchase and Sale Contracts                          X                         X
Securities Lending                                                             X                         X
Securities of Smaller or Emerging Growth Companies                             X                         X
Short Sales
Sovereign Debt                                                                 X                         X
Standby Commitment Agreements                                                  X                         X
Stripped Securities
Supranational Entities
Utility Industries                                                             X                         X
Electric                                                                                                 X
Telecommunications                                                                                       X
Gas                                                                                                      X
Water                                                                                                    X
Warrants                                                                       X                         X
When Issued Securities, Delayed Delivery Securities and Forward
  Commitments                                                                  X                         X
Zero Coupon Bonds




                                                                      VALUE OPPORTUNITIES

144 A Securities                                                              X
Asset-Backed Securities
Asset-Based Securities
Precious Metal Related Securities                                             X
Borrowing and Leverage                                                        X
                           Convertible Securities                             X
Corporate Loans
Debt Securities
Depositary Receipts                                                           X
Derivatives                                                                   X
Hedging                                                                       X
Indexed and Inverse Securities                                                X
Swap Agreements                                                               X
Credit Default Swap Agreements
Credit Linked Securities
Total Return Swap Agreements
Options on Securities and Securities Indices                                  X
Call Options                                                                  X
Put Options                                                                   X
Types of Options                                                              X
Futures                                                                       X
Foreign Exchange Transactions                                                 X
Forward Foreign Exchange Transactions                                         X
Currency Futures                                                              X
Currency Options                                                              X
Limitations on Currency Hedging                                               X
Risk Factors in Hedging Foreign Currency Risks                                X
Risk Factors in Derivatives                                                   X
Credit Risk                                                                   X
Currency Risk                                                                 X
Leverage Risk                                                                 X
Liquidity Risk                                                                X
Additional Risk Factors of OTC Transactions; Limitations on the use
  of OTC Derivatives                                                          X
Distressed Securities                                                         X
Foreign Investment Risk                                                       X
Foreign Market Risk                                                           X
Foreign Economy Risk                                                          X
Currency Risk and Exchange Risk                                               X
Governmental 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
Initial Public Offering                                                       XX
Investment in Other Investment Companies                                      X
Investment in Emerging Markets
Restrictions on Certain Investments
Risk of Investing in Asia-Pacific Countries
Restrictions on Foreign Investments in Asia-Pacific Countries
Risks of Investments in Russia
Junk Bonds
Mortgage Backed Securities
Real Estate Related Securities                                                X
Real Estate Investment Trusts ("REITS")                                       X
Repurchase Agreements and Purchase and Sale Contracts                         X
Securities Lending                                                            X
Securities of Smaller or Emerging Growth Companies                            X
Short Sales                                                                   X
Sovereign Debt
Standby Commitment Agreements                                                 X
Stripped Securities
Supranational Entities
Utility Industries                                                            X
Electric
Telecommunications
Gas
Water
Warrants                                                                      X
When Issued Securities, Delayed Delivery Securities and Forward
  Commitments                                                                 X
Zero Coupon Bonds




                                      II-3



144A SECURITIES. A Fund may purchase restricted securities that can be offered
and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Directors have determined to treat as liquid Rule 144A
securities that are either freely tradable in their primary markets offshore or
have been determined to be liquid in accordance with the policies and procedures
adopted by the Fund's Directors. The Directors have adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of restricted securities. The Directors, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance exactly how 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.

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.

ASSET-BASED SECURITIES. Certain Funds may invest in debt, preferred or
convertible securities, the principal amount, redemption terms or conversion
terms of which are related to the market price of some natural resource asset
such as gold bullion. For the purposes of a Fund's investment policies, these
securities are referred to as "asset-based securities." A Fund will purchase
only asset-based securities that are rated, or are issued by issuers that have
outstanding debt obligations rated investment grade (i.e., AAA, AA, A or BBB by
Standard & Poor's ("S&P") or Fitch Ratings ("Fitch") or Aaa, Aa, A or Baa by
Moody's Investors Service, Inc. ("Moody's") or commercial paper rated A-1 by S&P
or Prime-1 by Moody's) or of issuers that the Manager has determined to be of
similar creditworthiness. Obligations ranked in the fourth highest rating
category, while considered "investment grade," may have certain speculative
characteristics and may be more likely to be downgraded than securities rated in
the three highest rating categories. If the asset-based security is backed by a
bank letter of credit or other similar facility, the Manager may take such
backing into account in determining the creditworthiness of the issuer. While
the market prices for an asset-based security and the related natural resource
asset generally are expected to move in the same direction, there may not be
perfect correlation in the two price movements. Asset-based securities may not
be secured by a security interest in or claim on the underlying natural resource
asset. The asset-based securities in which a Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal) rates.
As an example, assume gold is selling at a market price of $300 per ounce



                                      II-4



and an issuer sells a $1,000 face amount gold-related note with a seven-year
maturity, payable at maturity at the greater of either $1,000 in cash or the
then market price of three ounces of gold. If at maturity, the market price of
gold is $400 per ounce, the amount payable on the note would be $1,200. Certain
asset-based securities may be payable at maturity in cash at the stated
principal amount or, at the option of the holder, directly in a stated amount of
the asset to which it is related. In such instance, because no Fund presently
intends to invest directly in natural resource assets, a Fund would sell the
asset-based security in the secondary market, to the extent one exists, prior to
maturity if the value of the stated amount of the asset exceeds the stated
principal amount and thereby realize the appreciation in the underlying asset.

Precious Metal-Related Securities. A Fund may invest in the equity securities of
companies that explore for, extract, process or deal in precious metals, e.g.,
gold, silver and platinum, and in asset-based securities indexed to the value of
such metals. Such securities may be purchased when they are believed to be
attractively priced in relation to the value of a company's precious
metal-related assets or when the values of precious metals are expected to
benefit from inflationary pressure or other economic, political or financial
uncertainty or instability. Based on historical experience, during periods of
economic or financial instability the securities of companies involved in
precious metals may be subject to extreme price fluctuations, reflecting the
high volatility of precious metal prices during such periods. In addition, the
instability of precious metal prices may result in volatile earnings of precious
metal-related companies, which may, in turn, affect adversely the financial
condition of such companies.

The major producers of gold include the Republic of South Africa, Russia,
Canada, the United States, Brazil and Australia. Sales of gold by Russia are
largely unpredictable and often relate to political and economic considerations
rather than to market forces. Economic, financial, social and political factors
within South Africa may significantly affect South African gold production.

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



                                      II-5



covenants not cured within the specified cure period may result in acceleration
of outstanding indebtedness and require the Fund to dispose of portfolio
investments at a time when it may be disadvantageous to do so.

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

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


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

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

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

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

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

Holders of convertible securities generally have a claim on the assets of the
issuer prior to the common stockholders but may be subordinated to other debt
securities of the same issuer. A convertible security may


                                      II-6


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 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.


                                      II-7


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


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

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

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



                                      II-8



DEBT SECURITIES. Debt securities, such as bonds, involve credit risk. This is
the risk that the issuer will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. Changes in an issuer's credit rating or the
market's perception of an issuer's creditworthiness may also affect the value of
a Fund's investment in that issuer. Credit risk is reduced to the extent a Fund
limits its debt investments to U.S. Government securities. All debt securities,
however, are subject to interest rate risk. This is the risk that the value of
the security may fall when interest rates rise. In general, the market price of
debt securities with longer maturities will go up or down more in response to
changes in interest rates than the market price of shorter-term securities.

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

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.



                                      II-9



A Fund may use Derivatives, including the following:

Indexed and Inverse Securities. A Fund may invest in securities the potential
return of which is based on an index or interest rate. As an illustration, a
Fund may invest in debt security that pays interest based on the current value
of an interest rate index, such as the prime rate. A Fund may also invest in a
debt security that returns principal at maturity based on the level of a
securities index or a basket of securities, or based on the relative changes of
two indices. In addition, certain Funds may invest in securities the potential
return of which is based inversely on the change in an index or interest rate
(that is, a security the value of which will move in the opposite direction of
changes to an index or interest rate). For example, a Fund may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If a Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant interest rate, index or indices.
Indexed and inverse securities involve credit risk, and certain indexed and
inverse securities may involve leverage risk, liquidity risk and currency risk.
A Fund may invest in indexed and inverse securities for hedging purposes only or
to increase returns. When used for hedging purposes, indexed and inverse
securities involve correlation risk. (Furthermore, where such a security
includes a contingent liability, in the event of such an adverse movement, a
Fund may be required to pay substantial additional margin to maintain the
position.)

Swap Agreements. Certain Funds are authorized to enter into equity swap
agreements, which are over-the-counter ("OTC") contracts in which one party
agrees to make periodic payments based on the change in market value of a
specified equity security, basket of equity securities or equity index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different equity security, basket of equity securities or
equity index. Swap agreements may be used to obtain exposure to an equity or
market without owning or taking physical custody of securities in circumstances
in which direct investment is restricted by local law or is otherwise
prohibited.

A Fund will enter into an equity swap transaction only if, immediately following
the time the Fund enters into the transaction, the aggregate notional principal
amount of equity swap transactions to which the Fund is a party would not exceed
5% of the Fund's net assets.

Swap agreements entail the risk that a party will default on its payment
obligations to a Fund thereunder. A Fund will seek to lessen the risk to some
extent by entering into a transaction only if the counterparty meets the current
credit requirement for OTC option counterparties. Swap agreements are also
subject to the risk that a Fund will not be able to meet its obligations to the
counterparty. The Fund, however, will deposit in a segregated account with its
custodian, liquid securities or cash or cash equivalents or other assets
permitted to be so segregated by the Commission in an amount equal to or greater
than the market value of the liabilities under the swap agreement or the amount
it would 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 swap
agreement.

Credit Default Swap Agreements and Similar Instruments. Certain Funds 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



                                     II-10



to receive the full notional value of the swap in exchange for an equal face
amount of deliverable obligations of the reference entity that may have little
or no value. As a seller, a Fund generally receives an up front payment or a
fixed rate of income throughout the term of the swap, which typically is between
six months and three years, provided that there is no credit event. If a credit
event occurs, generally the seller must pay the buyer the full notional value of
the swap in exchange for an equal face amount of deliverable obligations of the
reference entity that may have little or no value.

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

Credit Linked Securities. Among the income producing securities in which a Fund
may invest are credit linked securities, which are issued by a limited purpose
trust or other vehicle that, in turn, invests in a derivative instrument or
basket of derivative instruments, such a credit default swaps, interest rate
swaps and other securities, in order to provide exposure to certain fixed income
markets. For instance, a Fund may invest in credit linked securities as a cash
management tool in order to gain exposure to a certain market and/or to remain
fully invested when more traditional income producing securities are not
available.

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. Certain Funds may enter into 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.



                                     II-11



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.

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

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

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

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

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



                                     II-12



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 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.


                                     II-13



Futures

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

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

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

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

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

Foreign Exchange Transactions. A Fund may engage in spot and forward foreign
exchange transactions and currency swaps, purchase and sell options on
currencies and purchase and sell currency futures 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-14



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-15



net asset value of the Fund's shares will fluctuate. Moreover, although Currency
Instruments will be used with the intention of hedging against adverse currency
movements, transactions in Currency Instruments involve the risk that
anticipated currency movements will not be accurately predicted and that the
Fund's hedging strategies will be ineffective. To the extent that a Fund hedges
against anticipated currency movements that do not occur, the Fund may realize
losses and decrease its total return as the result of its hedging transactions.
Furthermore, a Fund will only engage in hedging activities from time to time and
may not be engaging in hedging activities when movements in currency exchange
rates occur.

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

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

Risk Factors in Derivatives

Derivatives are volatile and involve significant risks, including:

Credit Risk -- the risk that the counterparty on a Derivative transaction will
be unable to honor its financial obligation to a Fund.

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;



                                     II-16



Limitations on the Use of OTC Derivatives." However, there can be no assurance
that, at any specific time, either a liquid secondary market will exist for a
Derivative or the Fund will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in a
Derivative without incurring substantial losses, if at all.

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

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

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

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

DISTRESSED SECURITIES. A Fund may invest in securities, including corporate
loans purchased in the secondary market, which are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal and/or
interest at the time of acquisition by the Fund or are rated in the lower rating
categories (Ca or lower by Moody's and CC or lower by S&P or Fitch) 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



                                     II-17



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.


FOREIGN INVESTMENT RISKS

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

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


                                     II-18


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

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


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

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.



                                     II-19



INITIAL PUBLIC OFFERING RISK. The volume of initial public offerings and the
levels at which the newly issued stocks trade in the secondary market are
affected by the performance of the stock market overall. If initial public
offerings are brought to the market, availability may be limited and the Fund
may not be able to buy any shares at the offering price, or if it is able to buy
shares, it may not be able to buy as many shares at the offering price as it
would like. In addition, the prices of securities involved in initial public
offerings are often subject to greater and more unpredictable price changes than
more established stocks.


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

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.


                                     II-20


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

Risks of Investing in Asia-Pacific Countries. In addition to the risks of
foreign investing and the risks of investing in developing markets, the
developing market Asia-Pacific countries in which a Fund may invest are subject
to certain additional or specific risks. Certain Funds may make substantial
investments in Asia-Pacific countries. There is a high concentration of market
capitalization and trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of investors and
financial intermediaries. Many of these markets also may be affected by
developments with respect to more established markets in the region such as in
Japan and Hong Kong. Brokers in developing market Asia-Pacific countries
typically are fewer in number and less well capitalized than brokers in the
United States. These factors, combined with the U.S. regulatory requirements for
open-end investment companies and the restrictions on foreign investment
discussed below, result in potentially fewer investment opportunities for a Fund
and may have an adverse impact on the investment performance of the Fund.

Many of the developing market Asia-Pacific countries may be subject to a greater
degree of economic, political and social instability than is the case in the
United States and Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection. In addition, the governments of many of such countries,
such as Indonesia, have a heavy role in regulating and supervising the economy.
Another risk common to most such countries is that the economy is heavily export
oriented and, accordingly, is dependent upon international trade. The existence
of overburdened infrastructure and obsolete financial systems also present risks
in certain countries, as do environmental problems. Certain economies also
depend to a significant degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices that, in turn, may be
affected by a variety of factors.

The legal systems in certain developing market Asia-Pacific countries also may
have an adverse impact on the Fund. For example, while the potential liability
of a shareholder in a U.S. corporation with respect to acts of the corporation
is generally limited to the amount of the shareholder's investment, the notion
of limited liability is less clear in certain emerging market Asia-Pacific
countries. Similarly, the rights of investors in developing market Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations.
It may be difficult or impossible to obtain and/or enforce a judgment in a
developing market Asia-Pacific country.

Governments of many developing market Asia-Pacific countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, government actions in the


                                     II-21


future could have a significant effect on economic conditions in developing
market Asia-Pacific countries, which could affect private sector companies and a
Fund itself, as well as the value of securities in the Fund's portfolio. In
addition, economic statistics of developing market Asia-Pacific countries may be
less reliable than economic statistics of more developed nations.

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

Satisfactory custodial services for investment securities may not be available
in some developing Asia-Pacific countries, which may result in the Fund
incurring additional costs and delays in providing transportation and custody
services for such securities outside such countries.

Certain developing Asia-Pacific countries, such as the Philippines, India and
Turkey, are especially large debtors to commercial banks and foreign
governments.

Fund management may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or appropriate to invest in a
particular developing Asia-Pacific country. A Fund may invest in countries in
which foreign investors, including management of the Fund, have had no or
limited prior experience.

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

The manner in which foreign investors may invest in companies in certain
developing Asia-Pacific countries, as well as limitations on such investments,
also may have an adverse impact on the operations of a Fund. For example, a Fund
may be required in certain of such countries to invest initially through a local
broker or other entity and then have the shares purchased re-registered in the
name of the Fund. Re-registration may in some instances not be able to occur on
a timely basis, resulting in a delay during which a Fund may be denied certain
of its rights as an investor, including rights as to dividends or to be made
aware of certain corporate actions. There also may be instances where a Fund
places a purchase order but is subsequently informed, at the time of
re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its desired
investment at that time.

Substantial limitations may exist in certain countries with respect to a Fund's
ability to repatriate investment income, capital or the proceeds of sales of
securities by foreign investors. A Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. For example, in September 1998, Malaysia imposed currency controls
that limited a Fund's ability to repatriate proceeds of Malaysian


                                     II-22


investments. It is possible that Malaysia, or certain other countries may impose
similar restrictions or other restrictions relating to their currencies or to
securities of issuers in those countries. To the extent that such restrictions
have the effect of making certain investments illiquid, securities may not be
available to meet redemptions. Depending on a variety of financial factors, the
percentage of a Fund's portfolio subject to currency controls may increase. In
the event other countries impose similar controls, the portion of the Fund's
assets that may be used to meet redemptions may be further decreased. Even where
there is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect certain aspects of the operations of a Fund. For
example, funds may be withdrawn from the People's Republic of China only in U.S.
or Hong Kong dollars and only at an exchange rate established by the government
once each week.

In certain countries, banks or other financial institutions may be among the
leading companies or have actively traded securities. The Investment Company Act
restricts a Fund's investments in any equity securities of an issuer that, in
its most recent fiscal year, derived more than 15% of its revenues from
"securities related activities," as defined by the rules thereunder. These
provisions may restrict a Fund's investments in certain foreign banks and other
financial institutions.


Risks of Investments in Russia. The Fund may invest a portion of its assets in
securities issued by companies located in Russia. Because of the recent
formation of the Russian securities markets as well as the underdeveloped state
of Russia's banking system, settlement, clearing and registration of securities
transactions are subject to significant risks. Ownership of shares is defined
according to entries in the company's share register and normally evidenced by
extracts from the register. These extracts are not negotiable instruments and
are not effective evidence of securities ownership. The registrars are not
necessarily subject to effective state supervision nor are they licensed with
any governmental entity. Also, there is no central registration system for
shareholders and it is possible for the Fund to lose its registration through
fraud, negligence or mere oversight. While the Fund will endeavor to ensure that
its interest continues to be appropriately recorded either itself or through a
custodian or other agent inspecting the share register and by obtaining extracts
of share registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the Fund of its ownership rights or improperly dilute
its interest. In addition, while applicable Russian regulations impose liability
on registrars for losses resulting from their errors, it may be difficult for
the Fund to enforce any rights it may have against the registrar or issuer of
the securities in the event of loss of share registration. While the Fund
intends to invest directly in Russian companies that use an independent
registrar, there can be no assurance that such investments will not result in a
loss to the Fund.

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.



                                     II-23



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

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



                                     II-24



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.

Most mortgage-backed securities are issued by Federal government agencies such
as the Government National Mortgage Association ("Ginnie Mae"), or by government
sponsored enterprises such as the Federal Home Loan Mortgage Corporation
("Freddie Mac") or the Federal National Mortgage Association ("Fannie Mae").
Principal and interest payments on mortgage-backed securities issued by the
Federal government and some Federal government agencies, such as Ginnie Mae, are
guaranteed by the Federal government and backed by the full faith and credit of
the United States. Mortgage-backed securities issued by other government
agencies or government sponsored enterprises, such as Freddie Mac or Fannie Mae,
are backed only by the credit of the government agency or enterprise and are not
backed by the full faith and credit of the United States. Such securities
generally have very little credit risk, but may be subject to substantial
interest rate risks. Private mortgage-backed securities are issued by private
corporations rather than government agencies and are subject to credit risk and
interest rate risk.

REAL ESTATE RELATED SECURITIES. Although no Fund may invest directly in real
estate, certain Funds may invest in equity securities of issuers that are
principally engaged in the real estate industry. Therefore, an investment in a
Fund is subject to certain risks associated with the ownership of real estate
and with the real estate industry in general. These risks include, among others:
possible declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds or
other limitations on access to capital; overbuilding; risks associated with
leverage; market illiquidity; extended vacancies of properties; increase in
competition, property taxes, capital expenditures and operating expenses;
changes in zoning laws or other governmental regulation; costs resulting from
the clean-up of, and liability to third parties for damages resulting from,
environmental problems; tenant bankruptcies or other credit problems; casualty
or condemnation losses; uninsured damages from floods, earthquakes or other
natural disasters; limitations on and variations in rents, including decreases
in market rates for rents; investment in developments that are not completed or
that are subject to delays in completion; and changes in interest rates. To the
extent that assets underlying a Fund's investments are concentrated
geographically, by property type or in certain other respects, the Fund may be
subject to certain of the foregoing risks to a greater extent. Investments by a
Fund in securities of companies providing mortgage servicing will be subject to
the risks associated with refinancings and their impact on servicing rights.

In addition, if a Fund receives rental income or income from the disposition of
real property acquired as a result of a default on securities the Fund owns, the
receipt of such income may adversely affect the Fund's ability to retain its tax
status as a regulated investment company because of certain income source
requirements applicable to regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code").

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



                                     II-25



by borrowers and self-liquidation. REITs must also meet certain requirements
under the Code to avoid entity level tax and be eligible to pass-through certain
tax attributes of their income to shareholders. REITs are consequently subject
to the risk of failing to meet these requirements for favorable tax treatment
and of failing to maintain their exemptions from registration under the
Investment Company Act. REITs are also subject to the risks of changes in the
Code, affecting their tax status.

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

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

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



                                     II-26



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.

SECURITIES LENDING. Each Fund may lend securities with a value not exceeding
33 1/3% of its total assets or the limit prescribed by applicable law to banks,
brokers and other financial institutions. In return, the Fund receives
collateral in cash or securities issued or guaranteed by the U.S. Government,
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Each Fund maintains the ability
to obtain the right to vote or consent on proxy proposals involving material
events affecting securities loaned. A Fund receives the income on the loaned
securities. Where a Fund receives securities as collateral, the Fund receives a
fee for its loans from the borrower and does not receive the income on the
collateral. Where a Fund receives cash collateral, it may invest such collateral
and retain the amount earned, net of any amount rebated to the borrower. As a
result, the Fund's yield may increase. Loans of securities are terminable at any
time and the borrower, after notice, is required to return borrowed securities
within the standard time period for settlement of securities transactions. The
Fund is obligated to return the collateral to the borrower at the termination of
the loan. A Fund could suffer a loss in the event the Fund must return the cash
collateral and there are losses on investments made with the cash collateral. In
the event the borrower defaults on any of its obligations with respect to a
securities loan, a Fund could suffer a loss where there are losses on
investments made with 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.

SECURITIES OF SMALLER OR EMERGING GROWTH COMPANIES. Investment in smaller or
emerging growth companies involves greater risk than is customarily associated
with investments in more established companies. The securities of smaller or
emerging growth companies may be subject to more abrupt or erratic market
movements than larger, more established companies or the market average in
general. These companies may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group.

While smaller or emerging growth company issuers may offer greater opportunities
for capital appreciation than large cap issuers, investments in smaller or
emerging growth companies may involve greater risks and thus may be considered
speculative. Fund management believes that properly selected companies of this
type have the potential to increase their earnings or market valuation at a rate
substantially in excess of the general growth of the economy. Full development
of these companies and trends frequently takes time.

Small cap and emerging growth securities will often be traded only in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by a Fund of portfolio securities to meet
redemptions or otherwise may require the Fund to make many small sales over a
lengthy period of time, or to sell these securities at a discount from market
prices or during periods when, in Fund management's judgment, such disposition
is not desirable.

While the process of selection and continuous supervision by Fund management
does not, of course, guarantee successful investment results, it does provide
access to an asset class not available to the average individual due to the time
and cost involved. Careful initial selection is particularly important in this
area as many new enterprises have promise but lack certain of the fundamental
factors necessary to prosper. Investing in small cap and emerging growth
companies requires specialized research and analysis. In addition, many
investors cannot invest sufficient assets in such companies to provide wide
diversification.



                                     II-27



Small companies are generally little known to most individual investors although
some may be dominant in their respective industries. Fund management believes
that relatively small companies will continue to have the opportunity to develop
into significant business enterprises. A Fund may invest in securities of small
issuers in the relatively early stages of business development that have a new
technology, a unique or proprietary product or service, or a favorable market
position. Such companies may not be counted upon to develop into major
industrial companies, but Fund management believes that eventual recognition of
their special value characteristics by the investment community can provide
above-average long-term growth to the portfolio.

Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of their
business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.

Smaller companies, due to the size and kinds of markets that they serve, may be
less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.

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



                                     II-28



to repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
government entity's policy towards the International Monetary Fund and the
political constraints to which a government entity may be subject. Governmental
entities may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on the implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's ability
or willingness to timely service its debts. Consequently, governmental entities
may default on their sovereign debt.

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.


                                     II-29



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


UTILITY INDUSTRIES

Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an in inflationary period, restrictions on
operations and increased cost and delays attributable to environmental
considerations and regulation, difficulty in raising capital in adequate amounts
on reasonable terms in periods of high inflation and unsettled capital markets,
technological innovations that may render existing plants, equipment or products
obsolete, the potential impact of natural or man-made disasters, increased costs
and reduced availability of certain types of fuel, occasionally reduced
availability and high costs of natural gas for resale, the effects of energy
conservation, the effects of a national energy policy and lengthy delays and
greatly increased costs and other problems associated with the design,
construction, licensing, regulation and operation of nuclear facilities for
electric generation, including, among other considerations, the problems
associated with the use of radioactive materials and the disposal of radioactive
wastes. There are substantial differences between the regulatory practices and
policies of various jurisdictions, and any given regulatory agency may make
major shifts in policy from time to time. There is no assurance that regulatory
authorities will, in the future, grant rate increases or that such increases
will be adequate to permit the payment of dividends on common stocks.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief. Certain of
the issuers of securities held in the Fund's portfolio may own or operate
nuclear generating facilities. Governmental authorities may from time to time
review existing policies and impose additional requirements governing the
licensing, construction and operation of nuclear power plants. Prolonged changes
in climatic conditions can also have a significant impact on both the revenues
of an electric and gas utility as well as the expenses of a utility,
particularly a hydro-based electric utility.

Utility companies in the United States and in foreign countries are generally
subject to regulation. In the United States, most utility companies are
regulated by state and/or federal authorities. Such regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.

The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. In recent years, changes in regulation
in the United States increasingly have allowed utility companies to provide
services and products outside their traditional geographic areas and lines of
business, creating new areas of competition within the industries. In some
instances, utility companies are operating on an unregulated basis. Because of
trends toward deregulation and the evolution of independent power producers as
well as new entrants to the field of telecommunications, non-regulated providers
of utility services have become a significant part of their respective
industries. Competition and deregulation should result in certain utility
companies being able to earn more than their traditional regulated rates of
return, while others may be forced to defend their core business from increased
competition and may be less profitable. Reduced profitability, as well as new
uses of funds (such as for expansion, operations or stock buybacks) could result
in cuts in dividend payout rates. The Manager seeks to take advantage of
favorable investment opportunities that may arise from these structural changes.
Of course, there can be no assurance that favorable developments will occur in
the future.


                                     II-30


Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the United States, generally are
required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that may cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.

A Fund's investment policies are designed to enable it to capitalize on evolving
investment opportunities throughout the world. For example, the rapid growth of
certain foreign economies will necessitate expansion of capacity in the utility
industries in those countries. Although many foreign utility companies currently
are government-owned, thereby limiting current investment opportunities for a
Fund, the Manager believes that, in order to attract significant capital for
growth, foreign governments are likely to seek global investors through the
privatization of their utility industries. Privatization, which refers to the
trend toward investor ownership of assets rather than government ownership, is
expected to occur in newer, faster-growing economies and in mature economies. Of
course, there is no assurance that such favorable developments will occur or
that investment opportunities in foreign markets for the Fund will increase.

The revenues of domestic and foreign utility companies generally reflect the
economic growth and development in the geographic areas in which they do
business. The Manager will take into account anticipated economic growth rates
and other economic developments when selecting securities of utility companies.

Electric. The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. In the past, electric
utility companies, in general, have been favorably affected by lower fuel and
financing costs and the full or near completion of major construction programs.
In addition, many of these companies have generated cash flows in excess of
current operating expenses and construction expenditures, permitting some degree
of diversification into unregulated businesses. Some electric utilities have
also taken advantage of the right to sell power outside of their traditional
geographic areas. Electric utility companies have historically been subject to
the risks associated with increases in fuel and other operating costs, high
interest costs on borrowings needed for capital construction programs, costs
associated with compliance with environmental and safety regulations and changes
in the regulatory climate. As interest rates declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage.
Regulators, however, lowered allowed rates of return as interest rates declined
and thereby caused the benefits of the rate declines to be shared wholly or in
part with customers. The construction and operation of nuclear power facilities
are subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for decommissioning such plants.

The rating agencies are taking a closer look at the business profile of
utilities. Ratings for companies are expected to be impacted to a greater extent
in the future by the division of their asset base. Electric utility companies
that focus more on the generation of electricity may be assigned less favorable
ratings as this business is expected to be competitive and the least regulated.
On the other hand, companies that focus on transmission and distribution, which
is expected to be the least competitive and the more regulated part of the
business, may see higher ratings given the greater predictability of cash flow.


The introduction of competition into the industry as a result of deregulation
may result in lower revenue, lower credit ratings, increased default risk, and
lower electric utility security prices. Such increased



                                     II-31



competition may also cause long-term contracts, which electric utilities
previously entered into to buy power, to become "stranded assets," which have no
economic value. Any loss associated with such contracts must be absorbed by
ratepayers and investors. In addition, in anticipation of increasing
competition, some electric utilities have acquired electric utilities overseas
to diversify, enhance earnings and gain experience in operating in a deregulated
environment. In some instances, such acquisitions have involved significant
borrowings, which have burdened the acquirer's balance sheet. There is no
assurance that deregulation will continue. However, deregulation in any form
could significantly impact the electric utilities industry.

Telecommunications. The telecommunications industry today includes both
traditional telephone companies, with a history of broad market coverage and
highly regulated businesses, and cable companies, which began as small, lightly
regulated businesses focused on limited markets. Today these two historically
different businesses are converging in an industry that is trending toward
larger, competitive, national and international markets with an emphasis on
deregulation. Companies that distribute telephone services and provide access to
the telephone networks still comprise the greatest portion of this segment, but
non-regulated activities such as cellular telephone services, paging, data
processing, equipment retailing, computer software and hardware services are
becoming increasingly significant components as well. The presence of
unregulated companies in this industry and the entry of traditional telephone
companies into unregulated or less regulated businesses provide significant
investment opportunities with companies that may increase their earnings at
faster rates than had been possible in traditional regulated businesses.
However, increasing competition, technological innovations and other structural
changes have also adversely affected, and may continue to adversely affect, the
profitability of certain utilities and the growth rate of their dividends. Given
mergers, certain marketing tests currently underway and proposed legislation and
enforcement changes, it is likely that both traditional telephone companies and
cable companies will continue to provide a greatly expanded range of utility
services, including two-way video and informational services to residential,
corporate and governmental customers.


In February 1996, the Telecommunications Act of 1996 became law. The Act removed
regulatory restrictions on entry that prevented local and long-distance
telephone companies and cable television companies from competing against one
another. The Act also removed most cable rate controls and allowed broadcasters
to own more radio and television stations. Litigation concerning the
constitutionality of certain major provisions of the Act has slowed the
implementation of such provisions.

Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected
by disruptions in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Manager, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal, even for electricity generation.

Water. Water supply utilities are companies that collect, purify, distribute and
sell water. In the United States and around the world the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth. In the opinion of the Manager, there may be
opportunities for certain companies to acquire other water utility companies and
for foreign acquisition of domestic companies. The Manager believes that
favorable investment opportunities may result from consolidation of this
segment.

There can be no assurance that the positive developments noted above, including
those relating to privatization and changing regulation, will occur or that risk
factors other than those noted above will not develop in the future.


                                     II-32



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.

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

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

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

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



                                     II-33


SUITABILITY (ALL FUNDS)

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

INVESTMENT RESTRICTIONS (ALL FUNDS)

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

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

Each Fund's investments will be limited in order to allow the Fund to qualify as
a "regulated investment company" for purposes of the Code. See "Dividends and
Taxes -- Taxes." To qualify, among other requirements, each Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer.
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.

MANAGEMENT AND OTHER SERVICE ARRANGEMENTS

DIRECTORS AND OFFICERS

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


                                     II-34


MANAGEMENT ARRANGEMENTS

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


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


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


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


Payment of Fund Expenses. Each Management Agreement obligates the Manager to
provide management services and to pay all compensation of and furnish office
space for officers and employees of a Fund connected with investment and
economic research, trading and investment management of the Fund, as well as the
fees of all Directors of the Fund who are interested persons of the Fund. Each
Fund pays all other expenses incurred in the operation of that Fund, including
among other things: taxes; expenses for legal and auditing services; costs of
preparing, printing and mailing proxies, shareholder reports, prospectuses and
statements of additional information, except to the extent paid by FAM
Distributors, Inc.(the "Distributor"); charges of the custodian and
sub-custodian, and the transfer agent; expenses of redemption of shares;
Commission fees; expenses of registering the shares under Federal, state or
foreign laws; fees and expenses of Directors who are not interested persons of a
Fund as defined in the Investment Company Act (the "non-interested Directors");
accounting and pricing costs (including the daily calculations of net asset
value); insurance; interest; brokerage costs; litigation and other extraordinary
or non-recurring expenses; and other expenses properly payable by the Fund.
Certain accounting services are provided to each Fund by State Street Bank and
Trust Company ("State Street") pursuant to an agreement between State Street and
each Fund. Each Fund pays a fee for these services. In addition, the Manager
provides certain accounting services to each Fund and the Fund pays the Manager
a fee for such services. The Distributor pays certain promotional expenses of
the Funds incurred in connection with the offering of shares of the Funds.
Certain expenses are financed by each Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans."


Organization of the Manager. Fund Asset Management, L.P. and Merrill Lynch
Investment Managers, L.P. each is a limited partnership. The partners of FAM and
MLIM are. Merrill Lynch & Co., Inc. ("ML & Co."), a financial services holding
company and the parent of Merrill Lynch, Pierce, Fenner & Smith



                                     II-35


Incorporated ("Merrill Lynch"), and Princeton Services, Inc. ("Princeton
Services"). ML & Co. and Princeton Services are "controlling persons" of FAM and
MLIM (as defined under the Investment Company Act) because of their ownership of
FAM's and MLIM's voting securities or their power to exercise a controlling
influence over FAM's and MLIM's management or policies. Merrill Lynch Investment
Managers International Limited ("MLIMIL") is an affiliate of FAM and MLIM. The
ultimate parent of MLIMIL is ML & Co. ML & Co. is a controlling person of MLIMIL
(as defined under the Investment Company Act) because of its ownership of
MLIMIL's voting securities or its power to exercise a controlling influence over
MLIMIL's management or policies.

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

OTHER SERVICE ARRANGEMENTS


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


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


Duration and Termination. Unless earlier terminated as described below, each
Management Agreement and, if applicable, each Sub-Advisory Agreement and
Administration Agreement will remain in effect from year to year if approved
annually (a) by the Directors or by a vote of a majority of the outstanding
voting securities of the Fund and (b) by a majority of the Directors who are not
parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Each Agreement is not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.

Transfer Agency Services. Financial Data Services, Inc. (the "Transfer Agent"),
a subsidiary of ML & Co., acts as each Fund's 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. 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.



                                     II-36



Independent Registered Public Accounting Firm. The Audit Committee of each Fund
has selected an independent registered public accounting firm for that Fund that
audits the Fund's financial statements. Please see your Fund's Prospectus for
information on your Fund's independent registered public accounting firm.


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

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

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

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

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

CODE OF ETHICS


The Board of each Fund has approved a Code of Ethics pursuant to Rule 17j-1
under the Investment Company Act, which covers the Fund, the Manager, the
Sub-Adviser, if any, and the Distributor. The Code of Ethics establishes
procedures for personal investing and restricts certain transactions. Employees
subject to the Code of Ethics may invest in securities for their personal
investment accounts, including securities that may be purchased or held by the
Fund.

SELECTIVE DISCLOSURE OF PORTFOLIO HOLDINGS

Pursuant to policies and procedures adopted by the Fund and the Manager, the
Fund and the Manager may, under certain circumstances as set forth below, make
selective disclosure with respect to the Fund's portfolio holdings. The Fund's
Board of Directors has approved the adoption by the Fund of the policies and
procedures set forth below, and has delegated to the Manager the responsibility
for ongoing monitoring and supervision to ensure compliance with these policies
and procedures. The Board provides ongoing oversight of the Fund's and Manager's
compliance with the policies and procedures. As part of this oversight function,
the Directors receive from the Fund's Chief Compliance Officer at least
quarterly and more



                                     II-37



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
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



                                     II-38



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 to the pension plan consultants on a quarterly basis.

The Fund and the Manager monitor, to the extent possible, the use of
Confidential Information by the individuals or firms to which it has been
disclosed. To do so, in addition to the requirements of any applicable
confidentiality agreement and/or the terms and conditions of the Fund's and
Manager's Code of Ethics and Code of Conduct -- all of which require persons or
entities in possession of Confidential Information to keep such information
confidential and not to trade on such information for their own benefit -- the
Manager's compliance personnel under the supervision of the Fund's Chief
Compliance Officer, monitor the Manager's securities trading desks to determine
whether individuals or firms who have received Confidential Information have
made any trades on the basis of that information. In addition, the Manager
maintains an internal restricted list to prevent trading by the personnel of the
Manager or its affiliates in securities -- including securities held by the Fund
-- about which the Manager has Confidential Information. There can be no
assurance, however, that the Fund's policies and procedures with respect to the
selective disclosure of Fund portfolio holdings will prevent the misuse of such
information by individuals or firms that receive such information.

POTENTIAL CONFLICTS OF INTEREST

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



                                     II-39



businesses and has interests other than that of managing the Fund. These are
considerations of which investors in the Fund should be aware, and which may
cause conflicts of interest that could disadvantage the Fund. These activities
and interests include potential multiple advisory, transactional, financial and
other interests in securities and other instruments, and companies that may be
purchased or sold by the Fund.

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

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

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

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

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.



                                     II-40



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

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

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

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

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


                                     II-41


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

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

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

PURCHASE OF SHARES


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

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


The applicable offering price for purchase orders is based on the net asset
value of the Fund next determined after receipt of the purchase order by a
dealer or other financial intermediary ("Selling Dealer") that has been
authorized by the Distributor by contract to accept such orders. As to purchase
orders received by Selling Dealers prior to the close of business on the New
York Stock Exchange ("NYSE") (generally, the NYSE closes at 4:00 p.m. Eastern
time), on the day the order is placed, which includes orders received after the
close of business on the previous day, the applicable offering price is based on
the net asset value determined as of the close of business on the NYSE on that
day. If the purchase orders are not received by the Selling Dealer before the
close of business on the NYSE, such orders are deemed received on the next
business day.

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


                                     II-42


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

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


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

Eligible Class I Investors. Class I shares are offered to a limited group of
investors. Investors who currently own Class I shares in a shareholder account
are entitled to purchase additional Class I shares of a Fund in that account.
Certain employer-sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class I shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by the Manager or any of its affiliates. Class I shares are
available at net asset value to corporate warranty insurance reserve fund
programs and 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 TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, 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



                                     II-43



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.

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 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.



                                     II-44


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


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


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

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

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


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


                                     II-45


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

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

The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for the reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, these fees potentially may be offset to the extent
any return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class A
shares of the Fund after a conversion period of approximately eight 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 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 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:


                          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


                                     II-46


because they were issued through dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the
applicable rate in the third year after purchase).


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


                                     II-47


Conversion Date the conversion will result in less than $50 worth of Class B
shares being left in an account, all of the Class B shares of the Fund held in
the account will be converted into Class A shares of the Fund.

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


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


Contingent Deferred Sales Charges -- Class C Shares


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


                                     II-48



REDEMPTION FEE

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

     o    Redemptions resulting from death or disability

     o    Redemptions through a Systematic Withdrawal Plan

     o    Redemptions of shares purchased through an Automatic Investment Plan

     o    Redemptions of shares acquired through dividend reinvestment

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

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


CLOSED-END FUND REINVESTMENT OPTIONS

Class I shares of each Fund are offered at net asset value to shareholders of
certain closed-end funds advised by a Manager who purchased their shares prior
to October 21, 1994 (the date the Select PricingSM System commenced operations)
and wish to reinvest the net proceeds from a sale of such shares in Class I
shares, if the conditions set forth below are satisfied. Alternatively,
shareholders of closed-end funds who purchased shares on or after October 21,
1994 and wish to reinvest the net proceeds from a sale of those shares may
purchase Class I shares (if eligible to buy Class I shares) or Class A shares of
each Fund at net asset value if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds must be immediately reinvested in Class I or Class A shares. Second,
the closed-end fund shares must either have been acquired in that fund's initial
public offering or represent dividends paid on shares of common stock acquired
in such offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the reinvestment option.

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

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


                                     II-49


DISTRIBUTION PLANS

The distribution plan for each of the Class A, Class B, Class C and Class R
shares of the Select Pricing Funds (each, a "Plan") provides that a Fund pays
the Distributor an account maintenance fee, accrued daily and paid monthly, at
an annual rate based on the average daily net assets of the Fund attributable to
shares of the relevant class. This fee compensates the Distributor, Merrill
Lynch, a selected securities dealer or other financial intermediary (pursuant to
a sub-agreement) for account maintenance activities with respect to Class A,
Class B, Class C and Class R shares of the Select Pricing Funds.

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

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


                                     II-50


the CDSC borne by the Class B and Class C shares. This limitation does not apply
to the account maintenance fee. The maximum sales charge rule is applied
separately to each class and limits the aggregate of distribution fee payments
and CDSCs payable by a Fund to (1) 6.25% of eligible gross sales of Class B,
Class C and Class R shares, computed separately (excluding shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on the
unpaid balance for the respective class, computed separately, at the prime rate
plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the CDSC). In connection
with the Class B shares, the Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales. Consequently, the maximum amount payable to the Distributor (referred to
as the "voluntary maximum") in connection with the Class B shares is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the voluntary
maximum, no Fund will make further payments of the distribution fee with respect
to Class B shares and any CDSCs will be paid to the Fund rather than to the
Distributor; however, each Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances, payment in excess of the amount payable under the NASD formula
will not be made.

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

REDEMPTION OF SHARES

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


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


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

REDEMPTION


If you hold shares with the Transfer Agent you may redeem such shares without
charge by writing to the Fund's Transfer Agent, Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be sent to Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484. If you hold share
certificates issued by your Fund, the letter must be accompanied by certificates
for the shares. Redemption requests should not be sent to the



                                     II-51


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.

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.


                                     II-52


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 a number of 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 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



                                     II-53


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.

Exchanges of Class B and Class C Shares. Shareholders of certain Select Pricing
Funds with Class B and Class C shares outstanding ("outstanding Class B or Class
C shares") may exchange their Class B or Class C shares for Class B or Class C
shares, respectively, of a second Select Pricing Fund or for Class B shares of
Summit ("new Class B or Class C shares") on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC. 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 upon redemption of new Class B or
Class C shares, the time you held both the exchanged Class B or Class C shares
and the new Class B shares or Class C shares will count towards the holding
period of the new Class B or Class C shares. For example, if you exchange Class
B shares of a Fund for those of a second 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 second Fund and receive cash, there will be no
CDSC due on this redemption since by adding the two-and-a-half year holding
period of the Fund Class B shares to the four year holding period for the second
Fund's Class B shares, you will be deemed to have held the second Fund's Class B
shares for more than six years. Class B shares of certain Select Pricing Funds
purchased prior to June 1, 2001 are subject to the four-year CDSC schedule in
effect at that time. This four-year CDSC schedule will also apply to Class B
shares received in exchange for such 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



                                     II-54


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.


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



                                     II-55



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.


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


                                     II-56


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 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 a 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


                                     II-57


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.

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



                                     II-58



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 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.

                                     II-59


PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES


Subject to policies established by the Board of each Fund, the Manager is
primarily responsible for the execution of a Fund's portfolio transactions and
the allocation of brokerage. The Manager does not execute transactions through
any particular broker or dealer, but seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
operational facilities of the firm and the firm's risk and skill in positioning
blocks of securities. While the Manager generally seeks reasonable trade
execution costs, a Fund does not necessarily pay the lowest spread or commission
available. Subject to applicable legal requirements, the Manager may select a
broker based partly upon brokerage or research services provided to the Manager
and its clients, including a Fund. In return for such services the Manager may
cause a Fund to pay a higher commission than other brokers would charge if the
Manager determines in good faith that the commission is reasonable in relation
to the services provided.

In the case of Feeder Funds, because each Feeder Fund generally invests
exclusively in beneficial interests of a Master Portfolio, it is expected that
all transactions in portfolio securities will be entered into by the Master
Portfolio.


Section 28(e) of the Exchange Act ("Section 28(e)") permits a Manager, under
certain circumstances, to cause an account to pay a broker a commission for
effecting a transaction that exceeds the amount another broker or dealer would
have charged for effecting the same transaction in recognition of the value of
brokerage and research services provided by that broker or dealer. This includes
commissions paid on riskless principal transactions under certain conditions.
Brokerage and research services include (1) furnishing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities; (2)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (3) effecting securities transactions and performing functions
incidental to securities transactions (such as clearance, settlement, and
custody). The Manager believes that access to independent investment research is
beneficial to its investment decision-making processes and, therefore, to a
Fund.


To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information that assists in the
valuation of investments. Examples of research-oriented services for which the
Manager might pay with Fund commissions include research reports and other
information on the economy, industries, groups of securities, individual
companies, statistical information, political developments, technical market
action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. Except as noted immediately below,
research services furnished by brokers may be used in servicing some or all
client accounts and not all services may be used in connection with the account
that paid commissions to the broker providing such services. In some cases,
research information received from brokers by mutual fund management personnel,
or personnel principally responsible for the Manager's individually managed
portfolios, is not necessarily shared by and between such personnel. Any
investment advisory or other fees paid by a Fund to the Manager are not reduced
as a result of the Manager's receipt of research services. In some cases the
Manager may receive a service from a broker that has both a "research" and a
"non-research" use. When this occurs the Manager makes a good faith allocation,
under all the circumstances, between the research and non-research uses of the
service. The percentage of the service that is used for research purposes may be
paid for with client commissions, while the Manager will use its own funds to
pay for the percentage of the service that is used for non-research purposes. In
making this good faith allocation, the Manager faces a potential conflict of
interest, but the Manager believes that its allocation procedures are reasonably
designed to ensure that it appropriately allocates the anticipated use of such
services to their research and non-research uses.



                                     II-60


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.

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.

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


                                     II-61


funds advised by the Manager or its affiliates, or in a private investment
company managed by the lending agent. If a Fund acquires shares in either the
private investment company or an affiliated money market fund, shareholders
would bear both their proportionate share of the Fund's expenses, and
indirectly, the expense of such other entities. However, in accordance with the
exemptive order, the manager to the private investment company will not charge
any advisory fees with respect to shares purchased by a Fund. Such shares also
will not be subject to a sales load, redemption fee, distribution fee or service
fee, or in the case of the shares of an affiliated money market fund, the
payment of any such sales load, redemption fee, distribution fee or service fee
will be offset by the Manager's waiver of a portion of its advisory fee.

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

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

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

Portfolio Turnover

While a Fund generally does not expect to engage in trading for short term
gains, it will effect portfolio transactions without regard to holding period
if, in Fund management's judgment, such transactions are advisable in light of a
change in circumstances of a particular company or within a particular industry
or in general market, economic or financial conditions. The portfolio turnover
rate is calculated by dividing the lesser of a Fund's annual sales or purchases
of portfolio securities (exclusive of purchases or 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.

                                     II-62

DIVIDENDS AND TAXES

DIVIDENDS

Each Fund intends to distribute substantially all of its net investment income,
if any. Dividends from such net investment income are paid as set forth in each
Fund's prospectus. Each Fund will also distribute all net realized capital
gains, if any, to its shareholders at least annually. From time to time, a Fund
may declare a special distribution at or about the end of the calendar year in
order to comply with Federal tax requirements that certain percentages of its
ordinary income and capital gains be distributed during the year. If in any
fiscal year, a Fund has net income from certain foreign currency transactions,
such income will be distributed at least annually.

For information concerning the manner in which dividends may be reinvested
automatically in shares of each Fund, see "Shareholder Services -- Automatic
Dividend Reinvestment Plan." Shareholders may also elect in writing to receive
any such dividends in cash. Dividends are taxable to shareholders, as discussed
below, whether they are reinvested in shares of the Fund or received in cash.
The per share dividends on Class A, Class B, Class C and Class R shares will be
lower than the per share dividends on Class I shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable to Class B
and Class C shares, the account maintenance fees applicable to Class A shares,
and the account maintenance and distribution fees applicable to Class R shares.
Similarly, the per share dividends on Class B, Class C and Class R shares will
be lower than the per share dividends on Class A shares as a result of the
distribution fees and higher transfer agency fees applicable to Class B and
Class C shares and the distribution fees applicable to Class R shares, and the
per share dividends on Class B and Class C shares will be lower than the per
share dividends on Class R shares as a result of the distribution fees and
higher transfer agency fees applicable to Class B and Class C shares.

TAXES


Each Fund intends to qualify, or continue to qualify, for the special tax
treatment afforded to regulated investment companies ("RICs") under the Code. As
long as a Fund so qualifies, the Fund (but not its shareholders) will not be
subject to Federal income tax on the part of its net ordinary income and net
realized capital gains that it distributes to Class A, Class B, Class C and
Class I shareholders (together, the "shareholders"). Each Fund intends to
distribute substantially all of such income and gains. If, in any taxable year,
a Fund fails to qualify as a RIC under the Code, such Fund would be taxed in the
same manner as an ordinary corporation and all distributions from earnings and
profits (as determined under U.S. Federal income tax principles) to its
shareholders would be taxable as ordinary dividend income eligible for the
maximum 15% tax rate for non-corporate shareholders and the dividends-received
deduction for corporate shareholders.


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.


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. Distributions
comprised of dividends from domestic corporations and



                                     II-63



certain foreign corporations (generally, corporations incorporated in a
possession of the United States, some corporations eligible for treaty benefits
under a treaty with the United States and corporations whose stock is readily
tradable on an established securities market in the United States) are treated
as "qualified dividend income" eligible for taxation at a maximum tax rate of
15% in the hands of non-corporate shareholders. A certain portion of the Fund's
dividends when paid by a RIC to non-corporate shareholders may be eligible for
treatment as qualified dividend income. In order for dividends paid by the Fund
to be qualified dividend income, the Fund must meet holding period and certain
other requirements with respect to the dividend-paying stocks in its portfolio
and the non-corporate shareholder must meet holding period and certain other
requirements with respect to the Fund's shares. To the extent that a Fund
engages in securities lending with respect to stock paying qualified dividend
income, it may be limited in its ability to pay qualified dividend income to its
shareholders.


Any loss upon the sale or exchange of Fund shares held for six months or less
will be treated as long term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of a Fund's
earnings and profits will first reduce the adjusted tax basis of a shareholder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such shareholder (assuming the shares are held as a capital
asset). Long term capital gains (i.e., gains, from a sale or exchange of capital
assets held for more than one year) are generally taxed at preferential rates to
non-corporate tax payers. Generally not later than 60 days after the close of
its taxable year, each Fund will provide its shareholders with a written notice
designating the amount of any capital gain dividends, qualified dividend income
taxable at the maximum 15% rate as well as dividends eligible for the
dividend-received deduction.


Ordinary income and capital gain dividends are taxable to shareholders even if
they are reinvested in additional shares of a Fund. A portion of a Fund's
ordinary income dividends attributable to the dividends received from domestic
corporations will be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. Each Fund will
allocate any dividends eligible for the dividends received deduction as well as
any qualified dividend income eligible for taxation at the maximum 15% rate,
among each class of the Fund's shares according to a method (which it believes
is consistent with the Commission rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to
shareholders of each class of stock during the taxable year, or such other
method as the Internal Revenue Service may prescribe. To the extent that a
Fund's dividends are attributable to dividends received from foreign
corporations, payments on certain types of preferred stock and other
distributions ineligible for the deduction, they will not qualify 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


                                     II-64


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 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



                                     II-65



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 "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


                                     II-66


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.

PERFORMANCE DATA


From time to time a Fund may include its average annual total return and other
total return data, and if applicable, yield and tax-equivalent yield in
advertisements or information furnished to present or prospective shareholders.
Total return, yield and tax-equivalent yield each is based on a Fund's
historical performance and is not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C, Class I and Class R shares in accordance with a formula specified by the
Commission.

Quotations of average annual total return, before tax, for the specified periods
are computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return before taxes is computed assuming all dividends are
reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge, in the case of Class A and Class I
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares but does not take into account taxes payable on dividends or on
redemption.

Quotations of average annual total return, after taxes, on dividends for the
specified periods are computed by finding the average annual compounded rates of
return that would equate the initial amount invested to the ending value of such
investment at the end of each period assuming payment of taxes on dividends
received during such period. Average annual total return after taxes on
dividends is computed assuming all dividends, less the taxes due on such
dividends, are reinvested and taking into account all applicable recurring and
nonrecurring expenses, including the maximum sales charge, in the case of Class
A and Class I shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares. The taxes due on dividends are calculated by
applying to each dividend the highest applicable marginal Federal individual
income tax rates in effect on the reinvestment date for that dividend. The rates
used correspond to the tax character (including eligibility for the maximum 15%
tax rate applicable to qualified dividend income) 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



                                     II-67



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 (including eligibility for
the maximum 15% tax rate applicable to qualified dividend income) 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 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



                                     II-68



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 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


                                     II-69


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 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


                                     II-70


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 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


                                     II-71


          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 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 of the Funds are organized as "Massachusetts business trusts." Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust establishing a trust, a copy of which for each
applicable Fund, together with all amendments thereto (the "Declaration of
Trust"), is on file in the office of the Secretary of the Commonwealth of
Massachusetts, contains an express disclaimer of shareholder liability for acts
or obligations of the trust and provides for indemnification and reimbursement
of expenses out of the trust property for any shareholder held personally liable
for the obligations of the trust. The Declaration of Trust also provides that a
trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the trust, its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.


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.




                                     II-72

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-73


                                   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



                                      A-8

PART C. OTHER INFORMATION

ITEM 22. EXHIBITS.

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

1(a) -- Articles of Incorporation of the Registrant, dated June 7, 1988.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated
November 28, 1988.(a)
(c) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
December 7, 1992.(a)
(d) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated July
13, 1993.(d)
(e) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
December 16, 1993.(d)
(f) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated
October 17, 1994.(b)
(g) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
October 17, 1994.(b)
(h) -- Articles of Transfer from Merrill Lynch Balanced Fund for Investment and
Retirement, Inc. to the Registrant, dated March 1, 1996.(t)
(i) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
September 9, 1996.(d)
(j) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
November 6, 1996 (including Certificate of Correction dated February 19, 1997 filed
with respect thereto).(d)
(k) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
November 12, 1997.(g)
(l) -- Articles of Transfer from The Asset Program, Inc. to the Registrant, dated July 19,
2000.(t)
(m) -- Articles of Transfer from Merrill Lynch Asset Growth Fund, Inc. to the Registrant,
dated July 19, 2000.(t)
(n) -- Articles of Transfer from Merrill Lynch Asset Income Fund, Inc. to the Registrant,
dated July 19, 2000.(t)
(o) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated
September 25, 2000.(t)
(p) -- Articles Supplementary Increasing the Authorized Capital Stock of the Corporation
and Creating an Additional Class of Common Stock, dated December 9, 2002.(r)
(q) -- Articles of Amendment to the Articles of Incorporation, dated April 14, 2003.(v)
(r) -- Articles Supplementary Classifying Shares of Authorized Capital Stock, dated
December 30, 2004.
2 -- Revised and Restated By-Laws of the Registrant.(v)
3 -- Portions of the Articles of Incorporation, as amended and supplemented, and the
By-Laws of the Registrant defining rights of Shareholders.(e)
4(a) -- Management Agreement between the Registrant and Merrill Lynch Investment
Managers, L.P. (the "Manager"), dated December 13, 1988.(c)
(b) -- Sub-Advisory Agreement between the Manager and Merrill Lynch Asset Management
U.K. Limited, dated January 18, 1989.(c)
(c) -- Supplement to Management Agreement between the Registrant and the Manager,
dated January 3, 1994.(x)
5 -- Form of Unified Distribution Agreement between the Registrant and FAM
Distributors, Inc. (the "Distributor").(l)
6 -- None
7 -- Form of Custodian Agreement between the Registrant and Brown Brothers Harriman
& Co.(m)

C-1

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

8(a) -- Form of Unified Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial Data Services,
Inc.(w)
(b) -- Form of License Agreement relating to the use of name between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated. (c)
(c)(1) -- Amended and Restated Credit Agreement between the Registrant and a syndicate of
banks.(i)
(c)(2) -- Form of Second Amended and Restated Credit Agreement between the Registrant, a
syndicate of banks and certain other parties.(p)
(c)(3) -- Form of Third Amended and Restated Credit Agreement between the Registrant, a
syndicate of banks and certain other parties.(s)
(c)(4) -- Form of Fourth Amended and Restated Credit Agreement between the Registrant and
a syndicate of banks and certain other parties.(j)
(c)(5) -- Form of Fifth Amended and Restated Credit Agreement between the Registrant and a
syndicate of banks and certain other parties.(y)
(d) -- Form of Administrative Services Agreement between the Registrant and State Street
Bank and Trust Company.(o)
(e) -- Securities Lending Agency Agreement between the Registrant and QA Advisors LLC
(now MLIM LLC) dated August 10, 2001.(n)
9 -- Opinion of Brown & Wood LLP, counsel for the Registrant.(h)
10 -- Consent of _______, independent registered public accounting firm for the Registrant.
11 -- None
12 -- Certificate of the Manager.(c)
13(a) -- Amended and Restated Class A Distribution Plan.(f)
(b) -- Form of Amended and Restated Class B Distribution Plan.(k)
(c) -- Form of Amended and Restated Class C Distribution Plan.(k)
(d) -- Form of Class R Distribution Plan of the Registrant.(q)
14 -- Revised Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(f)
15 -- Code of Ethics.(u)
16 -- Power of Attorney.

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

(a) Filed on February 24, 1994, as an Exhibit to Post-Effective Amendment No. 7
to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "Securities Act") (File No.
33-22462) (the "Registration Statement").
(b) Filed on February 27, 1995, as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(c) Filed on February 27, 1996 as an Exhibit to Post-Effective Amendment No. 10
to the Registration Statement.
(d) Filed on February 25, 1997, as an Exhibit to Post-Effective Amendment No.
11 to the Registration Statement.
(e) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Sections 2, 3, 5 and 6), Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation as amended and supplemented, filed
as Exhibits to this Registration Statement, and Article II, Article III
(Sections 1, 3, 5, 6 and 17), Article IV (Section I), Article V (Section
7), Article VI, Article VII, Article XIII, and Article XIV of the
Registrant's By-Laws filed as Exhibit 2 to the Registration Statement.
(f) Incorporated by reference to Exhibits 13(a) and 14 to Post-Effective
Amendment No. 36 to the Registration Statement on Form N-1A of Merrill
Lynch Pacific Fund, Inc. (File No. 2-56978), filed on April 17, 2003.
(g) Filed on February 12, 1998, as an Exhibit to Post-Effective Amendment No.
12 to the Registration Statement.
(h) Filed on February 1, 2000, as an Exhibit to Post-Effective Amendment No. 15
to the Registration Statement.
(i) Incorporated by reference to Exhibit (b) to the Issuer Tender Offer
Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc.
(File No. 333-15973), filed on December 14, 2000.
(j) Incorporated by reference to Exhibit 8(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 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.
(l) 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.
(m) Incorporated by reference to Exhibit 7 to Post-Effective Amendment No. 2 to
the Registration Statement on Form N-1A of Master Large Cap Series Trust
(File No. 811-09739) filed on January 30, 2002.
(n) Incorporated by reference to Exhibit 8(f) to Post-Effective Amendment No. 5
to the Registration Statement on Form N-1A of Merrill Lynch Global
Technology Fund, Inc. (File No. 333-48929), filed on July 24, 2002.

C-2

(o) 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.
(p) 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. 811-5870), filed on December 14, 2001.
(q) Incorporated by reference to Exhibit 13(d) to Post-Effective Amendment No.
32 to the Registration Statement on Form N-1A of Merrill Lynch Basic Value
Fund, Inc. (File No. 2-58521), filed on December 20, 2002.
(r) Filed on December 27, 2002 as an Exhibit to Post-Effective Amendment No. 18
to the Registration Statement.
(s) Incorporated by reference to Exhibit (b)(3) to the Issuer Tender Offer
Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc.
(File No. 333-39837), filed on December 13, 2002.
(t) Filed on February 20, 2003, as an Exhibit to Post-Effective Amendment No.
19 to the Registration Statement.
(u) 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.
(v) Incorporated by reference to Exhibits 1(q) and 2 to the Registrant's
Registration Statement on Form N-14 (File No. 333-112455), filed on
February 3, 2004.
(w) 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.
(x) Filed on February 17, 2004, as an Exhibit to Post-Effective Amendment No.
20 to the Registration Statement.
(y) 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.

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.

Reference is made to Article VI of the Registrant's Articles of Incorporation,
Article VI of the Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement.

Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.

The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.

Insofar as the conditional advancing of indemnification moneys for actions based
upon the Investment Company Act of 1940, as amended, (the "Investment Company
Act") may be concerned, such payments will be made only on the following
conditions: (i) the advances must be limited to amounts used, or to be used, for
the preparation or presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be made only
upon receipt of a written promise by, or on behalf of, the recipient to repay
that amount of the advance which exceeds the amount which it is ultimately
determined he or she is entitled to receive from the Registrant by reason of
indemnification;

C-3

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

In Section 9 of 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, the Prospectus or the Statement of Additional
Information.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 Director, officer, or
controlling person of the Registrant and the principal underwriter in connection
with the successful defense of any action, suit or proceeding) is asserted by
such Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 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 9011, Princeton, New Jersey 08543-9011. The
address of FAM Distributors, Inc. ("FAMD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, NY 10080. The
address of the Fund's transfer agent, Financial Data Services, Inc. ("FDS"), is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.

Set forth below is a list of each executive officer and partner of the Manager
indicating each business, profession, vocation or employment of a substantial
nature in which each such person or entity has been engaged for at least the
last two fiscal years for his, her or its own account or in the capacity of
director, officer, partner or trustee. Additionally, Mr. Burke is Vice President
and Treasurer of all or substantially all of the investment companies advised by
FAM, MLIM or their affiliates, and Mr. Doll is an officer and Director of all or
substantially all of such companies.

C-4

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

Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-adviser
for a number of affiliated registered investment companies advised by FAM or
MLIM. The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is 33 King
William Street, London EC4R 9AS, England.

Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged for at least the last two
fiscal years for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Burke is an officer of one or more of the
registered investment companies advised by FAM, MLIM or their affiliates.

OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
-------------------- ---------------------------- -----------------------------------------

Nicholas C.D. Hall Director Director of MLIM and the Institutional
Liquidity Fund PLC; First Vice President
and General Counsel of MLIM (EMEA
Region)

James T. Stratford Alternate Director Director of MLIM; Head of Compliance
of MLIM (EMEA Region)

Donald C. Burke Treasurer First Vice President and Treasurer of
MLIM and FAM; Senior Vice President,
Director and Treasurer of Princeton
Services; Vice President of FAMD

Debra Anne Searle Company Secretary None

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

C-5

Technology Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch Inflation
Protected Fund, Merrill Lynch International Fund of Mercury Funds, Inc., Merrill
Lynch Latin America Fund, Inc., Merrill Lynch Large Cap Series Funds, Inc.,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Natural
Resources Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Principal
Protected Trust, Merrill Lynch Ready Assets Trust, Merrill Lynch Real Investment
Fund, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short Term U.S. Government Fund, Inc., Merrill Lynch Value
Opportunities Fund, Inc., Merrill Lynch U.S. Government Mortgage Fund, Merrill
Lynch U.S. High Yield Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utilities and
Telecommunications Fund, Inc., Merrill Lynch Variable Series Funds, Inc.,
Merrill Lynch World Income Fund, Inc. and The Asset Program, Inc. FAMD also acts
as the principal underwriter for the following closed-end registered investment
companies: Merrill Lynch Senior Floating Rate Fund, Inc., and Merrill Lynch
Senior Floating Rate Fund II, Inc.

(b) Set forth below is information concerning each director and officer of FAMD.
The principal business address of each such person is P.O. Box 9081, Princeton,
New Jersey 08543-9081.

POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH FAMD WITH REGISTRANT
--------------------- --------------------------- -----------------------------

Andrew J. Donohue President and Director None
Michael G. Clark Director None
Thomas J. Verage Director None
Donald C. Burke Vice President Vice President and Treasurer
John Fosina Treasurer None
Daniel Dart Director None
Jerry W. Miller Director None
Alice A. Pellegrino Secretary Secretary

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-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and the State of New
Jersey, on February 14, 2005.

MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.

(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
--------------------------------- Officer) and Director
(Robert C. Doll), Jr.

Donald C. Burke*
--------------------------------- Vice President and Treasurer
(Donald C. Burke)

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

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

Jean Margo Reid*
--------------------------------- Director
(Jean Margo Reid)

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

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

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

*By: /s/ Donald C. Burke
---------------------------------
(Donald C. Burke, Attorney-In-Fact) February 14, 2005

C-7




                                  EXHIBIT INDEX


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

1(r)           Articles Supplementary Classifying Shares of Authorized Capital
               Stock, Dated December 30, 2004.

16             Power of Attorney