N-14AE

As filed with the Securities and Exchange Commission on January 10, 2002

Securities Act File No. 333-            

Investment Company Act File No. 811-02688

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-14

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

¨     PRE-EFFECTIVE AMENDMENT NO.     

¨     POST-EFFECTIVE AMENDMENT NO.     

(Check Appropriate Box or Boxes)

Merrill Lynch Municipal Bond Fund, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(609) 282-2800

(Area Code And Telephone Number)

800 Scudders Mill Road

Plainsboro, New Jersey 08536

(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)

Terry K. Glenn

Merrill Lynch Municipal Bond 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:

Leonard B. Mackey, Jr., Esq. Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, NY 10166 Laurin Blumenthal Kleiman, Esq. Sidley Austin Brown & Wood LLP 875 Third Avenue New York, NY 10022 Philip L. Kirstein, Esq. Fund Asset Management, L.P. 800 Scudders Mill Road Plainsboro, NJ 08536

        It is proposed that this filing will become effective February 9, 2002 pursuant to Rule 488.

        Title of Securities to Be Registered: Common Stock, par value $.10 per share.

        No filing fee is required because of reliance on Section 24(f) of the Investment Company Act of 1940.

MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND,

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND,

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND,

MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND,

MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND,

MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND,

MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND,

MERRILL LYNCH OHIO MUNICIPAL BOND FUND, AND

MERRILL LYNCH TEXAS MUNICIPAL BOND FUND,

EACH A SERIES OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

P.O. Box 9011

Princeton, New Jersey 08543-9011

NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS

TO BE HELD ON MARCH 18, 2002

To The Shareholders Of

Merrill Lynch Arizona Municipal Bond Fund

Merrill Lynch Connecticut Municipal Bond Fund

Merrill Lynch Maryland Municipal Bond Fund

Merrill Lynch Massachusetts Municipal Bond Fund

Merrill Lynch Michigan Municipal Bond Fund

Merrill Lynch Minnesota Municipal Bond Fund

Merrill Lynch North Carolina Municipal Bond Fund

Merrill Lynch Ohio Municipal Bond Fund and

Merrill Lynch Texas Municipal Bond Fund:

        NOTICE IS HEREBY GIVEN that Special Meetings of Shareholders (each, a “Meeting” and collectively, the “Meetings”) of the following funds (each, a “State Fund” and collectively, the “State Funds”), each a series of Merrill Lynch Multi-State Municipal Series Trust (“Municipal Series Trust”), will be held at the offices of Fund Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Monday, March 18, 2002, at the times indicated below:

Legal Name	Referred to Herein As	Meeting Time
Merrill Lynch Arizona Municipal Bond Fund	Arizona Fund	9:30 a.m. Eastern time
Merrill Lynch Connecticut Municipal Bond Fund	Connecticut Fund	10:00 a.m. Eastern time
Merrill Lynch Maryland Municipal Bond Fund	Maryland Fund	10:30 a.m. Eastern time
Merrill Lynch Massachusetts Municipal Bond Fund	Massachusetts Fund	11:00 a.m. Eastern time
Merrill Lynch Michigan Municipal Bond Fund	Michigan Fund	11:30 a.m. Eastern time
Merrill Lynch Minnesota Municipal Bond Fund	Minnesota Fund	12:00 p.m. Eastern time
Merrill Lynch North Carolina Municipal Bond Fund	North Carolina Fund	12:30 p.m. Eastern time
Merrill Lynch Ohio Municipal Bond Fund	Ohio Fund	1:00 p.m. Eastern time
Merrill Lynch Texas Municipal Bond Fund	Texas Fund	1:30 p.m. Eastern time

        The Meetings will be held for the following purposes:

        (1)  To approve or disapprove an Agreement and Plan of Reorganization (the “Agreement and Plan”) between Merrill Lynch Municipal Bond Fund, Inc. (“Municipal Bond Fund”) and Municipal Series Trust providing for the acquisition of substantially all of the assets, and the assumption of substantially all of

the liabilities, the Arizona Fund, the Connecticut Fund, the Maryland Fund, the Massachusetts Fund, the Michigan Fund, the Minnesota Fund, the North Carolina Fund, the Ohio Fund, and the Texas Fund by the National Portfolio (the “National Portfolio”), a series of Municipal Bond Fund, and the simultaneous distribution to each State Fund of newly-issued shares of common stock of the National Portfolio having an aggregate net asset value equal to the value of the net assets of the applicable State Fund acquired by the National Portfolio. The Agreement and Plan also provides for the distribution, on a proportionate basis, of the shares of common stock of the National Portfolio received by each State Fund to the shareholders of such State Fund in liquidation of such Fund. A vote in favor of this proposal by the shareholders of a State Fund will constitute a vote in favor of: (a) the liquidation of the applicable State Fund, (b) the termination of such State Fund as a separate series of Municipal Series Trust, and (c) the termination of such State Fund’s registration under the Securities Act of 1933;

        (2)  To elect a Board of Trustees of Municipal Series Trust to serve until their successors have been duly elected and qualified or until their earlier resignation or removal; and

        (3)  To transact such other business as properly may come before any Meeting or any adjournment thereof.

        This Notice of Special Meetings of Shareholders and the enclosed Joint Proxy Statement and Prospectus are being sent to shareholders of each State Fund. Shareholders of Merrill Lynch Florida Municipal Bond Fund (the “Florida Fund”), Merrill Lynch New Jersey Municipal Bond Fund (the “New Jersey Fund”), Merrill Lynch New York Municipal Bond Fund (the “New York Fund”), and Merrill Lynch Pennsylvania Municipal Bond Fund (the “Pennsylvania Fund”), the other series of Municipal Series Trust, will receive a separate Notice of Special Meetings of Shareholders and a separate Proxy Statement with respect to the election of the Board of Trustees of Municipal Series Trust (Item 2 listed above). The vote of the shareholders of the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund is not required with respect to the approval or disapproval of the Agreement and Plan (Item 1 listed above).

        Each acquisition of assets and assumption of liabilities of a State Fund by the National Portfolio is individually referred to herein as a “State Fund Acquisition,” and the State Fund Acquisitions are collectively referred to herein as the “Reorganization.” Under the Agreement and Plan, the failure of the shareholders of any State Fund to approve the Agreement and Plan will not affect the ability of the shareholders of any other State Fund to approve the Agreement and Plan. The consummation of any State Fund Acquisition is not contingent upon the consummation of any other State Fund Acquisition.

        Shareholders of a State Fund are not entitled to appraisal rights in connection with the applicable State Fund Acquisition.

        Regardless of whether the shareholders of a State Fund approve the Agreement and Plan as described herein, the Board of Trustees of Municipal Series Trust elected at the Meetings will continue to serve as the Trustees of Municipal Series Trust until their successors have been duly elected and qualified or until their earlier resignation or removal. If the shareholders of a State Fund approve the Agreement and Plan and the applicable State Fund Acquisition is consummated, they will become shareholders of the National Portfolio. The Board of Directors of Municipal Bond Fund is responsible for the overall supervision of the operations of the National Portfolio.

        The Board of Trustees of Municipal Series Trust has fixed the close of business on January 22, 2002 as the record date for the determination of shareholders entitled to notice of, and to vote at, each Meeting and at any adjournment(s) thereof.

        A complete list of the shareholders of each State Fund entitled to vote at the applicable Meeting will be available and open to the examination of any shareholder of such State Fund for any purpose germane to the applicable Meeting during ordinary business hours from and after March 4, 2002, at the offices of Municipal Series Trust, 800 Scudders Mill Road, Plainsboro, New Jersey.

        You are cordially invited to attend the Meeting of any State Fund in which you owned shares on January 22, 2002. Shareholders who do not expect to attend in person the Meeting of any State Fund in which they owned shares on January 22, 2002 are requested to complete, date, and sign the enclosed form of proxy for their State Fund and return it promptly in the envelope provided for that purpose. If you have been provided with the opportunity on your proxy card or voting instruction form to provide voting instructions via telephone or the Internet, please take advantage of these prompt and efficient voting options. The enclosed proxy is being solicited on behalf of the Board of Trustees of Municipal Series Trust.

        If you have any questions regarding the enclosed proxy materials or need assistance in voting your shares, please contact our proxy solicitor, Georgeson Shareholder, at                                                              .

By Order of the Board of Trustees,

ALICE A. PELLEGRINO

Secretary

Merrill Lynch Multi-State Municipal Series Trust

Plainsboro, New Jersey

Dated: February [·], 2002

SUBJECT TO COMPLETION

PRELIMINARY JOINT PROXY STATEMENT AND PROSPECTUS DATED JANUARY 10, 2002

JOINT PROXY STATEMENT OF

MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND,

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND,

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND,

MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND,

MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND,

MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND,

MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND,

MERRILL LYNCH OHIO MUNICIPAL BOND FUND, AND

MERRILL LYNCH TEXAS MUNICIPAL BOND FUND,

EACH A SERIES OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

FOR USE AT SPECIAL MEETINGS OF SHAREHOLDERS

TO BE HELD ON MARCH 18, 2002

PROSPECTUS OF

THE NATIONAL PORTFOLIO OF MERRILL LYNCH MUNICIPAL BOND FUND, INC.

P.O. Box 9011, Princeton, New Jersey 08543-9011

(609) 282-2800

        This Joint Proxy Statement and Prospectus (“Proxy Statement and Prospectus”) is furnished to you because you are a shareholder of one or more of the funds listed below (each, a “State Fund” and collectively, the “State Funds”), each a series of Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business trust (“Municipal Series Trust”), and you are being asked to consider:

        (1)  the acquisition of your fund by the National Portfolio (the “National Portfolio”), a series of Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (“Municipal Bond Fund”); and

        (2)  the election of the Board of Trustees of Municipal Series Trust.

Legal Name	Referred to Herein As
Merrill Lynch Arizona Municipal Bond Fund	Arizona Fund
Merrill Lynch Connecticut Municipal Bond Fund	Connecticut Fund
Merrill Lynch Maryland Municipal Bond Fund	Maryland Fund
Merrill Lynch Massachusetts Municipal Bond Fund	Massachusetts Fund
Merrill Lynch Michigan Municipal Bond Fund	Michigan Fund
Merrill Lynch Minnesota Municipal Bond Fund	Minnesota Fund
Merrill Lynch North Carolina Municipal Bond Fund	North Carolina Fund
Merrill Lynch Ohio Municipal Bond Fund	Ohio Fund
Merrill Lynch Texas Municipal Bond Fund	Texas Fund

continued on next page

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

The date of this Proxy Statement and Prospectus is February [·], 2002

The information in this prospectus is not complete and may be changed. We may use this prospectus to sell securities until the registration statement containing this prospectus, which has been filed with the Securities and Exchange Commission, is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.         Proposal 1 will involve a two-step transaction:

        FIRST, the National Portfolio will acquire substantially all of the assets, and will assume substantially all of the liabilities, of your State Fund in return for an equal aggregate value of newly-issued shares of common stock of the National Portfolio.

        SECOND, your State Fund will distribute the shares of common stock of the National Portfolio received in the reorganization to its shareholders.

        This two-step transaction with respect to a State Fund will be referred to in this Proxy Statement and Prospectus as a “State Fund Acquisition.” The State Fund Acquisitions are collectively referred to herein as the “Reorganization.” After a State Fund Acquisition is completed, that State Fund will be terminated as a separate series of Municipal Series Trust.

        On March 18, 2002, a Special Meeting of Shareholders of each State Fund will be held to obtain shareholder approval of the applicable State Fund Acquisition and to elect the Board of Trustees of Municipal Series Trust. On March 15, 2002, a Special Meeting of Shareholders of Merrill Lynch Florida Municipal Bond Fund (the “Florida Fund”), Merrill Lynch New Jersey Municipal Bond Fund (the “New Jersey Fund”), Merrill Lynch New York Municipal Bond Fund (the “New York Fund”), and Merrill Lynch Pennsylvania Municipal Bond Fund (the “Pennsylvania Fund”), the other series of Municipal Series Trust, will also be held to elect the Board of Trustees of Municipal Series Trust. The State Funds, the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund are referred to herein as the “Series” of Municipal Series Trust. The Special Meetings of Shareholders of the Series of Municipal Series Trust are referred to herein individually as a “Meeting” and collectively as the “Meetings,” as the context requires. The vote of the shareholders of the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund is not required with respect to the acquisition of your fund by the National Portfolio (Item 1 listed above). Shareholders of the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund will receive a separate Notice of Special Meetings of Shareholders and a separate Proxy Statement with respect to the election of the Board of Trustees of Municipal Series Trust (Item 2 listed above).

        This Proxy Statement and Prospectus sets forth concisely the information about the National Portfolio that a shareholder of each State Fund should know before considering the applicable State Fund Acquisition and should be retained for future reference. Municipal Series Trust has authorized the solicitation of proxies in connection with the Reorganization and the election of the Board of Trustees of Municipal Series Trust solely on the basis of this Proxy Statement and Prospectus and the accompanying documents.

        The Board of Trustees of Municipal Series Trust has fixed the close of business on January 22, 2002 as the record date (the “Record Date”) for the determination of shareholders entitled to notice of and to vote at each Meeting and at any adjournment(s) thereof. Shareholders on the Record Date will be entitled to one vote for each share held, with no share having cumulative voting rights. As of the Record Date, each State Fund had outstanding the number of shares of each class indicated below:

State Fund	Class A	Class B	Class C	Class D
Arizona Fund
Connecticut Fund
Maryland Fund
Massachusetts Fund
Michigan Fund
Minnesota Fund
North Carolina Fund
Ohio Fund
Texas Fund

        With this Proxy Statement and Prospectus you will also receive the following documents:

· Prospectus of Municipal Bond Fund, dated October 5, 2001 (the “Municipal Bond Fund Prospectus”). The Municipal Bond Fund Prospectus is incorporated by reference into this Proxy Statement and Prospectus, which means that it is legally considered to be part of this Proxy Statement and Prospectus; and

· Annual Report to Stockholders of Municipal Bond Fund for the fiscal year ended June 30, 2001.

        Certain other documents containing information about each State Fund and Municipal Bond Fund have been filed with the Securities and Exchange Commission (the “Commission”) and may be obtained, without charge, by writing to each State Fund or Municipal Bond Fund at the address above, or by calling 1-800-637-3863. These documents are:

· Statement of Additional Information of Municipal Bond Fund, dated October 5, 2001 (the “Municipal Bond Fund Statement”);

· Prospectus of the Arizona Fund, dated November 14, 2001 (the “Arizona Prospectus”);

· Prospectus of the Connecticut Fund, dated November 14, 2001 (the “Connecticut Prospectus”);

· Prospectus of the Maryland Fund, dated November 14, 2001 (the “Maryland Prospectus”);

· Prospectus of the Massachusetts Fund, dated November 14, 2001 (the “Massachusetts Prospectus”);

· Prospectus of the Michigan Fund, dated November 14, 2001 (the “Michigan Prospectus”);

· Prospectus of the Minnesota Fund, dated November 14, 2001 (the “Minnesota Prospectus”);

· Prospectus of the North Carolina Fund, dated November 14, 2001 (the “North Carolina Prospectus”);

· Prospectus of the Ohio Fund, dated November 14, 2001 (the “Ohio Prospectus”);

· Prospectus of the Texas Fund, dated November 14, 2001 (the “Texas Prospectus”);

· Statement of Additional Information relating to each State Fund, dated November 14, 2001 (the “State Fund Statement”); and

· Statement of Additional Information relating to this Proxy Statement and Prospectus, dated February [·], 2002 (the “Statement of Additional Information”).

        The Arizona Prospectus, the Connecticut Prospectus, the Maryland Prospectus, the Massachusetts Prospectus, the Michigan Prospectus, the Minnesota Prospectus, the North Carolina Prospectus, the Ohio Prospectus, the Texas Prospectus, and the Statement of Additional Information are also incorporated by reference into this Proxy Statement and Prospectus. The Commission maintains a web site (http://www.sec.gov) that contains the Statement of Additional Information, other material incorporated herein by reference, and other information regarding Municipal Series Trust, each State Fund, Municipal Bond Fund, and the National Portfolio.

        The investment objective of each State Fund and the National Portfolio are similar; however, they differ with respect to the tax-exempt nature of the income paid to shareholders. The investment objective of each State Fund is to provide shareholders with income exempt from Federal income taxes, the designated state’s personal income taxes (where applicable) and, in certain instances, the designated state’s corporate income tax, local personal income taxes, local personal property taxes and/or state intangible personal property taxes. The investment objective of the National Portfolio is to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with its investment policies.

        The address of the principal executive offices of Municipal Series Trust and Municipal Bond Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.

TABLE OF CONTENTS

	Page
INTRODUCTION	1
ITEM 1. THE REORGANIZATION	3
SUMMARY	3
The Reorganization	3
Fee Tables	5
Municipal Series Trust	15
Municipal Bond Fund	15
Comparison of the Funds	15
Tax Considerations	22
RISK FACTORS AND SPECIAL CONSIDERATIONS	23
COMPARISON OF THE FUNDS	26
Financial Highlights	26
INVESTMENT OBJECTIVE AND POLICIES	46
Description of Municipal Bonds	47
Other Investment Policies	50
Investment Restrictions	51
Management	51
Purchase of Shares	54
Redemption of Shares	54
Performance	55
Code of Ethics	64
Shareholder Rights	64
Dividends	64
Automatic Dividend Reinvestment Plan	65
Tax Information	65
Portfolio Transactions	65
Portfolio Turnover	65
Additional Information	66
THE REORGANIZATION	68
General	68
Procedure	68
Terms of the Agreement and Plan of Reorganization	69
Potential Benefits to Shareholders of each Fund as a Result of a State Fund Acquisition or the                           Reorganization	70
Tax Consequences of each State Fund Acquisition	73
Appraisal Rights	74
Capitalization	75
ITEM 2. ELECTION OF BOARD MEMBERS	77
INFORMATION CONCERNING THE SPECIAL MEETINGS	79
Date, Time and Place of Meetings	79
Solicitation, Revocation and Use of Proxies	79
Record Date and Outstanding Shares	80
Security Ownership of Certain Beneficial Owners and Management of the State Funds and the                           National Portfolio	80
Voting Rights and Required Vote	80
ADDITIONAL INFORMATION	81
LEGAL PROCEEDINGS	82
LEGAL OPINIONS	82

	Page
EXPERTS	82
SHAREHOLDERS’ MEETINGS	83
SHAREHOLDER PROPOSALS	83
EXHIBIT I  —AGREEMENT AND PLAN OF REORGANIZATION	I-1
EXHIBIT II  —INFORMATION PERTAINING TO BOARD MEMBER NOMINEES	II-1
EXHIBIT III  —RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER	III-1
EXHIBIT IV  —SECURITY OWNERSHIP	IV-1
EXHIBIT V  —AUDIT COMMITTEE CHARTER	V-1

INTRODUCTION

        This Proxy Statement and Prospectus is furnished in connection with the solicitation of proxies on behalf of the Board of Trustees of Municipal Series Trust on behalf of each State Fund for use at the applicable Meetings to be held at the offices of Fund Asset Management, L.P. (“FAM”), 800 Scudders Mill Road, Plainsboro, New Jersey, on Monday, March 18, 2002, at the following times:

State Fund	Meeting Time
Arizona Fund	9:30 a.m. Eastern time
Connecticut Fund	10:00 a.m. Eastern time
Maryland Fund	10:30 a.m. Eastern time
Massachusetts Fund	11:00 a.m. Eastern time
Michigan Fund	11:30 a.m. Eastern time
Minnesota Fund	12:00 p.m. Eastern time
North Carolina Fund	12:30 p.m. Eastern time
Ohio Fund	1:00 p.m. Eastern time
Texas Fund	1:30 p.m. Eastern time

        The mailing address for Municipal Series Trust is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy Statement and Prospectus is February [    ·    ], 2002.

        Any person giving a proxy may revoke it at any time prior to its exercise by executing a superseding proxy, by giving written notice of the revocation to the Secretary of Municipal Series Trust at the address indicated above or by voting in person at the applicable Meeting. All properly executed proxies received prior to a Meeting will be voted at such Meeting in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, properly executed proxies will be voted “FOR” each of the following Items: (1) to approve the Agreement and Plan of Reorganization (the “Agreement and Plan”) between Municipal Series Trust and Municipal Bond Fund; and (2) to elect a Board of Trustees of Municipal Series Trust to serve until their successors have been duly elected and qualified or until their earlier resignation or removal.

        Assuming a quorum is present at the applicable Meeting of the shareholders of a State Fund, shareholder approval of the Agreement and Plan requires: (i) the affirmative vote of the shareholders of each State Fund, voting together as a single class, representing two-thirds of the outstanding shares entitled to be voted thereon, and (ii) the affirmative vote of Class B, Class C, and Class D shareholders of each State Fund, each voting separately as a single class, representing two-thirds of the outstanding Class B, Class C, and Class D shares entitled to be voted thereon. Under the Agreement and Plan, the failure of the shareholders of a State Fund to approve the Agreement and Plan will not affect the ability of any other State Fund to proceed with its State Fund Acquisition. Consummation of each State Fund Acquisition is also conditioned upon, among other things, the receipt of certain regulatory approvals as well as an opinion of counsel relating to the tax-free treatment of the transaction. The consummation of any State Fund Acquisition is not contingent upon the consummation of any other State Fund Acquisition. The Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund may amend the Agreement and Plan to change the terms of a State Fund Acquisition at any time prior to the approval thereof by the shareholders of the applicable State Fund. See “Information Concerning the Special Meetings.”

        Assuming a quorum with respect to each Series of Municipal Series Trust is present at the Meetings, the election of the Board of Trustees of Municipal Series Trust requires the affirmative vote of a majority of the shares of each Series represented at the applicable Meeting. This Proxy Statement and Prospectus is being used to solicit the vote of the shareholders of each State Fund with respect to the approval of the Agreement and Plan and the election of the Board of Trustees of Municipal Series Trust. The vote of the shareholders of the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund with respect to the election of the Board of Trustees of Municipal Series Trust is being solicited by a separate Proxy Statement.

        The Board of Trustees of Municipal Series Trust knows of no business other than that described above that will be presented for consideration at the Meetings. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote in accordance with their best judgment.

        This Proxy Statement and Prospectus serves as a prospectus of Municipal Bond Fund under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the issuance of shares of common stock of the National Portfolio pursuant to the terms of the Agreement and Plan.

Certain Defined Terms Used in this Proxy Statement and Prospectus

        Municipal Bond Fund is incorporated as a Maryland corporation while Municipal Series Trust is organized as a Massachusetts business trust. In each jurisdiction, nomenclature varies. For ease of reference and clarity of presentation, shares of common stock of the National Portfolio and shares of beneficial interest of each State Fund are referred to herein as “shares;” holders of shares are referred to herein as “shareholders;” the Trustees of Municipal Series Trust and the Directors of Municipal Bond Fund are referred to herein as “Board Members;” the Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund are each referred to herein as a “Board” and collectively as the “Boards;” the Declaration of Trust of Municipal Series Trust and the Articles of Incorporation of Municipal Bond Fund, each as amended and supplemented, are each referred to herein as a “Charter;” FAM, in its capacity as Manager for each State Fund and in its capacity as Investment Adviser for Municipal Bond Fund, is referred to herein as the “Investment Adviser;” and the Management Agreements for Municipal Series Trust, on behalf of each State Fund, and the Investment Advisory Agreement for Municipal Bond Fund, each as amended, are each referred to herein as an “Investment Advisory Agreement.”

        The National Portfolio and each State Fund are referred to herein individually as a “Fund” and collectively as the “Funds,” as the context requires. The fund resulting from any State Fund Acquisition or the Reorganization is sometimes referred to herein as the “Combined Fund.”

ITEM 1.    THE REORGANIZATION

SUMMARY

        The following is a summary of certain information contained elsewhere in this Proxy Statement and Prospectus (including documents incorporated herein by reference) and is qualified in its entirety by reference to the more complete information contained in this Proxy Statement and Prospectus and in the Agreement and Plan, attached hereto as Exhibit I.

The Reorganization

        The Boards of Municipal Series Trust and Municipal Bond Fund each unanimously approved each State Fund Acquisition at Board meetings held on December 14, 2001 and November 29, 2001, respectively.

        The investment objectives of each State Fund and the National Portfolio are similar; however, they differ with respect to the tax-exempt nature of the income paid to their respective shareholders. The investment objective of each State Fund is to provide shareholders with income exempt from Federal income taxes, the designated state’s personal income taxes (where applicable) and, in certain instances, the designated state’s corporate income tax, local personal income taxes, local personal property taxes and/or state intangible personal property taxes (applicable state and local taxes are collectively referred to herein as “State Taxes”). The investment objective of the National Portfolio is to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with its investment policies. These investment objectives differ in that the income generated by each State Fund, in addition to being exempt from Federal income taxes, generally will be exempt from State Taxes. Each State Fund other than the Arizona Fund is a non-diversified fund, while the National Portfolio and the Arizona Fund are diversified funds.

        If a State Fund’s shareholders approve the Agreement and Plan as described herein, the National Portfolio will acquire substantially all of the assets, and will assume substantially all of the liabilities, of that State Fund and will simultaneously distribute shares of the National Portfolio to that State Fund. Such shares will then be distributed on a proportionate basis to shareholders of such State Fund in liquidation of such Fund. Following the consummation of a State Fund Acquisition, the Board of Municipal Series Trust will take action to: (a) terminate such State Fund as a separate series of Municipal Series Trust in accordance with the Charter of Municipal Series Trust, and (b) terminate such State Fund’s registration under the Securities Act.

What will Shareholders of each State Fund Receive in a State Fund Acquisition?

        If the Agreement and Plan is approved and a State Fund Acquisition involving your State Fund is consummated:

· The National Portfolio will acquire the assets and assume the liabilities of your State Fund;

· You will become a shareholder of the National Portfolio; and

· You will receive shares of the National Portfolio that are the same class and that have the same aggregate net asset value as the shares of the applicable State Fund that you hold immediately prior to the State Fund Acquisition.

        Each State Fund Acquisition has been structured with the intention that it qualify as a tax-free reorganization for Federal income tax purposes. See “Summary—Tax Considerations” and “The Reorganization—Tax Consequences of each State Fund Acquisition.” You should consult your tax advisor regarding the tax effects of a State Fund Acquisition in light of your individual circumstances.

What are the Reasons for each State Fund Acquisition?

        The Board of Municipal Series Trust, including all of the Board Members who are not “interested persons” of Municipal Series Trust as defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”), has determined that each State Fund Acquisition is in the best interests of the applicable State Fund and the shareholders of such State Fund, and that the interests of such shareholders will not be diluted as a result of the applicable State Fund Acquisition. However, a shareholder of a State Fund will hold a lower ownership percentage in the Combined Fund after a State Fund Acquisition or the Reorganization than such shareholder currently holds in the applicable State Fund.

        In reaching their conclusion, the Board of Municipal Series Trust considered a number of factors, including the following:

· After any State Fund Acquisition, it is expected that shareholders of the applicable State Fund will remain invested in an open-end fund with a substantially larger combined asset base;

· After any State Fund Acquisition, although the account maintenance fees for Class D shares of the National Portfolio and the distribution fees for Class B and Class C shares of the National Portfolio are higher than the corresponding fees for the applicable class of shares of each State Fund, it is expected that such higher fees will be more than offset by the Combined Fund’s lower expected investment advisory fee rate and lower expected total operating expense ratio;

· After any State Fund Acquisition, although shareholders of the applicable State Fund will no longer own shares that provide income that is exempt from State Taxes, it is expected that any tax benefits lost will be more than offset by the Combined Fund’s lower expected investment advisory fee rate and lower expected total operating expense ratio;

· After any State Fund Acquisition, it is expected that shareholders of the applicable State Fund will experience improved economies of scale as shareholders of the Combined Fund;

· After any State Fund Acquisition, it is expected that shareholders of the applicable State Fund will benefit from greater flexibility in portfolio management as shareholders of the Combined Fund;

· After any State Fund Acquisition, shareholders of the applicable State Fund will be invested in a diversified fund; and

· After any State Fund Acquisition, shareholders of the applicable State Fund can still redeem their shares or exchange them into certain other Merrill Lynch mutual funds.

        See “Summary—Fee Tables” and “The Reorganization—Potential Benefits to Shareholders of each Fund as a Result of a State Fund Acquisition or the Reorganization.”

        If all of the requisite approvals are obtained with respect to a State Fund Acquisition, it is anticipated that the State Fund Acquisition will occur as soon as practicable after such approvals, provided that the Funds have obtained an opinion of counsel concerning the tax consequences of the Reorganization as set forth in the Agreement and Plan. Under the Agreement and Plan, a State Fund Acquisition may be abandoned at any time (whether before or after approval thereof by the shareholders of the applicable State Fund) prior to the Closing Date (as defined below), or the Closing Date may be postponed, (i) by mutual consent of the Board of Municipal Series Trust and the Board of Municipal Bond Fund; (ii) by the Board of Municipal Series Trust if any condition to the obligations of Municipal Series Trust has not been fulfilled or waived by such Board; or (iii) by the Board of Municipal Bond Fund if any condition to the obligations of Municipal Bond Fund has not been fulfilled or waived by such Board. In addition, under the Agreement and Plan, the failure of any State Fund’s shareholders to approve the Agreement and Plan will not affect the ability of the shareholders of any other State Fund to proceed with their State Fund Acquisition. The consummation of any State Fund Acquisition is not contingent upon the consummation of any other State Fund Acquisition. The Boards may amend the Agreement and Plan to change the terms of a State Fund Acquisition at any time prior to the approval thereof by the shareholders of the applicable State Fund.

Fee Tables

        The fee tables below provide information about the fees and expenses attributable to each class of shares of each State Fund and the National Portfolio and, assuming the Reorganization had taken place on June 30, 2001, the estimated pro forma annualized fees and expenses attributable to each class of shares of the Combined Fund. Future fees and expenses may be greater or less than those indicated below.

Fee Table for Class A Shareholders of each State Fund, the National Portfolio

and the Pro Forma Combined Fund as of June 30, 2001* (unaudited)

	Class A Shares
	Actual																				Pro Forma
	Arizona Fund		Connecticut Fund		Maryland Fund		Massachusetts Fund		Michigan Fund		Minnesota Fund		North Carolina Fund		Ohio Fund		Texas Fund		National Portfolio		Combined Fund
Shareholder Fees (fees paid directly from your     investment) (a):
Maximum Sales Charge (Load) Imposed on             Purchases (as a percentage of offering price)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)
Maximum Sales Charge (Load) Imposed on             Dividend Reinvestments	None		None		None		None		None		None		None		None		None		None		None
Maximum Deferred Sales Charge (Load) (as a             percentage of original purchase price or             redemption proceeds, whichever is lower)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)
Redemption Fee	None		None		None		None		None		None		None		None		None		None		None
Exchange Fee	None		None		None		None		None		None		None		None		None		None		None
Annual Fund Operating Expenses (expenses that     are deducted from Fund assets):
Investment Advisory Fees	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.48	%(e)	0.48	%(f)
12b-1 fees:
Account Maintenance Fees	None		None		None		None		None		None		None		None		None		None		None
Distribution Fees	None		None		None		None		None		None		None		None		None		None		None
Other Expenses (g)	0.45	%	0.42	%	0.81	%	0.47	%	0.49	%	0.48	%	0.56	%	0.48	%	0.58	%	0.10	%	0.09	%
Total Fund Operating Expenses	1.00	%	0.97	%(h)	1.36	%(h)	1.02	%	1.04	%	1.03	%	1.11	%	1.03	%	1.13	%	0.58	%	0.57	%

(footnotes begin on next page)

* The expenses for the Combined Fund represent the estimated annualized expenses assuming the National Portfolio had acquired the assets and assumed the liabilities of each State Fund as of June 30, 2001.

(a) In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated may charge clients a processing fee (currently $5.35) when a client buys or sells shares.

(b) Some investors may qualify for reductions in the sales charge (load).

(c) An investor may pay a deferred sales charge if such investor purchases $1 million or more and redeems within one year.

(d) Each State Fund pays FAM a fee at the annual rate of 0.55% of its average daily net assets not exceeding $500 million, 0.525% of the average daily net assets in excess of $500 million but not exceeding $1 billion; and 0.50% of the average daily net assets in excess of $1 billion. For the fiscal year ended July 31, 2001, FAM voluntarily waived $55,743 of the investment advisory fee due from the Connecticut Fund and $74,992 of the investment advisory fee due from the Maryland Fund. The Total Annual Fund Operating Expenses in the table above have been restated for the Connecticut Fund and the Maryland Fund to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of fees at any time without notice. See note (h) below.

(e) The National Portfolio pays FAM investment advisory fees at annual rates that decrease as the aggregate total assets of Municipal Bond Fund’s three portfolios increase over certain levels. The fee rates are applied to the average daily net assets of the National Portfolio, with the reduced rates applicable to portions of the assets of the National Portfolio to the extent that the aggregate average daily net assets of Municipal Bond Fund’s three portfolios are $250 million or less (0.500%) and in excess of $250 million (0.475%). See “Summary—Comparison of the Funds—Investment Advisory Fees.”

(f) After the Reorganization, the investment advisory fee paid by the Combined Fund will be at the National Portfolio’s contractual rate. Assuming the Reorganization had taken place on June 30, 2001, the Combined Fund would have paid, on a pro forma basis, an investment advisory fee at the annual rate of 0.48% of the average daily net assets of the Combined Fund.

(g) Financial Data Services, Inc. (the “Transfer Agent”), an affiliate of FAM, provides transfer agency services to each Fund. Each Fund pays a fee for these services. FAM or its affiliates also provide certain accounting services to the Funds and the Funds reimburse FAM or its affiliates for such services.

(h) FAM has voluntarily waived a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund. The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of investment advisory fees at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, are provided below as of June 30, 2001:

	Investment Advisory Fees Waived and Expenses Reimbursed		Total Operating Expenses After Waiver and Reimbursement
Connecticut Fund	0.10	%	0.87	%
Maryland Fund	0.30	%	1.06	%

Fee Table for Class B Shareholders of each State Fund, the National Portfolio

and the Pro Forma Combined Fund as of June 30, 2001* (unaudited)

	Class B Shares (b)
	Actual																				Pro Forma
	Arizona Fund		Connecticut Fund		Maryland Fund		Massachusetts Fund		Michigan Fund		Minnesota Fund		North Carolina Fund		Ohio Fund		Texas Fund		National Portfolio		Combined Fund
Shareholder Fees (fees paid directly from your     investment) (a):
Maximum Sales Charge (Load) Imposed on             Purchases (as a percentage of offering price)	None		None		None		None		None		None		None		None		None		None		None
Maximum Sales Charge (Load) Imposed on             Dividend Reinvestments	None		None		None		None		None		None		None		None		None		None		None
Maximum Deferred Sales Charge (Load) (as a             percentage of original purchase price or             redemption proceeds, whichever is lower)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)	4.00	%(c)
Redemption Fee	None		None		None		None		None		None		None		None		None		None		None
Exchange Fee	None		None		None		None		None		None		None		None		None		None		None
Annual Fund Operating Expenses (expenses that     are deducted from Fund assets):
Investment Advisory Fees	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.48	%(e)	0.48	%(f)
12b-1 fees:
Account Maintenance Fees (g)	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%
Distribution Fees	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.50	%	0.50	%
Other Expenses (h)	0.46	%	0.43	%	0.82	%	0.48	%	0.50	%	0.48	%	0.58	%	0.49	%	0.59	%	0.11	%	0.10	%
Total Fund Operating Expenses	1.51	%	1.48	%(i)	1.87	%(i)	1.53	%	1.55	%	1.53	%	1.63	%	1.54	%	1.64	%	1.34	%	1.33	%

(footnotes begin on next page)

*   The expenses for the Combined Fund represent the estimated annualized expenses assuming the National Portfolio had acquired the assets and assumed the liabilities of each State Fund as of June 30, 2001.

(a) In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated may charge clients a processing fee (currently $5.35) when a client buys or sells shares.

(b) Class B shares automatically convert to Class D shares about ten years after initial purchase. After such conversion, such shares will no longer be subject to distribution fees and will pay lower account maintenance fees.

(c) Some investors may qualify for reductions in the sales charge (load).

(d) Each State Fund pays FAM a fee at the annual rate of 0.55% of its average daily net assets not exceeding $500 million, 0.525% of the average daily net assets in excess of $500 million but not exceeding $1 billion; and 0.50% of the average daily net assets in excess of $1 billion. For the fiscal year ended July 31, 2001, FAM voluntarily waived $55,743 of the investment advisory fee due from the Connecticut Fund and $74,992 of the investment advisory fee due from the Maryland Fund. The Total Annual Fund Operating Expenses in the table above have been restated for the Connecticut Fund and the Maryland Fund to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of fees at any time without notice. See note (i) below.

(e) The National Portfolio pays FAM investment advisory fees at annual rates that decrease as the aggregate total assets of Municipal Bond Fund’s three portfolios increase over certain levels. The fee rates are applied to the average daily net assets of the National Portfolio, with the reduced rates applicable to portions of the assets of the National Portfolio to the extent that the aggregate average daily net assets of Municipal Bond Fund’s three portfolios are $250 million or less (0.500%) and in excess of $250 million (0.475%). See “Summary—Comparison of the Funds—Investment Advisory Fees.”

(f) After the Reorganization, the investment advisory fee paid by the Combined Fund will be at the National Portfolio’s contractual rate. Assuming the Reorganization had taken place on June 30, 2001, the Combined Fund would have paid, on a pro forma basis, an investment advisory fee at the annual rate of 0.48% of the average daily net assets of the Combined Fund.

(g) Each Fund calls the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in the prospectuses of each State Fund and the prospectus of Municipal Bond Fund and all other Fund materials. If an investor holds Class B or Class C shares over time, it may cost that shareholder more in distribution (12b-1) fees than the maximum sales charge that such shareholder would have paid if he or she had bought one of the other classes.

(h) The Transfer Agent, an affiliate of FAM, provides transfer agency services to each Fund. Each Fund pays a fee for these services. FAM or its affiliates also provide certain accounting services to the Funds and the Funds reimburse FAM or its affiliates for such services.

(i) FAM has voluntarily waived a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund. The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of investment advisory fees at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, are provided below as of June 30, 2001:

	Investment Advisory Fees Waived and Expenses Reimbursed		Total Operating Expenses After Waiver and Reimbursement
Connecticut Fund	0.10	%	1.38	%
Maryland Fund	0.30	%	1.57	%

Fee Table for Class C Shareholders of each State Fund, the National Portfolio

and the Pro Forma Combined Fund as of June 30, 2001* (unaudited)

	Class C Shares
	Actual																				Pro Forma
	Arizona Fund		Connecticut Fund		Maryland Fund		Massachusetts Fund		Michigan Fund		Minnesota Fund		North Carolina Fund		Ohio Fund		Texas Fund		National Portfolio		Combined Fund
Shareholder Fees (fees paid directly from your     investment) (a):
Maximum Sales Charge (Load) Imposed on Purchases             (as a percentage of offering price)	None		None		None		None		None		None		None		None		None		None		None
Maximum Sales Charge (Load) Imposed on Dividend             Reinvestments	None		None		None		None		None		None		None		None		None		None		None
Maximum Deferred Sales Charge (Load) (as a             percentage of original purchase price or redemption             proceeds, whichever is lower)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)	1.00	%(b)
Redemption Fee	None		None		None		None		None		None		None		None		None		None		None
Exchange Fee	None		None		None		None		None		None		None		None		None		None		None
Annual Fund Operating Expenses (expenses that are     deducted from Fund assets):
Investment Advisory Fees	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.55	%(c)	0.48	%(d)	0.48	%(e)
12b-1 fees:
Account Maintenance Fees (f)	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%	0.25	%
Distribution Fees	0.35	%	0.35	%	0.35	%	0.35	%	0.35	%	0.35	%	0.35	%	0.35	%	0.35	%	0.55	%	0.55	%
Other Expenses (g)	0.46	%	0.42	%	0.82	%	0.48	%	0.50	%	0.49	%	0.58	%	0.50	%	0.60	%	0.11	%	0.10	%
Total Fund Operating Expenses	1.61	%	1.57	%(h)	1.97	%(h)	1.63	%	1.65	%	1.64	%	1.73	%	1.65	%	1.75	%	1.39	%	1.38	%

(footnotes begin on next page)

* The expenses for the Combined Fund represent the estimated annualized expenses assuming the National Portfolio had acquired the assets and assumed the liabilities of each State Fund as of June 30, 2001.

(a) In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated may charge clients a processing fee (currently $5.35) when a client buys or sells shares.

(b) Some investors may qualify for reductions in the sales charge (load).

(c) Each State Fund pays FAM a fee at the annual rate of 0.55% of its average daily net assets not exceeding $500 million, 0.525% of the average daily net assets in excess of $500 million but not exceeding $1 billion; and 0.50% of the average daily net assets in excess of $1 billion. For the fiscal year ended July 31, 2001, FAM voluntarily waived $55,743 of the investment advisory fee due from the Connecticut Fund and $74,992 of the investment advisory fee due from the Maryland Fund. The Total Annual Fund Operating Expenses in the table above have been restated for the Connecticut Fund and the Maryland Fund to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of fees at any time without notice. See note (h) below.

(d) The National Portfolio pays FAM investment advisory fees at annual rates that decrease as the aggregate total assets of Municipal Bond Fund’s three portfolios increase over certain levels. The fee rates are applied to the average daily net assets of the National Portfolio, with the reduced rates applicable to portions of the assets of the National Portfolio to the extent that the aggregate average daily net assets of Municipal Bond Fund’s three portfolios are $250 million or less (0.500%) and in excess of $250 million (0.475%). See “Summary—Comparison of the Funds—Investment Advisory Fees.”

(e) After the Reorganization, the investment advisory fee paid by the Combined Fund will be at the National Portfolio’s contractual rate. Assuming the Reorganization had taken place on June 30, 2001, the Combined Fund would have paid, on a pro forma basis, an investment advisory fee at the annual rate of 0.48% of the average daily net assets of the Combined Fund.

(f) Each Fund calls the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in the prospectuses of each State Fund and the prospectus of Municipal Bond Fund and all other Fund materials. If an investor holds Class B or Class C shares over time, it may cost that shareholder more in distribution (12b-1) fees than the maximum sales charge that such shareholder would have paid if he or she had bought one of the other classes.

(g) The Transfer Agent, an affiliate of FAM, provides transfer agency services to each Fund. Each Fund pays a fee for these services. FAM or its affiliates also provide certain accounting services to the Funds and the Funds reimburse FAM or its affiliates for such services.

(h) FAM has voluntarily waived a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund. The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of investment advisory fees at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, are provided below as of June 30, 2001:

	Investment Advisory Fees Waived and Expenses Reimbursed		Total Operating Expenses After Waiver and Reimbursement
Connecticut Fund	0.10	%	1.47	%
Maryland Fund	0.30	%	1.67	%

Fee Table for Class D Shareholders of each State Fund, the National Portfolio

and the Pro Forma Combined Fund as of June 30, 2001* (unaudited)

	Class D Shares
	Actual																				Pro Forma
	Arizona Fund		Connecticut Fund		Maryland Fund		Massachusetts Fund		Michigan Fund		Minnesota Fund		North Carolina Fund		Ohio Fund		Texas Fund		National Portfolio		Combined Fund
Shareholder Fees (fees paid directly from your     investment) (a):
Maximum Sales Charge (Load) Imposed on             Purchases (as a percentage ofoffering price)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)	4.00	%(b)
Maximum Sales Charge (Load) Imposed on             Dividend Reinvestments	None		None		None		None		None		None		None		None		None		None		None
Maximum Deferred Sales Charge (Load) (as a             percentage of original purchase price or             redemption proceeds, whichever is lower)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)	None	(c)
Redemption Fee	None		None		None		None		None		None		None		None		None		None		None
Exchange Fee	None		None		None		None		None		None		None		None		None		None		None
Annual Fund Operating Expenses (expenses that     are deducted from Fund assets):
Investment Advisory Fees	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.55	%(d)	0.48	%(e)	0.48	%(f)
12b-1 fees:
Account Maintenance Fees (g)	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%	0.25	%	0.25	%
Distribution Fees	None		None		None		None		None		None		None		None		None		None		None
Other Expenses (h)	0.45	%	0.42	%	0.82	%	0.48	%	0.49	%	0.48	%	0.59	%	0.48	%	0.60	%	0.10	%	0.09	%
Total Fund Operating Expenses	1.10	%	1.07	%(i)	1.47	%(i)	1.13	%	1.14	%	1.13	%	1.24	%	1.13	%	1.25	%	0.83	%	0.82	%

(footnotes begin on next page)

* The expenses for the Combined Fund represent the estimated annualized expenses assuming the National Portfolio had acquired the assets and assumed the liabilities of each State Fund as of June 30, 2001.

(a) In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated may charge clients a processing fee (currently $5.35) when a client buys or sells shares.

(b) Some investors may qualify for reductions in the sales charge (load).

(c) An investor may pay a deferred sales charge if such investor purchases $1 million or more and redeems within one year.

(d) Each State Fund pays FAM a fee at the annual rate of 0.55% of its average daily net assets not exceeding $500 million, 0.525% of the average daily net assets in excess of $500 million but not exceeding $1 billion; and 0.50% of the average daily net assets in excess of $1 billion. For the fiscal year ended July 31, 2001, FAM voluntarily waived $55,743 of the investment advisory fee due from the Connecticut Fund and $74,992 of the investment advisory fee due from the Maryland Fund. The Total Annual Fund Operating Expenses in the table above have been restated for the Connecticut Fund and the Maryland Fund to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of fees at any time without notice. See note (i) below.

(e) The National Portfolio pays FAM investment advisory fees at annual rates that decrease as the aggregate total assets of Municipal Bond Fund’s three portfolios increase over certain levels. The fee rates are applied to the average daily net assets of the National Portfolio, with the reduced rates applicable to portions of the assets of the National Portfolio to the extent that the aggregate average daily net assets of Municipal Bond Fund’s three portfolios are $250 million or less (0.500%) and in excess of $250 million (0.475%). See “Summary—Comparison of the Funds—Investment Advisory Fees.”

(f) After the Reorganization, the investment advisory fee paid by the Combined Fund will be at the National Portfolio’s contractual rate. Assuming the Reorganization had taken place on June 30, 2001, the Combined Fund would have paid, on a pro forma basis, an investment advisory fee at the annual rate of 0.48% of the average daily net assets of the Combined Fund.

(g) Each Fund calls the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in the prospectuses of each State Fund and the prospectus of Municipal Bond Fund and all other Fund materials. If an investor holds Class B or Class C shares over time, it may cost that shareholder more in distribution (12b-1) fees than the maximum sales charge that such shareholder would have paid if he or she had bought one of the other classes.

(h) The Transfer Agent, an affiliate of FAM, provides transfer agency services to each Fund. Each Fund pays a fee for these services. FAM or its affiliates also provide certain accounting services to the Funds and the Funds reimburse FAM or its affiliates for such services.

(i) FAM has voluntarily waived a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund. The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver because FAM may discontinue or reduce such waiver of investment advisory fees at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, are provided below as of June 30, 2001:

	Investment Advisory Fees Waived and Expenses Reimbursed		Total Operating Expenses After Waiver and Reimbursement
Connecticut Fund	0.10	%	0.97	%
Maryland Fund	0.30	%	1.17	%

Examples:

        These examples assume that a shareholder invests $10,000 in the relevant Fund for the time periods indicated, that the investment has a 5% return each year, that the shareholder pays the sales charges, if any, that apply to the particular class and that each Fund’s operating expenses remain the same. Although a shareholder’s actual costs may be higher or lower, based on these assumptions the costs would be:

        EXPENSES IF YOU DID REDEEM YOUR SHARES:

	1 Year	3 Years	5 Years	10 Years
Class A
Arizona Fund	$498	$706	$  930	$1,576
Connecticut Fund	495	697	915	1,542
Maryland Fund	533	814	1,115	1,970
Massachusetts Fund	500	712	941	1,598
Michigan Fund	502	718	951	1,620
Minnesota Fund	501	715	946	1,609
North Carolina Fund	509	739	987	1,698
Ohio Fund	501	715	946	1,609
Texas Fund	511	745	997	1,720
National Portfolio	457	578	711	1,097
Combined Fund*	456	575	706	1,085
Class B
Arizona Fund	$554	$677	$  824	$1,802
Connecticut Fund	551	668	808	1,768
Maryland Fund	590	788	1,011	2,190
Massachusetts Fund	556	683	834	1,824
Michigan Fund	558	690	845	1,845
Minnesota Fund	556	683	834	1,824
North Carolina Fund	566	714	887	1,933
Ohio Fund	557	686	839	1,835
Texas Fund	567	717	892	1,944
National Portfolio	536	625	734	1,613
Combined Fund*	535	621	729	1,601
Class C
Arizona Fund	$264	$508	$  876	$1,911
Connecticut Fund	260	496	855	1,867
Maryland Fund	300	618	1,062	2,296
Massachusetts Fund	266	514	887	1,933
Michigan Fund	268	520	897	1,955
Minnesota Fund	267	517	892	1,944
North Carolina Fund	276	545	939	2,041
Ohio Fund	268	520	897	1,955
Texas Fund	278	551	949	2,062
National Portfolio	242	440	761	1,669
Combined Fund*	241	437	755	1,657
Class D
Arizona Fund	$508	$736	$  982	$1,687
Connecticut Fund	505	727	967	1,653
Maryland Fund	544	846	1,171	2,087
Massachusetts Fund	511	745	997	1,720
Michigan Fund	512	748	1,003	1,731
Minnesota Fund	511	745	997	1,720
North Carolina Fund	521	778	1,054	1,840
Ohio Fund	511	745	997	1,720
Texas Fund	522	781	1,059	1,851
National Portfolio	481	654	842	1,384
Combined Fund*	480	651	837	1,373

* Assuming the Reorganization had taken place on June 30, 2001.

        EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

	1 Year	3 Years	5 Years	10 Years
Class A
Arizona Fund	$498	$706	$  930	$1,576
Connecticut Fund	495	697	915	1,542
Maryland Fund	533	814	1,115	1,970
Massachusetts Fund	500	712	941	1,598
Michigan Fund	502	718	951	1,620
Minnesota Fund	501	715	946	1,609
North Carolina Fund	509	739	987	1,698
Ohio Fund	501	715	946	1,609
Texas Fund	511	745	997	1,720
National Portfolio	457	578	711	1,097
Combined Fund*	456	575	706	1,085
Class B
Arizona Fund	$154	$477	$  824	$1,802
Connecticut Fund	151	468	808	1,768
Maryland Fund	190	588	1,011	2,190
Massachusetts Fund	156	483	834	1,824
Michigan Fund	158	490	845	1,845
Minnesota Fund	156	483	834	1,824
North Carolina Fund	166	514	887	1,933
Ohio Fund	157	486	839	1,835
Texas Fund	167	517	892	1,944
National Portfolio	136	425	734	1,613
Combined Fund*	135	421	729	1,601
Class C
Arizona Fund	$164	$508	$  876	$1,911
Connecticut Fund	160	496	855	1,867
Maryland Fund	200	618	1,062	2,296
Massachusetts Fund	166	514	887	1,933
Michigan Fund	168	520	897	1,955
Minnesota Fund	167	517	892	1,944
North Carolina Fund	176	545	939	2,041
Ohio Fund	168	520	897	1,955
Texas Fund	178	551	949	2,062
National Portfolio	142	440	761	1,669
Combined Fund*	141	437	755	1,657
Class D
Arizona Fund	$508	$736	$  982	$1,687
Connecticut Fund	505	727	967	1,653
Maryland Fund	544	846	1,171	2,087
Massachusetts Fund	511	745	997	1,720
Michigan Fund	512	748	1,003	1,731
Minnesota Fund	511	745	997	1,720
North Carolina Fund	521	778	1,054	1,840
Ohio Fund	511	745	997	1,720
Texas Fund	522	781	1,059	1,851
National Portfolio	481	654	842	1,384
Combined Fund*	480	651	837	1,373

* Assuming the Reorganization had taken place on June 30, 2001.

        The foregoing Fee Tables and Examples are intended to assist investors in understanding the costs and expenses that a shareholder of a State Fund or the National Portfolio bears directly or indirectly as compared to the costs and expenses that would be borne by such investors taking into account the Reorganization. The Examples set forth above assume reinvestment of all dividends and utilize a 5% annual rate of return as mandated by Commission regulations. The Examples should not be considered a representation of past or future expenses or annual rates of return, and actual expenses or annual rates of return may be more or less than those assumed for purposes of the Examples. See “Summary,” “The Reorganization—Potential Benefits to Shareholders of each Fund as a Result of a State Fund Acquisition or the Reorganization” and “Comparison of the Funds—Management,” “—Purchase of Shares” and “—Redemption of Shares.”

Municipal Series Trust Municipal Series Trust was organized under the laws of the Commonwealth of Massachusetts on August 2, 1985 and commenced operations on November 6, 1986. The State Funds commenced operations on the following dates:

State Fund	Commencement of Operations
Arizona Fund	November 29, 1991
Connecticut Fund	July 1, 1994
Maryland Fund	October 29, 1993
Massachusetts Fund	February 28, 1992
Michigan Fund	January 29, 1993
Minnesota Fund	March 27, 1992
North Carolina Fund	September 25, 1992
Ohio Fund	February 28, 1992
Texas Fund	August 30, 1991

Each State Fund other than the Arizona Fund is classified as a non-diversified fund under the Investment Company Act, while the Arizona Fund is classified as a diversified fund under the Investment Company Act.

As of December 31, 2001, the approximate net assets of each State Fund were as follows:

Arizona Fund	$54.4 million
Connecticut Fund	$60.4 million
Maryland Fund	$28.0 million
Massachusetts Fund	$44.0 million
Michigan Fund	$42.9 million
Minnesota Fund	$39.9 million
North Carolina Fund	$33.8 million
Ohio Fund	$41.6 million
Texas Fund	$31.4 million

Municipal Bond Fund Municipal Bond Fund was incorporated under the laws of the State of Maryland on September 30, 1976 and commenced operations on October 21, 1977. The National Portfolio commenced operations on November 2, 1979. The National Portfolio is classified as a diversified fund under the Investment Company Act.

As of December 31, 2001, the three portfolios of Municipal Bond Fund had aggregate net assets of approximately $2.6 billion. As of that date, the National Portfolio had aggregate net assets of approximately $994.2 million.

Comparison of the Funds Investment Objectives.    The investment objective of each State Fund and the National Portfolio are similar; however, they differ with respect to the tax-exempt nature of the income paid to shareholders. The

investment objective of each State Fund is to provide shareholders with income exempt from Federal income taxes and State Taxes. The investment objective of the National Portfolio is to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with its investment policies.

Investment Policies.    Each State Fund will invest primarily in long-term investment grade municipal obligations that pay interest exempt from Federal income taxes and State Taxes (“State Municipal Bonds”). These obligations may be issued by or on behalf of the designated state, its political subdivisions, agencies or instrumentalities and obligations of other qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin Islands and Guam. Each State Fund invests at least 80% of its net assets in State Municipal Bonds.

The National Portfolio will invest at least 80% of its net assets in obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies and instrumentalities, the interest on which is exempt from Federal income taxes (“Municipal Bonds”). The National Portfolio contemplates that it will not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state.

Under normal conditions, the weighted average maturity of each State Fund’s investment portfolio is more than ten years. As of June 30, 2001, the weighted average maturity of the investment portfolio of each State Fund is set forth below:

Arizona Fund	14.42 years
Connecticut Fund	19.35 years
Maryland Fund	16.48 years
Massachusetts Fund	18.30 years
Michigan Fund	16.09 years
Minnesota Fund	18.06 years
North Carolina Fund	17.54 years
Ohio Fund	14.28 years
Texas Fund	19.93 years

The National Portfolio will usually invest in Municipal Bonds that have a maturity of five years or longer. As of June 30, 2001, the weighted average maturity of the National Portfolio’s investment portfolio was 17.87 years.

At least 80% of the assets of each State Fund is invested in Municipal Bonds rated at the time of purchase within the four highest rating categories as determined by either Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s (“S&P”) or Fitch, Inc. (“Fitch”) (referred to herein as “investment grade securities”) or in unrated Municipal Bonds that possess creditworthiness comparable, in the opinion of FAM, to investment grade securities. Each State Fund also may invest up to 20% of its assets in Municipal Bonds that are rated below investment grade (below BBB by S&P or Fitch or below Baa by Moody’s) or in comparable unrated securities (referred to herein as “high yield bonds” or “junk bonds”). No State Fund will invest in debt securities that are in default or that FAM believes will be in default. Each State Fund may invest in fixed rate or variable rate obligations.

The National Portfolio may invest in Municipal Bonds rated in any rating category, or in unrated Municipal Bonds. FAM will choose Municipal Bond investments that it believes offer a relatively high potential for total return relative to their total risk. Although the investment policies of the National Portfolio are not governed by specific rating categories, the National Portfolio does not presently intend to invest more than 35% of its assets in high yield bonds or unrated Municipal Bonds that FAM believes are of comparable quality. The 35% limitation on high yield bond investments reflects only the present intention of the National Portfolio, and may be changed by the Board of Municipal Bond Fund without shareholder approval. Therefore, if the Board of Municipal Bond Fund were to approve a change in the investment policies of the National Portfolio, it is possible that the National Portfolio could invest up to 100% of its assets in high yield bonds. The National Portfolio will not invest in debt securities in the lowest rating categories (those rated CC or lower by S&P or Fitch or Ca or lower by Moody’s) unless FAM believes those ratings do not accurately reflect the financial condition of the issuer or other factors affecting the creditworthiness of the securities. The National Portfolio does not intend to purchase debt securities that are in default or that FAM believes will be in default.

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

While the National Portfolio does not intend to realize taxable investment income, it may invest as much as 20% of its net assets on a temporary basis in taxable money market securities with remaining maturities of one year or less for liquidity purposes or as a temporary investment of cash pending investment of such cash in Municipal Bonds. In addition, as a temporary measure for defensive purposes, the National Portfolio may invest without limitation in taxable money market securities.

Portfolio Management.    Municipal Series Trust and Municipal Bond Fund are each advised by FAM. The current portfolio manager for each Fund and the expected portfolio manager for the Combined Fund are set forth below.

Fund	Portfolio Manager
Arizona Fund	Walter O’Connor
Connecticut Fund	William R. Bock
Maryland Fund	Robert D. Sneeden
Massachusetts Fund	Theodore R. Jaeckel, Jr.
Michigan Fund	Fred K. Steube
Minnesota Fund	Michael A. Kalinoski
North Carolina Fund	Michael A. Kalinoski
Ohio Fund	Theodore R. Jaeckel, Jr.
Texas Fund	Theodore R. Jaeckel, Jr.
National Portfolio	Walter O’Connor
Combined Fund	Walter O’Connor

FAM was organized as an investment adviser in 1977 and offers investment advisory services to more than 50 registered investment companies. FAM and its affiliates had approximately $529 billion in investment company and other portfolio assets under management as of November 2001. See “Comparison of the Funds—Management.”

Investment Advisory Fees.    Pursuant to separate Investment Advisory Agreements between Municipal Series Trust, on behalf of each State Fund, and FAM, each State Fund pays FAM a monthly investment advisory fee based upon the annual rate and breakpoints set forth below:

Average Daily Net Assets	Investment Advisory Fee Rate
Not exceeding $500 million	0.550	%
In excess of $500 million but not exceeding      $1 billion	0.525
In excess of $1 billion	0.500

For the fiscal year ended July 31, 2001, the investment advisory fee payable by each State Fund to FAM was equal to 0.55% of the average daily net assets of the applicable State Fund. However, during that period, FAM voluntarily waived a portion of the investment advisory fee payable by the Connecticut Fund and the Maryland Fund. FAM may discontinue or reduce such waivers of investment advisory fees at any time without notice.

As compensation for FAM’s services to the three portfolios of Municipal Bond Fund, FAM receives at the end of each month a fee with respect to each of the three portfolios. The fee for the National Portfolio is determined based on the annual advisory fee rates set forth in the table below. These annual advisory fee rates are applied with respect to the aggregate average daily net assets of the three portfolios of Municipal Bond Fund. The advisory fee rates for the National Portfolio are subject to reduction to the extent that the aggregate average daily net assets of the three portfolios of Municipal Bond Fund are $250 million or less or exceed $250 million (each such amount being a “breakpoint level”). The portion of the assets of the National Portfolio to which a fee rate applies will be determined on a “uniform percentage” basis for each breakpoint level. The uniform percentage for a breakpoint level is determined by dividing the aggregate average daily net assets of the three portfolios of Municipal Bond Fund that fall within that breakpoint level by the aggregate average daily net assets of the three portfolios of Municipal Bond Fund. The amount of the fee for the National Portfolio at each breakpoint level is determined by multiplying the average daily net assets of the National Portfolio by the uniform percentage applicable to that breakpoint level and multiplying the product by the applicable advisory fee rate.

Aggregate Average Daily Net Assets of the Three Portfolios	National Portfolio Advisory Fee Rate
Not exceeding $250 million	0.500	%
In excess of $250 million	0.475

As of June 30, 2001, the aggregate net assets of the three portfolios of Municipal Bond Fund were approximately $2.608 billion. As of that date, the aggregate net assets of the National Portfolio were approximately $1.037 billion and the advisory fee rate payable by the National Portfolio was 0.48%.

Assuming the Reorganization had taken place on June 30, 2001, the Combined Fund would have paid, on a pro forma basis, a monthly advisory fee at the annual rate of 0.48% of the average daily net assets of the Combined Fund. See “Summary—Fee Tables” and “Comparison of the Funds—Management.”

12b-1 Fees.    Under separate class-specific plans adopted pursuant to Rule 12b-1 under the Investment Company Act, each State Fund and the National Portfolio pay fees in connection with account maintenance for each of Class B, Class C, and Class D shares and in connection with the distribution of each of Class B and Class C shares (together, “12b-1 fees”). Set forth below is a comparison of the 12b-1 fees for the State Funds and the National Portfolio:

12b-1 Annual Fee Rates (as a percentage of average daily net assets of the applicable share class)
	Account Maintenance Fee		Distribution Fee
Share Class	State Funds	National Portfolio	State Funds	National Portfolio
Class B	0.25%	0.25%	0.25%	0.50%
Class C	0.25%	0.25%	0.35%	0.55%
Class D	0.10%	0.25%	N/A	N/A

Class Structure.    Each Fund offers four classes of shares under the Merrill Lynch Select Pricing ^SM System. The Class A, Class B, Class C and Class D shares issued by the National Portfolio are substantially similar to the Class A, Class B, Class C and Class D shares issued by each State Fund, except that (i) the shares of the National Portfolio are common stock in a series of a Maryland corporation and the shares of a State Fund are beneficial interests in a series of a Massachusetts business trust, (ii) the account maintenance fees for Class D shares of the National Portfolio are higher than the account maintenance fees for Class D shares of each State Fund, and (iii) the distribution fees for Class B and Class C shares of the National Portfolio are higher than the distribution fees for Class B and Class C shares of each State Fund. See “Comparison of the Funds—Purchase of Shares,” “—Redemption of Shares” and “Additional Information—Shareholder Services.” Although the account maintenance fees for Class D shares of the National Portfolio and the distribution fees for Class B and Class C shares of the National Portfolio are higher than the corresponding fees for the applicable class of shares of each State Fund, it is expected that such higher fees will be more than offset by the Combined Fund’s lower expected total operating expense ratio. See “Summary—Fee Tables.”

Overall Annual Expense Ratio.    The tables below show the total operating expense ratio for each class of shares for each State Fund and the National Portfolio as of June 30, 2001 and, assuming the applicable State Fund Acquisition and the Reorganization had taken place on June 30, 2001, the estimated pro forma operating expense ratio for each class of shares of the Combined Fund (in each case, including class specific distribution fees and account maintenance fees with respect to all Funds, and without giving effect to the waiver of a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund).

Total Operating Expense Ratios
Fund	Class A		Class B		Class C		Class D
Arizona Fund	1.00	%	1.51	%	1.61	%	1.10	%
Connecticut Fund*	0.97	%	1.48	%	1.57	%	1.07	%
Maryland Fund*	1.36	%	1.87	%	1.97	%	1.47	%
Massachusetts Fund	1.02	%	1.53	%	1.63	%	1.13	%
Michigan Fund	1.04	%	1.55	%	1.65	%	1.14	%
Minnesota Fund	1.03	%	1.53	%	1.64	%	1.13	%
North Carolina Fund	1.11	%	1.63	%	1.73	%	1.24	%
Ohio Fund	1.03	%	1.54	%	1.65	%	1.13	%
Texas Fund	1.13	%	1.64	%	1.75	%	1.25	%
National Portfolio	0.58	%	1.34	%	1.39	%	0.83	%

* In the past, FAM voluntarily waived a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund. The Total Operating Expense Ratio does not give effect to such waivers because FAM may discontinue or reduce such waivers of investment advisory fees at any time without notice.

Combined Fund Pro Forma Total Operating Expense Ratios*
	Class A		Class B		Class C		Class D
Assuming Only Arizona Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Connecticut Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Maryland Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Massachusetts Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Michigan Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Minnesota Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only North Carolina     Fund Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Ohio Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming Only Texas Fund     Acquired	0.58	%	1.34	%	1.39	%	0.83	%
Assuming All State Funds     Acquired	0.57	%	1.33	%	1.38	%	0.82	%

* Assumes the applicable State Fund Acquisition and the Reorganization had taken place on June 30, 2001.

Purchase of Shares.    Shares of the National Portfolio are offered continuously for sale to the public in the same manner as shares of each State Fund. See “Comparison of the Funds—Purchase of Shares.”

Redemption of Shares.    The redemption procedures for shares of the National Portfolio are the same as the redemption procedures for shares of each State Fund. For purposes of computing any contingent deferred sales charge (“CDSC”) that may be payable upon disposition of shares of the National Portfolio distributed to the State Fund’s shareholders in a State Fund Acquisition, the holding period for the shares of each State Fund that are outstanding on the date of a State Fund Acquisition will be tacked onto the holding period of the shares of the National Portfolio that are distributed in such State Fund Acquisition. See “Comparison of the Funds—Redemption of Shares.”

Ratings of Municipal Obligations.    Each State Fund will invest at least 80% of its assets in obligations that, at the time of purchase, are considered to be investment grade securities. The National Portfolio may invest in Municipal Bonds rated in any category but currently intends to invest at least 65% of its assets in investment grade securities. See Exhibit II—“Ratings of Municipal Obligations and Commercial Paper.”

Dividends.    The policies of each State Fund with respect to dividends and distributions are identical to those of the National Portfolio. See “Comparison of the Funds—Dividends.”

Net Asset Value.    The State Funds and the National Portfolio each determines the net asset value of each class of its shares once daily Monday through Friday as of the close of business on the New York Stock Exchange (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. Each Fund computes net asset value per share in the same manner. See “Comparison of the Funds—Additional Information—Net Asset Value.”

Voting Rights.    The corresponding voting rights of the shareholders of the State Funds and the shareholders of the National Portfolio are substantially similar. See “Comparison of the Funds—Additional Information—Capital Stock.”

Other Significant Considerations.    Shareholder services available to shareholders of each State Fund, such as the providing of annual and semi-annual reports, are substantially the same as those available to the shareholders of the National Portfolio. See “Comparison of the Funds—Additional Information—Shareholder Services.” An automatic dividend reinvestment plan is available to shareholders of each Fund. Such plans are identical. See “Comparison of the Funds—Automatic Dividend Reinvestment Plan” and “Comparison of the Funds—Additional Information—Shareholder Services.”

Tax Considerations Each State Fund and the National Portfolio will receive an opinion of counsel with respect to each State Fund Acquisition to the effect that, among other things, neither the National Portfolio nor any State Fund will recognize any gain or loss on the transaction, and no shareholder of a State Fund will recognize any gain or loss upon receipt of shares of the National Portfolio in a State Fund Acquisition. Consummation of a State Fund Acquisition is subject to the receipt of such opinion of counsel. After a State Fund Acquisition, dividends received by the shareholders of the Combined Fund will not be exempt from State Taxes. See “The Reorganization—Tax Consequences of each State Fund Acquisition.”

RISK FACTORS AND SPECIAL CONSIDERATIONS

        The principal investment risks associated with an investment in the National Portfolio are substantially similar to the principal investment risks associated with an investment in each State Fund. Such principal risks include bond market and selection risk, credit risk, interest rate risk, call and redemption risk and borrowing and leverage risk. The principal differences in risk are: (i) each State Fund is more exposed to the risks affecting issuers of its State Municipal Bonds and is more subject to risks associated with regional or state specific economic factors than the National Portfolio; (ii) to the extent a State Fund that is a non-diversified fund may concentrate its investments among fewer issuers than the National Portfolio, such State Fund’s exposure to credit and market risks associated with a single issuer may be greater than that of the National Portfolio; and (iii) the National Portfolio may be more exposed to the risks of investing in high yield bonds. The risk factors associated with an investment in the National Portfolio are set forth below and in the Municipal Bond Fund Prospectus that accompanies this Proxy Statement and Prospectus under the caption “Details about the Fund—Investment Risks.”

        Each Fund is subject to the following principal risks:

        Bond Market and Selection Risk—Bond market risk is the risk that the bond market will go down in value, including the possibility that the market will go down sharply and unpredictably. Selection risk is the risk that the securities that FAM selects will underperform the market, the relevant indices or other funds with similar investment objectives and investment strategies.

        Credit Risk—Credit risk is the risk that the issuer will be unable to pay the interest or principal when due. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation. Issuers of high-yield bonds generally are more subject to credit risk than issuers of investment grade securities.

        Interest Rate Risk—Interest rate risk is the risk that prices of municipal bonds 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.

        Call and Redemption Risk—A bond’s issuer may call a bond for redemption before it matures. If this happens to a bond a Fund holds, that Fund may lose income and may have to invest the proceeds in bonds with lower yields.

        Borrowing and Leverage Risk—Each Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in the net asset value of a Fund’s shares and in the yield on that Fund’s portfolio. Borrowing will cost a Fund interest expense and other fees. The costs of borrowing may reduce a Fund’s return. Certain securities that a Fund buys may create leverage including, for example, inverse floating rate securities, when issued securities, forward commitments and options.

        Each State Fund is subject to the following additional principal risks:

        State Specific Risk—Each Fund will invest primarily in the State Municipal Bonds of its designated state. As a result, each Fund is more exposed to risks affecting issuers of its State Municipal Bonds than is a municipal bond fund that invests more widely. As set forth above, the National Portfolio contemplates that it will not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state.

        Non-Diversification Risk—As set forth above, each State Fund other than the Arizona Fund is a non-diversified fund. To the extent a State Fund that is a non-diversified fund may invest in fewer issuers than the National Portfolio, such State Fund may be more exposed to credit and market risks associated with individual issuers than the National Portfolio.

        Except where noted, each Fund may be subject, to a lesser extent, to risks associated with the following investment strategies:

        General Obligation Bonds—The faith, credit and taxing power of the municipality that issues a general obligation bond secures payment of interest and repayment of principal. Timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base.

        Revenue Bonds—Payments of interest and principal on revenue bonds are made only from the revenues generated by a particular facility, class of facilities or the proceeds of a special tax or other revenue source. These payments depend on the money earned by the particular facility or class of facilities. Industrial development bonds are one type of revenue bond.

        Junk Bonds—Although the investment policies of the National Portfolio are not governed by specific rating categories, the National Portfolio does not presently intend to invest more than 35% of its assets in high yield bonds or unrated Municipal Bonds that FAM believes are of comparable quality. Each State Fund may only invest up to 20% of its total assets in high yield bonds. Because the National Portfolio may invest a higher percentage of its assets in junk bonds, an investment in the National Portfolio may be more subject to the risks associated with investments in junk bonds. Although junk bonds generally pay higher rates of interest than investment grade securities, they are high risk investments that may cause income and principal losses for that Fund. Junk bonds generally are less liquid and experience more price volatility than higher rated debt securities. The 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. See “Comparison of the Funds—Description of Municipal Bonds.”

        Industrial Development Bonds—Each Fund may invest in industrial development bonds (“IDBs”). Municipalities and other public authorities issue industrial development bonds to finance development of industrial facilities for use by a private enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not pledge its faith, credit and taxing power for repayment. If the private enterprise defaults on its payments, a Fund may not receive any income or get its money back from the investment.

        Insured Municipal Bonds—Bonds purchased by a Fund may be covered by insurance that guarantees timely interest payments and repayment of principal at maturity. If a bond’s insurer fails to fulfill its obligations or loses its credit rating, the value of the bond could drop. Insured bonds are protected against credit risk, but remain subject to the other risks associated with investments in municipal bonds.

        Moral Obligation Bonds—Each Fund may invest in moral obligation bonds. Moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality.

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

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

        Variable Rate Demand Obligations—Each Fund may invest in variable rate demand obligations (“VRDOs”). VRDOs are floating rate securities that combine an interest in a long term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay a Fund may lose money.

        When Issued Securities, Delayed Delivery Securities and Forward Commitments—Each Fund may invest in when issued securities and delayed delivery securities and enter into forward commitments. When issued and delayed delivery securities and forward commitments involve the risk that the security a Fund buys will lose value prior to its delivery to that Fund. There also is the risk that the security will not be issued or that the other party will not meet its obligation, in which case a Fund loses the investment opportunity for the assets it has set aside to pay for the security and any gain in the security’s price.

        Swap Agreements — Swap agreements are over-the-counter contracts in which one party agrees to make periodic payments based on the change in market value of a specified bond, basket of bonds, or index in return for periodic payments based on a fixed or variable interest rate or the change in market value of a different bond, basket of bonds, or index. Swap agreements may be used to obtain exposure to a bond or market without owning or taking physical custody of securities. Swap agreements are derivative securities and may increase a Fund’s exposure to the risks associated with such securities.

        Derivatives—Each Fund may use derivative instruments, including indexed and inverse securities, options on portfolio positions, options on securities or other financial indices, financial futures and options on such futures and swap agreements. Derivatives allow a Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including:

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

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

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

        Each Fund may use derivatives for hedging purposes including anticipatory hedges. Hedging is a strategy in which a fund uses a derivative to offset the risks associated with other holdings of that Fund. 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 a 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. No assurance can be given that a Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. None of the Funds are required to use hedging and each may choose not to do so.

        Indexed and Inverse Floating Rate Securities—Each Fund may invest in securities whose potential returns are directly related to changes in an underlying index or interest rate, known as indexed securities. The return on indexed securities will rise when the underlying index or interest rate rises and fall when the index or interest rate falls. Each Fund may also invest in securities whose return is inversely related to changes in an interest rate (inverse floaters). In general, income on inverse floaters will decrease when short-term interest rates increase and increase when short-term interest rates decrease. Investments in inverse floaters may subject a Fund to the risks of reduced or eliminated interest payments and losses of principal. In addition, certain indexed securities and inverse floaters may increase or decrease in value at a greater rate than the underlying interest rate, which effectively leverages the Fund’s investment. As a result, the market value of such securities will generally be more volatile than that of fixed rate, tax-exempt securities. Indexed securities and inverse floaters are derivative securities and can be considered speculative.

        Illiquid Securities—Each Fund may invest up to 15% of its assets in illiquid securities that it cannot easily sell within seven days at current value or that have contractual or legal restrictions on resale. If a 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.

COMPARISON OF THE FUNDS

Financial Highlights

        National Portfolio.    The Financial Highlights table is intended to help you understand the National Portfolio’s financial performance for each of the past five fiscal years. Certain information reflects financial results for a single National Portfolio share. The total returns in the table represent the rate an investor would have earned or lost on an investment in shares of the National Portfolio (assuming reinvestment of all dividends). The information has been audited by Deloitte & Touche LLP whose report, along with the National Portfolio’s financial statements, is included in Municipal Bond Fund’s annual report to shareholders that accompanies this Proxy Statement and Prospectus.

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended June 30,										For the Year Ended June 30,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$      9.70		$    10.22		$    10.64		$    10.38		$    10.11		$      9.70		$    10.21		$    10.63		$    10.37		$    10.11
Investment income—net	.54		.56		.56		.59		.60		.46		.49		.48		.51		.52
Realized and unrealized gain (loss) on investments—net	.44		(.52	)	(.42	)	.26		.27		.44		(.51	)	(.42	)	.26		.26
Total from investment operations	.98		.04		.14		.85		.87		.90		(.02	)	.06		.77		.78
Less dividends and distributions:
Investment income—net	(.54	)	(.56	)	(.56	)	(.59	)	(.60	)	(.46	)	(.49	)	(.48	)	(.51	)	(.52	)
In excess of realized gain on investments—net	—		—		—	†	—		—		—		—		—	†	—		—
Total dividends and distributions	(.54	)	(.56	)	(.56	)	(.59	)	(.60	)	(.46	)	(.49	)	(.48	)	(.51	)	(.52	)
Net asset value, end of year	$    10.14		$      9.70		$    10.22		$    10.64		$    10.38		$    10.14		$     9.70		$    10.21		$    10.63		$    10.37
Total Investment Return:*
Based on net asset value per share	10.32	%	.58	%	1.28	%	8.36	%	8.84	%	9.49	%	(.09	)%	.51	%	7.55	%	7.92	%
Ratios to Average Net Assets:
Expenses	.58	%	.56	%	.55	%	.55	%	.55	%	1.34	%	1.32	%	1.31	%	1.31	%	1.31	%
Investment income—net	5.42	%	5.74	%	5.26	%	5.58	%	5.86	%	4.67	%	4.98	%	4.50	%	4.82	%	5.10	%
Supplemental Data:
Net assets, end of year (in thousands)	$653,685		$682,553		$877,841		$964,940		$983,650		$227,592		$254,860		$374,642		$406,798		$415,103
Portfolio turnover	80.88	%	108.43	%	125.75	%	142.02	%	99.52	%	80.88	%	108.43	%	125.75	%	142.02	%	99.52	%

† Amount is less than $.01 per share.

* Total investment returns exclude the effects of sales charges.

National Portfolio—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended June 30,										For the Year Ended June 30,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$    9.71		$  10.22		$  10.64		$  10.38		$  10.11		$      9.71		$  10.22		$  10.64		$  10.39		$  10.12
Investment income—net	.46		.48		.47		.50		.52		.52		.54		.53		.56		.58
Realized and unrealized gain (loss) on investments—net	.43		(.51	)	(.42	)	.26		.27		.44		(.51	)	(.42	)	.25		.27
Total from investment operations	.89		(.03	)	.05		.76		.79		.96		.03		.11		.81		.85
Less dividends and distributions:
Investment income—net	(.46	)	(.48	)	(.47	)	(.50	)	(.52	)	(.52	)	(.54	)	(.53	)	(.56	)	(.58	)
In excess of realized gain on investments—net	—		—		—	†	—		—		—		—		—	†	—		—
Total dividends and distributions	(.46	)	(.48	)	(.47	)	(.50	)	(.52	)	(.52	)	(.54	)	(.53	)	(.56	)	(.58	)
Net asset value, end of year	$  10.14		$    9.71		$  10.22		$  10.64		$  10.38		$    10.15		$    9.71		$  10.22		$  10.64		$  10.39
Total Investment Return:*
Based on net asset value per share	9.33	%	(.13)	%	.47	%	7.49	%	7.97	%	10.04	%	.43	%	1.03	%	7.99	%	8.57	%
Ratios to Average Net Assets:
Expenses	1.39	%	1.37	%	1.36	%	1.36	%	1.36	%	.83	%	.81	%	.81	%	.80	%	.80	%
Investment income—net	4.61	%	4.92	%	4.45	%	4.76	%	5.04	%	5.16	%	5.50	%	5.01	%	5.32	%	5.60	%
Supplemental Data:
Net assets, end of year (in thousands)	$31,880		$30,303		$47,901		$41,087		$28,096		$124,082		$86,701		$93,201		$68,162		$51,038
Portfolio turnover	80.88	%	108.43	%	125.75	%	142.02	%	99.52	%	80.88	%	108.43	%	125.75	%	142.02	%	99.52	%

†  Amount is less than $.01 per share.

*  Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  10.26		$  10.53		$  10.88		$  10.87		$  10.54		$  10.26		$  10.53		$  10.88		$  10.87		$  10.54
Investment income—net	.52		.54		.52		.55		.55		.47		.49		.46		.49		.50
Realized and unrealized gain (loss) on investments—net	.37		(.26	)	(.24	)	.01		.33		.37		(.26	)	(.24	)	.01		.33
Total from investment operations	.89		.28		.28		.56		.88		.84		.23		.22		.50		.83
Less dividends and distributions:
Investment income—net	(.52	)	(.54	)	(.52	)	(.55	)	(.55	)	(.47	)	(.49	)	(.46	)	(.49	)	(.50	)
In excess of realized gain on investments—net	—	†	(.01	)	(.11	)	—		—		—	†	(.01	)	(.11	)	—		—
Total dividends and distributions	(.52	)	(.55	)	(.63	)	(.55	)	(.55	)	(.47	)	(.50	)	(.57	)	(.49	)	(.50	)
Net asset value, end of year	$  10.63		$  10.26		$  10.53		$  10.88		$  10.87		$  10.63		$  10.26		$  10.53		$  10.88		$  10.87
Total Investment Return:*
Based on net asset value per share	8.93	%	2.82	%	2.52	%	5.25	%	8.63	%	8.38	%	2.30	%	2.01	%	4.71	%	8.08	%
Ratios to Average Net Assets:
Expenses	1.00	%	.86	%	.94	%	.82	%	.79	%	1.51	%	1.37	%	1.44	%	1.32	%	1.30	%
Investment income—net	5.00	%	5.31	%	4.77	%	5.01	%	5.21	%	4.50	%	4.80	%	4.26	%	4.50	%	4.70	%
Supplemental Data:
Net assets, end of year (in thousands)	$11,413		$11,525		$12,975		$13,875		$14,012		$33,972		$34,565		$42,758		$51,503		$58,282
Portfolio turnover	41.00	%	41.15	%	25.16	%	53.75	%	29.68	%	41.00	%	41.15	%	25.16	%	53.75	%	29.68	%

†  Amount is less than $.01 per share.

*  Total investment returns exclude the effects of sales charges.

Arizona Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.25		$10.52		$10.88		$10.87		$10.54		$10.25		$10.52		$10.87		$10.86		$10.53
Investment income—net	.46		.48		.45		.48		.49		.51		.53		.51		.54		.54
Realized and unrealized gain (loss) on investments—net	.37		(.26	)	(.25	)	.01		.33		.37		(.26	)	(.24	)	.01		.33
Total from investment operations	.83		.22		.20		.49		.82		.88		.27		.27		.55		.87
Less dividends and distributions:
Investment income—net	(.46	)	(.48	)	(.45	)	(.48	)	(.49	)	(.51	)	(.53	)	(.51	)	(.54	)	(.54	)
In excess of realized gain on investments—net	—	†	(.01	)	(.11	)	—		—		—	†	(.01	)	(.11	)	—		—
Total dividends and distributions	(.46	)	(.49	)	(.56	)	(.48	)	(.49	)	(.51	)	(.54	)	(.62	)	(.54	)	(.54	)
Net asset value, end of year	$10.62		$10.25		$10.52		$10.88		$10.87		$10.62		$10.25		$10.52		$10.87		$10.86
Total Investment Return:*
Based on net asset value per share	8.28	%	2.20	%	1.81	%	4.61	%	7.97	%	8.82	%	2.72	%	2.42	%	5.14	%	8.52	%
Ratios to Average Net Assets:
Expenses	1.61	%	1.47	%	1.54	%	1.42	%	1.40	%	1.10	%	.96	%	1.05	%	.92	%	.89	%
Investment income—net	4.40	%	4.71	%	4.16	%	4.39	%	4.59	%	4.90	%	5.20	%	4.67	%	4.90	%	5.11	%
Supplemental Data:
Net assets, end of year (in thousands)	$1,723		$1,244		$  996		$1,233		$  957		$6,086		$4,406		$4,053		$2,740		$2,188
Portfolio turnover	41.00	%	41.15	%	25.16	%	53.75	%	29.68	%	41.00	%	41.15	%	25.16	%	53.75	%	29.68	%

†  Amount is less than $.01 per share.

*  Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.21		$10.53		$10.79		$10.68		$10.29		$  10.21		$  10.53		$  10.79		$  10.68		$  10.29
Investment income—net	.50		.50		.48		.52		.56		.45		.45		.43		.46		.51
Realized and unrealized gain (loss) on investments—net	.43		(.32	)	(.21	)	.11		.39		.43		(.32	)	(.21	)	.11		.39
Total from investment operations	.93		.18		.27		.63		.95		.88		.13		.22		.57		.90
Less dividends and distributions:
Investment income—net	(.50	)	(.50	)	(.48	)	(.52	)	(.56	)	(.45	)	(.45	)	(.43	)	(.46	)	(.51	)
In excess of realized gain on investments—net	—		—	†	(.05	)	—		—		—		—	†	(.05	)	—		—
Total dividends and distributions	(.50	)	(.50	)	(.53	)	(.52	)	(.56	)	(.45	)	(.45	)	(.48	)	(.46	)	(.51	)
Net asset value, end of year	$10.64		$10.21		$10.53		$10.79		$10.68		$  10.64		$  10.21		$  10.53		$  10.79		$  10.68
Total Investment Return:*
Based on net asset value per share	9.32	%	1.96	%	2.50	%	6.00	%	9.51	%	8.77	%	1.45	%	1.99	%	5.47	%	8.96	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	.87	%	.77	%	.84	%	.77	%	.52	%	1.38	%	1.27	%	1.35	%	1.27	%	1.02	%
Expenses	.97	%	.87	%	.94	%	.89	%	.92	%	1.48	%	1.37	%	1.45	%	1.40	%	1.43	%
Investment income—net	4.80	%	4.98	%	4.43	%	4.79	%	5.38	%	4.29	%	4.48	%	3.93	%	4.28	%	4.87	%
Supplemental Data:
Net assets, end of year (in thousands)	$6,951		$6,905		$9,013		$8,855		$8,380		$41,669		$34,989		$41,835		$41,964		$35,563
Portfolio turnover	57.42	%	85.68	%	47.62	%	53.99	%	32.46	%	57.42	%	85.68	%	47.62	%	53.99	%	32.46	%

†  Amount is less than $.01 per share.

*  Total investment returns exclude the effects of sales charges.

Connecticut Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.22		$10.53		$10.80		$10.69		$10.30		$10.21		$10.53		$10.79		$10.68		$10.29
Investment income—net	.44		.44		.41		.45		.50		.49		.49		.47		.51		.55
Realized and unrealized gain (loss) on investments—net	.42		(.31	)	(.22	)	.11		.39		.43		(.32	)	(.21	)	.11		.39
Total from investment operations	.86		.13		.19		.56		.89		.92		.17		.26		.62		.94
Less dividends and distributions:
Investment income—net	(.44	)	(.44	)	(.41	)	(.45	)	(.50	)	(.49	)	(.49	)	(.47	)	(.51	)	(.55	)
In excess of realized gain on investments—net	—		—	†	(.05	)	—		—		—		—	†	(.05	)	—		—
Total dividends and distributions	(.44	)	(.44	)	(.46	)	(.45	)	(.50	)	(.49	)	(.49	)	(.52	)	(.51	)	(.55	)
Net asset value, end of year	$10.64		$10.22		$10.53		$10.80		$10.69		$10.64		$10.21		$10.53		$10.79		$10.68
Total Investment Return:*
Based on net asset value per share	8.56	%	1.45	%	1.79	%	5.36	%	8.84	%	9.21	%	1.86	%	2.40	%	5.90	%	9.40	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.47	%	1.37	%	1.45	%	1.37	%	1.12	%	.97	%	.87	%	.95	%	.87	%	.62	%
Expenses	1.57	%	1.47	%	1.55	%	1.50	%	1.53	%	1.07	%	.97	%	1.05	%	.99	%	1.03	%
Investment income—net	4.20	%	4.38	%	3.82	%	4.17	%	4.77	%	4.71	%	4.88	%	4.32	%	4.67	%	5.27	%
Supplemental Data:
Net assets, end of year (in thousands)	$5,690		$5,085		$6,837		$4,399		$2,016		$5,778		$5,723		$7,182		$4,634		$3,440
Portfolio turnover	57.42	%	85.68	%	47.62	%	53.99	%	32.46	%	57.42	%	85.68	%	47.62	%	53.99	%	32.46	%

† Amount is less than $.01 per share.

* Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  9.40		$  9.56		$  9.80		$  9.66		$  9.21		$    9.40		$    9.56		$    9.80		$    9.66		$    9.21
Investment income—net	.44		.45		.43		.47		.48		.39		.40		.38		.42		.43
Realized and unrealized gain (loss) on investments—net	.43		(.16	)	(.24	)	.14		.45		.43		(.16	)	(.24	)	.14		.45
Total from investment operations	.87		.29		.19		.61		.93		.82		.24		.14		.56		.88
Less dividends from investment income—net	(.44	)	(.45	)	(.43	)	(.47	)	(.48	)	(.39	)	(.40	)	(.38	)	(.42	)	(.43	)
Net asset value, end of year	$  9.83		$  9.40		$  9.56		$  9.80		$  9.66		$    9.83		$    9.40		$    9.56		$    9.80		$    9.66
Total Investment Return:*
Based on net asset value per share	9.43	%	3.19	%	1.87	%	6.46	%	10.35	%	8.88	%	2.67	%	1.36	%	5.92	%	9.79	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.06	%	.91	%	.94	%	.73	%	.47	%	1.57	%	1.42	%	1.45	%	1.23	%	.97	%
Expenses	1.36	%	1.21	%	1.26	%	1.21	%	1.32	%	1.87	%	1.72	%	1.77	%	1.72	%	1.82	%
Investment income—net	4.56	%	4.82	%	4.35	%	4.80	%	5.11	%	4.04	%	4.31	%	3.84	%	4.29	%	4.59	%
Supplemental Data:
Net assets, end of year (in thousands)	$1,788		$1,771		$2,309		$2,303		$1,928		$21,655		$19,257		$24,775		$23,306		$21,851
Portfolio turnover	37.69	%	35.57	%	30.98	%	88.89	%	94.90	%	37.69	%	35.57	%	30.98	%	88.89	%	94.90	%

* Total investment returns exclude the effects of sales charges.

Maryland Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  9.40		$  9.56		$  9.80		$  9.67		$  9.22		$  9.39		$  9.55		$  9.80		$  9.66		$  9.21
Investment income—net	.38		.39		.37		.41		.42		.43		.44		.42		.46		.47
Realized and unrealized gain (loss) on investments—net	.44		(.16	)	(.24	)	.13		.45		.44		(.16	)	(.25	)	.14		.45
Total from investment operations	.82		.23		.13		.54		.87		.87		.28		.17		.60		.92
Less dividends from investment income—net	(.38	)	(.39	)	(.37	)	(.41	)	(.42	)	(.43	)	(.44	)	(.42	)	(.46	)	(.47	)
Net asset value, end of year	$  9.84		$  9.40		$  9.56		$  9.80		$  9.67		$  9.83		$  9.39		$  9.55		$  9.80		$  9.66
Total Investment Return:*
Based on net asset value per share	8.87	%	2.57	%	1.26	%	5.70	%	9.67	%	9.44	%	3.09	%	1.67	%	6.35	%	10.24	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.67	%	1.52	%	1.56	%	1.34	%	1.07	%	1.17	%	1.01	%	1.04	%	.83	%	.56	%
Expenses	1.97	%	1.82	%	1.88	%	1.82	%	1.92	%	1.47	%	1.31	%	1.36	%	1.31	%	1.41	%
Investment income—net	3.94	%	4.19	%	3.73	%	4.19	%	4.47	%	4.42	%	4.73	%	4.25	%	4.70	%	5.00	%
Supplemental Data:
Net assets, end of year (in thousands)	$2,204		$2,002		$2,762		$2,307		$2,038		$1,726		$  978		$1,091		$1,107		$  883
Portfolio turnover	37.69	%	35.57	%	30.98	%	88.89	%	94.90	%	37.69	%	35.57	%	30.98	%	88.89	%	94.90	%

*  Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.17		$10.63		$11.15		$11.07		$10.60		$  10.17		$  10.63		$  11.15		$  11.07		$  10.60
Investment income—net	.50		.51		.51		.56		.56		.44		.46		.45		.50		.51
Realized and unrealized gain (loss) on investments—net	.50		(.39	)	(.52	)	.08		.47		.50		(.39	)	(.52	)	.08		.47
Total from investment operations	1.00		.12		(.01	)	.64		1.03		.94		.07		(.07	)	.58		.98
Less dividends and distributions:
Investment income—net	(.50	)	(.51	)	(.51	)	(.56	)	(.56	)	(.44	)	(.46	)	(.45	)	(.50	)	(.51	)
In excess of realized gain on investments—net	—		(.07	)	—		—		—		—		(.07	)	—		—		—
Total dividends and distributions	(.50	)	(.58	)	(.51	)	(.56	)	(.56	)	(.44	)	(.53	)	(.45	)	(.50	)	(.51	)
Net asset value, end of year	$10.67		$10.17		$10.63		$11.15		$11.07		$  10.67		$  10.17		$  10.63		$  11.15		$  11.07
Total Investment Return:*
Based on net asset value per share	9.99	%	1.38	%	(.21	)%	5.92	%	10.02	%	9.44	%	.86	%	(.71	)%	5.38	%	9.46	%
Ratios to Average Net Assets:
Expenses	1.02	%	1.00	%	.95	%	.86	%	.83	%	1.53	%	1.50	%	1.46	%	1.37	%	1.34	%
Investment income—net	4.75	%	5.07	%	4.58	%	5.02	%	5.22	%	4.24	%	4.56	%	4.07	%	4.51	%	4.71	%
Supplemental Data:
Net assets, end of year (in thousands)	$3,928		$3,930		$5,080		$5,705		$5,757		$35,952		$37,035		$45,988		$51,255		$53,336
Portfolio turnover	32.60	%	25.66	%	89.30	%	23.32	%	24.64	%	32.60	%	25.66	%	89.30	%	23.32	%	24.64	%

* Total investment returns exclude the effects of sales charges.

Massachusetts Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.16		$10.62		$11.14		$11.06		$10.60		$10.17		$10.63		$11.15		$11.07		$10.61
Investment income—net	.43		.45		.44		.49		.49		.49		.50		.50		.55		.55
Realized and unrealized gain (loss) on investments—net	.50		(.39	)	(.52	)	.08		.46		.50		(.39	)	(.52	)	.08		.46
Total from investment operations	.93		.06		(.08	)	.57		.95		.99		.11		(.02	)	.63		1.01
Less dividends and distributions:
Investment income—net	(.43	)	(.45	)	(.44	)	(.49	)	(.49	)	(.49	)	(.50	)	(.50	)	(.55	)	(.55	)
In excess of realized gain on investments—net	—		(.07	)	—		—		—		—		(.07	)	—		—		—
Total dividends and distributions	(.43	)	(.52	)	(.44	)	(.49	)	(.49	)	(.49	)	(.57	)	(.50	)	(.55	)	(.55	)
Net asset value, end of year	$10.66		$10.16		$10.62		$11.14		$11.06		$10.67		$10.17		$10.63		$11.15		$11.07
Total Investment Return:*
Based on net asset value per share	9.34	%	.76	%	(.81	)%	5.28	%	9.25	%	9.88	%	1.28	%	(.30	)%	5.82	%	9.80	%
Ratios to Average Net Assets:
Expenses	1.63	%	1.60	%	1.57	%	1.47	%	1.43	%	1.13	%	1.09	%	1.06	%	.96	%	.93	%
Investment income—net	4.13	%	4.46	%	3.96	%	4.40	%	4.63	%	4.65	%	4.97	%	4.47	%	4.91	%	5.13	%
Supplemental Data:
Net assets, end of year (in thousands)	$2,565		$2,664		$3,814		$1,835		$1,495		$3,326		$2,931		$3,647		$2,837		$1,602
Portfolio turnover	32.60	%	25.66	%	89.30	%	23.32	%	24.64	%	32.60	%	25.66	%	89.30	%	23.32	%	24.64	%

*  Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  9.53		$  9.91		$10.33		$  10.34		$    9.92		$    9.53		$    9.91		$  10.33		$  10.34		$    9.92
Investment income—net	.46		.48		.46		.50		.52		.41		.43		.41		.45		.47
Realized and unrealized gain (loss) on investments—net	.44		(.38	)	(.42	)	(.01	)	.42		.44		(.38	)	(.42	)	(.01	)	.42
Total from investment operations	.90		.10		.04		.49		.94		.85		.05		(.01	)	.44		.89
Less dividends from investment income—net	(.46	)	(.48	)	(.46	)	(.50	)	(.52	)	(.41	)	(.43	)	(.41	)	(.45	)	(.47	)
Net asset value, end of year	$  9.97		$  9.53		$  9.91		$  10.33		$  10.34		$    9.97		$    9.53		$    9.91		$  10.33		$  10.34
Total Investment Return:*
Based on net asset value per share	9.61	%	1.21	%	.34	%	4.84	%	9.79	%	9.06	%	.70	%	(.17	)%	4.31	%	9.23	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.04	%	.79	%	.93	%	.80	%	.57	%	1.55	%	1.30	%	1.44	%	1.31	%	1.08	%
Expenses	1.04	%	.79	%	.93	%	.83	%	.80	%	1.55	%	1.30	%	1.44	%	1.34	%	1.31	%
Investment income—net	4.68	%	5.10	%	4.51	%	4.81	%	5.21	%	4.17	%	4.59	%	4.00	%	4.30	%	4.70	%
Supplemental Data:
Net assets, end of year (in thousands)	$7,860		$9,310		$9,384		$11,762		$11,841		$33,220		$37,514		$54,259		$61,918		$65,166
Portfolio turnover	59.61	%	85.25	%	129.08	%	65.39	%	35.09	%	59.61	%	85.25	%	129.08	%	65.39	%	35.09	%

* Total investment returns exclude the effects of sales charges.

Michigan Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  9.53		$  9.91		$10.32		$10.33		$  9.92		$  9.52		$  9.91		$10.32		$10.33		$  9.91
Investment income—net	.40		.42		.40		.43		.46		.45		.47		.45		.49		.51
Realized and unrealized gain (loss) on investments—net	.44		(.38	)	(.41	)	(.01	)	.41		.44		(.39	)	(.41	)	(.01	)	.42
Total from investment operations	.84		.04		(.01	)	.42		.87		.89		.08		.04		.48		.93
Less dividends from investment income—net	(.40	)	(.42	)	(.40	)	(.43	)	(.46	)	(.45	)	(.47	)	(.45	)	(.49	)	(.51	)
Net asset value, end of year	$  9.97		$  9.53		$  9.91		$10.32		$10.33		$  9.96		$  9.52		$  9.91		$10.32		$10.33
Total Investment Return:*
Based on net asset value per share	8.95	%	.60	%	(.17)	%	4.20	%	9.01	%	9.51	%	1.00	%	.34	%	4.74	%	9.69	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.65	%	1.40	%	1.55	%	1.42	%	1.18	%	1.14	%	.90	%	1.04	%	.90	%	.68	%
Expenses	1.65	%	1.40	%	1.55	%	1.45	%	1.41	%	1.14	%	.90	%	1.04	%	.93	%	.90	%
Investment income—net	4.07	%	4.49	%	3.89	%	4.18	%	4.60	%	4.58	%	4.98	%	4.40	%	4.71	%	5.11	%
Supplemental Data:
Net assets, end of year (in thousands)	$3,473		$3,440		$3,950		$2,802		$1,319		$2,582		$2,230		$4,312		$3,806		$3,494
Portfolio turnover	59.61	%	85.25	%	129.08	%	65.39	%	35.09	%	59.61	%	85.25	%	129.08	%	65.39	%	35.09	%

* Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.32		$10.50		$10.79		$10.72		$10.28		$  10.33		$  10.50		$  10.79		$  10.72		$  10.28
Investment income—net	.51		.52		.52		.54		.53		.45		.47		.46		.48		.48
Realized and unrealized gain (loss) on investments—net	.40		(.18	)	(.29	)	.07		.44		.39		(.17	)	(.29	)	.07		.44
Total from investment operations	.91		.34		.23		.61		.97		.84		.30		.17		.55		.92
Less dividends and distributions:
Investment income—net	(.51	)	(.52	)	(.52	)	(.54	)	(.53	)	(.45	)	(.47	)	(.46	)	(.48	)	(.48	)
In excess of realized gain on investments—net	—		—		—		—	†	—		—		—		—		—	†	—
Total dividends and distributions	(.51	)	(.52	)	(.52	)	(.54	)	(.53	)	(.45	)	(.47	)	(.46	)	(.48	)	(.48	)
Net asset value, end of year	$10.72		$10.32		$10.50		$10.79		$10.72		$  10.72		$  10.33		$  10.50		$  10.79		$  10.72
Total Investment Return:*
Based on net asset value per share	8.95	%	3.45	%	2.08	%	5.85	%	9.71	%	8.30	%	3.03	%	1.56	%	5.31	%	9.15	%
Ratios to Average Net Assets:
Expenses	1.03	%	.97	%	1.02	%	.91	%	.92	%	1.53	%	1.47	%	1.53	%	1.42	%	1.43	%
Investment income—net	4.79	%	5.12	%	4.80	%	4.98	%	5.09	%	4.28	%	4.61	%	4.29	%	4.47	%	4.58	%
Supplemental Data:
Net assets, end of year (in thousands)	$4,110		$4,141		$6,067		$6,993		$5,390		$32,135		$32,524		$37,507		$38,585		$41,274
Portfolio turnover	45.63	%	$43.42	%	26.09	%	56.43	%	28.42	%	45.63	%	43.42	%	26.09	%	56.43	%	28.42	%

† Amount is less than $.01 per share.

* Total investment returns exclude the effects of sales charges.

Minnesota Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.33		$10.50		$10.80		$10.72		$10.28		$10.33		$10.50		$10.80		$10.73		$10.28
Investment income—net	.44		.46		.45		.47		.47		.50		.51		.51		.53		.52
Realized and unrealized gain (loss) on investments—net	.39		(.17	)	(.30	)	.08		.44		.40		(.17	)	(.30	)	.07		.45
Total from investment operations	.83		.29		.15		.55		.91		.90		.34		.21		.60		.97
Less dividends and distributions:
Investment income—net	(.44	)	(.46	)	(.45	)	(.47	)	(.47	)	(.50	)	(.51	)	(.51	)	(.53	)	(.52	)
In excess of realized gain on investments—net	—		—		—		—	†	—		—		—		—		—	†	—
Total dividends and distributions	(.44	)	(.46	)	(.45	)	(.47	)	(.47	)	(.50	)	(.51	)	(.51	)	(.53	)	(.52	)
Net asset value, end of year	$10.72		$10.33		$10.50		$10.80		$10.72		$10.73		$10.33		$10.50		$10.80		$10.73
Total Investment Return:*
Based on net asset value per share	8.19	%	2.92	%	1.37	%	5.30	%	9.04	%	8.84	%	3.45	%	1.88	%	5.74	%	9.70	%
Ratios to Average Net Assets:
Expenses	1.64	%	1.57	%	1.63	%	1.52	%	1.53	%	1.13	%	1.07	%	1.13	%	1.01	%	1.02	%
Investment income—net	4.17	%	4.52	%	4.19	%	4.37	%	4.48	%	4.68	%	5.02	%	4.69	%	4.88	%	4.99	%
Supplemental Data:
Net assets, end of year (in thousands)	$2,410		$1,672		$1,721		$1,437		$1,201		$2,108		$1,598		$1,950		$1,141		$  924
Portfolio turnover	45.63	%	43.42	%	26.09	%	56.43	%	28.42	%	45.63	%	43.42	%	26.09	%	56.43	%	28.42	%

† Amount is less than $.01 per share.

* Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.14		$10.35		$11.00		$10.87		$10.36		$  10.14		$  10.35		$  11.01		$  10.88		$  10.36
Investment income—net	.48		.49		.47		.50		.51		.42		.44		.42		.45		.46
Realized and unrealized gain (loss) on investments—net	.43		(.21	)	(.35	)	.13		.51		.43		(.21	)	(.36	)	.13		.52
Total from investment operations	.91		.28		.12		.63		1.02		.85		.23		.06		.58		.98
Less dividends and distributions:
Investment income—net	(.48	)	(.49	)	(.47	)	(.50	)	(.51	)	(.42	)	(.44	)	(.42	)	(.45	)	(.46	)
Realized gain on investments—net	—		—		(.20	)	—	†	—		—		—		(.20	)	—	†	—
In excess of realized gain on investments—net	—		—		(.10	)	—		—		—		—		(.10	)	—		—
Total dividends and distributions	(.48	)	(.49	)	(.77	)	(.50	)	(.51	)	(.42	)	(.44	)	(.72	)	(.45	)	(.46	)
Net asset value, end of year	$10.57		$10.14		$10.35		$11.00		$10.87		$  10.57		$  10.14		$  10.35		$  11.01		$  10.88
Total Investment Return:*
Based on net asset value per share	9.13	%	2.90	%	1.02	%	5.99	%	10.17	%	8.58	%	2.38	%	.41	%	5.45	%	9.71	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.11	%	.96	%	1.03	%	.90	%	.80	%	1.63	%	1.46	%	1.54	%	1.41	%	1.31	%
Expenses	1.11	%	.96	%	1.03	%	.90	%	.88	%	1.63	%	1.46	%	1.54	%	1.41	%	1.39	%
Investment income—net	4.61	%	4.90	%	4.39	%	4.59	%	4.89	%	4.09	%	4.39	%	3.88	%	4.08	%	4.39	%
Supplemental Data:
Net assets, end of year (in thousands)	$6,441		$7,177		$9,094		$8,753		$8,542		$23,157		$25,533		$32,886		$37,204		$41,137
Portfolio turnover	28.58	%	$58.02	%	47.52	%	125.23	%	94.59	%	28.58	%	58.02	%	47.52	%	125.23	%	94.59	%

*  Total investment returns exclude the effects of sales charges.

†  Amount is less than $.01 per share.

North Carolina Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of period	$10.13		$10.35		$11.00		$10.87		$10.36		$10.14		$10.36		$11.01		$10.88		$10.37
Investment income—net	.41		.43		.41		.44		.45		.47		.48		.46		.49		.50
Realized and unrealized gain (loss) on investments—net	.44		(.22	)	(.35	)	.13		.51		.43		(.22	)	(.35	)	.13		.51
Total from investment operations	.85		.21		.06		.57		.96		.90		.26		.11		.62		1.01
Less dividends and distributions:
Investment income—net	(.41	)	(.43	)	(.41	)	(.44	)	(.45	)	(.47	)	(.48	)	(.46	)	(.49	)	(.50	)
Realized gain on investments—net	—		—		(.20	)	—	†	—		—		—		(.20	)	—	†	—
In excess of realized gain on investments—net	—		—		(.10	)	—		—		—		—		(.10	)	—		—
Total dividends and distributions	(.41	)	(.43	)	(.71	)	(.44	)	(.45	)	(.47	)	(.48	)	(.76	)	(.49	)	(.50	)
Net asset value, end of year	$10.57		$10.13		$10.35		$11.00		$10.87		$10.57		$10.14		$10.36		$11.01		$10.88
Total Investment Return:*
Based on net asset value per share	8.58	%	2.18	%	.41	%	5.35	%	9.50	%	9.02	%	2.70	%	.92	%	5.88	%	10.05	%
Ratios to Average Net Assets:
Expenses, net of reimbursement	1.73	%	1.56	%	1.64	%	1.51	%	1.41	%	1.24	%	1.05	%	1.14	%	1.00	%	.90	%
Expenses	1.73	%	1.56	%	1.64	%	1.51	%	1.49	%	1.24	%	1.05	%	1.14	%	1.00	%	.98	%
Investment income—net	4.00	%	4.29	%	3.78	%	3.98	%	4.28	%	4.47	%	4.81	%	4.28	%	4.49	%	4.79	%
Supplemental Data:
Net assets, end of year (in thousands)	$1,743		$1,868		$2,404		$2,527		$2,052		$4,040		$2,812		$3,057		$2,534		$2,132
Portfolio turnover	28.58	%	58.02	%	47.52	%	125.23	%	94.59	%	28.58	%	58.02	%	47.52	%	125.23	%	94.59	%

*  Amount is less than $.01 per share.

†  Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.13		$10.77		$11.21		$11.17		$10.70		$  10.13		$  10.77		$  11.21		$  11.17		$  10.70
Investment income—net	.49		.51		.52		.55		.55		.44		.46		.47		.50		.49
Realized and unrealized gain (loss) on investments—net	.25		(.40	)	(.34	)	.04		.47		.25		(.40	)	(.34	)	.04		.47
Total from investment operations	.74		.11		.18		.59		1.02		.69		.06		.13		.54		.96
Less dividends and distributions:
Investment income—net	(.49	)	(.51	)	(.52	)	(.55	)	(.55	)	(.44	)	(.46	)	(.47	)	(.50	)	(.49	)
Realized gain on investments—net	—		—		(.10	)	—		—		—		—		(.10	)	—		—
In excess of realized gain on investments—net	—		(.24	)	—		—		—		—		(.24	)	—		—		—
Total dividends and distributions	(.49	)	(.75	)	(.62	)	(.55	)	(.55	)	(.44	)	(.70	)	(.57	)	(.50	)	(.49	)
Net asset value, end of year	$10.38		$10.13		$10.77		$11.21		$11.17		$  10.38		$  10.13		$  10.77		$  11.21		$  11.17
Total Investment Return:*
Based on net asset value per share	7.51	%	1.28	%	1.59	%	5.43	%	9.80	%	6.96	%	.77	%	1.08	%	4.90	%	9.25	%
Ratios to Average Net Assets:
Expenses	1.03	%	.87	%	.92	%	.83	%	.80	%	1.54	%	1.38	%	1.43	%	1.34	%	1.31	%
Investment income—net	4.83	%	5.00	%	4.70	%	4.92	%	5.07	%	4.31	%	4.49	%	4.19	%	4.41	%	4.56	%
Supplemental Data:
Net assets, end of year (in thousands)	$6,109		$6,060		$9,161		$9,252		$8,506		$32,138		$37,864		$50,892		$55,554		$60,072
Portfolio turnover	38.01	%	57.46	%	82.55	%	35.46	%	52.57	%	38.01	%	57.46	%	82.55	%	35.46	%	52.57	%

* Total investment returns exclude the effects of sales charges.

Ohio Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$10.13		$10.77		$11.21		$11.17		$10.70		$10.13		$10.77		$11.21		$11.16		$10.70
Investment income—net	.43		.44		.46		.48		.48		.48		.50		.51		.54		.54
Realized and unrealized gain (loss) on investments—net	.25		(.40	)	(.34	)	.04		.47		.25		(.40	)	(.34	)	.05		.46
Total from investment operations	.68		.04		.12		.52		.95		.73		.10		.17		.59		1.00
Less dividends and distributions:
Investment income—net	(.43	)	(.44	)	(.46	)	(.48	)	(.48	)	(.48	)	(.50	)	(.51	)	(.54	)	(.54	)
Realized gain on investments—net	—		—		(.10	)	—		—		—		—		(.10	)	—		—
In excess of realized gain on investments—net	—		(.24	)	—		—		—		—		(.24	)	—		—		—
Total dividends and distributions	(.43	)	(.68	)	(.56	)	(.48	)	(.48	)	(.48	)	(.74	)	(.61	)	(.54	)	(.54	)
Net asset value, end of year	$10.38		$10.13		$10.77		$11.21		$11.17		$10.38		$10.13		$10.77		$11.21		$11.16
Total Investment Return:*
Based on net asset value per share	6.86	%	.67	%	.98	%	4.79	%	9.14	%	7.40	%	1.18	%	1.49	%	5.42	%	9.60	%
Ratios to Average Net Assets:
Expenses	1.65	%	1.48	%	1.53	%	1.44	%	1.41	%	1.13	%	.97	%	1.02	%	.93	%	.90	%
Investment income—net	4.18	%	4.39	%	4.08	%	4.31	%	4.46	%	4.72	%	4.90	%	4.59	%	4.82	%	4.97	%
Supplemental Data:
Net assets, end of year (in thousands)	$3,308		$2,057		$2,713		$2,526		$2,412		$4,162		$4,115		$5,867		$5,267		$4,310
Portfolio turnover	38.01	%	57.46	%	82.55	%	35.46	%	52.57	%	38.01	%	57.46	%	82.55	%	35.46	%	52.57	%

* Total investment returns exclude the effects of sales charges.

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

        The following per share data and ratios have been derived from information provided in the financial statements:

	Class A										Class B
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  9.74		$10.45		$10.90		$10.96		$  10.57		$    9.74		$  10.45		$  10.90		$  10.96		$  10.57
Investment income—net	.48		.50		.51		.58		.57		.43		.45		.45		.52		.52
Realized and unrealized gain (loss) on investments—net	.47		(.41	)	(.45	)	(.06	)	.39		.47		(.41	)	(.45	)	(.06	)	.39
Total from investment operations	.95		.09		.06		.52		.96		.90		.04		—		.46		.91
Less dividends and distributions:
Investment income—net	(.48	)	(.50	)	(.51	)	(.58	)	(.57	)	(.43	)	(.45	)	(.45	)	(.52	)	(.52	)
In excess of realized gain on investments—net	—		(.30	)	—		—		—		—		(.30	)	—		—		—
Total dividends and distributions	(.48	)	(.80	)	(.51	)	(.58	)	(.57	)	(.43	)	(.75	)	(.45	)	(.52	)	(.52	)
Net asset value, end of year	$10.21		$  9.74		$10.45		$10.90		$  10.96		$  10.21		$    9.74		$  10.45		$  10.90		$  10.96
Total Investment Return:*
Based on net asset value per share	9.98	%	1.19	%	.43	%	4.83	%	9.39	%	9.43	%	.68	%	(.08	)%	4.30	%	8.84	%
Ratios to Average Net Assets:
Expenses	1.13	%	.96	%	.98	%	.87	%	.83	%	1.64	%	1.47	%	1.49	%	1.38	%	1.34	%
Investment income—net	4.83	%	5.12	%	4.67	%	5.25	%	5.37	%	4.31	%	4.61	%	4.15	%	4.74	%	4.86	%
Supplemental Data:
Net assets, end of year (in thousands)	$4,316		$5,924		$8,545		$9,842		$10,707		$26,642		$30,090		$44,502		$48,887		$56,115
Portfolio turnover	26.93	%	97.91	%	129.23	%	24.61	%	47.83	%	26.93	%	97.91	%	129.23	%	24.61	%	47.83	%

* Total investment returns exclude the effects of sales charges.

Texas Fund—Financial Highlights (concluded)

	Class C										Class D
	For the Year Ended July 31,										For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:	2001		2000		1999		1998		1997		2001		2000		1999		1998		1997
Per Share Operating Performance:
Net asset value, beginning of year	$  9.75		$10.46		$10.91		$10.97		$10.58		$  9.75		$10.46		$10.92		$10.98		$10.58
Investment income—net	.42		.44		.44		.51		.51		.47		.49		.50		.57		.56
Realized and unrealized gain (loss) on investments—net	.47		(.41	)	(.45	)	(.06	)	.39		.48		(.41	)	(.46	)	(.06	)	.40
Total from investment operations	.89		.03		(.01	)	.45		.90		.95		.08		.04		.51		.96
Less dividends and distributions:
Investment income—net	(.42	)	(.44	)	(.44	)	(.51	)	(.51	)	(.47	)	(.49	)	(.50	)	(.57	)	(.56	)
In excess of realized gain on investments—net	—		(.30	)	—		—		—		—		(.30	)	—		—		—
Total dividends and distributions	(.42	)	(.74	)	(.44	)	(.51	)	(.51	)	(.47	)	(.79	)	(.50	)	(.57	)	(.56	)
Net asset value, end of year	$10.22		$  9.75		$10.46		$10.91		$10.97		$10.23		$  9.75		$10.46		$10.92		$10.98
Total Investment Return:*
Based on net asset value per share	9.30	%	.58	%	(.18	)%	4.18	%	8.71	%	9.97	%	1.10	%	.24	%	4.72	%	9.38	%
Ratios to Average Net Assets:
Expenses	1.75	%	1.58	%	1.59	%	1.48	%	1.45	%	1.25	%	1.06	%	1.11	%	.97	%	.93	%
Investment income—net	4.20	%	4.51	%	4.06	%	4.63	%	4.75	%	4.71	%	5.03	%	4.49	%	5.15	%	5.27	%
Supplemental Data:
Net assets, end of year (in thousands)	$  705		$  733		$  836		$1,304		$  917		$1,396		$  944		$1,166		$  338		$  335
Portfolio turnover	26.93	%	97.91	%	129.23	%	24.61	%	47.83	%	26.93	%	97.91	%	129.23	%	24.61	%	47.83	%

* Total investment returns exclude the effects of sales charges.

INVESTMENT OBJECTIVES AND POLICIES

        The investment objective of each State Fund and the National Portfolio are similar; however, they differ with respect to the tax-exempt nature of the income paid to their respective shareholders. The investment objective of each State Fund is to provide shareholders with income exempt from Federal income taxes and State Taxes. The investment objective of the National Portfolio is to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with its investment policies. The investment objective of each State Fund and the National Portfolio is a fundamental policy that may not be changed without a vote of a majority of that Fund’s outstanding voting securities (which for this purpose under the Investment Company Act means the lesser of (i) 67% of the respective Fund’s shares present at a meeting at which more than 50% of the outstanding shares of the respective Fund are represented or (ii) more than 50% of the respective Fund’s outstanding shares). No assurance can be given that the National Portfolio or a State Fund will achieve its investment objective, or that the Combined Fund will achieve its investment objective after any State Fund Acquisition or the Reorganization.

        As set forth above, each State Fund will invest primarily in long-term investment grade obligations issued by or on behalf of the designated state, its political subdivisions, agencies or instrumentalities and obligations of other qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin Islands and Guam. Each State Fund invests at least 80% of its net assets in State Municipal Bonds. Under normal circumstances, the National Portfolio will invest at least 80% of its net assets in Municipal Bonds. The National Portfolio contemplates that it will not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state.

        Under normal circumstances, at least 80% of the assets of each State Fund is invested in investment grade securities or in unrated Municipal Bonds that possess creditworthiness comparable, in the opinion of FAM, to investment grade securities. Each State Fund also may invest up to 20% of its assets in high yield bonds. None of the State Funds intends to purchase debt securities that are in default or which FAM believes will be in default. Under normal conditions, the weighted average maturity of each State Fund’s investment portfolio is more than ten years. The weighted average maturity of the investment portfolio of each State Fund as of June 30, 2001 is set forth below:

State Fund	Weighted Average Maturity
Arizona Fund	14.42 years
Connecticut Fund	19.35 years
Maryland Fund	16.48 years
Massachusetts Fund	18.30 years
Michigan Fund	16.09 years
Minnesota Fund	18.06 years
North Carolina Fund	17.54 years
Ohio Fund	14.28 years
Texas Fund	19.93 years

        The National Portfolio may invest in Municipal Bonds rated in any rating category or unrated Municipal Bonds. Although the investment policies of the National Portfolio are not restricted to specific rating categories, the National Portfolio does not presently intend to invest more than 35% of its assets in bonds rated below investment grade or in unrated bonds that Fund management believes are of comparable quality. The 35% limitation on high yield bond investments reflects only the present intention of the National Portfolio, and may be changed by the Board of Municipal Bond Fund without shareholder approval. Therefore, if the Board of Municipal Bond Fund were to approve a change in the investment policies of the National Portfolio, it is theoretically possible that the National Portfolio could invest up to 100% of its assets in high yield bonds. The National Portfolio does not intend to purchase debt securities that are in default or which FAM believes will be in default. The National Portfolio will usually invest in Municipal Bonds that have a maturity of five years or longer. As of June 30, 2001, the weighted average maturity of the National Portfolio’s investment portfolio was 17.87 years.

        For temporary periods, each State Fund may invest up to 35% of its assets in short term tax-exempt or taxable money market obligations, although each State Fund will generally not invest more than 20% of its net assets in taxable money market obligations. As a temporary measure for defensive purposes, each State Fund may invest without limitation in short term tax-exempt or taxable money market obligations. While the National Portfolio does not intend to realize taxable investment income, it has the authority to invest as much as 20% of its assets on a temporary basis in taxable money market securities with remaining maturities of no more than one year for liquidity purposes or as a temporary investment of cash pending investment of such cash in Municipal Bonds. In addition, as a temporary measure for defensive purposes, the National Portfolio may invest a greater portion of its assets in taxable money market securities with remaining maturities of no more than one year, when, in the judgment of FAM, market conditions warrant.

        Each Fund may invest in fixed rate or variable obligations. Each may also invest in derivative securities, including futures, options, indexed securities, inverse securities, and swap agreements. At times, each Fund may seek to hedge its portfolio through the use of futures contracts and options transactions thereon to reduce volatility in the net asset value of its shares.

        Each State Fund other than the Arizona Fund is classified as a non-diversified fund within the meaning of the Investment Company Act, which means that it is not limited by the Investment Company Act in the proportion of its total assets that it may invest in the securities of a single issuer. The National Portfolio and the Arizona Fund are classified as diversified funds within the meaning of the Investment Company Act. The investments of each State Fund and the National Portfolio are limited so as to qualify the applicable Fund for the special tax treatment afforded to regulated investment companies (“RICs”) under the Code. See “The Reorganization—Tax Consequences of each State Fund Acquisition.” To qualify as a RIC, among other requirements, each State Fund and the National Portfolio limits 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 are invested in the securities (other than U.S. Government 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 are invested in the securities (other than U.S. Government securities) of a single issuer and it will not own more than 10% of the outstanding voting securities of a single issuer. A fund that elects to be classified as “diversified” under the Investment Company Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets. To the extent a State Fund that is a non-diversified fund may concentrate its investments among fewer issuers than the National Portfolio, such State Fund’s exposure to credit and market risks associated with such issuers may be greater than that of the National Portfolio.

Description of Municipal Bonds

        Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of IDBs are issued by or on behalf of public authorities to finance various privately operated facilities, including pollution control facilities. Such obligations are included within the term Municipal Bonds if the interest paid thereon is exempt from Federal income tax. Municipal Bonds also include short term tax-exempt municipal obligations such as tax anticipation notes, bond anticipation notes, revenue anticipation notes, variable rate demand notes and Public Housing Authority notes that are fully secured by a pledge of the full faith and credit of the United States.

        The two principal classifications of Municipal Bonds are “general obligation” bonds and “revenue” or “special obligation” bonds. General obligation bonds are secured by the issuer’s pledge of faith, credit and taxing power for the payment of principal and interest. Revenue or special obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds from a special excise tax or other specific revenue source such as from the user of the facility being financed. Municipal Bonds also may include “moral obligation” bonds, which normally are issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.

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

        As set forth above, each Fund may invest in VRDOs. VRDOs are floating rate securities that combine an interest in a long-term Municipal Bond with the right to demand payment before maturity from a bank or other financial institution containing a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. The interest rates are adjustable at intervals ranging from daily to up to six months based on some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs at approximately the par value of the VRDOs upon the adjustment date. The adjustments are typically based upon the prime rate of a bank or some other appropriate interest rate adjustment index.

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

        Each Fund has been advised by its counsel that the interest received on Participating VRDOs will be treated as interest from tax-exempt obligations as long as the Fund does not invest more than a limited amount (not more than 20%) of its total assets in such investments and certain other conditions are met. It is contemplated that the Funds will not invest more than a limited amount of its total assets in Participating VRDOs.

        Also included within the general category of Municipal Bonds are participation certificates in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called “municipal lease obligations”) entered into by a state or political subdivision to finance the acquisition, development or construction of equipment, land or facilities. Although municipal lease obligations do not constitute general obligations of the issuer for which the lessee’s unlimited taxing power is pledged, a municipal lease obligation is frequently backed by the lessee’s covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain municipal lease obligations contain “non-appropriation” clauses which provide that the lessee has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although “non-appropriation” municipal lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult. These securities represent a relatively new type of financing that has not yet developed the depth of marketability associated with more conventional securities. Certain investments in municipal lease obligations may be illiquid. None of the Funds may invest in illiquid municipal lease obligations if such investment, together with all other illiquid investments, would exceed 15% of the Fund’s net assets. Each Fund may, however, invest without regard to such limitation in municipal lease obligations which FAM, pursuant to guidelines which have been adopted by the applicable Board and subject to the supervision of the applicable Board, determines to be liquid. FAM will deem municipal lease obligations liquid if they are publicly offered and have received an investment grade rating of BBB or better by S&P or Fitch, or Baa or better by Moody’s. Unrated municipal lease obligations, or those rated below investment grade, will be considered liquid if the obligations come to the market through an underwritten public offering and at least two dealers are willing to give competitive bids. In reference to the latter, FAM must, among other things, also review the creditworthiness of the entity obligated to make payment under the municipal lease obligation and make certain specified determinations based on such factors as the existence of a rating or credit enhancement such as insurance, the frequency of trades or quotes for the obligation and the willingness of dealers to make a market in the obligation.

        As set forth above, each Fund may invest in junk bonds. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high-yield securities may be more likely to experience financial stress, especially if such issuers are highly leveraged. During an economic downturn or recession, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer’s ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer’s inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer.

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

        A Fund may have difficulty disposing of certain junk bonds because there may be a thin trading market for such securities. Because not all dealers maintain markets in all junk bonds, there is no established secondary market for many of these securities, and each Fund anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent that a secondary trading market for junk bonds does exist, it is generally not as liquid as the secondary market for higher rated securities. Reduced secondary market liquidity may have an adverse impact on market price and a Fund’s ability to dispose of particular issues when necessary to meet its liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain securities also may make it more difficult for a Fund to obtain accurate market quotations for purposes of valuing its portfolio. Market quotations are generally available on many junk bonds only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales.

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

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

        For more information about junk bonds and the risks associated with investing in junk bonds, see “Merrill Lynch Municipal Bond Fund at a Glance,” “How Each Portfolio Invests—National Portfolio” and “Investment Risks” in the Municipal Bond Fund Prospectus and “Investment Policies of the Portfolios—National Portfolio” in the Municipal Bond Fund Statement.

        Yields on Municipal Bonds depend upon a variety of factors, including the general condition of the money market and of the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ability of a Fund to achieve its investment objective is also dependent on the continuing ability of the issuers of the Municipal Bonds in which the Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of holders of Municipal Bonds and the obligations of the issuers of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and such laws, if any, that may be enacted by Congress or state legislatures imposing a moratorium on the payment of principal and interest or imposing other constraints or conditions on the payment of principal and interest on Municipal Bonds.

        From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on Municipal Bonds. It may be expected that similar proposals may be introduced in the future. If such a proposal were enacted, the ability of a Fund to pay “exempt-interest” dividends might be adversely affected and such Fund would re-evaluate its investment objective and policies and consider changes in its structure. See “Dividends and Taxes.”

Other Investment Policies

        When-Issued Securities, Delayed Delivery Securities and Forward Commitments.    Each Fund may purchase or sell securities on a delayed delivery basis or on a when-issued basis or purchase or sell securities through a forward commitment. For a description of when-issued securities, delayed delivery transactions and forward commitments, including the risks associated therewith, see “Investment Risks” in the Municipal Bond Fund Prospectus, and “Investment Policies of the Portfolios—Description of Municipal Bonds” and “—Forward Commitments” in the Municipal Bond Fund Statement.

        Hedging Techniques.    Each Fund may engage in various portfolio strategies to hedge their respective portfolios against investment risk, interest rate risk and other risks. For a description of hedging instruments and the risks associated with investment in such instruments, see “Investment Risks” in the Municipal Bond Fund Prospectus, and “Investment Policies of the Portfolios—Financial Futures Contracts and Derivatives” and “—Description of Financial Futures Contracts” in the Municipal Bond Fund Statement.

        Indexed and Inverse Floating Obligations.    Each Fund may invest in indexed and inverse floating obligations. For a description of indexed and inverse floating obligations and the risks associated with investment in such instruments, see “Investment Risks” in the Municipal Bond Fund Prospectus and “Investment Policies of the Portfolios—Indexed and Inverse Floating Obligations” in the Municipal Bond Fund Statement.

        Swap Agreements.    Each Fund may invest in swap agreements. For a description of swap agreements and the risks associated with investment in such instruments, see “Investment Risks” in the Municipal Bond Fund Prospectus and “Investment Policies of the Portfolios—Swaps” in the Municipal Bond Fund Statement.

        Temporary Investments.    Each Fund may invest in certain short-term securities on a temporary basis for liquidity purposes or defensive purposes. For a description of such short-term securities, please see “Investment Objective and Policies” in the Municipal Bond Fund Statement and “Investment Policies of the Portfolios—Description of Temporary Investments” in the Municipal Bond Fund Statement and “Investment Objectives and Policies—Description of Temporary Investments” in the State Fund Statement.

Investment Restrictions

        Other than as noted below, the National Portfolio and each State Fund have substantially similar investment restrictions. As an additional fundamental restriction, each of the National Portfolio and the Arizona Fund will not make any investment inconsistent with its classification as a diversified fund under the Investment Company Act. A fund that elects to be classified as a “diversified” fund under the Investment Company Act, such as the National Portfolio, must satisfy the requirements that (i) with respect to 75% 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 (ii) with respect to 75% of its total assets, it will not own more than 10% of the outstanding voting securities of a single issuer. For purposes of this restriction, the National Portfolio will regard each state and each political subdivision, agency or instrumentality of such state and each multi-state agency of which such state is a member and each public authority that issues securities on behalf of a private entity as a separate issuer. If the security is backed only by the assets and revenues of a non-governmental entity, then the entity with the ultimate responsibility for payment of interest and principal may be regarded as the sole issuer. See “Investment Restrictions” in the Municipal Bond Fund Statement. Each State Fund other than the Arizona Fund is classified as a “non-diversified” fund within the meaning of the Investment Company Act, which means that each State Fund other than the Arizona Fund is not limited by the Investment Company Act in the proportion of its assets that such State Fund may invest in securities of a single issuer. To the extent that a State Fund assumes a large position in securities of a small number of issuers, a State Fund’s respective net asset value may fluctuate to a greater extent than that of a diversified fund as a result of changes in the financial condition or in the market’s assessment of the issuers, and such State Fund may be more susceptible to any single, economic, political or regulatory occurrence than a diversified fund such as the National Portfolio or the Arizona Fund.

Management

        Board Members and Officers.    The Board of Municipal Bond Fund consists of eight individuals, seven of whom are not “interested persons” of Municipal Bond Fund as defined in the Investment Company Act. The Board of Municipal Series Trust currently consists of five individuals, four of whom are not “interested persons” of Municipal Series Trust as defined by the Investment Company Act. See “Item 2: Election of Board Members.” Terry K. Glenn is a Board Member and an “interested person” of both Municipal Bond Fund and Municipal Series Trust. Mr. Glenn is also the President of Municipal Series Trust and Municipal Bond Fund. The Board Members are responsible for the overall supervision of the operation of each Fund and perform the various duties imposed on the Board Members of investment companies by the Investment Company Act.

        Information about the Board Members and officers of Municipal Bond Fund, including their ages and their principal occupations for at least the last five years, is set forth below. Unless otherwise noted, the address of each Board Member is P.O. Box 9011, Princeton, New Jersey 08543-9011.

        TERRY K. GLENN (61)—President and Director(1)(2)—Chairman (Americas Region) of Merrill Lynch Investment Managers, L.P. (“MLIM”) since 2001 and Executive Vice President of FAM and its affiliate, MLIM (which terms as used herein include their corporate predecessors) since 1983; President, Merrill Lynch Mutual Funds since 1999; President of FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. (“Princeton Services”) since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services Inc. since 1985.

        RONALD W. FORBES (61)—Director(2)(3)—1400 Washington Avenue, Albany, New York 12222. Professor Emeritus of Finance, School of Business, State University of New York at Albany since 2000 and Professor thereof from 1989 to 2000; International Consultant, Urban Institute, Washington, D.C. from 1995 to 1999.

        CYNTHIA A. MONTGOMERY (49)—Director(2)(3)—Harvard Business School, Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School since 1989; Associate Professor, J.L. Kellogg Graduate School of Management, Northwestern University from 1985 to 1989; Associate Professor, Graduate School of Business Administration, The University of Michigan from 1979 to 1985; Director, UnumProvident Corporation since 1990 and Director, Newell Rubbermaid Inc. since 1995.

        CHARLES C. REILLY (70)—Director(2)(3)—9 Hampton Harbor Road, Hampton Bays, New York 11946. Self-employed financial consultant since 1990; President and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct Professor, Columbia University Graduate School of Business from 1990 to 1991; Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990; Partner, Small Cities Cable Television from 1986 to 1997.

        KEVIN A. RYAN (69)—Director(2)(3)—127 Commonwealth Avenue, Chestnut Hill, Massachusetts 02467. Founder and currently Director Emeritus of the Boston University Center for the Advancement of Ethics and Character and Director thereof from 1989 to 1999; Professor from 1982 to 1999 and currently Professor Emeritus of Education at Boston University; formerly taught on the faculties of The University of Chicago, Stanford University and Ohio State University.

        ROSCOE S. SUDDARTH (66)—Director(2)(3)—7403 MacKenzie Court, Bethesda, Maryland 20817. Former President, Middle East Institute, from 1995 to 2001; Foreign Service Officer, United States Foreign Service, from 1961 to 1995; Career Minister, from 1989 to 1995; Deputy Inspector General, U.S. Department of State, from 1991 to 1994; U.S. Ambassador to the Hashemite Kingdom of Jordan, from 1987 to 1990.

        RICHARD R. WEST (63)—Director(2)(3)—Box 604, Genoa, Nevada 89411. Professor of Finance since 1984, Dean from 1984 to 1993, and currently Dean Emeritus of New York University Leonard N. Stern School of Business Administration; Director of Bowne & Co., Inc. (financial printers), Vornado Realty Trust, Inc. (real estate holding company) and Alexander’s, Inc. (real estate company).

        EDWARD D. ZINBARG (66)—Director(2)(3)—5 Hardwell Road, Short Hills, New Jersey 07078-2117. Self-employed financial consultant since 1994; Executive Vice President of The Prudential Insurance Company of America from 1988 to 1994; former Director of Prudential Reinsurance Company and former Trustee of The Prudential Foundation.

        KENNETH A. JACOB (50)—Senior Vice President(1)(2)—First Vice President of MLIM since 1997; Vice President of MLIM from 1984 to 1997; Vice President of FAM since 1984.

        JOHN LOFFREDO (38)—Senior Vice President(1)(2)—First Vice President of MLIM since 1997; Vice President of MLIM from 1991 to 1997.

        DONALD C. BURKE (41)—Vice President and Treasurer(1)(2)—First Vice President of FAM and MLIM since 1997 and Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; Vice President of FAM and MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.

        WALTER O’CONNOR (39)—Vice President and Portfolio Manager of the National Portfolio(1)(2)—Director (Tax-Exempt Fund Management) of MLIM since 1997; Vice President of MLIM from 1993 to 1997.

        ALICE A. PELLEGRINO (41)—Secretary(1)(2)—Vice President of MLIM since 1999; Attorney associated with MLIM since 1997; Associate with Kirkpatrick & Lockhart LLP from 1992 to 1997.

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

(2)  Such Board Member or officer is a director, trustee or officer of certain other investment companies for which FAM or MLIM acts as the investment adviser or manager.

(3)  Member of Municipal Bond Fund’s Audit and Nominating Committee, which is responsible for the selection of the independent auditors and the selection and nomination of non-interested Board Members.

        Investment Advisory Arrangements.    FAM serves as the Investment Adviser for the National Portfolio pursuant to an Investment Advisory Agreement with Municipal Bond Fund, on behalf of the National Portfolio. FAM also serves as the Investment Adviser for each State Fund pursuant to separate Investment Advisory Agreements with Municipal Series Trust, on behalf of the applicable State Fund. Under each Investment Advisory Agreement, except for certain minor differences, FAM provides substantially similar services to the Funds.

        Pursuant to the Investment Advisory Agreement between Municipal Series Trust, on behalf of each State Fund, and FAM, each State Fund pays FAM a monthly advisory fee based upon the annual rate and breakpoints set forth below:

Average Daily Net Assets of each State Fund	Investment Advisory Fee Rate
Not exceeding $500 million	0.550	%
In excess of $500 million but not exceeding $1 billion	0.525
In excess of $1 billion	0.500

        For the fiscal year ended July 31, 2001, the investment advisory fee payable by each State Fund to FAM was equal to 0.55% of the average daily net assets of the applicable State Fund. However, during that period, FAM voluntarily waived a portion of the advisory fee payable by the Connecticut Fund and the Maryland Fund. FAM may discontinue or reduce such waivers of investment advisory fees at any time without notice.

        As compensation for FAM’s services to the three portfolios of Municipal Bond Fund, FAM receives at the end of each month a fee with respect to each of the three portfolios. The fee for the National Portfolio is determined based on the annual advisory fee rates set forth in the table below. These annual advisory fee rates are applied with respect to the aggregate average daily net assets of the three portfolios of Municipal Bond Fund. The advisory fee rates for the National Portfolio are subject to reduction to the extent that the aggregate average daily net assets of the three portfolios of Municipal Bond Fund are $250 million or less or exceed $250 million (each such amount being a “breakpoint level”). The portion of the assets of the National Portfolio to which a fee rate applies will be determined on a “uniform percentage” basis for each breakpoint level. The uniform percentage for a breakpoint level is determined by dividing the aggregate average daily net assets of the three portfolios of Municipal Bond Fund that fall within that breakpoint level by the aggregate average daily net assets of the three portfolios of Municipal Bond Fund. The amount of the fee for the National Portfolio at each breakpoint level is determined by multiplying the average daily net assets of the National Portfolio by the uniform percentage applicable to that breakpoint level and multiplying the product by the applicable advisory fee rate. Stated otherwise, the advisory fee for the National Portfolio is computed as follows:

(	Breakpoint Asset Level	)
(		)	x Assets of the National Portfolio x Applicable Advisory Fee Rate for Breakpoint
(	Aggregate Average Daily	)
(	Net Assets of the 3 Portfolios	)

Aggregate of the Average Daily Net Assets of the Three Portfolios	National Portfolio Advisory Fee Rate
Not exceeding $250 million	0.500%
In excess of $250 million	0.475

        As of June 30, 2001, the aggregate net assets of the three portfolios of Municipal Bond Fund were approximately $2.608 billion. As of that date, the aggregate net assets of the National Portfolio were approximately $1.037 billion and the advisory fee rate of the National Portfolio was 0.48%. Assuming the applicable State Fund Acquisition had taken place on June 30, 2001, the pro forma investment advisory fee rate for the Combined Fund would have been lower than the investment advisory fee rate for each State Fund. See “Summary—Fee Tables.”

        12b-1 Fees.    As discussed above, each State Fund and the National Portfolio pay account maintenance and distribution fees under separate class-specific plans adopted pursuant to Rule 12b-1 under the Investment Company Act (together, “12b-1 Fees”). Set forth below is a comparison of the 12b-1 Fees for the State Funds and the National Portfolio:

12b-1 Annual Fee Rates

(as a percentage of average daily net assets attributable to the applicable share class)

	Account Maintenance Fee				Distribution Fee
Share Class	State Funds		National Portfolio		State Funds		National Portfolio
Class B	0.25	%	0.25	%	0.25	%	0.50	%
Class C	0.25	%	0.25	%	0.35	%	0.55	%
Class D	0.10	%	0.25	%	N/A		N/A

        Although the account maintenance fee for Class D shares of the Combined Fund will be higher than the account maintenance fee for Class D shares of each State Fund and the distribution fees for Class B and Class C shares of the Combined Fund will be higher than the distribution fees for Class B and Class C shares of each State Fund, it is expected that such higher fees will be more than offset by the Combined Fund’s lower expected total operating expense ratio. See “Summary—Fee Tables.”

Purchase of Shares

        Each Fund offers four classes of shares under the Merrill Lynch Select Pricing ^SM System. The Class A, Class B, Class C and Class D shares issued by the National Portfolio are substantially similar in all respects to the Class A, Class B, Class C and Class D shares issued by each State Fund, except that (i) the shares of the National Portfolio are common stock in a series of a Maryland corporation and the shares of a State Fund are beneficial interests in a series of a Massachusetts business trust, (ii) the account maintenance fees for Class D shares of the National Portfolio are higher than the account maintenance fees for Class D shares of each State Fund and (iii) the distribution fees for Class B and Class C shares of the National Portfolio are higher than the distribution fees for Class B and Class C shares of each State Fund. For a complete discussion of the four classes of shares and the purchase and distribution procedures related thereto see “Your Account—Merrill Lynch Select Pricing ^SM System,” “Your Account—How to Buy, Sell, Transfer and Exchange Shares” and “Your Account—Participation in Fee Based Programs” in the Prospectus of each State Fund and “Your Account—Merrill Lynch Select Pricing ^SM System” and “Your Account—How to Buy, Sell, Transfer and Exchange Shares” in Municipal Bond Fund Prospectus.

Redemption of Shares

        The procedure for redeeming shares of the National Portfolio is the same as the procedure for redeeming shares of each State Fund. For purposes of computing any CDSC that may be payable upon disposition of shares of the National Portfolio acquired by the State Fund’s shareholders in a State Fund Acquisition, the holding period for the shares of each State Fund that are outstanding on the date of such State Fund Acquisition will be tacked onto the holding period of the shares of the National Portfolio that are distributed in such State Fund Acquisition. See “Your Account—Merrill Lynch Select Pricing ^SM System,” “Your Account—How to Buy, Sell, Transfer and Exchange Shares” and “Your Account—Participation in Fee Based Programs” in the Prospectus of each State Fund and “Your Account—Merrill Lynch Select Pricing ^SM System” and “Your Account—How to Buy, Sell, Transfer and Exchange Shares” in the Municipal Bond Fund Prospectus.

Performance

        General.    The following tables provide performance information for each class of shares of each State Fund and the National Portfolio, including and excluding maximum applicable sales charges, for the periods indicated. Past performance does not indicate future performance.

Arizona Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	9.17%	4.81%	8.62%	4.62%	8.52%	7.52%	9.07%	4.71%
Five Years Ended 06/30/01	5.52%	4.66%	4.99%	4.99%	4.88%	4.88%	5.42%	4.56%
Ten Years/Inception*** through     06/30/01	6.51%	6.05%	5.97%	5.97%	5.59%	5.59%	6.14%	5.49%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on November 29, 1991. Class C and Class D shares commenced operations on October 21, 1994.

Arizona Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	4.00%	5.56%	3.66%	5.09%	3.56%	4.95%	3.91%	5.42%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Arizona Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Connecticut Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	9.18%	4.81%	8.63%	4.63%	8.63%	7.63%	9.07%	4.71%
Five Years Ended 06/30/01	5.71%	4.85%	5.18%	5.18%	5.08%	5.08%	5.61%	4.75%
Inception*** through 06/30/01	6.13%	5.52%	5.60%	5.60%	5.80%	5.80%	6.32%	5.68%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated. FAM waived a portion of its advisory fee with respect to the Connecticut Fund. Without such waiver, the Connecticut Fund’s performance would have been lower.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on July 1, 1994. Class C and Class D shares commenced operations on October 21, 1994.

Connecticut Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	4.17%	5.79%	3.84%	5.33%	3.74%	5.19%	4.08%	5.66%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Connecticut Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Maryland Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	9.75%	5.36%	9.20%	5.20%	8.97%	7.97%	9.64%	5.25%
Five Years Ended 06/30/01	6.19%	5.32%	5.65%	5.65%	5.52%	5.52%	6.08%	5.22%
Inception*** through 06/30/01	4.73%	4.18%	4.20%	4.20%	6.01%	6.01%	6.56%	5.91%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated. FAM waived a portion of its advisory fee with respect to the Maryland Fund. Without such waiver, the Maryland Fund’s performance would have been lower.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on October 29, 1993. Class C and Class D shares commenced operations on October 21, 1994.

Maryland Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	3.62%	5.03%	3.26%	4.53%	3.16%	4.39%	3.52%	4.89%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Maryland Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Massachusetts Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	10.09%	5.69%	9.54%	5.54%	9.43%	8.43%	9.98%	5.58%
Five Years Ended 06/30/01	5.27%	4.41%	4.74%	4.74%	4.63%	4.63%	5.16%	4.31%
Ten Years/Inception*** through     06/30/01	6.20%	5.73%	5.66%	5.66%	5.40%	5.40%	5.95%	5.31%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on February 28, 1992. Class C and Class D shares commenced operations on October 21, 1994.

Massachusetts Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	4.02%	5.59%	3.68%	5.11%	3.58%	4.98%	3.93%	5.45%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Massachusetts Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Michigan Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	9.68%	5.29%	9.13%	5.13%	9.02%	8.02%	9.58%	5.19%
Five Years Ended 06/30/01	5.03%	4.18%	4.50%	4.50%	4.39%	4.39%	4.93%	4.07%
Ten Years/Inception*** through     06/30/01	5.10%	4.59%	4.57%	4.57%	5.21%	5.21%	5.74%	5.10%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on January 29, 1993. Class C and Class D shares commenced operations on October 21, 1994.

Michigan Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	3.96%	5.50%	3.62%	5.02%	3.52%	4.89%	3.87%	5.37%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Michigan Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Minnesota Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	8.91%	4.55%	8.46%	4.46%	8.35%	7.35%	8.79%	4.44%
Five Years Ended 06/30/01	5.86%	5.00%	5.34%	5.34%	5.24%	5.24%	5.75%	4.89%
Ten Years/Inception*** through     06/30/01	6.20%	5.73%	5.67%	5.67%	5.53%	5.53%	6.07%	5.42%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on March 27, 1992. Class C and Class D shares commenced operations on October 21, 1994.

Minnesota Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	3.96%	5.50%	3.62%	5.02%	3.52%	4.88%	3.87%	5.37%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Minnesota Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

North Carolina Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	9.25%	4.88%	8.70%	4.70%	8.59%	7.59%	9.14%	4.78%
Five Years Ended 06/30/01	5.70%	4.84%	5.16%	5.16%	5.06%	5.06%	5.59%	4.73%
Ten Years/Inception*** through     06/30/01	5.96%	5.47%	5.42%	5.42%	5.74%	5.74%	6.27%	5.63%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on September 25, 1992. Class C and Class D shares commenced operations on October 21, 1994.

North Carolina Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	3.47%	4.81%	3.10%	4.31%	3.00%	4.17%	3.37%	4.68%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the North Carolina Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Ohio Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	7.24%	2.95%	6.70%	2.70%	6.59%	5.59%	7.24%	2.95%
Five Years Ended 06/30/01	4.95%	4.10%	4.42%	4.42%	4.32%	4.32%	4.87%	4.02%
Ten Years/Inception*** through     06/30/01	6.00%	5.53%	5.46%	5.46%	5.23%	5.23%	5.77%	5.12%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on February 28, 1992. Class C and Class D shares commenced operations on October 21, 1994.

Ohio Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	3.65%	5.07%	3.30%	4.58%	3.20%	4.44%	3.56%	4.94%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28% but does not assume any exemption of dividend income from State Taxes. If the exemption of dividend income from State Taxes was taken into account, the tax-equivalent yield of the Ohio Fund would have been higher. Dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

Texas Fund

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	9.73%	5.34%	9.18%	5.18%	9.06%	8.06%	9.51%	5.13%
Five Years Ended 06/30/01	4.93%	4.07%	4.40%	4.40%	4.28%	4.28%	4.80%	3.95%
Ten Years/Inception*** through     06/30/01	6.28%	5.84%	5.74%	5.74%	5.00%	5.00%	5.55%	4.91%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A and Class B shares commenced operations on August 30, 1991. Class C and Class D shares commenced operations on October 21, 1994.

Texas Fund

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	4.13%	5.74%	3.79%	5.27%	3.69%	5.12%	4.04%	5.61%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28%.

National Portfolio

Average Annual Total Return*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**	Without Sales Charge	With Sales Charge**
Year Ended 06/30/01	10.32%	5.91%	9.49%	5.49%	9.33%	8.33%	10.04%	5.64%
Five Years Ended 06/30/01	5.80%	4.94%	5.00%	5.00%	4.95%	4.95%	5.53%	4.67%
Ten Years/Inception*** through     06/30/01	6.81%	6.37%	6.01%	6.01%	5.79%	5.79%	6.39%	5.75%

*    The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated.

**   Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 4.00%. The CDSC on Class B shares is 4.00% and is reduced to 0.00% after four years. The CDSC on Class C shares is 1.00% and is reduced to 0.00% after one year.

***  Class A shares commenced operations on November 2, 1979. Class B shares commenced operations on October 21, 1988. Class C and Class D shares commenced operations on October 21, 1994.

National Portfolio

Yield and Tax Equivalent Yield*

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
Period	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**	Yield	Tax Equivalent Yield**
30 Days Ended 06/30/01	4.62%	6.42%	4.05%	5.63%	4.00%	5.56%	4.38%	6.08%

*    Assumes the maximum applicable sales charge currently in effect.

**   Assumes a Federal income tax rate of 28%.

Code of Ethics

        The Board of each of Municipal Bond Fund and Municipal Series Trust has approved the same Code of Ethics under Rule 17j-1 of the Investment Company Act, which covers the Funds, FAM, and FAMD. 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 respective Fund.

Shareholder Rights

        Voting rights for Board Members are not cumulative. Shares of the National Portfolio to be issued to a State Fund in a State Fund Acquisition and thereafter distributed to the shareholders of such State Fund will be fully paid and non assessable, will have no preemptive rights and will have the conversion rights described in this Prospectus and Proxy Statement and in the Municipal Bond Fund Prospectus. Each share of the National Portfolio is entitled to participate equally in dividends declared with respect to the National Portfolio and in the net assets of the National Portfolio on liquidation or dissolution after satisfaction of outstanding liabilities, except that Class B, Class C, and Class D shares bear certain additional expenses. The account maintenance fees for Class D shares of the National Portfolio are higher than the account maintenance fees for Class D shares of each State Fund and the distribution fees for Class B and Class C shares of the National Portfolio are higher than the distribution fees for Class B and Class C shares of each State Fund. Rights attributable to shares of each State Fund are identical to those described above.

Dividends

        The current policy of each State Fund with respect to dividends is substantially similar to the current dividend policy of the National Portfolio. It is the intention of each Fund to distribute net investment income, if any, monthly. In addition, each Fund declares and distributes all net realized capital gains, if any, to shareholders at least annually. Capital gains distributions will be automatically reinvested in shares unless the shareholder elects to receive such distributions in cash.

Automatic Dividend Reinvestment Plan

        Each Fund offers its shareholders an Automatic Dividend Reinvestment Plan (each, a “Plan” and collectively, the “Plans”) with the same terms. Pursuant to the Plans, dividends will be automatically reinvested, without a sales charge, in additional full and fractional shares of the relevant Fund unless a shareholder has elected to receive such dividends in cash. For further information about the Plans, see “Shareholder Services—Automatic Reinvestment of Dividends” in the Municipal Bond Fund Statement.

        After a State Fund Acquisition, prior shareholders of the applicable State Fund who elected to receive dividends in cash will continue to receive dividends in cash from the Combined Fund; all other shareholders of the applicable State Fund will have their dividends automatically reinvested in shares of the Combined Fund. However, if a shareholder owns shares of any State Fund and the National Portfolio, after the applicable State Fund Acquisition, the shareholder’s election with respect to the dividends of the National Portfolio will control unless the shareholder specifically elects a different option at that time.

Tax Information

        The tax consequences associated with an investment in shares of a State Fund are substantially similar to the tax consequences associated with an investment in shares of the National Portfolio, except that dividends received by shareholders of the Combined Fund will not be exempt from State Taxes. See “Your Account—Dividends and Taxes” in the Municipal Bond Fund Prospectus.

Portfolio Transactions

        The procedures for engaging in portfolio transactions are generally the same for each State Fund and Municipal Bond Fund. For a discussion of these procedures, see “Portfolio Transactions and Brokerage Commissions” in the Municipal Bond Fund Statement.

Portfolio Turnover

        Generally, none of the Funds purchases securities for short term trading profits. However, each Fund may dispose of securities without regard to the time that they have been held when such action, for defensive or other reasons, appears advisable to FAM. Neither Fund has any limit on its rate of portfolio turnover. A high portfolio turnover may result in negative tax consequences, such as an increase in capital gain dividends or in ordinary income dividends of accrued market discount. High portfolio turnover also may involve correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions that are borne directly by the Funds. The following table illustrates the portfolio turnover rates for each Fund for the last two fiscal years:

Fund	Portfolio Turnover Rate for Fiscal Year End 2000*	Portfolio Turnover Rate for Fiscal Year End 2001*
Arizona Fund	41.15%	41.00%
Connecticut Fund	85.68%	57.42%
Maryland Fund	35.57%	37.69%
Massachusetts Fund	25.66%	32.60%
Michigan Fund	85.25%	59.61%
Minnesota Fund	43.42%	45.63%
North Carolina Fund	58.02%	28.58%
Ohio Fund	57.46%	38.01%
Texas Fund	97.91%	26.93%
National Portfolio	108.43%	80.88%

* The fiscal year end for each State Fund is July 31 and the fiscal year end for the National Portfolio is June 30.

Additional Information

        Net Asset Value.    The State Funds and the National Portfolio determine net asset value of each class of their shares once daily 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. Net asset value is computed by dividing the market 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. For a discussion of these procedures, see “Determination of Net Asset Value” in the Municipal Bond Fund Statement.

        Shareholder Services.    Municipal Bond Fund offers a number of shareholder services and investment plans designed to facilitate investment in shares of Municipal Bond Fund. For a description of these services, see “Shareholder Services” in the Municipal Bond Fund Statement.

        Custodian.    State Street Bank and Trust Company (“State Street”) acts as custodian of each State Fund. The principal business address of State Street in such capacity is P.O. Box 351, Boston, Massachusetts 02101. The Bank of New York acts as custodian of Municipal Bond Fund. The principal business address of The Bank of New York in such capacity is 100 Church Street, New York, New York 10007. It is presently anticipated that The Bank of New York will serve as the custodian of the Combined Fund.

        Accounting Services.    Both Municipal Series Trust, on behalf of each State Fund, and Municipal Bond Fund on behalf of its three Portfolios, have entered into an agreement with State Street effective January 1, 2001, pursuant to which State Street provides certain accounting services to each Fund. Each State Fund and Municipal Bond Fund pays a fee for these services. Prior to January 1, 2001, FAM provided accounting services to each Fund and was reimbursed by each State Fund and Municipal Bond Fund at its cost in connection with such services. FAM continues to provide certain accounting services to each Fund and each State Fund and Municipal Bond Fund reimburses FAM for these services.

        The tables below show the amounts paid by each State Fund and Municipal Bond Fund to State Street and to FAM for the periods indicated:

	Fees for Accounting Services
	Fiscal Year End 2001*		Fiscal Year End 2000*		Fiscal Year End 1999*
	Paid to State Street**	Paid to FAM	Paid to State Street	Paid to FAM	Paid to State Street	Paid to FAM
Arizona Fund	$  40,790	$  28,351	N/A	$  26,186	N/A	$  56,198
Connecticut Fund	$  38,425	$  22,890	N/A	$  60,072	N/A	$  43,334
Maryland Fund	$  31,311	$    6,025	N/A	$  43,512	N/A	$  45,934
Massachusetts Fund	$  27,015	$  17,561	N/A	$  67,762	N/A	$  53,354
Michigan Fund	$  36,017	$  31,006	N/A	$  17,838	N/A	$  84,307
Minnesota Fund	$  22,234	$    4,768	N/A	$  48,518	N/A	$  56,907
North Carolina Fund	$  29,040	$  20,010	N/A	$  53,762	N/A	$  64,647
Ohio Fund	$  39,277	$  31,064	N/A	$  48,681	N/A	$  56,012
Texas Fund	$  30,476	$  14,697	N/A	$  47,047	N/A	$  62,699
Municipal Bond Fund***	$362,706	$265,020	N/A	$416,856	N/A	$429,103

* The fiscal year end for each State Fund is July 31 and the fiscal year end for the National Portfolio is June 30.

** Represents payments pursuant to the agreement with State Street commencing January 1, 2001.

*** Represents payments made on behalf of all three Portfolios of Municipal Bond Fund.

        Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent.    Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, an affiliate of FAM, serves as the transfer agent, dividend disbursing agent and shareholder servicing agent with respect to each Fund (the “Transfer Agent”), at the same fee schedule, pursuant to separate agreements with each of the Funds. Each Fund currently pays between $16.00 and $20.00 for each Class A or Class D shareholder account and between $19.00 and $23.00 for each Class B or Class C shareholder account, depending on the level of service required. Each also 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 Fund Advisor (Merrill Lynch MFSA ^SM ) Program. The following table sets forth the transfer agent fees paid by each Fund for the last three fiscal years:

	Transfer Agent Fees†
Fund	Fiscal Year End 1999*	Fiscal Year End 2000*	Fiscal Year End 2001*
Arizona Fund	$  30,195	$  14,967	$  24,036
Connecticut Fund	$  19,350	$  17,749	$  20,612
Maryland Fund	$  16,671	$  14,656	$  17,853
Massachusetts Fund	$  27,039	$  24,382	$  25,348
Michigan Fund	$  38,662	$  28,041	$  29,462
Minnesota Fund	$  23,491	$  17,689	$  22,814
North Carolina Fund	$  24,602	$  20,821	$  22,575
Ohio Fund	$  39,654	$  24,989	$  31,100
Texas Fund	$  24,812	$  22,316	$  22,279
National Portfolio	$599,800	$456,342	$445,860

* The fiscal year end for each State Fund is July 31 and the fiscal year end for the National Portfolio is June 30.

† For the fiscal year end 1999, 2000, and 2001, each Fund generally paid fees to the Transfer Agent at lower rates than the ones currently in effect. If the current rates were in effect for the fiscal year end 1999, 2000, and 2001, the fees paid by each Fund to the Transfer Agent may have been higher.

        Shares of Beneficial Interest/Capital Stock.    Municipal Bond Fund is authorized to issue 3,850,000,000 shares of common stock, par value $.10 per share, of which the National Portfolio is authorized to issue 1,500,000,000 shares divided into four classes, designated Class A, Class B, Class C, and Class D Common

Stock. Each of Class A, Class B, Class C, and Class D of the National Portfolio is authorized to issue up to 375,000,000 shares. Each outstanding share of the National Portfolio is fully paid and non-assessable and has full voting rights. Municipal Series Trust is authorized to issue an unlimited number of shares of beneficial interest, par value $.10 per share, which have been divided into thirteen series, and further divided into four classes, designated Class A, Class B, Class C and Class D shares; each outstanding share is fully paid and nonassessable, except that shareholders of each State Fund may under certain circumstances be held personally liable for the obligations of Municipal Series Trust, and has full voting rights. The Class A, Class B, Class C, and Class D shares issued by the National Portfolio are substantially similar to the Class A, Class B, Class C, and Class D shares issued by each State Fund, except that (i) the shares of the National Portfolio are common stock in a series of a Maryland corporation and the shares of a State Fund are beneficial interests in a series of a Massachusetts business trust, (ii) the account maintenance fees for Class D shares of the National Portfolio are higher than the account maintenance fees for Class D shares of each State Fund and (iii) the distribution fees for Class B and Class C shares of the National Portfolio are higher than the distribution fees for Class B and Class C shares of each State Fund. See “Summary—Fee Tables.”

        Shareholder Inquiries.    Shareholder inquiries with respect to each State Fund and the National Portfolio may be addressed to the respective Fund by telephone at (609) 282-2800 or at the address set forth on the cover page of this Proxy Statement and Prospectus.

THE REORGANIZATION

General

        Under the Agreement and Plan (attached hereto as Exhibit I), the National Portfolio will acquire substantially all of the assets, and will assume substantially all of the liabilities, of each State Fund, and will simultaneously distribute to each State Fund shares of common stock of the National Portfolio. Such shares will then be distributed on a proportionate basis to the shareholders of the applicable State Fund in liquidation of such Fund.

        Generally, the assets transferred by each State Fund to the National Portfolio will equal all investments of such State Fund held in its portfolio as of the Valuation Time (as defined below) and all other assets of such State Fund as of such time.

        Each State Fund will distribute shares of the National Portfolio received by it pro rata to its shareholders in return for such shareholders’ proportionate interest in such State Fund. The shares of the National Portfolio received by the shareholders of a State Fund will be of the same class and have the same aggregate net asset value as each such shareholder’s interest in the respective State Fund as of the Valuation Time. (See “Terms of the Agreement and Plan of Reorganization—Valuation of Assets and Liabilities” for information concerning the calculation of net asset value.) Such distribution of the shares of the National Portfolio will be accomplished by opening new accounts on the books of Municipal Bond Fund in the names of the shareholders of each State Fund, including shareholders holding shares of a State Fund in certificate form, and transferring to those shareholders’ accounts the shares of common stock of the National Portfolio representing such shareholders’ interest previously credited to the account of the respective State Fund. Shareholders holding shares of a State Fund in certificate form may receive certificates representing the shares of the National Portfolio credited to their account in respect of such shares of a State Fund by sending the certificates to the Transfer Agent accompanied by a written request for such exchange.

        Since the shares of the National Portfolio will be issued at net asset value, and the shares of each State Fund will be valued at net asset value, the holders of shares of each State Fund will not be diluted as a result of any State Fund Acquisition. However, a shareholder of a State Fund will hold a lower ownership percentage in the Combined Fund after a State Fund Acquisition than such shareholder currently holds in the applicable State Fund.

        Under the Agreement and Plan, the failure of the shareholders of any State Fund to approve the Agreement and Plan as described herein will not affect the ability of any other State Fund to proceed with the Reorganization. The consummation of any State Fund Acquisition is not contingent upon the consummation of any other State Fund Acquisition.

Procedure

        On December 14, 2001, the Board of Municipal Series Trust, including all of the Board Members who are not “interested persons” of Municipal Series Trust as defined by the Investment Company Act, unanimously approved the Agreement and Plan and the submission of the Agreement and Plan to the shareholders of each State Fund for their approval. The Board of Municipal Bond Fund, including all of the Board Members who are not “interested persons” of Municipal Bond Fund as defined by the Investment Company Act, unanimously approved the Agreement and Plan on November 29, 2001.

        If the shareholders of a State Fund approve the Agreement and Plan at the applicable Meeting, all required regulatory approvals are obtained and certain other conditions are either met or waived, it is presently anticipated that the applicable State Fund Acquisition will take place as soon as practicable after such shareholder approval.

        The Board of Municipal Series Trust recommends that the shareholders of each State Fund approve the Agreement and Plan.

Terms of the Agreement and Plan of Reorganization

        The following is a summary of the significant terms of the Agreement and Plan of Reorganization. This summary is qualified in its entirety by reference to the Agreement and Plan of Reorganization, attached hereto as Exhibit I.

        Valuation of Assets and Liabilities.    The assets of a State Fund and the assets of the National Portfolio will be valued as of the close of business on the NYSE on the business day prior to the date on which the applicable State Fund Acquisition takes place (the “Valuation Time”). The assets of each State Fund and the assets of the National Portfolio will be valued according to the procedures set forth under “Determination of Net Asset Value” in the Municipal Bond Fund Statement. These procedures are identical to those used by Municipal Series Trust to value the assets of each State Fund. Purchase orders for shares of a State Fund that have not been confirmed as of the Valuation Time will be treated as assets of such State Fund for purposes of the applicable State Fund Acquisition; redemption requests with respect to shares of a State Fund which have not settled as of the Valuation Time will be treated as liabilities of such State Fund for purposes of the applicable State Fund Acquisition.

        Distribution of Shares of the National Portfolio.    On the business day on which the applicable State Fund Acquisition takes place (the “Closing Date”), Municipal Bond Fund will issue to the State Fund a number of shares of the National Portfolio with an aggregate net asset value equal to the value of the assets of such State Fund acquired by the National Portfolio, reduced by the amount of liabilities of such State Fund assumed by the National Portfolio. As soon as practicable after the Closing Date, a State Fund will distribute the shares of the National Portfolio received by it pro rata to its shareholders in proportion to such shareholders’ interest in that State Fund. The shares of the National Portfolio received by the shareholders of a State Fund will be of the same class and have the same aggregate net asset value as the shares of that State Fund held by such shareholder as of the Valuation Time.

        Expenses.    The expenses of a State Fund Acquisition that are directly attributable to a State Fund and the conduct of its business will be deducted from its assets as of the Valuation Time. These expenses are expected to include, among other things, the expenses incurred in preparing, printing and mailing the proxy materials to be used in connection with the applicable Meeting, the expenses related to the solicitation of proxies to be voted at the applicable Meeting, and the expenses of printing the N-14 Registration Statement. The expenses of the Reorganization that are directly attributable to Municipal Bond Fund and the conduct of its business will be deducted from the assets of the National Portfolio as of the Valuation Time. These expenses are expected to include the costs of printing sufficient copies of the Municipal Bond Fund Prospectus and the most recent annual report of Municipal Bond Fund to accompany this Proxy Statement and Prospectus. Certain additional expenses of the Reorganization, including expenses incurred in connection with obtaining an opinion of counsel with respect to the tax consequences of any State Fund Acquisition or the Reorganization, the preparation of the Agreement and Plan, legal fees, transfer agent fees and audit fees, will be borne equally by each Fund. The aggregate expenses of the Reorganization attributable to Municipal Bond Fund are currently estimated to be $50,608. The aggregate expenses of the Reorganization attributable to each State Fund are estimated below:

State Fund	Estimated Aggregate Expenses
Arizona Fund	$48,019
Connecticut Fund	47,150
Maryland Fund	44,750
Massachusetts Fund	49,268
Michigan Fund	52,489
Minnesota Fund	47,603
North Carolina Fund	47,444
Ohio Fund	53,370
Texas Fund	46,329

        Required Approvals.    Consummation of each State Fund Acquisition requires, among other things, (i) the affirmative vote of the shareholders of each State Fund, voting together as a single class, representing two-thirds of the outstanding shares entitled to be voted thereon, and (ii) the affirmative vote of Class B, Class C, and Class D shareholders of each State Fund, each voting separately as a single class, representing two-thirds of the outstanding Class B, Class C, and Class D shares entitled to be voted thereon. Under the Agreement and Plan, the failure of any State Fund’s shareholders to approve the Agreement and Plan will not affect the ability of the other State Funds to proceed with their State Fund Acquisition. The Board may amend the Agreement and Plan to change the terms of a State Fund Acquisition at any time prior to the approval thereof by the shareholders of the applicable State Fund. The consummation of each State Fund Acquisition is also conditioned upon the receipt of certain regulatory approvals as well as an opinion of counsel relating to the tax-free treatment of the transaction.

        Termination of the State Funds.    After a State Fund Acquisition, the Board of Municipal Series Trust will take action to: (a) terminate such State Fund as a separate series of Municipal Series Trust in accordance with the Charter of Municipal Series Trust, and (b) terminate such State Fund’s registration under the Securities Act.

        Amendments and Conditions.    The Agreement and Plan may be amended at any time prior to the Closing Date with respect to any of the terms therein. The obligations of Municipal Series Trust and Municipal Bond Fund pursuant to the Agreement and Plan are subject to various conditions, including a registration statement on Form N-14 becoming effective, approval of each State Fund Acquisition by shareholders of the applicable State Fund as described herein, an opinion of counsel being received as to tax matters, an opinion of counsel being received as to securities matters and the continuing accuracy of various representations and warranties of Municipal Series Trust and Municipal Bond Fund being confirmed by the respective parties. The Board may amend the Agreement and Plan to change the terms of a State Fund Acquisition at any time prior to the approval thereof by the shareholders of the applicable State Fund.

        Termination, Postponement and Waivers.    The Agreement and Plan may be terminated, and any State Fund Acquisition abandoned at any time, whether before or after adoption thereof by the shareholders of the applicable State Fund, prior to the Closing Date, or the Closing Date may be postponed (i) by mutual consent of the Board of Municipal Series Trust and the Board of Municipal Bond Fund; (ii) by the Board of Municipal Series Trust if any condition of the obligations of Municipal Series Trust has not been fulfilled or waived by such Board; or (iii) by the Board of Municipal Bond Fund if any condition of the obligations of Municipal Bond Fund has not been fulfilled or waived by such Board.

Potential Benefits to Shareholders of each Fund as a Result of a State Fund Acquisition or the Reorganization

        FAM and the Board of Municipal Series Trust have determined that the shareholders of each Fund are likely to benefit from the Reorganization. First, following the applicable State Fund Acquisition, shareholders of each State Fund will remain invested in an open-end fund that seeks to provide income exempt from Federal income taxes. In addition, shareholders of each Fund are likely to experience certain additional benefits as a result of the Reorganization, including lower expenses per share, economies of scale, greater investment diversification and greater flexibility in portfolio management. See “Comparison of the Funds—Redemption of Shares” and “—Additional Information—Shareholder Services.”

        Specifically, after a State Fund Acquisition or the Reorganization, on a pro forma basis, it is expected that the investment advisory fee rate for the Combined Fund will be lower than the investment advisory fee rate for each State Fund. After a State Fund Acquisition or the Reorganization, the total operating expense ratio of the Combined Fund, as a percentage of its net assets, is also expected to be lower than the current total operating expense ratio for each State Fund (including any voluntary waiver of investment advisory fees due from the Connecticut Fund or the Maryland Fund). In the past, FAM voluntarily waived a portion of the investment advisory fees payable by the Connecticut Fund and the Maryland Fund; however, FAM is not obligated to waive its fees and may reduce or discontinue such waivers at any time without notice. Also, after the Reorganization, the total operating expense ratio of the Combined Fund, as a percentage of its net assets, is expected to be lower than the current total operating expense ratio of the National Portfolio. These lower total operating expense ratios are expected to be achieved because certain fixed costs, such as costs of printing shareholder reports and proxy statements, legal expenses, audit fees, registration fees, mailing costs and other expenses, would be spread across the larger asset base of the Combined Fund. In addition, since each State Fund invests primarily in State Municipal Bonds of its applicable State, and the National Portfolio may invest in Municipal Bonds of any State, shareholders of each State Fund will experience greater investment diversification as a result of the applicable State Fund Acquisition. FAM expects that the benefits from a State Fund Acquisition or the Reorganization to shareholders of each State Fund will more than offset: (a) the higher account maintenance fees for Class D shares of the National Portfolio, (b) the higher distribution fees for Class B and Class C shares of the National Portfolio, and (c) any tax benefits lost because such shareholders will no longer own shares in a single-state, tax-exempt fund.

        To illustrate the potential economies of scale, the tables below show the total operating expense ratio for each class of shares for each State Fund and the National Portfolio as of June 30, 2001 and, assuming each State Fund Acquisition and the Reorganization had taken place on June 30, 2001, the estimated pro forma total operating expense ratio for each class of shares of the Combined Fund (in each case, including class specific distribution fees and account maintenance fees with respect to all Funds and without giving effect to the waiver of a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund).

Total Operating Expense Ratios

Fund	Class A	Class B	Class C	Class D
Arizona Fund	1.00%	1.51%	1.61%	1.10%
Connecticut Fund*	0.97%	1.48%	1.57%	1.07%
Maryland Fund*	1.36%	1.87%	1.97%	1.47%
Massachusetts Fund	1.02%	1.53%	1.63%	1.13%
Michigan Fund	1.04%	1.55%	1.65%	1.14%
Minnesota Fund	1.03%	1.53%	1.64%	1.13%
North Carolina Fund	1.11%	1.63%	1.73%	1.24%
Ohio Fund	1.03%	1.54%	1.65%	1.13%
Texas Fund	1.13%	1.64%	1.75%	1.25%
National Portfolio	0.58%	1.34%	1.39%	0.83%

* In the past, FAM voluntarily waived a portion of the investment advisory fees due from the Connecticut Fund and the Maryland Fund. The Total Operating Expense Ratio does not give effect to such waivers because FAM may discontinue or reduce such waivers of investment advisory fees at any time without notice.

Combined Fund Pro Forma Total Operating Expense Ratios*

	Class A	Class B	Class C	Class D
Assuming Only Arizona
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Connecticut
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Maryland
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Massachusetts
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Michigan
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Minnesota
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only North Carolina
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Ohio
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming Only Texas
Fund Acquired	0.58%	1.34%	1.39%	0.83%
Assuming All State Funds
Acquired	0.57%	1.33%	1.38%	0.82%

* Assumes the applicable State Fund Acquisition and the Reorganization had taken place on June 30, 2001.

        The following table sets forth the net assets of each State Fund as of its last three fiscal year ends.

	Net Assets
	Fiscal Year End 1999*	Fiscal Year End 2000*	Fiscal Year End 2001*
Arizona Fund	$60,782,256	$51,739,709	$53,194,418
Connecticut Fund	64,867,396	52,702,341	60,087,800
Maryland Fund	30,936,702	24,008,121	27,372,688
Massachusetts Fund	58,528,668	46,559,733	45,771,025
Michigan Fund	71,905,285	52,493,753	47,135,048
Minnesota Fund	47,244,549	39,935,470	40,762,931
North Carolina Fund	47,441,011	37,389,903	35,380,574
Ohio Fund	68,633,044	50,096,227	45,717,243
Texas Fund	55,049,048	37,690,786	33,059,355

* The fiscal year end for each State Fund is July 31.

        The preceding table illustrates that (i) the net assets of several of the State Funds have decreased over the past several years and (ii) in all cases, net assets for each State Fund as of their fiscal year ends in 2001 are below the net assets for each State Fund as of their fiscal year ends in 1999. FAM anticipates that if this decrease in net assets continues, each State Fund might experience higher operating expense ratios. Conversely, FAM anticipates that the State Funds and the National Portfolio as a combined entity might experience certain economies of scale, which might in turn result in a substantially lower total operating expense ratio for shareholders of each State Fund and a lower operating expense ratio for shareholders of the Combined Fund. Absent a State Fund Acquisition, the applicable State Fund might experience the opposite result, that is, a higher total operating expense ratio due to a continuing reduction in an already relatively small asset base. Although no assurance can be given that the foregoing would in fact occur, FAM believes that the economies of scale that may be realized as a result of each State Fund Acquisition and the Reorganization would be beneficial to shareholders of each State Fund.

        Based on the foregoing, the Board of Municipal Series Trust and the Board of Municipal Bond Fund concluded that each State Fund Acquisition presents no significant risks or costs (including legal, accounting and administrative costs) that would outweigh the benefits described above. In approving each State Fund Acquisition, the Board of Municipal Series Trust and the Board of Municipal Bond Fund determined that the interests of existing shareholders of each State Fund and the existing shareholders of the National Portfolio, respectively, would not be diluted as a result of the applicable State Fund Acquisition.

Tax Consequences of each State Fund Acquisition

        Summary.    Municipal Series Trust and Municipal Bond Fund will receive an opinion of counsel with respect to each State Fund Acquisition to the effect that, among other things, neither the State Funds nor the National Portfolio will recognize any gain or loss on the transaction, and no shareholder of a State Fund will recognize any gain or loss upon receipt of shares of the National Portfolio in a State Fund Acquisition.

        General.    Each State Fund Acquisition has been structured with the intention that it qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the “Code”). Each Fund has elected and qualified for the special tax treatment afforded RICs under the Code, and the National Portfolio intends to continue to so qualify after each State Fund Acquisition. The Funds will receive an opinion of counsel to the effect that for Federal income tax purposes: (i) the transfer of substantially all of the assets of each State Fund to the National Portfolio and the simultaneous distribution of shares of the National Portfolio as provided in the Agreement and Plan will each constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and the National Portfolio and the State Funds each will be deemed to be a “party” to a reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized by any State Fund as a result of the asset transfer in return for shares of the National Portfolio or on the distribution of the shares of the National Portfolio to shareholders of such State Fund under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized to the National Portfolio on the receipt of assets of any State Fund in return for shares of the National Portfolio; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the shareholders of any State Fund on the receipt of shares of common stock of the National Portfolio in return for their respective State Fund shares; (v) in accordance with Section 362(b) of the Code, the tax basis of assets of each State Fund in the hands of the National Portfolio will be the same as the tax basis of such assets in the hands of the respective State Fund immediately prior to the consummation of the applicable State Fund Acquisition; (vi) in accordance with Section 358 of the Code, immediately after the applicable State Fund Acquisition, the tax basis of the shares of the National Portfolio received by the shareholders of a State Fund in the applicable State Fund Acquisition will be equal to the tax basis of the shares of the respective State Fund surrendered in the Reorganization; (vii) in accordance with Section 1223 of the Code, a shareholder’s holding period for the shares of the National Portfolio will be determined by including the period for which such shareholder held the shares of their respective State Fund, provided, that such shares of a State Fund were held as a capital asset; (viii) in accordance with Section 1223 of the Code, the National Portfolio’s holding period with respect to the assets of any State Fund transferred will include the period for which such assets were held by the State Funds; and (ix) the taxable year of each State Fund will end on the effective date of the applicable State Fund Acquisition, and pursuant to Section 381(a) of the Code and regulations thereunder, the National Portfolio will succeed to and take into account certain tax attributes of the State Funds, such as earnings and profits, capital loss carryovers and method of accounting.

        Under Section 381(a) of the Code, the National Portfolio will succeed to and take into account certain tax attributes of each State Fund including, but not limited to, earnings and profits, any net operating loss carryovers, any capital loss carryovers and method of accounting. The Code, however, contains special limitations with regard to the use of net operating losses, capital losses, and other similar items in the context of certain reorganizations, including a tax-free reorganization pursuant to Section 368(a)(1)(C) of the Code, which could reduce the benefit of these attributes to the National Portfolio. As of September 30, 2001, each State Fund other than the Minnesota Fund had net realized capital losses. As of that date, each Fund also had net unrealized capital gains. As a result of the Reorganization, shareholders of the State Funds may benefit from the ability of the Combined Fund to use the net realized capital losses of the State Funds to offset future net realized capital gains, if any, of the Combined Fund.

        Shareholders should consult their tax advisers regarding the effect of a State Fund Acquisition in light of their individual circumstances. As the foregoing relates only to Federal income tax consequences, shareholders also should consult their tax advisers as to the foreign, state and local tax consequences of each State Fund Acquisition. As set forth under the heading “Investment Objectives and Policies—Tax Information,” dividends received by shareholders of the Combined Fund will not be exempt from State Taxes.

        Status as a Regulated Investment Company.    Each State Fund and the National Portfolio have elected and qualified to be taxed as RICs under Sections 851–855 of the Code, and, after each State Fund Acquisition, the National Portfolio intends to continue to operate so as to qualify as a RIC.

Appraisal Rights

        Shareholders of the State Funds are not entitled to appraisal rights in connection with any State Fund Acquisition.

Capitalization

        The following tables set forth as of June 30, 2001: (i) the capitalization of each State Fund, (ii) the capitalization of the National Portfolio and (iii) the pro forma capitalization of the Combined Fund as adjusted to give effect to the Reorganization.

Capitalization of Each State Fund and the National Portfolio

and Pro Forma Capitalization of the Combined Fund as of June 30, 2001

Fund and Class	Total Net Assets	Shares Outstanding	Net Asset Value Per Share
Arizona Fund
Class A	$11,470,561	1,087,604	$10.55
Class B	$34,094,912	3,232,674	$10.55
Class C	$  1,508,990	143,187	$10.54
Class D	$  6,010,713	570,416	$10.54
Connecticut Fund
Class A	$  6,852,524	651,337	$10.52
Class B	$40,419,386	3,841,406	$10.52
Class C	$  5,589,921	530,907	$10.53
Class D	$  5,713,519	542,916	$10.52
Maryland Fund
Class A	$  1,737,489	178,229	$  9.75
Class B	$21,301,233	2,184,493	$  9.75
Class C	$  2,134,644	218,849	$  9.75
Class D	$  1,709,256	175,373	$  9.75
Massachusetts Fund
Class A	$  3,858,557	365,688	$10.55
Class B	$35,636,611	3,377,554	$10.55
Class C	$  2,519,498	239,008	$10.54
Class D	$  3,220,182	305,136	$10.55
Michigan Fund
Class A	$  7,919,848	801,727	$  9.88
Class B	$33,630,745	3,404,349	$  9.88
Class C	$  3,251,077	329,095	$  9.88
Class D	$  2,545,093	257,859	$  9.87
Minnesota Fund
Class A	$  4,209,283	395,799	$10.63
Class B	$31,779,531	2,987,560	$10.64
Class C	$  2,301,484	216,330	$10.64
Class D	$  2,092,450	196,586	$10.64
North Carolina Fund
Class A	$  6,375,803	609,831	$10.46
Class B	$23,007,037	2,200,120	$10.46
Class C	$  1,694,860	162,105	$10.46
Class D	$  3,871,260	370,145	$10.46
Ohio Fund
Class A	$  6,089,218	593,487	$10.26
Class B	$32,694,487	3,186,508	$10.26
Class C	$  3,211,535	313,030	$10.26
Class D	$  4,038,476	393,732	$10.26

Fund and Class	Total Net Assets	Shares Outstanding	Net Asset Value Per Share
Texas Fund
Class A	$    4,303,778	427,001	$10.08
Class B	$  26,518,674	2,631,028	$10.08
Class C	$        693,946	68,775	$10.09
Class D	$    1,369,850	135,701	$10.09
National Portfolio
Class A	$653,685,063	64,446,120	$10.14
Class B	$227,592,229	22,446,024	$10.14
Class C	$  31,879,825	3,142,464	$10.14
Class D	$124,081,663	12,228,620	$10.15
Combined Fund*
Class A	$706,502,124	69,674,766	$10.14
Class B	$506,674,845	49,967,933	$10.14
Class C	$  54,785,780	5,402,937	$10.14
Class D	$154,652,462	15,236,696	$10.15

*  Total Net Assets and Net Asset Value Per Share include the aggregate value of the net assets of the National Portfolio as of June 30, 2001 and the aggregate value of the net assets of each State Fund that would have been transferred to the National Portfolio had the Reorganization been consummated on June 30, 2001. The data does not take into account expenses incurred in connection with each State Fund Acquisition or the actual number of shares that would have been issued to each State Fund. No assurance can be given as to how many shares of the National Portfolio the shareholders of a State Fund will receive on the date of a State Fund Acquisition. The foregoing should not be relied upon to reflect the number of shares of the National Portfolio that actually will be received by the shareholder of that State Fund on or after such date.

ITEM 2:    ELECTION OF BOARD MEMBERS

        At the Meeting, the Board Member nominees of Municipal Series Trust will be elected to serve until their successors have been duly elected and qualified or until their earlier resignation or removal. Regardless of whether the shareholders of a State Fund approve the Agreement and Plan as described herein, the Board of Municipal Series Trust elected at the Meetings will continue to serve as the Board Members of Municipal Series Trust until their successors have been duly elected and qualified or until their earlier resignation or removal. If the shareholders of a State Fund approve the Agreement and Plan and the applicable State Fund Acquisition is consummated, they will become shareholders of the National Portfolio. The Board of Directors of Municipal Bond Fund is responsible for the overall supervision of the operations of the National Portfolio.

        Shareholders of the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund, the other series of Municipal Series Trust, will receive a separate Notice of Special Meetings of Shareholders and a separate Proxy Statement with respect to the election of the Board of Municipal Series Trust.

        It is intended that all properly executed proxies will be voted (unless such authority has been withheld in the proxy or revoked as described herein) “FOR” the following Board Member nominees: James H. Bodurtha, Terry K. Glenn, Joe Grills, Herbert I. London, André F. Perold, Roberta Cooper Ramo, Robert S. Salomon, Jr., Melvin R. Seiden, and Stephen B. Swensrud. Certain biographical and other information relating to the Board Member nominees is set forth in Exhibit II to this Proxy Statement and Prospectus.

        The Board of Municipal Series Trust knows of no reason why any of the Board Member nominees listed in Exhibit II will be unable to serve, but in the event of any such unavailability, the proxies received will be voted for such substitute nominee or nominees as the Board of Municipal Series Trust may recommend.

        Committee and Board Meetings.    The Board of Municipal Series Trust has a standing Audit and Nominating Committee (the “Committee”), which consists of Board Members who are not “interested persons” of Municipal Series Trust within the meaning of the Investment Company Act. The principal responsibilities of the Committee are to: (i) recommend to the Board the selection, retention or termination of Municipal Series Trust’s independent auditors; (ii) review with the independent auditors the scope, performance and anticipated cost of their audit; (iii) discuss with the independent auditors certain matters relating to Municipal Series Trust’s financial statements, including any adjustment to such financial statements recommended by such independent auditors, or any other results of any audit; (iv) ensure that the independent auditors submit on a periodic basis a formal written statement with respect to their independence, discuss with the independent auditors any relationships or services disclosed in the statement that may impact the objectivity and independence of Municipal Series Trust’s independent auditors and recommend that the Board take appropriate action in response thereto to satisfy itself of the independent auditor’s independence; and (v) consider the comments of the independent auditors and management’s responses thereto with respect to the quality and adequacy of Municipal Series Trust’s accounting and financial reporting policies and practices and internal controls. The Board of Municipal Series Trust has adopted a written charter for the Committee, a copy of which is attached as Exhibit V. The Committee also reviews and nominates candidates to serve as non-interested Board Members. The Committee generally will not consider nominees recommended by shareholders of the State Funds. The non-interested Board Members have retained independent legal counsel to assist them in connection with these duties.

        During each State Fund’s most recently completed fiscal year, Municipal Series Trust held 10 Board meetings and four Committee meetings. Each of the Board Members then in office attended at least 75% of the total number of meetings of the Board of Municipal Series Trust held during the fiscal year and, if a member, attended at least 75% of the total number of meetings of the Committee held during the period for which he or she served.

        Interested Persons.    Municipal Series Trust considers Mr. Glenn to be an “interested person” of Municipal Series Trust within the meaning of Section 2(a)(19) of the Investment Company Act because of the positions he holds with FAM and its affiliates. Mr. Glenn is the President of Municipal Series Trust.

        Compensation of Board Members.    FAM pays all compensation to all officers of Municipal Series Trust and all Board Members of Municipal Series Trust who are affiliated with Merrill Lynch & Co., Inc. (“ML & Co.”) or its subsidiaries. Municipal Series Trust pays fees to each Board Member who is not affiliated with the FAM (each, a “non-affiliated Board Member”) for service to the Municipal Series Trust. Each non-affiliated Board Member receives an aggregate annual retainer of $100,000 for his or her services to multiple investment companies advised by FAM or its affiliate, MLIM (“MLIM/FAM-advised funds”). The portion of the annual retainer allocated to each MLIM/FAM-advised fund is determined quarterly based on the relative net assets of each such fund. In addition, each non-affiliated Board Member receives a fee per in-person Board meeting attended and a fee per in-person Committee meeting attended. The annual per meeting fees paid to each non-affiliated Board Member aggregate $60,000 for all MLIM/FAM-advised funds for which that Board Member serves and are allocated equally among those funds. Municipal Series Trust also reimburses the non-affiliated Board Members for actual out-of-pocket expenses relating to attendance at meetings.

        The following table shows the compensation earned by the non-affiliated Board Members of Municipal Series Trust from Municipal Series Trust for the fiscal year ended July 31, 2001, and the aggregate compensation paid to the Board Member nominees from all MLIM/FAM-advised funds, for the calendar year ended December 31, 2001.

Name	Position with Trust	Compensation From Trust	Pension or Retirement Benefits Accrued as Part of Trust Expense	Estimated Annual Benefits upon Retirement	Aggregate Compensation from Trust and Other MLIM/FAM- Advised Funds
James H. Bodurtha	Board Member	$29,916	None	None	$160,000
Joe Grills*	Nominee	N/A	N/A	N/A	$220,000
Herbert I. London	Board Member	$29,916	None	None	$160,000
Joseph L. May**	Board Member	$29,916	None	None	$160,000
Andre F. Perold	Board Member	$29,916	None	None	$160,000
Roberta Cooper Ramo	Board Member	$29,916	None	None	$160,000
Robert S. Salomon, Jr.*	Nominee	N/A	N/A	N/A	$220,000
Melvin R. Seiden*	Nominee	N/A	N/A	N/A	$220,000
Stephen B. Swensrud*	Nominee	N/A	N/A	N/A	$220,000

* Not presently a Board Member of Municipal Series Trust but nominated to be elected a Board Member of Municipal Series Trust at the Meetings.

** Joseph L. May retired as a Board Member on December 31, 2001.

        After all of the Board Member nominees are elected to the Board of Municipal Series Trust, Municipal Series Trust will pay each non-affiliated Board Member an annual fee for serving as a Board Member plus a fee for each Board meeting attended in person. Municipal Series Trust will also compensate each member of the Committee with an annual fee, plus a fee for each Committee meeting attended in person. Municipal Series Trust will continue to reimburse the non-affiliated Board Members for actual out-of-pocket expenses relating to attendance at meetings. The estimated aggregate compensation to be paid by Municipal Series Trust to the non-affiliated Board Members for a 12-month period under this compensation schedule is $45,000, assuming that (a) all of the Board Member nominees are elected to the Board of Municipal Series Trust, (b) Municipal Series Trust holds four Board meetings and four Committee meetings, and (c) each Board Member attends each such meeting in person.

        Officers of Municipal Series Trust.     Information relating to the officers of Municipal Series Trust is set forth in Exhibit II to this Proxy Statement and Prospectus. Officers of Municipal Series Trust and Municipal Bond Fund are elected and appointed by the Board of Municipal Series Trust and Municipal Bond Fund, respectively, and hold office until they resign, are removed or are otherwise disqualified to serve.

        Share Ownership.    Set forth in Exhibit II to this Proxy Statement and Prospectus is the following information for each Board Member nominee: (i) the number of shares of each State Fund owned; (ii) the aggregate dollar range of equity in each Series; and (iii) the aggregate dollar range of securities in all registered funds overseen by the Board Member nominee in the Merrill Lynch family of funds. Also set forth in Exhibit II is information for each Board Member nominee and his or her immediate family members relating to securities owned beneficially or of record in ML & Co. As of the Record Date, the Board Members and officers of Municipal Series Trust as a group owned an aggregate of less than 1% of the common stock of each State Fund outstanding at such date. At such date, Mr. Glenn, President and a Board Member of Municipal Series Trust, and the other officers of Municipal Series Trust, owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co.

        The Board of Municipal Series Trust recommends that its shareholders vote FOR the election of the Board Member nominees.

INFORMATION CONCERNING THE SPECIAL MEETINGS

Date, Time and Place of Meetings

        The Meetings will be held at the offices of FAM, 800 Scudders Mill Road, Plainsboro, New Jersey on Monday, March 18, 2002, at the following times:

State Fund	Meeting Time
Arizona Fund	9:30 a.m. Eastern time
Connecticut Fund	10:00 a.m. Eastern time
Maryland Fund	10:30 a.m. Eastern time
Massachusetts Fund	11:00 a.m. Eastern time
Michigan Fund	11:30 a.m. Eastern time
Minnesota Fund	12:00 p.m. Eastern time
North Carolina Fund	12:30 p.m. Eastern time
Ohio Fund	1:00 p.m. Eastern time
Texas Fund	1:30 p.m. Eastern time

Solicitation, Revocation and Use of Proxies

        A shareholder executing and returning a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a notice of revocation to the Secretary of Municipal Series Trust. Although mere attendance at a Meeting for a State Fund in which you own shares will not revoke a proxy, a shareholder present at such a Meeting may withdraw his or her proxy and vote in person.

        All shares represented by properly executed proxies, unless such proxies previously have been revoked, will be voted at the applicable Meeting in accordance with the directions on the proxies; if no direction is indicated on a properly executed proxy, such shares will be voted (i) “FOR” approval of the Agreement and Plan, and (ii) “FOR” the election of the Board of Municipal Series Trust.

        It is not anticipated that any other matters will be brought before the Meetings. If, however, any other business properly is brought before any Meeting, proxies will be voted in accordance with the judgment of the persons designated on such proxies.

Record Date and Outstanding Shares

        Only holders of record of shares of a State Fund as of the close of business on the Record Date are entitled to vote at the applicable Meeting or any adjournment thereof. As of the close of business on the Record Date, the number of shares of each class issued, outstanding and entitled to vote is set forth below for each State Fund:

State Fund	Class A	Class B	Class C	Class D
Arizona Fund
Connecticut Fund
Maryland Fund
Massachusetts Fund
Michigan Fund
Minnesota Fund
North Carolina Fund
Ohio Fund
Texas Fund

Security Ownership of Certain Beneficial Owners and Management of the State Funds and the National Portfolio

        As of the Record Date, the Board Members and officers of Municipal Series Trust as a group (17 persons) owned an aggregate of less than 1% of the outstanding shares of each State Fund and owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co.

        As of the Record Date, the Board Members and officers of Municipal Bond Fund as a group (15 persons) owned an aggregate of less than 1% of the outstanding shares of the National Portfolio and owned less than 1% of the outstanding shares of common stock of ML & Co.

        To the knowledge of Municipal Series Trust, as of the Record Date, except as set forth in Exhibit IV to this Proxy Statement and Prospectus, no person or entity owned of record or beneficially 5% or more of any class of the outstanding shares of any State Fund.

        To the knowledge of Municipal Bond Fund, as of the Record Date, except as set forth in Exhibit IV to this Proxy Statement and Prospectus no person or entity owned of record or beneficially 5% or more of any class of the outstanding shares of the National Portfolio.

Voting Rights and Required Vote

        For purposes of this Proxy Statement and Prospectus, each share of each class of a State Fund’s outstanding shares is entitled to one vote as described herein. Assuming a quorum is present at the applicable Meeting of the shareholders of a State Fund, shareholder approval of the Agreement and Plan requires: (i) the affirmative vote of the shareholders of each State Fund, voting together as a single class, representing two-thirds of the outstanding shares entitled to be voted thereon, and (ii) the affirmative vote of Class B, Class C, and Class D shareholders of each State Fund, each voting separately as a single class, representing two-thirds of the outstanding Class B, Class C, and Class D shares entitled to be voted thereon. Under the Agreement and Plan, the failure of the shareholders of a State Fund to approve the Agreement and Plan will not affect the ability of any other State Fund to proceed with its State Fund Acquisition. Consummation of each State Fund Acquisition is also conditioned upon, among other things, the receipt of certain regulatory approvals as well as an opinion of counsel relating to the tax-free treatment of the transaction. The consummation of any State Fund Acquisition is not contingent upon the consummation of any other State Fund Acquisition.

        Assuming a quorum with respect to each Series of Municipal Series Trust is present at the Meetings, the election of the Board of Municipal Series Trust requires the affirmative vote of a majority of the shares of each Series represented at the applicable Meeting. This Proxy Statement and Prospectus is being used to solicit the vote of the shareholders of each State Fund with respect to the approval of the Agreement and Plan and the election of the Board of Municipal Series Trust. The vote of the shareholders of the Florida Fund, the New Jersey Fund, the New York Fund, and the Pennsylvania Fund with respect to the election of the Board of Municipal Series Trust is being solicited by a separate Proxy Statement.

        A quorum for purposes of a Meeting of the shareholders of a State Fund consists of one-third of the shares of the applicable State Fund and one-third of the shares of each of Class B, Class C, and Class D of the applicable State Fund entitled to vote at the Meeting, present in person or by proxy. If, by the time scheduled for such a Meeting, the required quorum of a State Fund’s shareholders is not present or if a quorum is present but sufficient votes to approve or disapprove the Agreement and Plan or elect the Board of Municipal Series Trust are not received, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies from shareholders. Any such adjournment will require the affirmative vote of a majority of the shares of the applicable State Fund and a majority of the shares of each of Class B, Class C, and Class D of the applicable State Fund, present in person or by proxy and entitled to vote at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of any such adjournment if they determine that adjournment and additional solicitation are reasonable and in the interests of the shareholders of such State Fund.

ADDITIONAL INFORMATION

        The expenses of preparation, printing and mailing of the enclosed form of proxy, the accompanying Notice and this Proxy Statement and Prospectus will be borne by the applicable State Fund for its shareholders. The State Funds will reimburse banks, brokers and others for their reasonable expenses in forwarding proxy solicitation materials to the beneficial owners of its shares and will reimburse certain persons that may be employed for their reasonable expenses in assisting in the solicitation of proxies. See “The Reorganization—Terms of the Agreement and Plan of Reorganization—Expenses.”

        In order to obtain the necessary quorum at a Meeting of the shareholders of a State Fund, supplementary solicitation may be made by mail, telephone, telegraph or personal interview by the officers of the State Funds. Each State Fund has retained Georgeson Shareholder, 17 State Street, New York, New York 10004, to assist in the solicitation of proxies at a cost to each State Fund of approximately $[    ·    ] plus out-of-pocket expenses, which are estimated to be approximately $[    ·    ] per State Fund.

        Broker dealer firms, including Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), holding shares of a State Fund in “street name” for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares before the Meetings. Broker dealer firms, including Merrill Lynch, will not be permitted to vote without instructions with respect to the approval of the Agreement and Plan and the Reorganization. The State Funds understand that, under the rules of the NYSE, such broker-dealer firms may, without instructions from their customers and clients, grant authority to the proxies designated to vote on the election of the Board of Municipal Series Trust if no instructions have been received prior to the date specified in the broker-dealer firm’s request for voting instructions. Each State Fund will include shares held of record by broker-dealers as to which such authority has been granted in its tabulation of the total number of shares present for purposes of determining whether the necessary quorum of shareholders exists. Merrill Lynch has advised each State Fund that it intends to vote shares held in its name for which no instructions have been received, except as limited by agreement or applicable law, on the election of the Board of Municipal Series Trust in the same proportion as the votes received from beneficial owners of such State Fund shares for which instructions have been received, whether or not held in nominee name. Properly executed proxies that are returned but that are marked “abstain” or with respect to which a broker-dealer has received no instructions and therefore has declined to vote on the proposal (“broker non-votes”) will be counted as present for the purposes of determining a quorum. However, such abstentions and broker non-votes will have the same effect as a vote against approval of the Agreement and Plan and the Reorganization and against the election of the Board of Municipal Series Trust.

        The Board of Municipal Series Trust knows of no other matters to be presented at the Meetings. However, if other matters are presented for a vote at a Meeting or any adjournment thereof, the persons named as proxies will vote the shares represented by properly executed proxies in accordance with their best judgment on these matters.

        This Proxy Statement and Prospectus does not contain all of the information set forth in the registration statements and the exhibits relating thereto, which each State Fund and Municipal Bond Fund, respectively, have filed with the Commission under the Securities Act and the Investment Company Act, to which reference is hereby made.

        Each State Fund and Municipal Bond Fund file reports and other information with the Commission. Reports, proxy statements, registration statements and other information filed by each State Fund and Municipal Bond Fund can be inspected and copied at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Pacific Regional Office, at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including each State Fund and Municipal Bond Fund, that file electronically with the Commission.

LEGAL PROCEEDINGS

        There are no material legal proceedings to which any State Fund, the National Portfolio, Municipal Series Trust or Municipal Bond Fund is a party.

LEGAL OPINIONS

        Certain legal matters in connection with each State Fund Acquisition will be passed upon for the applicable State Fund by Sidley Austin Brown & Wood LLP , 875 Third Avenue, New York, New York 10022 and for the National Portfolio by Clifford Chance Rogers & Wells LLP , 200 Park Avenue, New York, New York 10166. Sidley Austin Brown & Wood LLP will rely as to matters of Massachusetts law on the opinion of Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110-1726. Clifford Chance Rogers & Wells LLP will rely as to matters of Maryland law on the opinion of Sidley Austin Brown & Wood LLP , 1501 K. Street, N.W., Washington, D.C. 20005. Certain tax matters in connection with each State Fund Acquisition will be passed upon for each Fund by Sidley Austin Brown & Wood LLP , 875 Third Avenue, New York, New York 10022, counsel to each State Fund and special tax counsel to the National Portfolio.

EXPERTS

        The financial highlights of the Funds included in this Proxy Statement and Prospectus have been so included in reliance on the reports of Deloitte & Touche LLP , independent auditors, given on their authority as experts in auditing and accounting. The principal business address of Deloitte & Touche LLP is Two World Financial Center, New York, New York 10281-1008. Deloitte & Touche LLP will serve as the independent auditors for the Combined Fund after the Reorganization.

SHAREHOLDERS’ MEETINGS

        Shareholders of the National Portfolio are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Board Members and any other matter submitted to a shareholder vote. Municipal Bond Fund does not intend to hold 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 Board Members; (ii) approval of a management or an investment advisory agreement; and (iii) approval of distribution arrangements. The Charter of Municipal Bond Fund does not require Municipal Bond Fund to hold an annual meeting of shareholders of the National Portfolio. The Charter of Municipal Series Trust does not require Municipal Series Trust to hold an annual meeting of shareholders of any State Fund. Municipal Bond Fund and Municipal Series Trust will be required, however, to call special meetings of shareholders of the National Portfolio and each State Fund, respectively, in accordance with the requirements of the Investment Company Act to seek approval of new management and advisory arrangements or of a change in the fundamental policies, objectives or restrictions of any Fund. Municipal Bond Fund and Municipal Series Trust also would be required to hold a shareholders’ meeting to elect new Board Members at such time as less than a majority of the Board Members holding office have been elected by shareholders. In addition, each State Fund may hold shareholder meetings for approval of certain other matters as required by the Charter of Municipal Series Trust. The by-laws of Municipal Bond Fund provide that a shareholders’ meeting may be called with respect to the National Portfolio at any time by a majority of the Board Members, the President, or on the written request of the holders of at least 10% of the outstanding shares of the National Portfolio entitled to vote at such meeting. The Charter of Municipal Series Trust provides that a shareholders’ meeting may be called with respect to any State Fund at any time by a majority of the Board Members of Municipal Series Trust and shall be called by any Board Member upon written request of shareholders of any State Fund holding in the aggregate not less than 10% of the outstanding shares of such State Fund having voting rights.

SHAREHOLDER PROPOSALS

        A shareholder proposal intended to be presented at any subsequent meetings of shareholders of a State Fund must be received by the applicable State Fund in a reasonable time before the solicitation relating to such meeting is to be made by the Board of Municipal Series Trust in order to be considered in that State Fund’s proxy statement and form of proxy relating to the meeting. Any shareholder of a State Fund who desires to bring a proposal at any subsequent meeting of the shareholders of the State Fund without including such proposal in the State Fund’s proxy statement relating to the meeting must deliver notice of such proposal to the State Fund in a reasonable time before the State Fund begins to print and mail the proxy solicitation materials to be used in connection with such meeting.

By Order of the Board of Trustees,

ALICE A. PELLEGRINO

Secretary

Merrill Lynch Multi-State Municipal Series Trust

EXHIBIT I

AGREEMENT AND PLAN OF REORGANIZATION

        THIS AGREEMENT AND PLAN OF REORGANIZATION (this “Agreement”) is made as of the [     ·    ] day of February, 2002, by and between Merrill Lynch Multi-State Municipal Series Trust, a Massachusetts business trust (“Municipal Series Trust”), on behalf of Merrill Lynch Arizona Municipal Bond Fund (the “Arizona Fund”), Merrill Lynch Connecticut Municipal Bond Fund (the “Connecticut Fund”), Merrill Lynch Maryland Municipal Bond Fund (the “Maryland Fund”), Merrill Lynch Massachusetts Municipal Bond Fund (the “Massachusetts Fund”), Merrill Lynch Michigan Municipal Bond Fund (the “Michigan Fund”), Merrill Lynch Minnesota Municipal Bond Fund (the “Minnesota Fund”), Merrill Lynch North Carolina Municipal Bond Fund (the “North Carolina Fund”), Merrill Lynch Ohio Municipal Bond Fund (the “Ohio Fund”), and Merrill Lynch Texas Municipal Bond Fund (the “Texas Fund”), each a series of Municipal Series Trust, and Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (“Municipal Bond Fund”) on behalf of the National Portfolio, a portfolio of Municipal Bond Fund (the “National Portfolio”).

PLAN OF REORGANIZATION

        The reorganization will comprise the following:

        (a)  (1) the acquisition by the National Portfolio of substantially all of the assets, and the assumption by the National Portfolio of substantially all of the liabilities, of the Arizona Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Arizona Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares (defined below) of the National Portfolio to the shareholders of the Arizona Fund in proportion to such shareholders’ interest in the Arizona Fund;

        (b)  (1) the acquisition by National Portfolio of substantially all of the assets, and the assumption by National Portfolio of substantially all of the liabilities, of the Connecticut Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Connecticut Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Connecticut Fund in proportion to such shareholders’ interest in the Connecticut Fund;

        (c)  (1) the acquisition by the National Portfolio of substantially all of the assets, and the assumption by the National Portfolio of substantially all of the liabilities, of the Maryland Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Maryland Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Maryland Fund in proportion to such shareholders’ interest in the Maryland Fund;

        (d)  (1) the acquisition by the National Portfolio of substantially all of the assets, and the assumption by the National Portfolio of substantially all of the liabilities, of the Massachusetts Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Massachusetts Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Massachusetts Fund in proportion to such shareholders’ interest in the Massachusetts Fund;

        (e)  (1) the acquisition by National Portfolio of substantially all of the assets, and the assumption by National Portfolio of substantially all of the liabilities, of the Michigan Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Michigan Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Michigan Fund in proportion to such shareholders’ interest in the Michigan Fund;

        (f)  (1) the acquisition by the National Portfolio of substantially all of the assets, and the assumption by the National Portfolio of substantially all of the liabilities, of the Minnesota Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Minnesota Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Minnesota Fund in proportion to such shareholders’ interest in the Minnesota Fund;

        (g)  (1) the acquisition by the National Portfolio of substantially all of the assets, and the assumption by the National Portfolio of substantially all of the liabilities, of the North Carolina Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the North Carolina Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the North Carolina Fund in proportion to such shareholders’ interest in the North Carolina Fund;

        (h)  (1) the acquisition by National Portfolio of substantially all of the assets, and the assumption by National Portfolio of substantially all of the liabilities, of the Ohio Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Ohio Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Ohio Fund in proportion to such shareholders’ interest in the Ohio Fund; and

        (i)  (1) the acquisition by the National Portfolio of substantially all of the assets, and the assumption by the National Portfolio of substantially all of the liabilities, of the Texas Fund, a series of Municipal Series Trust, (2) the issuance by Municipal Bond Fund of shares of common stock of the National Portfolio to the Texas Fund with an aggregate net asset value equal to the aggregate net value of the assets acquired by the National Portfolio, reduced by the amount of the liabilities assumed by the National Portfolio, and (3) the subsequent distribution of Corresponding Shares of the National Portfolio to the shareholders of the Texas Fund in proportion to such shareholders’ interest in the Texas Fund.

        Any transaction described in each of paragraphs (a), (b), (c), (d), (e), (f), (g), (h), and (i) above may be consummated upon and subject to the terms hereinafter set forth without the consummation of any other transaction described in any of those paragraphs. Any such transaction will be referred to herein individually or collectively as the “Reorganization.” The consummation of any Reorganization is not contingent upon the consummation of any other Reorganization. The Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund may change the terms of any Reorganization or the consideration for any Reorganization prior to the approval thereof by the shareholders of the applicable State Fund in accordance with the terms of this Agreement. Municipal Bond Fund and Municipal Series Trust are individually referred to herein as a “Fund” and collectively referred to herein as the “Funds,” as the context requires. The Arizona Fund, the Connecticut Fund, the Maryland Fund, the Massachusetts Fund, the Michigan Fund, the Minnesota Fund, the North Carolina Fund, the Ohio Fund, and the Texas Fund are individually referred to herein as a “State Fund” and collectively referred to herein as the “State Funds,” as the context requires. Any reference to any State Fund hereunder shall be deemed to include only those State Funds that participate in a Reorganization.

        In the course of the Reorganization, shares of common stock of National Portfolio will be distributed to the shareholders of each State Fund as follows: each holder of shares of beneficial interest of a State Fund will be entitled to receive shares of the same class of common stock of the National Portfolio (e.g., Class A, Class B, Class C or Class D) (“Corresponding Shares”), as the shares of beneficial interest of the applicable State Fund owned by such shareholder as of the Valuation Time (as defined in Section 3(c) of this Agreement). The aggregate net asset value of the Corresponding Shares of the National Portfolio to be received by each shareholder of a State Fund will equal the aggregate net asset value of the shares of beneficial interest of that State Fund owned by such shareholder as of the Valuation Time. In consideration therefor, on the Closing Date (as defined in Section 7 of this Agreement), the National Portfolio shall acquire substantially all of the assets of each State Fund and assume substantially all of the liabilities of each State Fund. It is intended that the transactions between the National Portfolio and each of the State Funds as described in this Agreement shall be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the “Code”), and any successor provision.

        As promptly as practicable after the consummation of the Reorganization, the Board of Trustees of Municipal Series Trust shall take such action as necessary to terminate each State Fund as a separate series of Municipal Series Trust in accordance with the Declaration of Trust of Municipal Series Trust, as amended, and the laws of the Commonwealth of Massachusetts.

AGREEMENT

        In order to consummate the Reorganization and in consideration of the promises and the covenants and agreements hereinafter set forth, and intending to be legally bound, Municipal Bond Fund, on behalf of the National Portfolio, and Municipal Series Trust, on behalf of each State Fund, hereby agree as follows:

1.    Representations and Warranties of Municipal Bond Fund.

        Municipal Bond Fund, on behalf of the National Portfolio, represents and warrants to, and agrees with, Municipal Series Trust that:

        (a)  Municipal Bond Fund is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has the power to own all of its assets and to carry out this Agreement. Municipal Bond Fund has all necessary Federal, state, and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.

        (b)  Municipal Bond Fund is duly registered under the 1940 Act as a diversified, open-end management investment company (File No. 811-02688), and such registration has not been revoked or rescinded and is in full force and effect. Municipal Bond Fund has elected and qualified the National Portfolio for the special tax treatment afforded regulated investment companies (“RICs”) under Sections 851-855 of the Code at all times since the inception of the National Portfolio and intends to continue to so qualify the National Portfolio until consummation of the Reorganization and thereafter.

        (c)  Municipal Series Trust has been furnished with a statement of assets and liabilities and a schedule of investments of the National Portfolio, each as of June 30, 2001, said financial statements having been audited by Deloitte & Touche LLP , independent public accountants. Municipal Series Trust has been furnished with or will have been furnished prior to the Closing Date with an unaudited statement of assets and liabilities and an unaudited schedule of investments of the National Portfolio, each as of December 31, 2001. An unaudited statement of assets and liabilities of the National Portfolio and an unaudited schedule of investments of the National Portfolio, each as of the Valuation Time, will be furnished to Municipal Series Trust at or prior to the Closing Date for the purpose of determining the number of shares of the National Portfolio to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of the National Portfolio as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis.

        (d)  Municipal Series Trust has been furnished with Municipal Bond Fund’s Annual Report to Stockholders for the fiscal year ended June 30, 2001 and has been furnished or will have been furnished prior to the Closing Date with Municipal Bond Fund’s Semi-Annual Report to Stockholders for the fiscal period ended December 31, 2001, and the financial statements appearing therein fairly present the financial position of Municipal Bond Fund and the National Portfolio as of the date indicated, in conformity with generally accepted accounting principles applied on a consistent basis.

        (e)  Municipal Series Trust has been furnished with the prospectus and statement of additional information of Municipal Bond Fund, each dated October 5, 2001, and said prospectus and said statement of additional information, each as amended and supplemented to date, does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

        (f)  Municipal Bond Fund has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery, and performance of this Agreement on behalf of the National Portfolio has been duly authorized by all necessary action of the Board of Directors of Municipal Bond Fund, and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and court decisions with respect thereto.

        (g)  There are no material legal, administrative or other proceedings pending or, to the knowledge of Municipal Bond Fund or the National Portfolio, threatened against Municipal Bond Fund or the National Portfolio which assert liability on the part of Municipal Bond Fund or the National Portfolio, or which materially affect their financial condition or their ability to consummate the Reorganization. Neither Municipal Bond Fund nor the National Portfolio is charged with or, to the knowledge of Municipal Bond Fund or the National Portfolio, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business.

        (h)  Municipal Bond Fund is not a party to or obligated under any provision of its Articles of Incorporation, as amended and supplemented, or its by-laws, as amended, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement.

        (i)  There are no material contracts outstanding to which Municipal Bond Fund or the National Portfolio is a party that have not been disclosed in the N-14 Registration Statement (as defined in subsection (l) below) or will not otherwise be disclosed to Municipal Series Trust prior to the Valuation Time.

        (j)  The National Portfolio has no known liabilities of a material amount, contingent or otherwise, other than those shown on the National Portfolio’s statements of assets and liabilities referred to above, those incurred in the ordinary course of its business as an investment company since June 30, 2001; and those incurred in connection with the Reorganization. As of the Valuation Time, Municipal Bond Fund will advise Municipal Series Trust in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time with respect to the National Portfolio.

        (k)  No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Municipal Bond Fund of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934 Act”), and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico).

        (l)  The registration statement filed by Municipal Bond Fund on Form N-14 relating to the shares of common stock of the National Portfolio to be issued pursuant to this Agreement which includes the combined proxy statement of Municipal Series Trust with respect to each State Fund and the prospectus of Municipal Bond Fund with respect to the transactions contemplated herein (the “Combined Proxy Statement and Prospectus”), and any supplement or amendment thereto or to the documents therein (as amended or supplemented, the “N-14 Registration Statement”), on its effective date, at the time of the shareholders’ meeting referred to in Section 6(a) of this Agreement and at the Closing Date, insofar as it relates to the National Portfolio (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations thereunder, and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the Proxy Statement and Prospectus did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subparagraph shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Municipal Bond Fund with respect to the National Portfolio for use in the N-14 Registration Statement as provided in Section 6(d) of this Agreement.

        (m)  Municipal Bond Fund is authorized to issue 3,850,000,000 shares of common stock, par value $.10 per share, and presently has three series, of which the National Portfolio is authorized to issue 1,500,000,000 shares divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Each of Class A, Class B, Class C and Class D of the National Portfolio consists of 375,000,000 authorized shares. Each outstanding share of the National Portfolio is fully paid and non-assessable and has full voting rights.

        (n)  The shares of common stock of the National Portfolio to be issued to Municipal Series Trust for distribution to the shareholders of each State Fund pursuant to this Agreement will have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, and no shareholder of the National Portfolio will have any preemptive right of subscription or purchase in respect thereof.

        (o)  At or prior to the Closing Date, the shares of common stock of the National Portfolio to be transferred to Municipal Series Trust for distribution to the shareholders of each State Fund on the Closing Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of beneficial interest of each State Fund presently are qualified, and there are a sufficient number of such shares registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transactions contemplated by this Agreement to be consummated.

        (p)  At or prior to the Closing Date, Municipal Bond Fund will have obtained any and all approvals, including regulatory and director approvals, with respect to the National Portfolio, necessary to issue the shares of common stock of the National Portfolio to Municipal Series Trust for distribution to the shareholders of each State Fund.

2.    Representations and Warranties of Municipal Series Trust.

        Municipal Series Trust, on behalf of each State Fund, represents and warrants to, and agrees with, Municipal Bond Fund that:

        (a)  Municipal Series Trust is a trust with transferable shares of beneficial interest duly organized, validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts, and has the power to own all of its assets and to carry out this Agreement. Municipal Series Trust has all necessary Federal, state, and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.

        (b)  Municipal Series Trust is duly registered under the 1940 Act as an open-end management investment company (File No. 811-4375), and such registration has not been revoked or rescinded and is in full force and effect. Municipal Series Trust has elected and qualified each State Fund for the special tax treatment afforded RICs under Sections 851-855 of the Code at all times since its inception, and intends to continue to so qualify each State Fund for their taxable years ending upon liquidation.

        (c)  As used in this Agreement, the term “Investments” shall mean (i) the investments of each State Fund as shown on their unaudited schedules of investments as of the Valuation Time as furnished to Municipal Bond Fund, and (ii) all other assets owned by each State Fund or liabilities incurred by each State Fund as of the Valuation Time.

        (d)  Municipal Series Trust has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery, and performance of this Agreement on behalf of each State Fund have been duly authorized by all necessary action of the Board of Trustees of Municipal Series Trust and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and court decisions with respect thereto.

        (e)  Municipal Bond Fund has been furnished with a statement of assets and liabilities and a schedule of investments of each State Fund, each as of July 31, 2001, said financial statements having been audited by Deloitte & Touche LLP independent public accountants. Municipal Bond Fund has been furnished with or will have been furnished prior to the Closing Date with an unaudited statement of assets and liabilities and an unaudited schedule of investments of each State Fund, each as of January 31, 2002. An unaudited statement of assets and liabilities of each State Fund and an unaudited schedule of investments of each State Fund, each as of the Valuation Time, will be furnished to Municipal Bond Fund at or prior to the Closing Date for the purpose of determining the number of shares of common stock of the National Portfolio to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of the applicable State Fund as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis.

        (f)  Municipal Bond Fund has been furnished with each State Fund’s Annual Report to Shareholders for the fiscal year ended July 31, 2001 and has been furnished or will have been furnished prior to the Closing Date with each State Fund’s Semi-Annual Report to Shareholders for the fiscal period ended January 31, 2002, and the financial statements appearing therein fairly present the financial position of each State Fund as of the date indicated, in conformity with generally accepted accounting principles applied on a consistent basis.

        (g)  Municipal Bond Fund has been furnished with the prospectus of each State Fund and the statement of additional information relating to each State Fund, each dated November 14, 2001, and said prospectuses and said statements of additional information, each as amended and supplemented to date, does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

        (h)  There are no material legal, administrative or other proceedings pending or, to the knowledge of Municipal Series Trust or each State Fund, threatened against Municipal Series Trust or any State Fund which assert liability on the part of Municipal Series Trust or any State Fund or which materially affect their financial condition or their ability to consummate the Reorganization. Neither Municipal Series Trust nor any State Fund is charged with or, to the best of their knowledge, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of their respective businesses.

        (i)  There are no material contracts outstanding to which Municipal Series Trust or each State Fund is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to Municipal Bond Fund prior to the Valuation Time.

        (j)  Municipal Series Trust is not a party to or obligated under any provision of its Declaration of Trust, as amended, or its by-laws, as amended, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement.

        (k)  No State Fund has any known liabilities of a material amount, contingent or otherwise, other than those shown on their statements of assets and liabilities referred to above, those incurred in the ordinary course of their respective businesses as an investment company since July 31, 2001 and those incurred in connection with the Reorganization. As of the Valuation Time, Municipal Series Trust will advise Municipal Bond Fund in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time with respect to each State Fund.

        (l)  Each State Fund has filed, or has obtained extensions to file, all Federal, state, and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all Federal, state and local taxes shown on said returns to be due and owing and all assessments received by them, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of each State Fund have been adequately provided for on their books, and no tax deficiency or liability of any State Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service (the “IRS”) or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.

        (m)  At both the Valuation Time and the Closing Date, Municipal Series Trust will have full right, power, and authority to sell, assign, transfer, and deliver the Investments. At the Closing Date, subject only to the delivery of the Investments as contemplated by this Agreement, Municipal Series Trust will have good and marketable title to all of the Investments, and Municipal Bond Fund will acquire all of the Investments free and clear of any encumbrances, liens or security interests and without any restrictions upon the transfer thereof (except those imposed by the Federal or state securities laws and those imperfections of title or encumbrances that do not materially detract from the value or use of the Investments or materially affect title thereto).

        (n)  No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Municipal Series Trust and each State Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act or state securities laws, and the Declaration of Trust of Municipal Series Trust, as amended.

        (o)  The N-14 Registration Statement, on its effective date, at the time of the shareholders’ meetings referred to in Section 6(a) of this Agreement, and on the Closing Date, insofar as it relates to the State Funds (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the rules and regulations thereunder, and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the Combined Proxy Statement and Prospectus did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subparagraph shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Municipal Series Trust with respect to the State Funds for use in the N-14 Registration Statement as provided in Section 6(d) of this Agreement.

        (p)  Municipal Series Trust is authorized to issue an unlimited number of shares of beneficial interest, par value of $.10 per share, which have been divided into thirteen series, and further divided into four classes, designated Class A, Class B, Class C and Class D shares; each outstanding share is fully paid and nonassessable and has full voting rights.

        (q)  The books and records of Municipal Series Trust with respect to each State Fund made available to Municipal Bond Fund and/or its counsel are substantially true and correct and do not contain any material misstatements or omissions with respect to the operations of each State Fund.

        (r)  Municipal Series Trust will not sell or otherwise dispose of any of the shares of common stock of the National Portfolio to be received in the Reorganization, except in distribution to the shareholders of the applicable State Fund.

        (s)  At or prior to the Closing Date, Municipal Series Trust will have obtained any and all regulatory, trustee, and shareholder approvals with respect to each State Fund necessary to effect the Reorganization as set forth herein.

3.    The Reorganization.

        (a)  Subject to receiving the required approvals of the shareholders of each State Fund as described herein, and to the other terms and conditions contained herein, Municipal Series Trust agrees on behalf of each State Fund to convey, transfer, and deliver to Municipal Bond Fund for the benefit of the National Portfolio, and Municipal Bond Fund agrees to acquire from Municipal Series Trust for the benefit of the National Portfolio, on the Closing Date, all of the Investments (including interest accrued as of the Valuation Time on debt instruments), and shall cause the National Portfolio to assume substantially all of the liabilities of each State Fund, in return for that number of shares of common stock of the National Portfolio provided in Section 4 of this Agreement. Pursuant to this Agreement, as soon as practicable on or after the Closing Date, Municipal Series Trust will distribute all shares of common stock of the National Portfolio received by Municipal Series Trust to the shareholders of the State Funds in return for their corresponding State Fund shares. Such distribution shall be accomplished by the opening of shareholder accounts on the stock ledger records of the National Portfolio in the amounts due the shareholders of each State Fund based on their respective holdings in each State Fund as of the Valuation Time.

        (b)  Municipal Series Trust will pay or cause to be paid to Municipal Bond Fund for the benefit of the National Portfolio any interest or dividends it receives on or after the Closing Date with respect to the Investments transferred to Municipal Bond Fund for the benefit of National Portfolio hereunder.

        (c)  The Valuation Time shall be 4:00 P.M., Eastern time, on                                      , 2002, or such earlier or later day and time as may be mutually agreed upon in writing by an officer of Municipal Bond Fund and an officer of Municipal Series Trust (the “Valuation Time”).

        (d)  The National Portfolio will acquire substantially all of the assets of each State Fund and assume substantially all of the liabilities of each State Fund except that recourse for such liabilities will be limited to the net assets of each State Fund acquired by the National Portfolio. The known liabilities of each State Fund as of the Valuation Time shall be confirmed in writing to Municipal Bond Fund by Municipal Series Trust pursuant to Section 2(k) of this Agreement.

        (e)  Municipal Bond Fund and Municipal Series Trust will jointly execute any such instruments as required to effect the transfer of the Investments of each State Fund to the National Portfolio.

        (f)  The existence of each State Fund will terminate following the distribution referred to in subparagraph (a) of this Section 3 and a majority of the Trustees shall execute and lodge among the records of Municipal Series Trust an instrument in writing setting forth the fact of such termination and cause a copy thereof to be filed in the Office of the Secretary of the Commonwealth of Massachusetts.

4.    Issuance and Valuation of Shares of Common Stock of the National Portfolio in the Reorganization.

        Full shares of common stock of the National Portfolio, and to the extent necessary, fractional shares of common stock of the National Portfolio, of an aggregate net asset value equal to the value of the assets of each State Fund that are acquired, determined as hereinafter provided, reduced by the amount of liabilities of each State Fund assumed by the National Portfolio, shall be issued by Municipal Bond Fund on behalf of the National Portfolio in return for such assets of each State Fund. The net asset value of each State Fund and the National Portfolio shall be determined in accordance with the procedures described in the most recent effective prospectus of Municipal Bond Fund with respect to the National Portfolio as of the Valuation Time. Such valuation and determination shall be made by Municipal Bond Fund in cooperation with Municipal Series Trust. Municipal Bond Fund shall issue its Class A, Class B, Class C and Class D shares of common stock of the National Portfolio to Municipal Series Trust in certificates or share deposit receipts (one in respect of each class) registered in the name of Municipal Series Trust. Municipal Series Trust shall distribute Corresponding Shares of the National Portfolio to its shareholders by redelivering such certificates to Financial Data Services, Inc. (“FDS”).

5.    Payment of Expenses.

        (a)  The expenses of the Reorganization that are directly attributable to each State Fund and the conduct of its business will be deducted from the assets of that State Fund as of Valuation Time. These expenses are expected to include the expenses incurred in preparing, printing and mailing proxy materials to be utilized in connection with the State Fund’s shareholders meeting (the “Meeting”) and the expenses related to the solicitation of proxies to be voted at that Meeting. The expenses of the Reorganization that are directly attributable to Municipal Bond Fund will be deducted from the assets of the National Portfolio. These expenses are expected to include the costs of printing sufficient copies of its prospectus, and its most recent Annual Report to accompany the Combined Proxy Statement and Prospectus. Certain additional expenses of the Reorganization, including expenses incurred in connection with obtaining a tax opinion, the preparation of this Agreement, legal fees, transfer agent fees and audit fees will be borne equally by each State Fund and the National Portfolio.

        (b)  If for any reason the Reorganization is not consummated, no party shall be liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages.

6.    Covenants of Municipal Bond Fund and Municipal Series Trust.

        (a)  Municipal Series Trust agrees to call a special meeting of the shareholders of each State Fund, to be held as soon as is practicable after the effective date of the N-14 Registration Statement, for the purpose of considering the Reorganization as described in this Agreement, and it shall be a condition to the obligations of each of the parties hereto that (i) the holders of two-thirds of the shares of beneficial interest of the applicable State Fund issued and outstanding and entitled to vote thereon, voting together as a single class, shall have approved this Agreement at such special meeting at or prior to the Valuation Time, and (ii) the holders of two-thirds of the shares of beneficial interest of each of Class B, Class C, and Class D of the applicable State Fund issued and outstanding and entitled to vote thereon, each class voting separately as a single class, shall have approved this Agreement at such special meeting at or prior to the Valuation Time.

        (b)  Each of Municipal Bond Fund and Municipal Series Trust covenants to operate the business of the National Portfolio and each State Fund, respectively, as presently conducted between the date hereof and the Closing Date.

        (c)  Municipal Series Trust agrees that following the consummation of the Reorganization, it will terminate each State Fund as a separate series of Municipal Series Trust in accordance with the Declaration of Trust of Municipal Series Trust, as amended, the laws of the Commonwealth of Massachusetts, and any other applicable law, it will not make any distributions of any shares of common stock of the National Portfolio other than to the shareholders of the State Funds and without first paying or adequately providing for the payment of all of the State Funds’ liabilities not assumed by the National Portfolio, if any, and on and after the Closing Date, it shall not conduct any business with respect to each State Fund except in connection with such State Fund’s termination.

        (d)  Municipal Bond Fund will file the N-14 Registration Statement with the Securities and Exchange Commission (the “Commission”) and will use its best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. Municipal Bond Fund and Municipal Series Trust agree to cooperate fully with each other, and each will furnish to the other the information relating to the National Portfolio and the State Funds, respectively, to be set forth in the N-14 Registration Statement as required by the 1933 Act, the 1934 Act, and the 1940 Act, and the rules and regulations thereunder, and the state securities laws.

        (e)  Municipal Bond Fund has no plan or intention to sell or otherwise dispose of the assets of any State Fund to be acquired in the Reorganization, except for dispositions made in the ordinary course of business.

        (f)  Each of Municipal Series Trust and Municipal Bond Fund agree that by the Closing Date, all of its Federal and other tax returns and reports required to be filed on or before such date by the State Funds and National Portfolio, respectively, shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes. In connection with this covenant, the Funds agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. Municipal Bond Fund agrees to retain for a period of ten (10) years following the Closing Date all returns, schedules and work papers and all material records or other documents relating to tax matters of each State Fund for such State Fund’s taxable period first ending after the Closing Date and for all prior taxable periods. Any information obtained under this subsection shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Closing Date, Municipal Series Trust shall prepare, or shall cause its agents to prepare, any Federal, state or local tax returns, including any Forms 1099, required to be filed by or with respect to each State Fund with respect to such State Fund’s final taxable year ending with its complete liquidation and for any prior periods or taxable years and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by Municipal Series Trust (other than for payment of taxes) in connection with the preparation and filing of said tax returns and Forms 1099 after the Closing Date shall be borne by such State Funds to the extent such expenses have been accrued by such State Fund in the ordinary course without regard to the Reorganization; any excess expenses shall be borne by Fund Asset Management, L.P. (“FAM”) at the time such tax returns and Forms 1099 are prepared.

        (g)  Municipal Series Trust agrees to mail to the shareholders of record of each State Fund entitled to vote at the special meeting of shareholders of the applicable State Fund at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, a Combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.

        (h)  Following the consummation of the Reorganization, National Portfolio expects to stay in existence and continue its business as a series of an open-end management investment company registered under the 1940 Act.

7.    Closing Date.

        (a)  Delivery of the assets of each State Fund to be transferred, together with any other Investments, and the shares of common stock of the National Portfolio to be issued, shall be made at the offices of Sidley Austin Brown & Wood LLP , 875 Third Avenue, New York, New York 10022, at 10:00 A.M. on the next full business day following the Valuation Time, or at such other place, time and date agreed to in writing by an officer of Municipal Series Trust and an officer of Municipal Bond Fund, the date and time upon which such delivery is to take place being referred to herein as the “Closing Date.” To the extent that any Investments, for any reason, are not transferable on the Closing Date, Municipal Series Trust shall cause such Investments to be transferred to Municipal Bond Fund’s account with The Bank of New York at the earliest practicable date thereafter.

        (b)  Municipal Series Trust will deliver to Municipal Bond Fund on the Closing Date confirmations or other adequate evidence as to the tax basis of each of the Investments delivered to Municipal Bond Fund hereunder, certified by Deloitte & Touche LLP .

        (c)  As soon as practicable after the close of business on the Closing Date, Municipal Series Trust shall deliver to Municipal Bond Fund a list of the names and addresses of all of the shareholders of record of each State Fund on the Closing Date and the number of shares of beneficial interest of each State Fund owned by each such shareholder, certified to the best of their knowledge and belief by FDS or by the President (or any Vice President) of Municipal Series Trust.

        (d)  As used in this Section 7 and throughout this Agreement, Closing Date shall mean the date on which the Reorganization is consummated with respect to a State Fund. Each Fund agrees that (i) the consummation of any Reorganization is not contingent upon the consummation of any other Reorganization; (ii) the Reorganization may be consummated separately with respect to each State Fund on one or more Closing Dates; and (iii) the terms of one Reorganization may differ from the terms of any other Reorganization.

8.    Municipal Series Trust Conditions.

        The obligations of Municipal Series Trust on behalf of each State Fund hereunder shall be subject to the following conditions:

        (a)  That this Agreement shall have been adopted, and the Reorganization shall have been approved, by the affirmative vote of (i) the holders of two-thirds of the shares of beneficial interest of the applicable State Fund issued and outstanding and entitled to vote thereon, voting together as a single class at a special meeting of the shareholders of each State Fund, at or prior to the Valuation Time, and (ii) the holders of two-thirds of the shares of beneficial interest of each of Class B, Class C, and Class D of the applicable State Fund issued and outstanding and entitled to vote thereon, each class voting separately as a single class at such special meeting at or prior to the Valuation Time. In addition, this Agreement shall have been adopted, and the Reorganization shall have been approved by the Board of Directors of Municipal Bond Fund; and that Municipal Bond Fund shall have delivered to Municipal Series Trust a copy of the resolution approving this Agreement adopted by the Board of Directors of Municipal Bond Fund, certified by the Secretary of Municipal Bond Fund.

        (b)  That Municipal Bond Fund shall have furnished to Municipal Series Trust a statement of the National Portfolio’s assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of the National Portfolio’s investments, all as of the Valuation Time, certified on Municipal Bond Fund’s behalf by its President (or any Vice President) and its Treasurer, and a certificate signed by Municipal Bond Fund’s President (or any Vice President) and its Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date, there has been no material adverse change in the financial position of the National Portfolio since the date of the most recent Annual Report to Stockholders of Municipal Bond Fund, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.

        (c)  That Municipal Bond Fund shall have furnished to Municipal Series Trust a certificate signed by Municipal Bond Fund’s President (or any Vice President) and its Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date all representations and warranties of Municipal Bond Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that Municipal Bond Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates.

        (d)  That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.

        (e)  That Municipal Series Trust shall have received an opinion as to Maryland law of Sidley Austin Brown & Wood LLP , special Maryland counsel to Municipal Bond Fund, in form satisfactory to Municipal Series Trust and dated as of the Closing Date, to the effect that (i) Municipal Bond Fund is a corporation duly organized, validly existing, and in good standing in conformity with the laws of the State of Maryland; (ii) the Corresponding Shares of the National Portfolio to be delivered to the shareholders of the State Funds as provided for by this Agreement are duly authorized and, upon delivery, will be validly issued and outstanding and fully paid and nonassessable by Municipal Bond Fund, and no shareholder of Municipal Bond Fund has any preemptive right to subscription or purchase in respect thereof (pursuant to the Articles of Incorporation of Municipal Bond Fund, as amended and supplemented, or the by-laws of Municipal Bond Fund, as amended, or, to the best of such counsel’s knowledge, otherwise); (iii) this Agreement has been duly authorized, executed, and delivered by Municipal Bond Fund, and represents a valid and binding contract, enforceable in accordance with its terms, except as enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and court decisions with respect thereto; provided, such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity, and provided further, that such counsel shall express no opinion whether the indemnification covenants contained in this Agreement are permitted by law; (iv) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate the Articles of Incorporation of Municipal Bond Fund, as amended and supplemented, the by-laws of Municipal Bond Fund, as amended, or, to the best of such counsel’s knowledge, Maryland law; (v) to the best of such counsel’s knowledge, no consent, approval, authorization or order of any Maryland state court or governmental authority is required for the consummation by Municipal Bond Fund of the Reorganization, except such as have been obtained under Maryland law; and (vi) such opinion is solely for the benefit of Municipal Series Trust and its Trustees and officers. In giving the opinion set forth above, Sidley Austin Brown & Wood LLP may state that it is relying on certain certificates of officers of FAM, Merrill Lynch Investment Managers, L.P. (“MLIM”), FDS, and Municipal Bond Fund with regard to matters of fact and certain certificates and written statements of government officials with respect to the organization, existence, and good standing of Municipal Bond Fund.

        (f)  That Municipal Series Trust shall have received an opinion of Clifford Chance Rogers & Wells LLP (“Clifford Chance”), as counsel to Municipal Bond Fund, in form satisfactory to Municipal Series Trust and dated the Closing Date, to the effect that (i) no consent, approval, authorization or order of any United States Federal court or governmental authority is required for the consummation by Municipal Bond Fund of the Reorganization, except such as have been obtained under the 1933 Act, the 1934 Act, and the 1940 Act and the published rules and regulations of the Commission thereunder, and under applicable state securities laws, if any; (ii) the N-14 Registration Statement has become effective under the 1933 Act, no stop order suspending the effectiveness of the N-14 Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and the N-14 Registration Statement, as of its effective date, appears on its face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the 1934 Act, and the 1940 Act and the published rules and regulations of the Commission thereunder; (iii) the descriptions in the N-14 Registration Statement of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; (iv) such counsel does not know of any statutes, legal or governmental proceedings or contracts or other documents related to the Reorganization of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (v) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate any material provision of any agreement (known to such counsel) to which Municipal Bond Fund is a party or by which Municipal Bond Fund is bound; (vi) Municipal Bond Fund, to the knowledge of such counsel, is not required to qualify to do business as a foreign corporation in any jurisdiction, except as may be required by state securities laws, and except where each has so qualified or the failure so to qualify would not have a material adverse effect on Municipal Bond Fund, or its stockholders; (vii) such counsel does not have actual knowledge of any material suit, action or legal or administrative proceeding pending or threatened against Municipal Bond Fund, the unfavorable outcome of which would materially and adversely affect Municipal Bond Fund; and (viii) all corporate actions required to be taken by Municipal Bond Fund to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary corporate actions on the part of Municipal Bond Fund. Such opinion also shall state that (x) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement, nothing has come to its attention that would lead it to believe that, on the effective date of the N-14 Registration Statement, (1) the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (2) the combined proxy statement and prospectus included in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (y) such counsel does not express any opinion or belief as to the financial statements or other financial or statistical data contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, Clifford Chance may state that it is relying on certain certificates of officers of FAM, MLIM, FDS, and Municipal Bond Fund with regard to matters of fact; certain certificates and written statements of governmental officials with respect to the good standing of Municipal Bond Fund, and the opinion of Sidley Austin Brown & Wood LLP as to matters of Maryland law.

        (g)  That Municipal Bond Fund on behalf of the National Portfolio shall have received an opinion of Sidley Austin Brown & Wood LLP , special tax counsel to Municipal Bond Fund and the National Portfolio to the effect that for Federal income tax purposes (i) the transfer of substantially all of the assets of each State Fund to the National Portfolio and the simultaneous distribution of shares of common stock of the National Portfolio as provided in the Agreement and Plan will each constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and the National Portfolio and each State Fund will be deemed to be a “party” to the applicable Reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized to any State Fund as a result of the asset transfer in return for shares of common stock of the National Portfolio or on the distribution of the shares of common stock of the National Portfolio to shareholders of such State Fund under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized to the National Portfolio on the receipt of assets of any State Fund in return for shares of the National Portfolio; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the shareholders of any State Fund on the receipt of Corresponding Shares of the National Portfolio in return for their respective State Fund shares; (v) in accordance with Section 362(b) of the Code, the tax basis of assets of each State Fund in the hands of the National Portfolio will be the same as the tax basis of such assets in the hands of the respective State Fund immediately prior to the consummation of the applicable Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the applicable Reorganization, the tax basis of the Corresponding Shares of the National Portfolio received by the shareholders of a State Fund in the applicable Reorganization will be equal to the tax basis of the shares of beneficial interest of the respective State Fund surrendered; (vii) in accordance with Section 1223 of the Code, a shareholder’s holding period for the Corresponding Shares of the National Portfolio will be determined by including the period for which such shareholder held the shares of their respective State Fund, provided, that such State Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, the National Portfolio’s holding period with respect to the assets of any State Fund transferred will include the period for which such assets were held by the State Funds; and (ix) the taxable year of each State Fund will end on the effective date of the applicable Reorganization, and pursuant to Section 381(a) of the Code and regulations thereunder, the National Portfolio will succeed to and take into account certain tax attributes of the State Funds, such as earnings and profits, capital loss carryovers and method of accounting.

        (h)  That all proceedings taken by Municipal Bond Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to Municipal Series Trust.

        (i)  That the N-14 Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Municipal Bond Fund, contemplated by the Commission.

        (j)  That Municipal Series Trust shall have received from Deloitte & Touche LLP a letter dated within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Closing Date, in form and substance satisfactory to Municipal Series Trust, to the effect that (i) they are independent public accountants with respect to Municipal Bond Fund within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of the National Portfolio included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; and (iii) on the basis of limited procedures agreed upon by Municipal Series Trust and Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of the National Portfolio included in the N-14 Registration Statement, and inquiries of certain officials of Municipal Bond Fund responsible for financial and accounting matters, nothing came to its attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Municipal Series Trust and Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to the National Portfolio appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of Municipal Bond Fund or from schedules prepared by officials of Municipal Bond Fund having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom.

        (k)  That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of Municipal Bond Fund or would prohibit the Reorganization.

        (l)  That Municipal Series Trust shall have received from the Commission such orders or interpretations as Sidley Austin Brown & Wood LLP , as counsel to Municipal Series Trust and each State Fund, deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, and the 1940 Act in connection with the Reorganization, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect.

    9.    Municipal Bond Fund Conditions.

        The obligations of Municipal Bond Fund, on behalf of the National Portfolio hereunder shall be subject to the following conditions:

        (a)  That this Agreement shall have been adopted, and the Reorganization shall have been approved, by the Board of Trustees of Municipal Series Trust and by the affirmative vote of (i) the holders of two-thirds of the shares of beneficial interest of the applicable State Fund issued and outstanding and entitled to vote thereon, all classes voting together as a single class at a special meeting of the shareholders of each State Fund, at or prior to the Valuation Time, and (ii) the holders of two-thirds of the shares of beneficial interest of each of Class B, Class C, and Class D of the applicable State Fund issued and outstanding and entitled to vote thereon, each class voting separately as a single class at such special meeting at or prior to the Valuation Time; and that Municipal Series Trust shall have delivered to Municipal Bond Fund a copy of the resolution approving this Agreement adopted by the Board of Trustees of Municipal Series Trust, and a certificate setting forth the vote of the shareholders of each State Fund obtained, each certified by the Secretary of Municipal Series Trust.

        (b)  That Municipal Series Trust shall have furnished to Municipal Bond Fund a statement of each State Fund’s assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of Investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on behalf of Municipal Series Trust by its President (or any Vice President) and its Treasurer, and a certificate of both such officers, dated the Closing Date, certifying that as of the Valuation Time and as of the Closing Date, there has been no material adverse change in the financial position of each State Fund since the date of the most recent Annual Report to shareholders of each such State Fund, other than changes in the Investments since that date or changes in the market value of the Investments.

        (c)  That Municipal Series Trust shall have furnished to Municipal Bond Fund a certificate signed by the President of Municipal Series Trust (or any Vice President) and its Treasurer, dated the Closing Date, certifying that as of the Valuation Time and as of the Closing Date, all representations and warranties of Municipal Series Trust made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and that Municipal Series Trust has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates.

        (d)  That Municipal Series Trust shall have delivered to Municipal Bond Fund a letter from Deloitte & Touche LLP, dated the Closing Date, stating that such firm has performed a limited review of the Federal, state and local income tax returns of Municipal Series Trust with respect to each State Fund for the period ended July 31, 2001 (which returns originally were prepared and filed by Municipal Series Trust), and that based on such limited review, nothing came to their attention which caused them to believe that such returns did not properly reflect, in all material respects, the Federal, state and local income taxes of each State Fund for the period covered thereby; and that for the period from August 1, 2001, to and including the Closing Date and for any taxable year of Municipal Series Trust ending upon the termination of the last State Fund to be so terminated, such firm has performed a limited review to ascertain the amount of applicable Federal, state and local taxes, and has determined that either such amount has been paid or reserves established for payment of such taxes, this review to be based on unaudited financial data; and that based on such limited review, nothing has come to their attention which caused them to believe that the taxes paid or reserves set aside for payment of such taxes were not adequate in all material respects for the satisfaction of Federal, state and local taxes for the period from August 1, 2001, to and including the Closing Date and for any taxable year of Municipal Series Trust ending upon the termination of the last State Fund to be so terminated or that Municipal Series Trust would not continue to qualify as a regulated investment company for Federal income tax purposes.

        (e)  That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.

        (f)  That Municipal Bond Fund shall have received an opinion of Bingham Dana LLP, Massachusetts counsel to Municipal Series Trust, in form satisfactory to Municipal Bond Fund and dated as of the Closing Date, to the effect that (i) Municipal Series Trust is a trust with transferable shares of beneficial interests validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts; (ii) this Agreement, to the extent Massachusetts law applies, has been duly authorized and executed by Municipal Series Trust; (iii) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by Municipal Series Trust; (iv) the execution and delivery of this Agreement and the consummation of the Reorganization do not violate the Declaration of Trust of Municipal Series Trust, as amended, the by-laws of Municipal Series Trust, as amended, or, to the best of such counsel’s knowledge, Massachusetts law; and (v) to the best of such counsel’s knowledge, no consent, approval, authorization or order of any Massachusetts state court or governmental authority is required for the consummation by Municipal Series Trust of the Reorganization, except (a) a filing with the Secretary of the Commonwealth of Massachusetts to terminate each State Fund as a series of Municipal Series Trust, and (b) such as may be required under Massachusetts state securities laws, about which such counsel need not express any opinion. Such opinion may state that it is solely for the benefit of Municipal Bond Fund and its Directors and officers. In giving the opinion set forth above, Bingham Dana LLP may state that it is relying on certain certificates of officers of FAM, MLIM, FDS, and Municipal Series Trust with regard to matters of fact and certain certificates and written statements of government officials with respect to the organization, existence, and good standing of Municipal Series Trust.

        (g)  That Municipal Bond Fund shall have received an opinion of Sidley Austin Brown & Wood LLP , as counsel to Municipal Series Trust and each State Fund, in form satisfactory to Municipal Bond Fund and dated as of the Closing Date, with respect to the matters specified in Section 8(f) of this Agreement and such other matters as Municipal Bond Fund reasonably may deem necessary or desirable.

        (h)  That Municipal Bond Fund shall have received an opinion of Sidley Austin Brown & Wood LLP, as special tax counsel to Municipal Series Trust and each State Fund, with respect to the matters specified in Section 8(g) of this Agreement.

        (i)  That the Investments to be transferred to Municipal Bond Fund shall not include any assets or liabilities which the National Portfolio, by reason of charter limitations or otherwise, may not properly acquire or assume [or which may not be disposed of in the ordinary course of business of the National Portfolio].

        (j)  That all proceedings taken by Municipal Series Trust and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to Municipal Bond Fund.

        (k)  That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Municipal Series Trust, contemplated by the Commission.

        (l)  That Municipal Bond Fund shall have received from Deloitte & Touche LLP a letter dated within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Closing Date, in form and substance satisfactory to Municipal Bond Fund, to the effect that (i) they are independent public accountants with respect to Municipal Series Trust within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of each State Fund included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (iii) on the basis of limited procedures agreed upon by Municipal Series Trust and Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of each State Fund included in the N-14 Registration Statement, and inquiries of certain officials of Municipal Series Trust responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Municipal Series Trust and Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to each State Fund appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of Municipal Series Trust or from schedules prepared by officials of Municipal Series Trust having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom.

        (m)  That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of Municipal Series Trust or would prohibit the Reorganization.

        (n)  That, Municipal Bond Fund shall have received from the Commission such orders or interpretations as Clifford Chance, as counsel to Municipal Bond Fund, deems reasonably necessary or desirable under the 1933 Act, the 1934 Act, and the 1940 Act in connection with the Reorganization, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect.

        (o)  That prior to the Closing Date, Municipal Series Trust shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to shareholders of each State Fund all of such State Fund’s investment company taxable income, tax-exempt net income, and net capital gain for the period from August 1, 2001 to and including the Closing Date, if any (computed without regard to any deduction for dividends paid), and all of such State Fund’s net capital gain, if any, realized for the period from August 1, 2001 to and including the Closing Date.

10.    Termination, Postponement and Waivers.

        (a)  Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the Reorganization abandoned at any time (whether before or after adoption thereof by the shareholders of a State Fund) prior to the Closing Date, or the Closing Date may be postponed, (i) by mutual consent of the Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund; (ii) by the Board of Trustees of Municipal Series Trust if any condition of Municipal Series Trust’s obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of Municipal Bond Fund if any condition of Municipal Bond Fund’s obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.

        (b)  If the transaction or transactions contemplated by this Agreement have not been consummated by [December 31, 2002], this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to in writing by the Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund.

        (c)  In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become void and have no further effect, and there shall not be any liability on the part of either Municipal Series Trust or Municipal Bond Fund or persons who are their trustees, directors, officers, agents, stockholders or shareholders in respect of this Agreement.

        (d)  At any time prior to the Closing Date, any of the terms or conditions of this Agreement may be waived by the Board of Trustees of Municipal Series Trust or the Board of Directors of Municipal Bond Fund, respectively (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of each State Fund and the National Portfolio, respectively, on behalf of which such action is taken. In addition, the Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund have delegated to FAM, as the investment advisor to each, the ability to make non-material changes to the transaction if FAM deems it to be in the best interests of Municipal Series Trust and Municipal Bond Fund to do so.

        (e)  The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with, and be terminated by, the consummation of the Reorganization, and neither Municipal Series Trust nor Municipal Bond Fund nor any of their officers, directors or trustees, agents or shareholders shall have any liability with respect to such representations or warranties after the Closing Date. This provision shall not protect any officer, director or trustee, agent or shareholder of Municipal Series Trust or any officer, director or trustee, agent or stockholder of Municipal Bond Fund against any liability to the entity for which that officer, director or trustee, agent or stockholder or shareholder so acts or to its shareholders or stockholders, to which that officer, director or trustee, agent or shareholder or shareholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties in the conduct of such office.

        (f)  If any order or orders of the Commission with respect to this Agreement shall be issued prior to the Closing Date and shall impose any terms or conditions which are determined by action of the Board of Trustees of Municipal Series Trust and the Board of Directors of Municipal Bond Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the shareholders of each State Fund unless such terms and conditions shall result in a change in the method of computing the number of shares of common stock of the National Portfolio to be issued to Municipal Series Trust for distribution to the shareholders of each State Fund in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the shareholders of each State Fund prior to the meetings at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless Municipal Series Trust promptly shall call a special meeting of shareholders of each State Fund at which such conditions so imposed shall be submitted for approval.

11.    Indemnification.

        (a)  Municipal Series Trust hereby agrees to indemnify and hold Municipal Bond Fund harmless from all loss, liability and expense (including reasonable counsel fees and expenses in connection with the contest of any claim) which Municipal Bond Fund may incur or sustain by reason of the fact that (i) Municipal Bond Fund shall be required to pay any corporate obligation of Municipal Series Trust, whether consisting of tax deficiencies or otherwise, based upon a claim or claims against Municipal Series Trust or the State Funds which were omitted or not fairly reflected in the financial statements to be delivered to Municipal Bond Fund in connection with the Reorganization; (ii) prior to the Reorganization, any representations or warranties made by Municipal Series Trust in this Agreement should prove to be false or erroneous in any material respect; (iii) any covenant of Municipal Series Trust has been breached in any material respect; or (iv) any claim is made alleging that (a) the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Combined Proxy Statement and Prospectus delivered to the shareholders of the State Funds and forming a part of the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such claim is based on written information furnished to Municipal Series Trust by Municipal Bond Fund.

        (b)  Municipal Bond Fund hereby agrees to indemnify and hold Municipal Series Trust harmless from all loss, liability and expenses (including reasonable counsel fees and expenses in connection with the contest of any claim) which Municipal Series Trust may incur or sustain by reason of the fact that (i) prior to the Reorganization, any representations or warranties made by Municipal Bond Fund in this Agreement should prove false or erroneous in any material respect, (ii) any covenant of Municipal Bond Fund has been breached in any material respect, or (iii) any claim is made alleging that (a) the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, not misleading or (b) the Combined Proxy Statement and Prospectus delivered to shareholders of the State Funds and forming a part of the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made not misleading, except insofar as such claim is based on written information furnished to Municipal Bond Fund by Municipal Series Trust.

        (c)  In the event that any claim is made against Municipal Bond Fund in respect of which indemnity may be sought by Municipal Bond Fund from Municipal Series Trust under Section 11(a) of this Agreement, or in the event that any claim is made against Municipal Series Trust in respect of which indemnity may be sought by Municipal Series Trust from Municipal Bond Fund under Section 11(b) of this Agreement, then the party seeking indemnification (the “Indemnified Party”), with reasonable promptness and before payment of such claim, shall give written notice of such claim to the other party (the “Indemnifying Party”). If no objection as to the validity of the claim is made in writing to the Indemnified Party by the Indemnifying Party within thirty (30) days after the giving of notice hereunder, then the Indemnified Party may pay such claim and shall be entitled to reimbursement therefor, pursuant to this Agreement. If, prior to the termination of such thirty-day period, objection in writing as to the validity of such claim is made to the Indemnified Party, the Indemnified Party shall withhold payment thereof until the validity of such claim is established (i) to the satisfaction of the Indemnifying Party, or (ii) by a final determination of a court of competent jurisdiction, whereupon the Indemnified Party may pay such claim and shall be entitled to reimbursement thereof, pursuant to this Agreement, or (iii) with respect to any tax claims, within seven (7) calendar days following the earlier of (A) an agreement between Municipal Series Trust and Municipal Bond Fund that an indemnity amount is payable, (B) an assessment of a tax by a taxing authority, or (c) a “determination” as defined in Section 1313(a) of the Code. For purposes of this Section 11, the term “assessment” shall have the same meaning as used in Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable provision under the laws of the appropriate taxing authority. In the event of any objection by the Indemnifying Party, the Indemnifying Party promptly shall investigate the claim, and if it is not satisfied with the validity thereof, the Indemnifying Party shall conduct the defense against such claim. All costs and expenses incurred by the Indemnifying Party in connection with such investigation and defense of such claim shall be borne by it. These indemnification provisions are in addition to, and not in limitation of, any other rights the parties may have under applicable law.

12.    Other Matters.

        (a)  Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance of any shares of common stock of the National Portfolio to any person who at the time of the Reorganization is, to its knowledge, an affiliate of a party to the Reorganization pursuant to Rule 145(c) under the 1933 Act, Municipal Bond Fund will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows:

THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MERRILL LYNCH MUNICIPAL BOND FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.

and, further, that stop transfer instructions will be issued to FDS with respect to such shares of common stock. Municipal Series Trust will provide Municipal Bond Fund on the Closing Date with the name of any shareholder of any State Fund who is to the knowledge of Municipal Series Trust an affiliate of Municipal Series Trust on such date.

        (b)  All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.

        (c)  Any notice, report or demand required or permitted by any provision of this Agreement shall be in writing and shall be made by hand delivery, prepaid certified mail or overnight service, addressed to Municipal Series Trust or Municipal Bond Fund, in either case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.

        (d)  This Agreement supersedes all previous correspondence and oral communications between the parties regarding the Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each party and shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state.

        (e)  A copy of Municipal Series Trust’s Declaration of Trust, as amended, is on file with the Secretary of the Commonwealth of Massachusetts. Municipal Bond Fund acknowledges that the obligations of or arising out of this instrument are not binding upon any of Municipal Series Trust’s trustees, officers, employees, agents or shareholders individually, but are binding solely upon the assets and property of Municipal Series Trust. Municipal Bond Fund further acknowledges that the assets and liabilities of each series of Municipal Series Trust are separate and distinct and that the obligations of or arising out of this instrument are binding solely upon the assets or property of the series on whose behalf Municipal Series Trust has executed this Agreement.

        (f)  Copies of the Articles of Incorporation of Municipal Bond Fund, as amended and supplemented, are on file with the Department of Assessments and Taxation of the State of Maryland and notice is hereby given that this instrument is executed on behalf of the Directors of Municipal Bond Fund.

        This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument.

MERRILL LYNCH MUNICIPAL BOND FUND, INC . ON BEHALF OF THE NATIONAL PORTFOLIO

Attest:  By:

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND

Attest: By:

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND

Attest: By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND

Attest: By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND

Attest: By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND

Attest: By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND

Attest: By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND

Attest: By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH OHIO MUNICIPAL BOND FUND

Attest:

By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

MERRILL LYNCH MULTI - -STATE MUNICIPAL SERIES TRUST ON BEHALF OF MERRILL LYNCH TEXAS MUNICIPAL BOND FUND

Attest:

By: 

Donald C. Burke, Vice President and Treasurer

Alice A. Pellegrino, Secretary

EXHIBIT II

INFORMATION PERTAINING TO BOARD MEMBER NOMINEES

        Certain biographical and other information relating to the Board Member nominee who is an “interested person”, as defined in the Investment Company Act, of Municipal Series Trust is set forth below:

Name, Address and Age of Board Member Nominee	Position(s) Held with Municipal Series Trust	Term of Office and Length of Time Served	Principal Occupation During Past Five Years	Number of MLIM/FAM- Advised Funds Overseen	Public Directorships
Terry K. Glenn (61)* P.O. Box 9011 Princeton, New Jersey 08543-9011	Trustee and President	Trustee since 1999; President since 1999**	Chairman (Americas Region) since 2001, and Executive Vice President since 1983 of FAM and MLIM (the terms FAM and MLIM, as used herein, include their corporate predecessors); President of Merrill Lynch Mutual Funds since 1999; President of FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. (“Princeton Services”) since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. since 1985.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None

*   Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. Mr. Glenn is an “interested person,” as defined in the Investment Company Act, of Municipal Series Trust based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; President of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P.

**   Mr. Glenn served as Executive Vice President from 1993 until his election as President in 1999.

        Certain biographical and other information relating to the Board Member nominees who are not “interested persons”, as defined in the Investment Company Act, of the Municipal Series Trust is set forth below:

Name, Address and Age of Board Member Nominee	Position(s) Held with Municipal Series Trust	Term of Office and Length of Time Served	Principal Occupation During Past Five Years	Number of MLIM/FAM- Advised Funds Overseen	Public Directorships
James H. Bodurtha (57)* 36 Popponesset Road Cotuit, Massachusetts 02635	Trustee	Trustee since 1995	Director and Executive Vice President, The China Business Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.	31 registered investment companies consisting of 41 portfolios	Chairman of Berkshire Corporation
Joe Grills (66)* P.O. Box 98 Rapidan, Virginia 22733	N/A	N/A	Member of the Committee of Investment of Employee Benefit Assets of the Association of Financial Professionals (“CIEBA”) since 1986; Member of CIEBA’s Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Corporation (“IBM”) and Chief Investment Officer of IBM Retirement Funds from 1986 to 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000; Director, Duke Management Company since 1992 and Vice Chairman thereof since 1998; Director, LaSalle Street Fund since 1995; Director, Kimco Realty Corporation since 1997; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998; Director, Montpelier Foundation since 1998 and its Vice Chairman since 2000; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000.	20 registered investment companies consisting of 49 portfolios	Kimco Realty Corporation
Herbert I. London (62)* 2 Washington Square Village New York, New York 10012	Trustee	Trustee since 1987	John M. Olin Professor of Humanities, New York University since 1993 and Professor thereof since 1980; President, Hudson Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division of New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Director, Damon Corp. from 1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP since 1996.	31 registered investment companies consisting of 41 portfolios	None

Name, Address and Age of Board Member Nominee	Position(s) Held with Municipal Series Trust	Term of Office and Length of Time Served	Principal Occupation During Past Five Years	Number of MLIM/FAM- Advised Funds Overseen	Public Directorships
André F. Perold (49)* Morgan Hall Soldiers Field Boston, Massachusetts 02163	Trustee	Trustee since 1985	Harvard Business School: George Gund Professor of Finance and Banking since 2000; Sylvan C. Coleman Professor of Financial Management from 1993 to 2000; Trustee, Commonfund since 1989; Director, Sanlam Limited and Sanlam Life since 2001; Director, Genbel Securities Limited and Gensec Bank since 1999; Director, Stockback.com since 2000; Director, Sanlam Investment Management from 1999 to 2001; Director, Bulldogresearch.com since 2000; Director, Quantec Limited 1991 to 1999.	31 registered investment companies consisting of 41 portfolios	Commonfund and Stockback.com
Roberta Cooper Ramo (58)* P.O. Box 2168 500 Fourth Street, N.W. Albuquerque, New Mexico 87107	Trustee	Trustee since 2000	Shareholder, Modrall, Sperling, Roehl, Harris & Sisk, P.A. since 1993; President, American Bar Association from 1995 to 1996 and Member of the Board of Governors thereof from 1994 to 1997; Partner, Poole, Kelly & Ramo, Attorneys at Law, P.C. from 1977 to 1993; Director, Coopers, Inc. since 1999; Director of ECMC Group (service provider to students, schools and lenders) since 2001; Director, United New Mexico Bank (now Wells Fargo) from 1983 to 1988; Director, First National Bank of New Mexico (now First Security) from 1975 to 1976.	31 registered investment companies consisting of 41 portfolios	Coopers, Inc.
Robert S. Salomon, Jr. (64)* 106 Dolphin Cove Quay Stamford, Connecticut 06902	N/A	N/A	Principal of STI Management (investment adviser) since 1994; Chairman and CEO of Salomon Brothers Asset Management Inc. from 1992 to 1995; Chairman of Salomon Brothers Equity Mutual Funds from 1992 to 1995; regular columnist with Forbes Magazine since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers Inc. from 1975 to 1991; Trustee, Commonfund since 1980.	16 registered investment companies consisting of 36 portfolios	Commonfund
Melvin R. Seiden (71)* 780 Third Avenue, Suite 2502, New York, New York 10017	N/A	N/A	Director of Silbanc Properties, Ltd. (real estate, investment and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to 1987.	16 registered investment companies consisting of 36 portfolios	None
Stephen B. Swensrud (68)* 88 Broad Street, 2nd Floor, Boston, Massachusetts 02110	N/A	N/A	Chairman of Fernwood Advisors (investment adviser) since 1996; Principal of Fernwood Associates (financial consultant) since 1975; Chairman of RPP Corporation (manufacturing) since 1978; Director, International Mobile Communications, Inc. (telecommunications) since 1998.	42 registered investment companies consisting of 87 portfolios	None

*   Each of the Board Member nominees is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. and is a member of the Audit and Nominating Committee of each B on which he or she currently serves as a Board Member and will be a member of the Audit and Nominating Committee of Municipal Series Trust.

        Certain biographical and other information relating to the officers of Municipal Series Trust is set forth below:

Name, Address and Age of Officer	Position(s) Held with Municipal Series Trust	Term of Office** and Length of Time Served	Principal Occupation During Past Five Years	Number of MLIM/FAM- Advised Funds Overseen	Public Directorships
Donald C. Burke (41)	Vice President and Treasurer	Vice President since 1993; Treasurer since 1999	First Vice President of FAM and MLIM since 1997 and the Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton since 1999; Vice President of FAMD since 1999; Vice President of FAM and MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Kenneth A. Jacob (50)	Senior Vice President	Senior Vice President since	First Vice President of MLIM since 1997; Vice President of MLIM from 1984 to 1997; Vice President of FAM since 1984.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
John Loffredo (38)	Senior Vice President	Senior Vice President since 2001	First Vice President of MLIM since 1997; Vice President of MLIM from 1991 to 1997.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Alice A. Pellegrino (41)	Secretary	Secretary since 1999	Vice President of MLIM since 1999; Attorney associated with MLIM; Associate with Kirkpatrick & Lockhart LLP from 1992 to 1997.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
William R. Bock (66)	Vice President and Portfolio Manager	Vice President since 1997	Vice President of MLIM since 1989.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Robert A. DiMella, CFA (35)	Vice President and Portfolio Manager	Vice President since 1998	Vice President of MLIM since 1997; Assistant Vice President of MLIM from 1995 to 1997.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Theodore R. Jaeckel, Jr. (42)	Vice President and Portfolio Manager	Vice President since 1997	Director (Municipal Tax-Exempt Fund Management) of MLIM since 1997; Vice President of MLIM since 1991.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Michael Kalinoski (31)	Vice President and Portfolio Manager	Vice President since 1999	Vice President and Portfolio Manager of MLIM since 1999; Head Municipal Bond Trader with Strong Funds from 1996 to 1999.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Walter O’Connor (40)	Vice President and Portfolio Manager	Vice President since 1998	Director (Municipal Tax-Exempt) of MLIM since 1997; Vice President of MLIM from 1993 to 1997.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Roberto W. Roffo (36)	Vice President and Portfolio Manager	Vice President since 1998	Vice President of MLIM since 1996; Portfolio Manager with MLIM since 1992.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Robert D. Sneeden (49)	Vice President and Portfolio Manager	Vice President since 1997	Assistant Vice President and Portfolio Manager of MLIM since 1994.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None
Fred K. Steube (51)	Vice President and Portfolio Manager		Vice President of MLIM since 1989.	[Ÿ] registered investment companies consisting of [Ÿ] portfolios	None

*   The address of each officer listed above is P.O. Box 9011, Princeton, New Jersey 08543-9011.

** Elected by and serves at the pleasure of the Board of Municipal Series Trust.

        As of the Record Date, none of the Board Member nominees held shares of the State Funds except as set forth in the table below:

Name	Fund/Class	No. of Shares Held
Terry K. Glenn
James H. Bodurtha
Joe Grills
Herbert I. London
André F. Perold
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Melvin R. Seiden
Stephen B. Swensrud

        Information relating to the share ownership by the Board Member nominees as of the Record Date is set forth in the chart below:

Name	Aggregate Dollar Range of Equity in Each Series	Aggregate Dollar Range of Securities in All Registered Funds Overseen by Nominee in Merrill Lynch Family of Funds
Terry K. Glenn
James H. Bodurtha
Joe Grills
Herbert I. London
André F. Perold
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Melvin R. Seiden
Stephen B. Swensrud

        The following table provides information, as of the Record Date, for each Board Member Nominee and his immediate family members relating to securities owned beneficially or of record in ML & Co.

Name	Name of Owner and Relationship to Board Member Nominee	Title of Class	Value of Securities	Percent of Class
Terry K. Glenn	N/A
James H. Bodurtha	N/A
Joe Grills	N/A
Herbert I. London	N/A
Andre F. Perold	N/A
Roberta Cooper Ramo	N/A
Robert S. Salomon, Jr.	N/A
Melvin R. Seiden	N/A
Stephen B. Swensrud	N/A

EXHIBIT III

RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER

Description of Moody’s Investors Service, Inc.’s (“Moody’s”) Municipal Bond Ratings

Aaa	Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edge.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes 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 some time in the future.
Baa	Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba	Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest 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 a 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:    These bonds in the Aa, A, Baa, Ba and B groups which Moody’s believes possess the strongest investment attributes are designated by the symbols Aal, A1, Baal, Bal and B1.

        Short term Notes:    The three ratings of Moody’s for short-term notes are MIG 1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG I/VMIG 1 denotes “best quality, enjoying strong protection from established cash flows”; MIG 2/VMIG 2 denotes “high quality” with “ample margins of protection”; MIG 3/VMIG 3 instruments are of “favorable quality . . . but . . . lacking the undeniable strength of the preceding grades.”

Description of Moody’s Commercial Paper Ratings

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

        Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of short-term promissory obligations. Prime-1 repayment capacity will often be evidenced by the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins, in earning coverage of fixed financial charges and high internal cash generation; and with 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, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.

        Issuers rated Prime-3 (or 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 the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.

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

Description of Standard & Poor’s, A Division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”), Municipal Debt Ratings

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

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

I.	Likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation;
II.	Nature of and provisions of the 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.
AAA	Debt rated “AAA” has the highest rating assigned by Standard & Poor’s. Capacity of the obligor to meet its financial commitment on the obligation is extremely strong.

AA	Debt 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	Debt 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	Debt 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	Debt rated “BB,” “B,” “CCC,” “CC,” and “C” are regarded as having significant speculative
B	characteristics. “BB” indicates the least degree of speculation and “C” the highest degree of speculation
CCC CC	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.
C
D	Debt 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 tiling of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized.

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

c	The “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 the 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 documentation confirming investments and cash flows,
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 swans 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.

Description of Standard & Poor’s Commercial Paper Ratings

        A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from “A-1” for the highest quality obligations to “D” for the lowest. These categories are as follows:

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

A-2	Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated “A-1.”
A-3	Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.
B	Issues rated “B” are regarded as having only speculative capacity for timely payment.
C	This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
D	Debt rated “D” is in payment default. The “D” rating category is used when interest payments or principal 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.
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.

Description of Standard & Poor’s Note Rating

        A Standard & Poor’s note rating reflects the liquidity factors and market access risks unique to such 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, Inc.’s (“Fitch”) Investment Grade Bond Ratings

        Fitch investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The 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 that have the same rating are of similar but not necessarily identical credit quality since the rating categories do not fully reflect small differences in the degrees of credit risk.

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

        Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for 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.
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 an 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 which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
CC	Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time.
C	Bonds are in imminent default in payment of interest or principal.
DDD DD D	Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. “DDD” represents the highest potential for recovery on these bonds, and “D” represents the lowest potential for recovery.

        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.

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 municipal 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.

Notes to Fitch’s Investment Grade Bond Ratings, Speculative Grade Bond Ratings and Short-Term Rating

NR	Indicates that Fitch does not rate the specific issue.
Conditional	A conditional ratite 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.
Ratings Watch	Ratings are placed own Rating Watch 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. Rating Watch is relatively short- term, and should be resolved within three to 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.

EXHIBIT IV

SECURITY OWNERSHIP

        To the knowledge of Municipal Series Trust, the following persons or entities owned beneficially or of record 5% or more of any class of the State Fund’s outstanding shares as of the Record Date.

Arizona Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Arizona Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Connecticut Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Connecticut Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Maryland Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Maryland Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Massachusetts Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Massachusetts Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Michigan Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Michigan Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Minnesota Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Minnesota Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

North Carolina Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch North Carolina Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Ohio Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Ohio Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

Texas Fund

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o Merrill Lynch Texas Municipal Bond Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

        To the knowledge of Municipal Bond Fund, the following persons or entities owned beneficially or of record 5% or more of any class of the National Portfolio outstanding shares as of the Record Date:

National Portfolio

	Percentage of Class Owned				Owned
Shareholder Name and Address*	Class A	Class B	Class C	Class D	Beneficially	Of Record

*  Unless otherwise indicated, the address for each shareholder listed above is: c/o National Portfolio of Merrill Lynch Municipal Bond Fund, Inc., 800 Scudders Mill Road, Plainsboro, New Jersey 80536.

EXHIBIT V

CHARTER OF THE AUDIT COMMITTEE

OF THE BOARD OF DIRECTORS /TRUSTEES

FOR NON - -EXCHANGE LISTED FUNDS

        Although each investment company audit committee also serves as a nominating committee, the following charter pertains only to each audit and nominating committee’s duties as an audit committee. The Board of Directors/Trustees of each investment company listed on Appendix A hereto, has adopted the following audit committee charter:

I.   Composition of the Audit Committee

        The Audit Committee shall be composed of Directors/Trustees:

(a)   each of whom shall not be an “interested person” of the Fund, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended;

(b)   each of whom shall not have any relationship to the Fund that may interfere with the exercise of their independence from Fund management and the Fund; and

(c)   each of whom shall be financially literate, as such qualification is interpreted by the Board of Directors/Trustees in its business judgment, or shall become financially literate within a reasonable period of time after his or her appointment to the Audit Committee.

II.   Purposes of the Audit Committee

        The purposes of the Audit Committee are to assist the Board of Directors/Trustees:

(a)   in its oversight of the Fund’s accounting and financial reporting policies and practices, the Fund’s internal audit controls and procedures and, as appropriate, the internal audit controls and procedures of certain of the Fund’s service providers;

(b)   in its oversight of the Fund’s financial statements and the independent audit thereof; and

(c)   in acting as a liaison between the Fund’s independent accountants and the Board of Directors/Trustees.

        The function of the Audit Committee is oversight. Fund management is responsible for maintaining appropriate systems for accounting. The independent accountants of the Fund are responsible for conducting a proper audit of the Fund’s financial statements.

III.   Responsibilities and Duties of the Audit Committee

        The policies and procedures of the Audit Committee shall remain flexible to facilitate its ability to react to changing conditions and to generally discharge its functions. The following listed responsibilities describe areas of attention in broad terms.

        To carry out its purposes, the Audit Committee shall have the following responsibilities and duties:

(a)   to recommend the selection, retention or termination of the Fund’s independent accountants based on an evaluation of their independence and the nature and performance of audit services and other services;

(b)   to ensure that the independent accountants for the Fund submit on a periodic basis to the Audit Committee a formal written statement delineating all relationships between such independent accountants and the Fund, consistent with Independence Standards Board Standard No. 1, and to actively engage in a dialogue with the independent accountants for the Fund with respect to any disclosed relationships or services that may impact the objectivity and independence of such independent accountants and, if deemed appropriate by the Audit Committee, to recommend that the Board of Directors/Trustees take appropriate action in response to the report of such independent accountants to satisfy itself of the independence of such independent accountants;

(c)   to receive specific representations from the independent accountants with respect to their independence and to consider whether the provision of any disclosed non-audit services by the independent accountants is compatible with maintaining the independence of those accountants;

(d)   to review the fees charged by independent accountants for audit and other services;

(e)   to review with the independent accountants arrangements for annual audits and special audits and the scope thereof;

(f)   to discuss with the independent accountants those matters required by SAS No. 61 and SAS No. 90 relating to the Fund’s financial statements, including, without limitation, any adjustment to such financial statements recommended by such independent accountants, or any other results of any audit;

(g)   to consider with the independent accountants their comments with respect to the quality and adequacy of the Fund’s accounting and financial reporting policies, practices and internal controls and management’s responses thereto, including, without limitation, the effect on the Fund of any recommendation of changes in accounting principles or practices by management or the independent accountants;

(h)   to report to the Board of Directors/Trustees regularly with respect to the Audit Committee’s activities and to make any recommendations it believes necessary or appropriate with respect to the Fund’s accounting and financial reporting policies, practices and the Fund’s internal controls;

(i)   to review legal and regulatory matters presented by counsel and the independent accountants for the Fund that may have a material impact on the Fund’s financial statements;

(j)   to cause to be prepared and to review and submit any report, including any recommendation of the Audit Committee, required to be included in the Fund’s annual proxy statement by the rules of the Securities and Exchange Commission; and

(k)   to perform such other functions consistent with this Charter, the Fund’s By-laws and governing law, as the Audit Committee or the Board of Directors/Trustees deems necessary or appropriate.

        In fulfilling their responsibilities hereunder, it is recognized that members of the Audit Committee are not full-time employees of the Fund and are not, and do not represent themselves to be, accountants or auditors by profession or experts in the field of accounting or auditing. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures, and each member of the Audit Committee shall be entitled to rely on (i) the integrity of those persons and organizations inside and outside the Fund from which the Audit Committee receives information and (ii) the accuracy of the financial and other information provided to the Audit Committee by such persons or organizations absent actual knowledge to the contrary (which actual knowledge shall be promptly reported to the Board of Directors/Trustees).

        The independent accountants for the Fund are ultimately accountable to the Board of Directors/Trustees and the Audit Committee. The Board of Directors/Trustees and the Audit Committee have the ultimate authority and responsibility to select, evaluate and, where appropriate, replace the independent accountants for the Fund (or to nominate the independent accountants to be proposed for shareholder approval in the proxy statement).

IV.   Meetings

        The Audit Committee shall meet at least once annually with the independent accountants (outside the presence of Fund management) and at least once annually with the representatives of Fund management responsible for the financial and accounting operations of the Fund. The Audit Committee shall hold special meetings at such times as the Audit Committee believes appropriate. Members of the Audit Committee may participate in a meeting of the Audit Committee by means of conference call or similar communications equipment by means of which all persons participating in such meeting can hear each other.

V.   Outside Resources and Assistance from Fund Management

        The appropriate officers of the Fund shall provide or arrange to provide such information, data and services as the Audit Committee may request. The Audit Committee shall have the power and authority to take all action it believes necessary or appropriate to discharge its responsibilities, including the authority to retain at the expense of the Fund their own counsel and other experts and consultants whose expertise would be considered helpful to the Audit Committee.

        Dated June 20, 2001

Appendix A

Master Focus Twenty Trust

Merrill Lynch Focus Twenty Fund, Inc.

Mercury Focus Twenty Fund, Inc.

Master Large Cap Series Trust

Merrill Lynch Large Cap Series Funds, Inc.

Mercury Large Cap Series Funds, Inc.

Master Mid Cap Growth Trust

Merrill Lynch Mid Cap Growth Fund, Inc.

Mercury Mid Cap Growth Fund, Inc.

Master Premier Growth Trust

Merrill Lynch Premier Growth Fund, Inc.

Mercury Premier Growth Fund, Inc.

Merrill Lynch California Municipal Series Trust

Merrill Lynch California Municipal Bond Fund

Merrill Lynch California Insured Municipal Bond Fund

Merrill Lynch Growth fund

Merrill Lynch Multi-State Limited Maturity Municipal Series Trust

Merrill Lynch California Limited Maturity Municipal Bond Fund

Merrill Lynch Florida Limited Maturity Municipal Bond Fund

Merrill Lynch Multi-State Municipal Series Trust

Merrill Lynch Arizona Municipal Bond Fund

Merrill Lynch Arkansas Municipal Bond fund

Merrill Lynch Colorado Municipal Bond Fund

Merrill Lynch Connecticut Municipal Bond Fund

Merrill Lynch Florida Municipal Bond Fund

Merrill Lynch Maryland Municipal Bond Fund

Merrill Lynch Massachusetts Municipal Bond Fund

Merrill Lynch Michigan Municipal Bond Fund

Merrill Lynch Minnesota Municipal Bond Fund

Merrill Lynch New Jersey Municipal Bond Fund

Merrill Lynch New Mexico Municipal Bond Fund

Merrill Lynch New York Municipal Bond Fund

Merrill Lynch North Carolina Municipal Bond Fund

Merrill Lynch Ohio Municipal Bond Fund

Merrill Lynch Oregon Municipal Bond Fund

Merrill Lynch Pennsylvania Municipal Bond Fund

Merrill Lynch Texas Municipal Bond Fund

Merrill Lynch World Income Fund, Inc.

The information in this statement of additional information is not complete and may be changed. We may use this statement of additional information to sell securities until the registration statement containing this statement of additional information, which has been filed with the Securities and Exchange Commission, is effective. This statement of additional information is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION

DATED JANUARY 10, 2002

MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND,

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND,

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND,

MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND,

MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND,

MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND,

MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND,

MERRILL LYNCH OHIO MUNICIPAL BOND FUND, AND

MERRILL LYNCH TEXAS MUNICIPAL BOND FUND,

EACH A SERIES OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

THE NATIONAL PORTFOLIO OF MERRILL LYNCH MUNICIPAL BOND FUND, INC.

P.O. Box 9011

Princeton, New Jersey 08543-9011

(609) 282-2800

        This Statement of Additional Information is not a prospectus and should be read in conjunction with the Joint Proxy Statement and Prospectus of Merrill Lynch Arizona Municipal Bond Fund (the “Arizona Fund”), Merrill Lynch Connecticut Municipal Bond Fund (the “Connecticut Fund”), Merrill Lynch Maryland Municipal Bond Fund (the “Maryland Fund”), Merrill Lynch Massachusetts Municipal Bond Fund (the “Massachusetts Fund”), Merrill Lynch Michigan Municipal Bond Fund (the “Michigan Fund”), Merrill Lynch Minnesota Municipal Bond Fund (the “Minnesota Fund”), Merrill Lynch North Carolina Municipal Bond Fund (the “North Carolina Fund”), Merrill Lynch Ohio Municipal Bond Fund (the “Ohio Fund”), and Merrill Lynch Texas Municipal Bond Fund (the “Texas Fund”), each a series of Merrill Lynch Multi-State Municipal Series Trust (“Municipal Series Trust”), and the National Portfolio (the “National Portfolio”) of Merrill Lynch Municipal Bond Fund, Inc. (“Municipal Bond Fund”), dated February [·], 2002 (the “Proxy Statement and Prospectus”), which has been filed with the Securities and Exchange Commission (the “Commission”) and can be obtained, without charge, by calling Municipal Bond Fund at 1-800-637-3863, or by writing to Municipal Bond Fund at the above address. This Statement of Additional Information has been incorporated by reference into the Proxy Statement and Prospectus. The Arizona Fund, the Connecticut Fund, the Maryland Fund, the Massachusetts Fund, the Michigan Fund, the Minnesota Fund, the North Carolina Fund, the Ohio Fund, and the Texas Fund are individually referred to herein as a “State Fund” and collectively as the “State Funds,” as the context requires.

        Further information about the National Portfolio is contained in the Statement of Additional Information of Municipal Bond Fund, dated October 5, 2001 (the “Municipal Bond Fund Statement”), which is incorporated by reference into and accompanies this Statement of Additional Information.

        The Commission maintains a web site (http://www.sec.gov) that contains the prospectus relating to each State Fund, the statement of additional information relating to each State Fund, the prospectus of Municipal Bond Fund, the Municipal Bond Fund Statement, other material incorporated by reference and other information regarding Municipal Bond Fund, the National Portfolio Municipal Series Trust, and each State Fund.

The date of this Statement of Additional Information is February [·], 2002

TABLE OF CONTENTS

General Information	2
Financial Statements	2

GENERAL INFORMATION

        The shareholders of each State Fund are being asked to approve (i) the acquisition of substantially all of the assets, and the assumption of substantially all of the liabilities, of the applicable State Fund, by the National Portfolio in return for an equal aggregate value of shares of common stock of the National Portfolio, and (ii) the election of the Board of Trustees of Municipal Series Trust. Each acquisition of assets of a State Fund by the National Portfolio and assumption of liabilities of a State Fund by the National Portfolio is individually referred to herein as a “State Fund Acquisition” and the State Fund Acquisitions are collectively referred to herein as the “Reorganization.” Municipal Bond Fund is an open-end fund that is organized as a Maryland corporation. A Special Meeting of the Shareholders of each State Fund will be held at the offices of Fund Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey on Monday, March 18, 2002 at the following times:

State Fund	Meeting Time
Arizona Fund	9:30 a.m. Eastern time
Connecticut Fund	10:00 a.m. Eastern time
Maryland Fund	10:30 a.m. Eastern time
Massachusetts Fund	11:00 a.m. Eastern time
Michigan Fund	11:30 a.m. Eastern time
Minnesota Fund	12:00 p.m. Eastern time
North Carolina Fund	12:30 p.m. Eastern time
Ohio Fund	1:00 p.m. Eastern time
Texas Fund	1:30 p.m. Eastern time

        For detailed information about each State Fund Acquisition and the Reorganization and the election of the Board of Trustees of Municipal Series Trust, shareholders of each State Fund should refer to the Proxy Statement and Prospectus. For further information about the National Portfolio, shareholders should refer to the Municipal Bond Fund Statement, which accompanies this Statement of Additional Information and is incorporated by reference herein.

FINANCIAL STATEMENTS

        In accordance with Part B, Item 14(a) of Form N-14, pro forma financial statements reflecting consummation of a State Fund Acquisition or consummation of the Reorganization have not been prepared since, as of January [    ·    ], 2002, the net asset value of no State Fund exceeded 10% of the net asset value of the National Portfolio.

National Portfolio

        Audited financial statements and accompanying notes for the fiscal year ended June 30, 2001 and the independent auditors’ report thereon, dated August 17, 2001, of the National Portfolio are incorporated herein by reference from Municipal Bond Fund’s Annual Report to Stockholders, which accompanies this Statement of Additional Information.

Arizona Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 13, 2001, of the Arizona Fund are incorporated herein by reference from the Arizona Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Arizona Fund.

Connecticut Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the Connecticut Fund are incorporated herein by reference from the Connecticut Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Connecticut Fund.

Maryland Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the Maryland Fund are incorporated herein by reference from the Maryland Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Maryland Fund.

Massachusetts Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the Massachusetts Fund are incorporated herein by reference from the Massachusetts Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Massachusetts Fund.

Michigan Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the Michigan Fund are incorporated herein by reference from the Michigan Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Michigan Fund.

Minnesota Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the Minnesota Fund are incorporated herein by reference from the Minnesota Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Minnesota Fund.

North Carolina Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the North Carolina Fund are incorporated herein by reference from the North Carolina Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the North Carolina Fund.

Ohio Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 10, 2001, of the Ohio Fund are incorporated herein by reference from the Ohio Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Ohio Fund.

Texas Fund

        Audited financial statements and accompanying notes for the fiscal year ended July 31, 2001 and the independent auditors’ report thereon, dated September 12, 2001, of the Texas Fund are incorporated herein by reference from the Texas Fund’s Annual Report to Shareholders, which accompanies this Statement of Additional Information if you are a shareholder of the Texas Fund.

PART C

OTHER INFORMATION

Item 15.    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.

        Insofar as the conditional advancing of indemnification moneys for actions based on the Investment Company Act of 1940, as amended (the “Investment Company Act”), may be concerned, Article VI of the Registrant’s By-Laws provides that such payments will be made only on the following conditions: (i) advances may be made only on receipt of a written affirmation of such person’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any such advance if it is ultimately determined that the standard of conduct has not been met; and (ii) (a) such promise must be secured by a security for the undertaking in form and amount acceptable to the Registrant, (b) the Registrant is insured against losses arising by receipt by the advance, or (c) 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 at the time the advance is proposed to be made, there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification.

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

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to 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 16.    Exhibits.

1(a)	—	Articles of Incorporation of the Registrant, dated September 30, 1976.(a)
1(b)	—	Articles of Amendment to the Articles of Incorporation of the Registrant, dated October 4, 1976.(b)
1(c)	—	Articles Supplementary to the Articles of Incorporation of the Registrant increasing the authorized capital stock of the Insured Portfolio.(c)
1(d)	—	Articles Supplementary to the Articles of Incorporation of the Registrant establishing Class B Common Stock of the Limited Maturity Portfolio.(d)
2	—	By-Laws of the Registrant.(b)
3	—	Not applicable.
4	—	Form of Agreement and Plan of Reorganization between the Registrant and Merrill Lynch Multi-State Municipal Series Trust.(e)

5	—	Copies of instruments defining the rights of stockholders, including the relevant portions of the Articles of Incorporation of the Registrant, as amended and supplemented, and the By-Laws of the Registrant.(f)
6	—	Form of Advisory Agreement between the Registrant and Fund Asset Management, L.P.(a)
7	—	Form of Unified Distribution Agreement between the Registrant and the Distributor.(g)
8	—	None.
9	—	Custody Agreement between the Registrant and The Bank of New York.(a)
10(a)	—	Form of Amended and Restated Class B Distribution Plan.(h)
10(b)	—	Form of Amended and Restated Class C Distribution Plan.(h)
10(c)	—	Form of Amended and Restated Class D Distribution Plan.(h)
10(d)	—	Merrill Lynch Select  SM Pricing System Plan pursuant to Rule 18f-3 under the Investment Company Act.(i)
11	—	Opinion and Consent of Sidley Austin Brown & Wood LLP .
12	—	Tax Opinion of Sidley Austin Brown & Wood LLP .(j)
13	—	Not applicable.
14(a)	—	Consent of Deloitte & Touche LLP , independent auditors for the Registrant.
14(b)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(c)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(d)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(e)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(f)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(g)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(h)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(i)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Ohio Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(j)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Texas Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
15	—	Not applicable.
16	—	Power of Attorney.(k)
17(a)	—	Prospectus, dated October 5, 2001, of the Registrant.
17(b)	—	Statement of Additional Information, dated October 5, 2001, of the Registrant.
17(c)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(d)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(e)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.

17(f)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(g)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(h)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(i)	—	Prospectus, dated November 14, 2001, of Merrill Lynch North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(j)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Ohio Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(k)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Texas Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(l)	—	Annual Report to Shareholders of the Registrant, as of June 30, 2001.
17(m)	—	Annual Report to Shareholders of Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(n)	—	Annual Report to Shareholders of Merrill Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(o)	—	Annual Report to Shareholders of Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(p)	—	Annual Report to Shareholders of Merrill Lynch Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(q)	—	Annual Report to Shareholders of Merrill Lynch Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(r)	—	Annual Report to Shareholders of Merrill Lynch Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(s)	—	Annual Report to Shareholders of Merrill Lynch North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(t)	—	Annual Report to Shareholders of Merrill Lynch Ohio Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(u)	—	Annual Report to Shareholders of Merrill Lynch Texas Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.

(a) Filed on October 31, 1980 as an Exhibit to Post-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-1A (File No. 2-57354) under the Securities Act (the “Registration Statement”).

(b) Filed on October 12, 1988 as an Exhibit to Post-Effective Amendment No. 13 to the Registration Statement.

(c) Filed on October 29, 1990 as an Exhibit to Post-Effective Amendment No. 15 to the Registration Statement.

(d) Filed on September 1, 1992 as an Exhibit to Post-Effective Amendment No. 16 to the Registration Statement.

(e) Included as Exhibit I to the Proxy Statement and Prospectus contained in this Registration Statement.

(f) Reference is made to Article V (section 3), Article VI (sections 3 and 5), Article VII and Article VIII of the Registrant’s Articles of Incorporation filed on October 31, 1980 as an Exhibit to Post-Effective Amendment No. 4 to the Registration Statement; and to Article II, Article III (section 3, 5 and 6), Article VII, Article XII, Article XIII and Article XV of the Registrant’s By-Laws, filed on October 12, 1988 as an Exhibit to Post-Effective Amendment No. 13 to the Registration Statement.

(g) 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.

(h) 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.

(i) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A under the Securities Act of 1933, as amended, filed on January 25, 1996, relating to shares of Merrill Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal Series Trust (File No. 2-99473).

(j) To be filed by post-effective amendment.

(k) Included on the signature page of the Proxy Statement and Prospectus contained in this Registration Statement.

Item 17.    Undertakings.

        (1)  The undersigned Registrant agrees that prior to any public reoffering of the securities registered through use of a prospectus which is party of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the reoffering prospectus will contain information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by other items of the applicable form.

        (2)  The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be field as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of securities at that time shall be deemed to be the initial bona fide offering of them.

        (3)  The Registrant undertakes to file, by post-effective amendment, a copy of an opinion of counsel as to certain tax matters within a reasonable time after receipt of such opinion.

SIGNATURES

        As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant, in the Township of Plainsboro and State of New Jersey, on the 10th day of January, 2002.

MERRILL LYNCH MUNICIPAL BOND FUND , INC .

(Registrant)

By:  /s/    TERRY K. GLENN

    (Terry K. Glenn, President)

        Each person whose signature appears below hereby authorizes Terry K. Glenn, Donald C. Burke, and Alice A. Pellegrino, or any of them, as attorney-in-fact, to sign on his or her behalf, individually and in each capacity stated below, any amendments to this Registration Statement (including post-effective amendments) and to file the same, with all exhibits thereto, with the Securities and Exchange Commission.

        As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signatures	Title	Date
/s/    TERRY K. GLENN                                                                                                             (Terry K. Glenn)	President (Principal Executive Officer) and Director	January 10, 2002
/s/    DONALD C. BURKE                                                                                                             (Donald C. Burke)	Vice President and Treasurer (Principal Financial and Accounting Officer)	January 10, 2002
/s/    RONALD W. FORBES                                                                                                             (Ronald W. Forbes)	Director	January 10, 2002
/s/    CYNTHIA A. MONTGOMERY                                                                                                             (Cynthia A. Montgomery)	Director	January 10, 2002
/s/    CHARLES C. REILLY                                                                                                             (Charles C. Reilly)	Director	January 10, 2002
/s/    KEVIN A. RYAN                                                                                                             (Kevin A. Ryan)	Director	January 10, 2002
(Roscoe S. Suddarth)	Director
/s/    RICHARD R. WEST                                                                                                             (Richard R. West)	Director	January 10, 2002
/s/    EDWARD D. ZINBARG                                                                                                             (Edward D. Zinbarg)	Director	January 10, 2002

[Proxy Card Front]

CLASS [·]

MERRILL LYNCH                      MUNICIPAL BOND FUND

OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

P.O. Box 9011

Princeton, New Jersey 08543-9011

PROXY

This proxy is solicited on behalf of the Board of Trustees

        The undersigned hereby appoints Terry K. Glenn, Donald C. Burke, and Alice A. Pellegrino as proxies, each with the power to appoint his or her substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch                   Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust (the “Fund”) held of record by the undersigned on January 22, 2002 at a Special Meeting of Shareholders of the Fund to be held on March 18, 2002, or any adjournment thereof.

        THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND PROPOSAL 2.

        By signing and dating the reverse side of this card, you authorize the proxies to vote each proposal as marked, or if not marked, to vote “FOR” each proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return the card at once in the enclosed envelope.

(Continued and to be signed on the reverse side)

[Proxy Card Reverse]

1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between Merrill Lynch Multi-State Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc.

FOR    ¨ AGAINST    ¨ ABSTAIN    ¨

2. Election of Trustees of Merrill Lynch Multi-State Municipal Series Trust

	For All ¨	Withhold All ¨	For All Except ¨
01)  James H. Bodurtha
02)  Terry K. Glenn
03)  Joe Grills
04)  Herbert I. London
05)  André F. Perold
06)  Roberta Cooper Ramo
07)  Robert S. Salomon Jr.
08)  Melvin R. Seiden
09)  Stephen B. Swensrud

To withhold authority to vote for certain nominees only, mark “For All Except” and write each such nominee’s number on the line below.

3. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof.

Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons.

Dated:                               , 2002

X

Signature

X

Signature, if held jointly

        PLEASE MARK BOXES /X/ OR x IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

EXHIBIT INDEX

Exhibit Number		Description
11	—	Opinion and Consent of Sidley Austin Brown & Wood LLP .
14(a)	—	Consent of Deloitte & Touche LLP , independent auditors for the Registrant.
14(b)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(c)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(d)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(e)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(f)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(g)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(h)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(i)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Ohio Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
14(j)	—	Consent of Deloitte & Touche LLP , independent auditors for Merrill Lynch Texas Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(a)	—	Prospectus, dated October 5, 2001, of the Registrant.
17(b)	—	Statement of Additional Information, dated October 5, 2001, of the Registrant.
17(c)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(d)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(e)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(f)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(g)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(h)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(i)	—	Prospectus, dated November 14, 2001, of Merrill Lynch North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(j)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Ohio Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(k)	—	Prospectus, dated November 14, 2001, of Merrill Lynch Texas Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust.
17(l)	—	Annual Report to Shareholders of the Registrant, as of June 30, 2001.

Exhibit Number		Description
17(m)	—	Annual Report to Shareholders of Merrill Lynch Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(n)	—	Annual Report to Shareholders of Merrill Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(o)	—	Annual Report to Shareholders of Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(p)	—	Annual Report to Shareholders of Merrill Lynch Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(q)	—	Annual Report to Shareholders of Merrill Lynch Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(r)	—	Annual Report to Shareholders of Merrill Lynch Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(s)	—	Annual Report to Shareholders of Merrill Lynch North Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(t)	—	Annual Report to Shareholders of Merrill Lynch Ohio Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.
17(u)	—	Annual Report to Shareholders of Merrill Lynch Texas Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust, as of July 31, 2001.

EX-99.11

                                                                      Exhibit 11
                         SIDLEY AUSTIN BROWN & WOOD LLP
                                 1501 K STREET
                          N.W., Washington D.C. 20005
                            TELEPHONE: 212-906-2000
                            FACSIMILE: 212-906-2021


                                                                January 10, 2002
Merrill Lynch Municipal Bond Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey  08536
Ladies and Gentlemen:

         We have acted as special Maryland counsel for Merrill Lynch Municipal
Bond Fund, Inc. (the "Fund") in connection with the proposed acquisition by the
National Portfolio of the Fund (the "National Portfolio") of substantially all
of the assets, and the proposed assumption by the National Portfolio of
substantially all of the liabilities, of each of Merrill Lynch Arizona Municipal
Bond Fund (the "Arizona Fund"), Merrill Lynch Connecticut Municipal Bond Fund
(the "Connecticut Fund"), Merrill Lynch Maryland Municipal Bond Fund (the
"Maryland Fund"), Merrill Lynch Massachusetts Municipal Bond Fund (the
"Massachusetts Fund"), Merrill Lynch Michigan Municipal Bond Fund (the "Michigan
Fund"), Merrill Lynch Minnesota Municipal Bond Fund (the "Minnesota Fund"),
Merrill Lynch North Carolina Municipal Bond Fund (the "North Carolina Fund"),
Merrill Lynch Ohio Municipal Bond Fund (the "Ohio Fund"), and Merrill Lynch
Texas Municipal Bond Fund (the "Texas Fund") (each, a "State Fund" and
collectively, the "State Funds), each a series of Merrill Lynch Multi-State
Municipal Series Trust ("Municipal Series Trust"), and the simultaneous
distribution to each State Fund of newly-issued shares of common stock of the
National Portfolio having an aggregate net asset value equal to the net assets
of the applicable State Fund acquired by the National Portfolio reduced by the
amount of liabilities of the applicable State Fund assumed by the National
Portfolio (collectively, the "Reorganization"). This opinion is furnished in
connection with the Fund's Registration Statement on Form N-14 under the
Securities Act of 1933, as amended (the "Registration Statement"), relating to
shares of common stock, par value $0.10 per share, of the Fund (the "Shares"),
to be issued in the Reorganization.

         As special Maryland counsel for the Fund in connection with the
Reorganization, we are familiar with the proceedings taken by the Fund and to be
taken by the Fund in connection with the authorization and issuance of the
Shares. In addition, we have examined and are familiar with the Articles of
Incorporation of the Fund, as amended and supplemented, the By-laws of the Fund,
as amended, and such other documents as we have deemed relevant to the matters
referred to in this opinion.

         Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between the Fund and
Municipal Series Trust (the "Agreement and Plan") as set forth in the joint
proxy statement and prospectus constituting a part of the Registration Statement
(the "Proxy Statement and Prospectus"), the Shares, upon issuance in the manner
referred to in the Agreement and Plan, against payment of the consideration set
forth in the Agreement and Plan, will be legally issued, fully paid, and
non-assessable shares of common stock of the National Portfolio.


         We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting a part thereof.

                                       Very truly yours,

                                       /S/ Sidley Austin Brown & Wood LLP

EX-99.14A

                                                                   Exhibit 14(a)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated August 17, 2001 for
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") appearing in the June 30,
2001 Annual Report of the Fund, and to the references to us under the captions
"COMPARISON OF THE FUNDS - Financial Highlights - National Portfolio" and
"EXPERTS", appearing in the Joint Proxy Statement and Prospectus, which are part
of such Registration Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14B

                                                                   Exhibit 14(b)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 13, 2001
for Merrill Lynch Arizona Municipal Bond Fund (the "Fund") of Merrill Lynch
Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual Report
of the Fund, and to the references to us under the captions "COMPARISON OF THE
FUNDS - Financial Highlights - Arizona Fund" and "EXPERTS", appearing in the
Joint Proxy Statement and Prospectus, which are part of such Registration
Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14C

                                                                   Exhibit 14(c)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") of Merrill Lynch
Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual Report
of the Fund, and to the references to us under the captions "COMPARISON OF THE
FUNDS - Financial Highlights - Connecticut Fund" and "EXPERTS", appearing in the
Joint Proxy Statement and Prospectus, which are part of such Registration
Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14D

                                                                   Exhibit 14(d)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch Maryland Municipal Bond Fund (the "Fund") of Merrill Lynch
Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual Report
of the Fund, and to the references to us under the captions "COMPARISON OF THE
FUNDS - Financial Highlights - Maryland Fund" and "EXPERTS", appearing in the
Joint Proxy Statement and Prospectus, which are part of such Registration
Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14E

                                                                   Exhibit 14(e)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch Massachusetts Municipal Bond Fund (the "Fund") of Merrill
Lynch Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual
Report of the Fund, and to the references to us under the captions "COMPARISON
OF THE FUNDS - Financial Highlights - Massachusetts Fund" and "EXPERTS",
appearing in the Joint Proxy Statement and Prospectus, which are part of such
Registration Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14F

                                                                   Exhibit 14(f)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch Michigan Municipal Bond Fund (the "Fund") of Merrill Lynch
Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual Report
of the Fund, and to the references to us under the captions "COMPARISON OF THE
FUNDS - Financial Highlights - Michigan Fund" and "EXPERTS", appearing in the
Joint Proxy Statement and Prospectus, which are part of such Registration
Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14G

                                                                   Exhibit 14(g)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch Minnesota Municipal Bond Fund (the "Fund") of Merrill Lynch
Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual Report
of the Fund, and to the references to us under the captions "COMPARISON OF THE
FUNDS - Financial Highlights - Minnesota Fund" and "EXPERTS", appearing in the
Joint Proxy Statement and Prospectus, which are part of such Registration
Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14H

                                                                   Exhibit 14(h)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch North Carolina Municipal Bond Fund (the "Fund") of Merrill
Lynch Multi-State Municipal Series Trust appearing in the July 31, 2001 Annual
Report of the Fund, and to the references to us under the captions "COMPARISON
OF THE FUNDS - Financial Highlights - North Carolina Fund" and "EXPERTS",
appearing in the Joint Proxy Statement and Prospectus, which are part of such
Registration Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14I

                                                                   Exhibit 14(i)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 10, 2001
for Merrill Lynch Ohio Municipal Bond Fund (the "Fund") of Merrill Lynch Multi-
State Municipal Series Trust appearing in the July 31, 2001 Annual Report of the
Fund, and to the references to us under the captions "COMPARISON OF THE FUNDS -
Financial Highlights - Ohio Fund" and "EXPERTS", appearing in the Joint Proxy
Statement and Prospectus, which are part of such Registration Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.14J

                                                                   Exhibit 14(j)

INDEPENDENT AUDITORS' CONSENT


We consent to the use in Registration Statement No. 811-02688 on Form N-14 of
Merrill Lynch Municipal Bond Fund, Inc. of our report dated September 12, 2001
for Merrill Lynch Texas Municipal Bond Fund (the "Fund") of Merrill Lynch Multi-
State Municipal Series Trust appearing in the July 31, 2001 Annual Report of the
Fund, and to the references to us under the captions "COMPARISON OF THE FUNDS -
Financial Highlights - Texas Fund" and "EXPERTS", appearing in the Joint Proxy
Statement and Prospectus, which are part of such Registration Statement.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
January 9, 2002

EX-99.17A

                                                                   EXHIBIT 17(a)


                   [LOGO Merrill Lynch Investment Managers]

                    Merrill Lynch Municipal Bond Fund, Inc.

                                                                 October 5, 2001

           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
           [ICON]
           KEY FACTS
           -------------------------------------------------------------------
           Merrill Lynch Municipal Bond Fund at a Glance                     3
           Risk/Return Bar Chart                                             6
           Fees and Expenses                                                 9

           [ICON]
           DETAILS ABOUT THE FUND
           -------------------------------------------------------------------
           How each Portfolio Invests                                       15
           Investment Risks                                                 18

           [ICON]
           YOUR ACCOUNT
           -------------------------------------------------------------------
           Merrill Lynch Select Pricing(SM) System                          23
           How to Buy, Sell, Transfer and Exchange Shares                   29
           Participation in Fee-Based Programs                              33

           [ICON]
           MANAGEMENT OF THE FUND
           -------------------------------------------------------------------
           Fund Asset Management                                            36
           Financial Highlights                                             37

           [ICON]
           FOR MORE INFORMATION
           -------------------------------------------------------------------
           Shareholder Reports                                      Back Cover
           Statement of Additional Information                      Back Cover

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.


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

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

Municipal Bonds -- debt obligations issued by or on behalf of a governmental
entity or other qualifying issuer that pay interest exempt from Federal income
tax.

Investment Grade-- any of the four highest debt obligation ratings by
recognized rating agencies, including Standard & Poor's, Moody's Investors
Service, Inc. and Fitch, Inc.

[ICON]
Key Facts

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

What is the Fund's investment objective?

The Fund consists of three separate portfolios -- the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio. Each Portfolio is, in
effect, a separate fund that issues its own shares. The investment objective of
each Portfolio is to provide shareholders with as high a level of income exempt
from Federal income taxes as is consistent with the investment policies of such
Portfolio.

What are the Fund's main investment strategies?

Each Portfolio seeks to achieve its objective by investing at least 80% of its
net assets in municipal bonds under normal circumstances. In choosing
investments, each Portfolio's management analyzes the credit quality of issuers
(and insurers, in the case of the Insured Portfolio) and considers the yields
available on municipal bonds with different maturities. The investment
strategies of the Portfolios differ primarily in the quality and maturity of the
municipal bonds in which they invest. None of the Portfolios can guarantee that
it will achieve its objective.

The Insured Portfolio invests primarily in investment grade municipal bonds that
are covered by insurance that guarantees the timely payment of principal at
maturity and interest when due. The Portfolio will usually invest a majority of
its assets in municipal bonds that have a maturity of five years or longer.
While insurance reduces the credit risk of the Portfolio's investments, it may
also reduce the yield on insured bonds. Therefore, the Portfolio's yield may be
lower than it would be if the Portfolio invested in uninsured municipal bonds.
Insurance does not guarantee the market value of municipal bonds in the
Portfolio or the value of the Portfolio's shares.

The National Portfolio may invest in municipal bonds rated in any rating
category or in unrated municipal bonds. The Portfolio will usually invest in
municipal bonds that have a maturity of five years or longer. Portfolio
management chooses municipal bonds that it believes offer a relatively high
potential for total return relative to their total risk. Although the Portfolio
may invest in municipal bonds in any rating category, Portfolio management does
not presently intend to invest more than 35% of the Portfolio's assets in
municipal bonds rated below investment grade (below BBB by Standard & Poor's
("S&P") or Fitch, Inc. ("Fitch") or below Baa by Moody's Investors Service, Inc.
("Moody's")) or in unrated municipal bonds that Portfolio management believes
are of comparable quality. These lower-rated obligations are commonly known as
"junk bonds." The 35% limitation

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.
                                                                               3


Municipal Notes -- shorter-term municipal debt obligations that pay interest
exempt from Federal income tax and that have a maturity that is generally one
year or less.

[ICON]
KEY FACTS

on junk bond investments reflects only the present intention of Portfolio
management, and may be changed at any time. Therefore, it is possible that the
Portfolio could invest up to 100% of its assets in junk bonds. Portfolio
management does not presently intend to invest in municipal bonds that are in
default or that it believes will be in default.

The Limited Maturity Portfolio invests primarily in investment grade municipal
bonds that have a maturity of less than four years or municipal notes. Because
of their shorter maturities, the Portfolio's investments will not usually be as
sensitive to changes in prevailing interest rates as are long-term municipal
bonds. Fluctuations in interest rates on short-term municipal bonds may,
however, vary more widely than those on long-term municipal bonds from time to
time.

None of the Portfolios currently contemplates investing more than 25% of its
total assets in municipal bonds whose issuers are located in the same state.

Each of the Portfolios is permitted to engage in transactions in certain
derivatives, such as financial futures contracts and options thereon, for
hedging purposes. Each of the Portfolios may also invest in other derivatives,
such as indexed and inverse floating rate obligations and swap agreements, for
hedging purposes or to enhance income.

What are the main risks of investing in the Portfolios?

As with any mutual fund, the value of each Portfolio's investments -- and
therefore the value of the Portfolio's shares -- may fluctuate. These changes
may occur in response to interest rate changes or other developments that may
affect the municipal bond market generally or a particular issuer or obligation.
Generally, when interest rates go up, the value of municipal bonds goes down.
Bonds with longer maturities are affected more by changes in interest rates than
bonds with shorter maturities. Also, Portfolio management may select securities
that underperform the bond market, the relevant indices or other funds with
similar investment objectives and investment strategies. Derivatives and high
yield bonds may be volatile and subject to liquidity, leverage and credit risks.
If the value of a Portfolio's investments goes down, you may lose money.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

4


The National Portfolio is generally subject to greater risk than the other
Portfolios because it may invest in junk bonds. Investing in junk bonds is
riskier than investing in higher quality municipal bonds -- price fluctuations
may be larger and more frequent, and there is greater risk of losing both income
and principal. In addition, the National Portfolio may also invest to a greater
extent in municipal bonds with longer maturities and in uninsured municipal
bonds.

Who should invest?

One of the Portfolios of the Fund may be an appropriate investment for you if
you:

    . Are looking for an investment that provides current income exempt from
      Federal income tax

    . Want a professionally managed and diversified portfolio without the
      administrative burdens of direct investments in municipal bonds

    . Are looking for liquidity

    . Can tolerate the risk of loss caused by changes in interest rates or
      adverse changes in the price of municipal bonds in general

    The National Portfolio may be an appropriate investment for you if, in
    addition to the first four factors outlined above, you:

    . Are willing to accept the risk of greater loss of income and principal

The Limited Maturity Portfolio may be an appropriate investment for you if, in
addition to the first four factors outlined above, you:

    . Are investing with shorter-term goals in mind

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.
                                                                               5


[ICON]
Key Facts

                RISK/RETURN BAR CHART FOR THE INSURED PORTFOLIO
- --------------------------------------------------------------------------------

The bar chart and table shown below provide an indication of the risks of
investing in the Insured Portfolio. The bar chart shows changes in the Insured
Portfolio'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 Insured Portfolio's shares
for the periods shown with those of the Lehman Brothers Municipal Bond Index.
How the Insured Portfolio performed in the past is not necessarily an indication
of how the Insured Portfolio will perform in the future.

                                    [Chart]

1991      1992     1993      1994    1995    1996   1997   1998   1999    2000

11.10%    8.35%    11.88%    -7.36%  16.41%  2.77%  7.94%  4.96%  -6.07%  11.59%

During the ten-year period shown in the bar chart, the highest return for a
quarter was 7.31% (quarter ended March 31, 1995) and the lowest return for a
quarter was -6.55% (quarter ended March 31, 1994). The Portfolio's year-to-date
return as of September 30, 2001 was 4.98%.



                                                                                             Past
                                                                        Past     Past     Ten Years/
                   Average Annual Total Returns (as of                  One      Five       Since
                           December 31, 2000)                           Year     Years    Inception
       -----------------------------------------------------------------------------------------------
                                                                                 
       Municipal Bond Insured Portfolio*-- Class A                      7.79%    3.98%       6.26%
       Lehman Brothers Municipal Bond Index**                          11.68%    5.84%       7.32%
       -----------------------------------------------------------------------------------------------
       Municipal Bond Insured Portfolio*-- Class B                      7.59%    4.06%       5.89%
       Lehman Brothers Municipal Bond Index**                          11.68%    5.84%       7.32%
       -----------------------------------------------------------------------------------------------
       Municipal Bond Insured Portfolio*-- Class C                     10.53%    3.99%       5.71%+
       Lehman Brothers Municipal Bond Index**                          11.68%    5.84%       7.54%++
       -----------------------------------------------------------------------------------------------
       Municipal Bond Insured Portfolio*-- Class D                      7.67%    3.72%       5.60%+
       Lehman Brothers Municipal Bond Index**                          11.68%    5.84%       7.54%++
       -----------------------------------------------------------------------------------------------


 *Includes all applicable fees and sales charges.

**This unmanaged Index consists of revenue bonds, prefunded bonds, general
  obligation bonds and insured bonds, all of which mature within 30 years. Past
  performance is not predictive of future performance.

 +Inception date is October 21, 1994.

++Since October 31, 1994.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

6


                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

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

 RISK/RETURN BAR CHART FOR THE NATIONAL PORTFOLIO
- ---------------------------------------------------------------------------

The bar chart and table shown below provide an indication of the risks of
investing in the National Portfolio. The bar chart shows changes in the National
Portfolio'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 National Portfolio's shares
for the periods shown with those of the Lehman Brothers Municipal Bond Index.
How the National Portfolio performed in the past is not necessarily an
indication of how the National Portfolio will perform in the future.

                           [GRAPHIC]

                 
               1991                11.74%
               1992                 8.53%
               1993                11.65%
               1994                -7.27%
               1995                17.07%
               1996                 4.14%
               1997                 8.53%
               1998                 4.53%
               1999                -6.13%
               2000                11.42%

               

During the ten-year period shown in the bar chart, the highest return for a
quarter was 6.95% (quarter ended March 31, 1995) and the lowest return for a
quarter was -6.07% (quarter ended March 31, 1994). The Portfolio's year-to-date
return as of September 30, 2001 was 4.99%.

                                                                      Past
                                                      Past   Past  Ten Years/
       Average Annual Total Returns (as of            One    Five     Since
                December 31, 2000)                    Year   Years  Inception
       ----------------------------------------------------------------------
       Municipal Bond National Portfolio*-- Class A   7.88%  4.28%   6.53%
       Lehman Brothers Municipal Bond Index**        11.68%  5.84%   7.32%
       ----------------------------------------------------------------------
       Municipal Bond National Portfolio*-- Class B   7.42%  4.32%   6.15%
       Lehman Brothers Municipal Bond Index**        11.68%  5.84%   7.32%
       ----------------------------------------------------------------------
       Municipal Bond National Portfolio*-- Class C  10.48%  4.29%   5.85%+
       Lehman Brothers Municipal Bond Index**        11.68%  5.84%   7.54%++
       ----------------------------------------------------------------------
       Municipal Bond National Portfolio*-- Class D   7.50%  4.00%   5.74%+
       Lehman Brothers Municipal Bond Index**        11.68%  5.84%   7.54%++
       ----------------------------------------------------------------------

 * Includes all applicable fees and sales charges.

** This unmanaged Index consists of revenue bonds, prerefunded bonds, general
   obligation bonds and insured bonds, all of which mature within 30 years. Past
   performance is not predictive of future performance.

 + Inception date is October 21, 1994.

++ Since October 31, 1994.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.
                                                                               7


[ICON] Key Facts

RISK/RETURN BAR CHART FOR THE LIMITED MATURITY PORTFOLIO
- ---------------------------------------------------------------------------

The bar chart and table shown below provide an indication of the risks of
investing in the Limited Maturity Portfolio. The bar chart shows changes in the
Limited Maturity Portfolio's performance for Class A 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 Limited Maturity
Portfolio's shares for the periods shown with those of the Lehman Brothers
Municipal Bond Index and the Lehman Brothers 3-year General Obligation Bond
Index. How the Limited Maturity Portfolio performed in the past is not
necessarily an indication of how the Limited Maturity Portfolio will perform in
the future.

                                   [GRAPHIC]

                 
                              1991                7.39%
                              1992                5.62%
                              1993                4.30%
                              1994                1.35%
                              1995                6.13%
                              1996                3.72%
                              1997                4.21%
                              1998                4.62%
                              1999                2.04%
                              2000                5.04%

                              

During the ten-year period shown in the bar chart, the highest return for a
quarter was 2.27% (quarter ended December 31, 1991) and the lowest return for a
quarter was -0.20% (quarter ended March 31, 1994). The Portfolio's year-to-date
return as of September 30, 2001 was 4.72%.

                                                                        Past
                                                       Past    Past  Ten Years/
       Average Annual Total Returns (as of             One     Five     Since
               December 31, 2000)                      Year   Years   Inception
       ------------------------------------------------------------------------
       Municipal Bond Limited Maturity*-- Class A      3.99%  3.71%      4.32%
       Lehman Brothers Municipal Bond Index**         11.68%  5.84%      7.32%
       Lehman Brothers 3-year General
       Obligation Bond Index***                        6.20%  4.70%      5.55%
       ------------------------------------------------------------------------
       Municipal Bond Limited Maturity*-- Class B      3.66%  3.55%     3.61%+
       Lehman Brothers Municipal Bond Index**         11.68%  5.84%    6.78%++
       Lehman Brothers 3-year General
       Obligation Bond Index***                        6.20%  4.70%    4.96%++
       ------------------------------------------------------------------------
       Municipal Bond Limited Maturity*-- Class C      3.66%  3.41%   3.72%+++
       Lehman Brothers Municipal Bond Index**         11.68%  5.84%  7.54%++++
       Lehman Brothers 3-year General
       Obligation Bond Index***                        6.20%  4.70%  5.26%++++
       ------------------------------------------------------------------------
       Municipal Bond Limited Maturity*-- Class D      3.99%  3.63%   3.92%+++
       Lehman Brothers Municipal Bond Index**         11.68%  5.84%  7.54%++++
       Lehman Brothers 3-year General
       Obligation Bond Index***                        6.20%  4.70%  5.26%++++
       ------------------------------------------------------------------------
  *  Includes all applicable fees and sales charges.

 **  This unmanaged Index consists of revenue bonds, prerefunded bonds, general
     obligation bonds and insured bonds, all of which mature within 30 years.
     Past performance is not predictive of future performance.

 *** This unmanaged Index consists of state and local government obligation
     bonds that mature in 3 to 4 years, rated Baa or better. Past performance is
     not predictive of future performance.

 +   Inception date is November 2, 1992.

 ++  Since October 31, 1992.

 +++ Inception date is October 21, 1994.

++++ Since October 31, 1994.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.
8


UNDERSTANDING EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which you may pay when you buy
or sell shares of a Portfolio.

Expenses paid indirectly by the shareholder:

Annual Portfolio Operating Expenses -- expenses that cover the costs of
operating a Portfolio.

Management Fee -- a fee paid to the Investment Adviser for managing a Portfolio.

Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Advisors 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.

  FEES AND EXPENSES FOR THE INSURED PORTFOLIO
- --------------------------------------------------------------------------------

Each Portfolio offers four different classes of shares. Although your money will
be invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

These tables show the different fees and expenses that you may pay if you buy
and hold the different classes of shares of each Portfolio. Future expenses may
be greater or less than those indicated below.



                                                                                     Insured Portfolio
                                                                      -----------------------------------------------
Shareholder Fees (fees paid directly from your investment)(a):        Class A     Class B(b)     Class C    Class D
- ---------------------------------------------------------------------------------------------------------------------
                                                                                                
Maximum Sales Charge (Load) imposed on purchases (as a
 percentage of  offering price)                                       4.00%(c)    None           None       4.00%(c)
- ---------------------------------------------------------------------------------------------------------------------
 Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, whichever is lower)            None(d)     4.00%(c)       1.00%(c)   None(d)
- ---------------------------------------------------------------------------------------------------------------------
 Maximum Sales Charge (Load) imposed on Dividend Reinvestments        None        None           None       None
- ---------------------------------------------------------------------------------------------------------------------
 Redemption Fee                                                       None        None           None       None
- ---------------------------------------------------------------------------------------------------------------------
 Exchange Fee                                                         None        None           None       None
- ---------------------------------------------------------------------------------------------------------------------
 Annual Portfolio Operating Expenses (expenses that are deducted
 from Portfolio assets):
- ---------------------------------------------------------------------------------------------------------------------
 Management Fee(e)                                                    0.37%       0.37%          0.37%      0.37%
- ---------------------------------------------------------------------------------------------------------------------
 Distribution and/or Service (12b-1) Fees(f)                          None        0.75%          0.80%      0.25%
- ---------------------------------------------------------------------------------------------------------------------
 Other Expenses (including transfer agency fees)(g)                   0.08%       0.09%          0.09%      0.08%
- ---------------------------------------------------------------------------------------------------------------------
 Total Annual Portfolio Operating Expenses                            0.45%       1.21%          1.26%      0.70%
- ---------------------------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution
     fees.
(c)  Some investors may qualify for reductions in the sales charge (load).
(d)  You may pay a deferred sales charge if you purchase $1 million or more and
     you redeem within one year.
(e)  The Fund pays the Investment Adviser fees at annual rates that decrease as
     the total assets of the Fund's three Portfolios increase above certain
     levels. The fee rates are applied to the average daily net assets of each
     Portfolio, with the reduced rates applicable to portions of the assets of
     each Portfolio to the extent that the aggregate of the average daily net
     assets of the three combined Portfolios exceeds $250 million, $400 million,
     $550 million and $1.5 billion (each such amount being a "breakpoint
     level"). These annual fee rates range from 0.40% to 0.35% for the Insured
     Portfolio, 0.50% to 0.475% for the National Portfolio and 0.40% to 0.325%
     for the Limited Maturity Portfolio. For the fiscal year ended June 30,
     2001, the Investment Adviser received a fee equal to 0.41% of the aggregate
     of the average daily net assets of the three combined Portfolios.
(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.
(g)  For the fiscal year ended June 30, 2001, the Fund paid the Transfer Agent
     fees totaling $436,170 for the Insured Portfolio, based on charges ranging
     from $11.00 to $14.00 for each shareholder account, reimbursement of the
     Transfer Agent's out-of-pocket expenses, a fee of 0.10% of account assets
     for certain accounts that participate in the Merrill Lynch Mutual Fund
     Advisor program and a $0.20 per month closed account charge for accounts
     that closed within the calendar year. The Transfer Agency fee schedule has
     been changed and the Fund currently pays between $16.00 and $23.00 for each
     shareholder account. The Fund continues to reimburse the Transfer Agent's
     reasonable out-of-pocket expenses and to pay a fee of 0.10% of account
     assets for certain accounts that participate in the Merrill Lynch Mutual
     Fund Advisor program but no longer pays a closed account charge. The Fund
     entered into an agreement with State Street Bank and Trust Company
     effective January 1, 2001 pursuant to which State Street provides certain
     accounting services to the Fund. For the period January 1, 2001 through
     June 30, 2001, the Fund paid State Street $182,426 under this agreement.
     Prior to January 1, 2001, the Investment Adviser provided accounting
     services to the Fund at its cost and the Fund reimbursed the Investment
     Adviser for these services. The Investment Adviser continues to provide
     certain accounting services to the Fund and the Fund reimburses the
     Investment Adviser for such services. For the fiscal year ended June 30,
     2001, the Fund reimbursed the Investment Adviser an aggregate of $127,406
     for the above described services.

                  MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                               9


[ICON] Key Facts

Examples:

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

These examples assume that you invest $10,000 in the Insured Portfolio 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
Insured Portfolio's operating expenses remain the same. This assumption is 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 this example. 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                       $ 444       $ 539       $ 642      $   944
- ---------------------------------------------------------------------------
Class B                       $ 523       $ 584       $ 665      $ 1,466
- ---------------------------------------------------------------------------
Class C                       $ 228       $ 400       $ 692      $ 1,523
- ---------------------------------------------------------------------------
Class D                       $ 469       $ 615       $ 774      $ 1,236
- ---------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                              1 Year     3 Years     5 Years     10 Years
- ---------------------------------------------------------------------------
Class A                       $ 444       $ 539       $ 642      $   944
- ---------------------------------------------------------------------------
Class B                       $ 123       $ 384       $ 665      $ 1,466
- ---------------------------------------------------------------------------
Class C                       $ 128       $ 400       $ 692      $ 1,523
- ---------------------------------------------------------------------------
Class D                       $ 469       $ 615       $ 774      $ 1,236
- ---------------------------------------------------------------------------

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

10


FEES AND EXPENSES FOR THE NATIONAL PORTFOLIO
- --------------------------------------------------------------------------------



                                                                                             National Portfolio
                                                                        ------------------------------------------------------
Shareholder Fees (fees paid directly from your                             Class A        Class B(b)     Class C   Class D
investment)(a):
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
   Maximum Sales Charge (Load) imposed on purchases (as a percentage of
   offering price)                                                         4.00%(c)       None           None      4.00%(c)
- ------------------------------------------------------------------------------------------------------------------------------
   Maximum Deferred Sales Charge (Load) (as a percentage of original
   purchase price or redemption proceeds, whichever is lower)              None(d)        4.0%(c)        1.0%(c)   None(d)
- ------------------------------------------------------------------------------------------------------------------------------
   Maximum Sales Charge (Load) imposed on Dividend Reinvestments           None           None           None      None
- ------------------------------------------------------------------------------------------------------------------------------
   Redemption Fee                                                          None           None           None      None
- ------------------------------------------------------------------------------------------------------------------------------
   Exchange Fee                                                            None           None           None      None
- ------------------------------------------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (expenses that are deducted from
Portfolio assets):
- ------------------------------------------------------------------------------------------------------------------------------
   Management Fee(e)                                                       0.48%          0.48%          0.48%     0.48%
- ------------------------------------------------------------------------------------------------------------------------------
   Distribution and/or Service (12b-1) Fees(f)                             None           0.75%          0.80%     0.25%
- ------------------------------------------------------------------------------------------------------------------------------
   Other Expenses (including transfer agency fees)(g)                      0.10%          0.11%          0.11%     0.10%
- ------------------------------------------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses                                  0.58%          1.34%          1.39%     0.83%
- ------------------------------------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution
     fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Investment Adviser fees at annual rates that decrease as
     the total assets of the Fund's three Portfolios increase above certain
     levels. The fee rates are applied to the average daily net assets of each
     Portfolio, with the reduced rates applicable to portions of the assets of
     each Portfolio to the extent that the aggregate of the average daily net
     assets of the three combined Portfolios exceeds $250 million, $400 million,
     $550 million and $1.5 billion (each such amount being a "breakpoint
     level"). These annual fee rates range from 0.40% to 0.35% for the Insured
     Portfolio, 0.50% to 0.475% for the National Portfolio and 0.40% to 0.325%
     for the Limited Maturity Portfolio. For the fiscal year ended June 30,
     2001, the Investment Adviser received a fee equal to 0.41% of the aggregate
     of the average daily net assets of the three combined Portfolios.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  For the fiscal year ended June 30, 2001, the Fund paid the Transfer Agent
     fees totaling $445,860 for the National Portfolio, based on charges ranging
     from $11.00 to $14.00 for each shareholder account, reimbursement of the
     Transfer Agent's out-of-pocket expenses, a fee of 0.10% of account assets
     for certain accounts that participate in the Merrill Lynch Mutual Fund
     Advisor program and a $0.20 per month closed account charge for accounts
     that closed within the calendar year. The Transfer Agency fee schedule has
     been changed and the Fund currently pays between $16.00 and $23.00 for each
     shareholder account. The Fund continues to reimburse the Transfer Agent's
     reasonable out-of-pocket expenses and to pay a fee of 0.10% of account
     assets for certain accounts that participate in the Merrill Lynch Mutual
     Fund Advisor program but no longer pays a closed account charge. The Fund
     entered into an agreement with State Street Bank and Trust Company
     effective January 1, 2001 pursuant to which State Street provides certain
     accounting services to the Fund. For the period January 1, 2001 through
     June 30, 2001, the Fund paid State Street $143,033 under this agreement.
     Prior to January 1, 2001, the Investment Adviser provided accounting
     services to the Fund at its cost and the Fund reimbursed the Investment
     Adviser for these services. The Investment Adviser continues to provide
     certain accounting services to the Fund and the Fund reimburses the
     Investment Adviser for such services. For the fiscal year ended June 30,
     2001, the Fund reimbursed the Investment Adviser an aggregate of $103,166
     for the above described services.

                  MERRILL LYNCH MUNICIPAL BOND FUND, INC.
                                                                              11


[ICON] Key Facts

Examples:

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

These examples assume that you invest $10,000 in the National Portfolio 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
National Portfolio's operating expenses remain the same. This assumption is 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 this example. 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                       $ 457       $ 578       $ 711      $ 1,097
- ---------------------------------------------------------------------------
Class B                       $ 536       $ 625       $ 734      $ 1,613
- ---------------------------------------------------------------------------
Class C                       $ 242       $ 440       $ 761      $ 1,669
- ---------------------------------------------------------------------------
Class D                       $ 481       $ 654       $ 842      $ 1,384
- ---------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                              1 Year     3 Years     5 Years     10 Years
- ---------------------------------------------------------------------------
Class A                       $ 457       $ 578       $ 711      $ 1,097
- ---------------------------------------------------------------------------
Class B                       $ 136       $ 425       $ 734      $ 1,613
- ---------------------------------------------------------------------------
Class C                       $ 142       $ 440       $ 761      $ 1,669
- ---------------------------------------------------------------------------
Class D                       $ 481       $ 654       $ 842      $ 1,384
- ---------------------------------------------------------------------------

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

12


FEES AND EXPENSES FOR THE LIMITED MATURITY PORTFOLIO
- -------------------------------------------------------------------------------



                                                                                    Limited Maturity Portfolio
                                                                           --------------------------------------------------
Shareholder Fees (fees paid directly from your investment)(a):             Class A        Class B(b)     Class C   Class D
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                       
   Maximum Sales Charge (Load) imposed on purchases (as a percentage of
offering price)                                                            1.00%(c)       None           None      1.00%(c)
- -----------------------------------------------------------------------------------------------------------------------------
   Maximum Deferred Sales Charge (Load) (as a percentage of original
   purchase price or redemption proceeds, whichever is lower)              None(d)        1.0%(c)        1.0%(c)   None(d)
- -----------------------------------------------------------------------------------------------------------------------------
   Maximum Sales Charge (Load) imposed on Dividend Reinvestments           None           None           None      None
- -----------------------------------------------------------------------------------------------------------------------------
   Redemption Fee                                                          None           None           None      None
- -----------------------------------------------------------------------------------------------------------------------------
   Exchange Fee                                                            None           None           None      None
- -----------------------------------------------------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (expenses that are deducted from
Portfolio assets):
- -----------------------------------------------------------------------------------------------------------------------------
   Management Fee(e)                                                       0.34%          0.34%          0.34%     0.34%
- -----------------------------------------------------------------------------------------------------------------------------
   Distribution and/or Service (12b-1) Fees(f)                             None           0.35%          0.35%     0.10%
- -----------------------------------------------------------------------------------------------------------------------------
   Other Expenses (including transfer agency fees)(g)                      0.10%          0.11%          0.12%     0.10%
- -----------------------------------------------------------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses                                  0.44%          0.80%          0.81%     0.54%
- -----------------------------------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution
     fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Investment Adviser fees at annual rates that decrease as
     the total assets of the Fund's three Portfolios increase above certain
     levels. The fee rates are applied to the average daily net assets of each
     Portfolio, with the reduced rates applicable to portions of the assets of
     each Portfolio to the extent that the aggregate of the average daily net
     assets of the three combined Portfolios exceeds $250 million, $400 million,
     $550 million and $1.5 billion (each such amount being a "breakpoint
     level"). These annual fee rates range from 0.40% to 0.35% for the Insured
     Portfolio, 0.50% to 0.475% for the National Portfolio and 0.40% to 0.325%
     for the Limited Maturity Portfolio. For the fiscal year ended June 30,
     2001, the Investment Adviser received a fee equal to 0.41% of the aggregate
     of the average daily net assets of the three combined Portfolios.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  For the fiscal year ended June 30, 2001, the Fund paid the Transfer Agent
     fees totaling $61,578 for the Limited Maturity Portfolio, based on charges
     ranging from $11.00 to $14.00 for each shareholder account, reimbursement
     of the Transfer Agent's out-of-pocket expenses, a fee of 0.10% of account
     assets for certain accounts that participate in the Merrill Lynch Mutual
     Fund Advisor program and a $0.20 per month closed account charge for
     accounts that closed within the calendar year. The Transfer Agency fee
     schedule has been changed and the Fund currently pays between $16.00 and
     $23.00 for each shareholder account. The Fund continues to reimburse the
     Transfer Agent's reasonable out-of-pocket expenses and to pay a fee of
     0.10% of account assets for certain accounts that participate in the
     Merrill Lynch Mutual Fund Advisor program but no longer pays a closed
     account charge. The Fund entered into an agreement with State Street Bank
     and Trust Company effective January 1, 2001 pursuant to which State Street
     provides certain accounting services to the Fund. For the period January 1,
     2001 through June 30, 2001, the Fund paid State Street $37,247 under this
     agreement. Prior to January 1, 2001, the Investment Adviser provided
     accounting services to the Fund at its cost and the Fund reimbursed the
     Investment Adviser for these services. The Investment Adviser continues to
     provide certain accounting services to the Fund and the Fund reimburses the
     Investment Adviser for such services. For the fiscal year ended June 30,
     2001, the Fund reimbursed the Investment Adviser an aggregate of $34,448
     for the above described services.

                  MERRILL LYNCH MUNICIPAL BOND FUND, INC.
                                                                              13


[ICON] Key Facts

Examples:

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

These examples assume that you invest $10,000 in the Limited Maturity Portfolio
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 Limited Maturity Portfolio's operating expenses remain the same. This
assumption is 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 this example.
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                       $ 145       $ 240       $ 344      $   649
- ---------------------------------------------------------------------------
Class B                       $ 182       $ 255       $ 444      $   990
- ---------------------------------------------------------------------------
Class C                       $ 183       $ 259       $ 450      $ 1,002
- ---------------------------------------------------------------------------
Class D                       $ 155       $ 271       $ 399      $   770
- ---------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                              1 Year     3 Years     5 Years     10 Years
- ---------------------------------------------------------------------------
Class A                       $ 145       $ 240       $ 344      $   649
- ---------------------------------------------------------------------------
Class B                       $  82       $ 255       $ 444      $   990
- ---------------------------------------------------------------------------
Class C                       $  83       $ 259       $ 450      $ 1,002
- ---------------------------------------------------------------------------
Class D                       $ 155       $ 271       $ 399      $   770
- ---------------------------------------------------------------------------

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

14


[ICON] Details About the Fund

HOW EACH PORTFOLIO INVESTS
- -------------------------------------------------------------------------------

The main goal of each Portfolio is current income exempt from Federal income
tax. Each Portfolio invests primarily in a diversified portfolio of municipal
bonds. Under normal circumstances, each Portfolio maintains at least 80% of its
assets in municipal bonds. Municipal bonds may be obligations of a variety of
issuers, including governmental entities or other qualifying issuers. Issuers
may be states, territories and possessions of the United States and the District
of Columbia and their political subdivisions, agencies and instrumentalities.
Municipal bonds also include short-term tax-exempt obligations like municipal
notes and variable rate demand obligations. Because of its emphasis on municipal
bonds, each Portfolio should be considered as a means of diversifying an
investment portfolio and not in itself a balanced investment plan.

Each Portfolio may invest up to 20% of its assets on a temporary basis in
taxable money market securities that have a maturity of one year or less. The
Portfolios make these investments for liquidity purposes or as a temporary
investment pending an investment in municipal bonds. As a temporary measure for
defensive purposes, each Portfolio may invest without limitation in taxable
money market securities. These investments may prevent a Portfolio from meeting
its investment objective.

Investments in taxable money market securities may cause a Portfolio to have
taxable investment income. Each Portfolio may also realize capital gains on the
sale of its municipal bonds (and other securities it holds). These capital gains
will be taxable regardless of whether they are derived from a sale of municipal
bonds.

Each Portfolio's investments may consist of private activity bonds that may
subject certain shareholders to an alternative minimum tax.

The Portfolios may use derivatives including futures, options, indexed
securities and inverse securities, and swap agreements. Derivatives are
financial instruments whose value is derived from another security or an index
such as the Lehman Brothers Municipal Bond Index.

                  MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              15


[ICON] Details About the Fund

ABOUT THE PORTFOLIO MANAGER OF THE INSURED PORTFOLIO

Robert A. DiMella is a Vice President and the portfolio manager of the Insured
Portfolio. Mr. DiMella has been a Vice President of Merrill Lynch Investment
Managers since 1997, a portfolio manager since 1994 and was an Assistant Vice
President from 1995 to 1997.

ABOUT THE INVESTMENT ADVISER

The Fund is managed by Fund Asset Management.

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

     . Credit Quality Of Issuers -- based on bond ratings and other factors
       including economic and financial conditions.

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

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

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

INSURED PORTFOLIO
- --------------------------------------------------------------------------------

The Insured Portfolio invests primarily in investment grade municipal bonds
covered by insurance guaranteeing the timely payment of principal at maturity
and interest when due. Under normal circumstances, the Portfolio expects to
invest 100% of its assets in municipal bonds covered by such insurance. Either
the issuer of the bond or the Portfolio purchases the insurance. The Portfolio
will usually invest a majority of its assets in municipal bonds that have a
maturity of five years or longer.

While insurance reduces the credit risk of the Portfolio's investments, it may
also reduce the yield on the insured bonds; therefore, the Portfolio's yield may
be lower than it would be if the Portfolio invested in uninsured municipal
bonds. Insurance does not guarantee the market value of municipal bonds in the
Portfolio or the value of the Portfolio's shares.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

16


ABOUT THE PORTFOLIO MANAGER OF THE NATIONAL PORTFOLIO

Walter O'Connor is a Vice President and the portfolio manager of the National
Portfolio. Mr. O'Connor has been a Director (Municipal Tax-Exempt) of Merrill
Lynch Investment Managers since 1997, a portfolio manager since 1991 and was a
Vice President from 1993 to 1997.

ABOUT THE PORTFOLIO MANAGER OF THE LIMITED MATURITY PORTFOLIO

Peter J. Hayes is a Managing Director and the portfolio manager of the Limited
Maturity Portfolio. Mr. Hayes has been a First Vice President of Merrill Lynch
Investment Managers since 1997, a portfolio manager since 1987 and was a Vice
President from 1988 to 1997.

NATIONAL PORTFOLIO
- --------------------------------------------------------------------------------

The National Portfolio may invest in municipal bonds rated in any rating
category or in unrated municipal bonds. The Portfolio will usually invest in
municipal bonds that have a maturity of five years or longer. Portfolio
management will choose municipal bond investments that it believes offer a
relatively high potential for total return relative to their total risk.
Although the Portfolio's investment policies are not governed by specific rating
categories, Portfolio management does not presently intend to invest more than
35% of the Portfolio's assets in municipal bonds rated below investment grade
(below BBB by S&P or Fitch, or below Baa by Moody's) or in unrated municipal
bonds that Portfolio management believes are of comparable quality. These
lower-rated obligations are commonly known as "junk bonds." The 35% limitation
on junk bond investments reflects only the present intention of Portfolio
management, and may be changed at any time. Therefore, it is possible that the
Portfolio could invest up to 100% of its assets in junk bonds. The Portfolio
will not invest in municipal bonds rated in the lowest rating categories (CC or
lower by S&P or Fitch, or Ca or lower by Moody's) unless Portfolio management
believes those ratings do not accurately reflect the financial condition of the
issuer or other factors affecting the creditworthiness of the bonds. Portfolio
management does not presently intend to invest in municipal bonds that are in
default or that it believes will be in default.

LIMITED MATURITY PORTFOLIO
- ---------------------------------------------------------------------------

The Limited Maturity Portfolio invests primarily in investment grade municipal
bonds or notes, including variable rate demand obligations, that have a maturity
of less than four years. Under normal circumstances, the Portfolio expects to
invest at least 65% of its assets in such bonds or notes. Certain municipal
bonds that the Portfolio purchases may have a maturity of greater than four
years, but allow the Portfolio to require the issuer to redeem the bonds within
four years. The Portfolio treats these bonds as having a maturity of less than
four years. Because of their shorter maturities, the Portfolio's investments
generally will not be as sensitive to changes in prevailing interest rates as
are investments in long-term municipal bonds. Fluctuations in interest rates on
short-term municipal bonds may, however, vary more widely than those on
long-term municipal bonds from time to time.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              17


[ICON] Details About the Fund

INVESTMENT RISKS
- --------------------------------------------------------------------------------

This section contains a summary discussion of the general risks of investing in
the Portfolios. As with any mutual fund, there can be no guarantee that any
Portfolio will meet its goals or that any Portfolio's performance will be
positive for any period of time.

Bond Market and Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Portfolio management selects will underperform the market, the relevant
indices or other funds with similar investment objectives and investment
strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

Call and Redemption Risk -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond a Portfolio holds, the Portfolio
may lose income and may have to invest the proceeds in bonds with lower yields.

Borrowing and Leverage Risk -- Each Portfolio may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of a Portfolio's shares and in the yield on a Portfolio's
holdings. Borrowing will cost a Portfolio interest expense and other fees. The
costs of borrowing may reduce a Portfolio's return. Certain securities that a
Portfolio buys may create leverage including, for example, when-issued
securities, forward commitments and options.

Risks associated with certain types of obligations in which one or more of the
Portfolios may invest include:

General Obligation Bonds -- The faith, credit and taxing power of the
municipality that issues a general obligation bond secures payment of interest
and repayment of principal. Timely payments depend on the issuer's credit

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

18


quality, ability to raise tax revenues and ability to maintain an adequate
tax base.

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

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

Junk Bonds -- Only the National Portfolio may invest in junk bonds. Junk bonds
are debt securities that are rated below investment grade by the major rating
agencies or are unrated securities that Portfolio management believes are of
comparable quality. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Portfolio. Junk bonds generally are less
liquid and experience more price volatility than higher rated debt securities.
The issuers of junk bonds may have a larger amount of outstanding debt relative
to their assets than issuers of investment grade bonds. In the event of an
issuer's bankruptcy, claims of other creditors may have priority over the claims
of junk bond holders, leaving few or no assets available to repay junk bond
holders. Junk bonds may be subject to greater call and redemption risk than
higher rated debt securities.

Insured Municipal Bonds -- Insurance guarantees that interest payments on a bond
will be made on time and that the principal will be repaid when the bond
matures. Either the issuer of the bond or the Portfolio purchases the insurance.
Insurance is expected to protect a Portfolio against losses caused by a bond
issuer's failure to make interest and principal payments. However, insurance
does not protect a Portfolio or its shareholders against losses caused by
declines in a bond's value. Also, a Portfolio cannot be certain that any
insurance company will make the payments it guarantees. A Portfolio may lose
money on its investment if the insurance company does not make these payments.
In addition, if a Portfolio purchases the insurance, it must

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              19


[ICON] Details About the Fund

pay the premiums, which will reduce the Portfolio's yield. Each Portfolio
intends to use only insurance companies that have an AAA credit rating from S&P
or Fitch, or an Aaa credit rating from Moody's. However, if insurance with these
ratings is not available, a Portfolio may use insurance companies with lower
ratings or stop purchasing insurance or insured bonds. If a bond's insurer fails
to fulfill its obligations or loses its credit rating, the value of the bond
could drop.

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

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

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

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

Derivatives -- Each Portfolio may use derivative instruments, including indexed
and inverse floating rate securities, options on portfolio positions, options on
securities or other financial indices, financial futures and options on such
futures and swap agreements. Derivatives allow the Portfolio to increase or
decrease its risk exposure more quickly and efficiently than other types of
instruments.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

20


Derivatives are volatile and involve significant risks, including:

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

       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.

Each Portfolio may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Portfolio uses a derivative to offset
the risks associated with other Portfolio 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 Portfolio 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 Portfolio, in which case any losses on
the holdings being hedged may not be reduced. There can be no assurance that the
Portfolio's hedging strategy will reduce risk or that hedging transactions will
be either available or cost effective. None of the Portfolios is required to use
hedging and each may choose not to do so.

Indexed and Inverse Floating Rate Securities-- Each of the Portfolios may invest
in securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Portfolios may also invest
in securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Portfolios to the

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              21


[ICON] Details About the Fund

risks of reduced or eliminated interest payments and losses of principal. In
addition, certain indexed securities and inverse floaters may increase or
decrease in value at a greater rate than the underlying interest rate, which
effectively leverages the Portfolio's investment. As a result, the market value
of such securities will generally be more volatile than that of fixed rate,
tax-exempt securities. Indexed securities and inverse floaters are derivative
securities and can be considered speculative.

When-Issued Securities, Delayed-Delivery Securities and Forward Commitments--
When-issued and delayed-delivery securities and forward commitments involve the
risk that the security a Portfolio 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, in which case the Portfolio loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

Illiquid Investments-- Each Portfolio may invest up to 15% of its net assets in
illiquid securities that it cannot easily sell within seven days at current
value or that have contractual or legal restrictions on resale. If the Portfolio
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.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

22


[ICON] Your Account

MERRILL LYNCH SELECT PRICING (SM) SYSTEM
- --------------------------------------------------------------------------------

Each Portfolio offers four share classes, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
Each share class represents the same ownership interest in the portfolio
investments of the particular 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 Merrill Lynch Financial Advisor can help you determine which
share class is best suited to your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25% for the Insured Portfolio and National
Portfolio, and an account maintenance fee of 0.10% for the Limited Maturity
Portfolio. You may be eligible for a sales charge reduction or waiver.

Certain financial intermediaries may charge additional fees in connection with
transactions in Portfolio shares. The Investment Adviser, the Distributor or
their affiliates may 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 Portfolio shares or for shareholder servicing
activities.

If you select Class B or Class C shares, you will invest the full amount of your
purchase price, but you will be subject to an account maintenance fee of 0.25%
for the Insured Portfolio and National Portfolio and 0.15% for the Limited
Maturity Portfolio on an ongoing basis. In addition, if you select Class B or
Class C shares of the Insured Portfolio or National Portfolio you will be
subject to a distribution fee of 0.50% for Class B shares and 0.55% for Class C
shares. If you select Class B or Class C shares of the Limited Maturity
Portfolio you will be subject to a distribution fee of 0.20%. Because these fees
are paid out of each Portfolio'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 of a Portfolio.

Class C shares of the Limited Maturity Portfolio are offered only through the
exchange privilege and may only be purchased through exchange of the Class C
shares of another Portfolio or another fund using the Merrill Lynch Select
Pricing(SM) System.

Each Portfolio's shares are distributed by FAM Distributors, Inc., an
affiliate of Merrill Lynch.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              23


[ICON] Your Account

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



                               Class A                    Class B                   Class C                      Class D
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                               
Availability            Limited to certain          Generally available       Generally available          Generally available
                        investors including:        through Merrill Lynch.    through Merrill Lynch.       through Merrill Lynch.
                        . Current Class A           Limited availability      Limited availability         Limited availability
                        shareholders                through selected          through selected             through selected
                        . Participants in           securities dealers and    securities dealers and       securities dealers and
                        certain Merrill Lynch-      other financial           other financial              other financial
                        sponsored programs          intermediaries.           intermediaries. Shares       intermediaries.
                        . Certain affiliates of                               of the Limited
                        Merrill Lynch,                                        Maturity Portfolio are
                        selected securities                                   available only through
                        dealers and other                                     the Exchange
                        financial                                             Privilege.
                        intermediaries
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Sales Charge?   Yes. Payable at time of     No. Entire purchase       No. Entire purchase          Yes. Payable at time of
                        purchase. Lower sales       price is invested in      price is invested in         purchase. Lower sales
                        charges available for       shares of the Fund.       shares of the Fund.          charges available for
                        larger investments.                                                                larger investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Sales Charge?  No. (May be charged         Yes. Payable if you       Yes. Payable if you          No. (May be charged
                        for purchases over          redeem within four        redeem within one            for purchases over $1
                        $1 million that are         years of purchase for     year of purchase.            million that are
                        redeemed within one         the Insured Portfolio                                  redeemed within one
                        year.)                      and the National                                       year.)
                                                    Portfolio or within one
                                                    year of purchase for
                                                    the Limited Maturity
                                                    Portfolio.
- ------------------------------------------------------------------------------------------------------------------------------------
Account Maintenance     No.                         0.25% Account             0.25% Account                0.25% Account
and Distribution Fees?                              Maintenance Fee for       Maintenance Fee for          Maintenance Fee for
                                                    the Insured Portfolio     the Insured Portfolio        the Insured Portfolio
                                                    and National Portfolio    and National Portfolio       and National Portfolio
                                                    and 0.15% for the         and 0.15% for the            and 0.10% Account
                                                    Limited Maturity          Limited Maturity             Maintenance Fee for
                                                    Portfolio. 0.50%          Portfolio. 0.55%             the Limited Maturity
                                                    Distribution Fee for      Distribution Fee for         Portfolio. No
                                                    the Insured Portfolio     the Insured Portfolio        Distribution Fee.
                                                    and National Portfolio    and National Portfolio
                                                    and 0.20%                 and 0.20%
                                                    Distribution Fee for      Distribution Fee for
                                                    the Limited Maturity      the Limited Maturity
                                                    Portfolio.                Portfolio.
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion to Class D   No.                         Yes, automatically        No.                          N/A.
shares?                                             after approximately
                                                    ten years.
- ------------------------------------------------------------------------------------------------------------------------------------


                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

24


Class A and Class D Shares-- Initial Sales Charge Options

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

                   Insured Portfolio and National Portfolio
        ---------------------------------------------------------------



                                                                                               Dealer
                                                                                            Compensation
                                                  As a % of               As a % of           as a % of
         Your Investment                       Offering Price         Your Investment*     Offering Price
        -------------------------------------------------------------------------------------------------------
                                                                                  
        Less than $25,000                          4.00%                    4.17%              3.75%
        -------------------------------------------------------------------------------------------------------
        $25,000 but less than $50,000              3.75%                    3.90%              3.50%
        -------------------------------------------------------------------------------------------------------
        $50,000 but less than $100,000             3.25%                    3.36%              3.00%
        -------------------------------------------------------------------------------------------------------
        $100,000 but less than $250,000            2.50%                    2.56%              2.25%
        -------------------------------------------------------------------------------------------------------
        $250,000 but less than
        $1,000,000                                 1.50%                    1.52%              1.25%
        -------------------------------------------------------------------------------------------------------
        $1,000,000 and over**                      0.00%                    0.00%              0.00%
        -------------------------------------------------------------------------------------------------------

                                                    Limited Maturity Portfolio
        -------------------------------------------------------------------------------------------------------


                                                                                               Dealer
                                                                                            Compensation
                                                  As a % of               As a % of           as a % of
         Your Investment                       Offering Price         Your Investment*     Offering Price
        -------------------------------------------------------------------------------------------------------
                                                                                  
        Less than $100,000                         1.00%                    1.01%              0.95%
        -------------------------------------------------------------------------------------------------------
        $100,000 but less than $250,000            0.75%                    0.76%              0.70%
        -------------------------------------------------------------------------------------------------------
        $250,000 but less than $500,000            0.50%                    0.50%              0.45%
        -------------------------------------------------------------------------------------------------------
        $500,000 but less than
        $1,000,000                                 0.30%                    0.30%              0.27%
        -------------------------------------------------------------------------------------------------------
        $1,000,000 and over**                      0.00%                    0.00%              0.00%
        -------------------------------------------------------------------------------------------------------



 * Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not
   pay an initial sales charge. In that case, the Investment Adviser 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% (for the Insured
   Portfolio and National Portfolio) or 0.20% (for the Limited Maturity
   Portfolio). Such deferred sales charge may be waived in connection with
   certain fee-based programs.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              25


[ICON] Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

     . Purchases under a Right of Accumulation or Letter of Intent
     . Merrill Lynch Blueprint (SM) Program participants
     . TMA (SM) Managed Trusts
     . Certain Merrill Lynch investment or central asset accounts
     . Purchases using proceeds from the sale of certain Merrill Lynch closed-
       end funds under certain circumstances
     . Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees
     . Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years (or within one year for the Limited Maturity Portfolio) 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 account maintenance fees of 0.25% (or
0.15% for Class B and Class C shares of the

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

26


Limited Maturity Portfolio) and distribution fees each year under a distribution
plan that the Fund has adopted under Rule 12b-1. If you invest in the Insured
Portfolio or National Portfolio, you will pay distribution fees for your Class B
and Class C shares in the amount of 0.50% or 0.55%, respectively, of your
investment each year. Distribution fees for Class B and Class C shares of the
Limited Maturity Portfolio are 0.20% each year. Because these fees are paid out
of each Portfolio'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 Merrill Lynch Financial Advisor, selected
securities dealer or other financial intermediary who assists you in purchasing
Portfolio shares.

Class B Shares

If you redeem Class B shares within four years (or within one year for the
Limited Maturity Portfolio) 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 schedules:

                   Insured Portfolio and National Portfolio
              ------------------------------------------------
                  Years Since Purchase        Sales Charge*
              ------------------------------------------------
              0 - 1                        4.00%
              ------------------------------------------------
              1 - 2                        3.00%
              ------------------------------------------------
              2 - 3                        2.00%
              ------------------------------------------------
              3 - 4                        1.00%
              ------------------------------------------------
              4 and thereafter             0.00%
              ------------------------------------------------

                          Limited Maturity Portfolio
              ------------------------------------------------
                  Year Since Purchase         Sales Charge*
              ------------------------------------------------
              0 - 1                        1.00%
              ------------------------------------------------
              1 and thereafter             0.00%
              ------------------------------------------------

* The percentage charge will apply to the lesser of the original cost of the
  shares being redeemed or the proceeds of your redemption. Shares acquired
  through reinvestment of dividends or distributions are not subject to a
  deferred sales charge. Not all Merrill Lynch funds have identical deferred
  sales charge schedules. If you exchange your shares for shares of another
  fund, the higher charge will apply.

                  MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              27


[ICON] Your Account

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

    . Redemption in connection with participation in certain fee-based programs
      of Merrill Lynch or other financial intermediaries that have agreements
      with the Distributor or its affiliates or in connection with involuntary
      termination of an account in which Portfolio shares are held
    . Withdrawals following 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
    . Withdrawal 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

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

Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Portfolio's ten year
conversion schedule will apply. If you exchange your Class B shares in a
Portfolio for Class B shares of a fund with a longer conversion schedule, the
other fund's conversion schedule will apply. The length of time that you hold
both the original and exchanged Class B shares in both funds will count toward
the conversion schedule. The conversion schedule may be modified in certain
other cases as well.

Class C Shares

If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

28


deferred sales charge relating to Class C shares may be reduced or waived in
connection with participation in certain Merrill Lynch fee-based programs,
involuntary termination of an account in which Portfolio shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

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

The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch, a selected securities dealer, broker,
investment adviser, service provider or other financial intermediary. You may
also buy shares through the Transfer Agent. To learn more about buying, selling,
transferring or exchanging shares through the Transfer Agent, call
1-800-MER-FUND. Because the selection of a mutual fund involves many
considerations, your Merrill Lynch Financial Advisor 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. The involuntary redemption
does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act
accounts.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              29



[ICON] Your Account

 If You Want to     Your Choices        Information Important for You to Know
- -------------------------------------------------------------------------------
Buy Shares       First, select          Refer to the Merrill Lynch Select
                 the share class        Pricing(SM) System table on page 24. Be
                 appropriate for        sure to read this prospectus carefully.
                 you
                 --------------------------------------------------------------
                 Next, determine the    The minimum initial investment for a
                 amount of your         Portfolio is $1,000 for all accounts
                 investment             except:
                                           . $500 for Employee Access(SM)
                                             Accounts
                                           . $250 for certain Merrill Lynch
                                             fee-based programs
                                           . $100 for Merrill Lynch Blueprint
                                             (SM) Program
                                        (The minimums for initial investments
                                          may be waived under certain
                                          circumstances.)
                 --------------------------------------------------------------

                 Have your Merrill      The price of your shares is based on the
                 Lynch Financial        next calculation of net asset value
                 Advisor, selected      after your order is placed. Any purchase
                 securities dealer      orders placed prior to the close of
                 or other financial     business on the New York Stock Exchange
                 intermediary submit    (generally 4:00 pm Eastern time) will be
                 your purchase order    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.
                                        Each Portfolio may reject any order to
                                        buy shares and may suspend the sale of
                                        shares at any time. Selected securities
                                        dealers or other financial
                                        intermediaries, including Merrill Lynch,
                                        may charge a processing fee to confirm a
                                        purchase. Merrill Lynch currently
                                        charges a fee of $5.35.
                 ----------------------------------------------------------
                 Or contact the         To purchase shares directly, call
                 Transfer Agent         Transfer Agent at 1-800-MER-FUND and
                                        request a purchase application. 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    The minimum investment for additional
Investment       shares                 purchases is generally $50 except that
                                        certain programs, such as automatic
                                        investment programs, may have higher
                                        minimums. (The minimums for additional
                                        purchases may be waived under certain
                                        circumstances.)
                 ----------------------------------------------------------
                 Acquire additional     All dividends and capital gains
                 shares through         distributions are automatically
                 the automatic          reinvested without a sales charge.
                 dividend reinvestment
                 plan
                 ----------------------------------------------------------
                 Participate in the     You may invest a specific amount on
                 automatic investment   a periodic basis through certain
                 plan                   Merrill Lynch investment or central
                                        asset accounts.

30

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.


- ---------------------------------------------------------------------------
Transfer Shares  Transfer to a          You may transfer your shares of a
to Another       participating          Portfolio only to another securities
Securities       securities             dealer that has entered into an
Dealer or Other  dealer or other        agreement with the Distributor. Certain
Financial        financial              shareholder services may not be
Intermediary     intermediary           available for the transferred shares.
                                        You may only purchase additional shares
                                        of funds previously owned before the
                                        transfer. All future trading of these
                                        assets must be coordinated by the
                                        receiving firm.
- ---------------------------------------------------------------------------
 If You Want to     Your Choices           Information Important for You to Know
- ---------------------------------------------------------------------------
Transfer Shares    Transfer to a         You must either:
to Another         non-participating       . Transfer your shares to an
Securities         securities dealer     account with the Transfer Agent; or
Dealer or Other    or other financial      . Sell your shares, paying any
Financial          intermediary          applicable deferred sales charge.
Intermediary
(continued)
- ---------------------------------------------------------------------------

Sell Your       Have your Merrill       The price of your shares is based on
Shares          Lynch Financial         the next calculation of net asset
                Advisor, selected       value after your order is placed. For
                securities dealer       your redemption request to be priced
                or other financial      at the net asset value on the day of
                intermediary            your request, you must submit your
                submit your sales       request to your dealer or other
                order                   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, including Merrill Lynch,
                                        may charge a fee to process a redemption
                                        of shares. Merrill Lynch currently
                                        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        You may sell shares held at the
                Transfer Agent          Transfer Agent by writing to the
                                        Transfer Agent at the address on the
                                        inside back cover of this prospectus.
                                        All shareholders on the account must
                                        sign the letter. A signature guarantee
                                        will generally be required but may be
                                        waived in certain limited circumstances.
                                        You can obtain a signature guarantee
                                        from a bank, securities dealer,
                                        securities broker, credit union, savings
                                        association, national securities
                                        exchange or registered securities
                                        association. A notary public seal will
                                        not be acceptable. If you hold stock
                                        certificates, return the certificates
                                        with the letter. The Transfer Agent will
                                        normally mail redemption proceeds within
                                        seven days following receipt of a
                                        properly completed request. If you make
                                        a redemption request before the Fund has
                                        collected payment for the purchase of
                                        shares, the Fund or the Transfer Agent
                                        may delay mailing your proceeds. This
                                        delay will usually not exceed ten days.

                                        You may also sell shares held at the
                                        Transfer Agent by telephone request if
                                        the amount being sold is less than
                                        $50,000 and if certain other conditions
                                        are met. Contact the Transfer Agent at
                                        1-800-MER-FUND for details.
- ---------------------------------------------------------------------------
                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.
                                                                              31


[ICON] Your Account


 If You Want to       Your Choices        Information Important for You to Know
- -------------------------------------------------------------------------------
Sell Shares         Participate in     You can choose to receive systematic
Systematically      the Fund's         payments from your Fund account either by
                    Systematic         check or through direct deposit to your
                    Withdrawal Plan    bank account on a monthly or quarterly
                                       basis. If you hold your Portfolio shares
                                       in a Merrill Lynch CMA(R) or CBA(R)
                                       Account 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 and other
                                       distributions 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 Merrill
                                       Lynch Financial Advisor or other
                                       financial intermediary for details.
- ---------------------------------------------------------------------------

Exchange Your      Select the fund     You can exchange your shares of a Shares
Shares             into which you      Portfolio for shares of many other
                   want to exchange.   Merrill Lynch mutual funds. You must
                   Be sure to read     have held the shares used in the exchange
                   that fund's         for at least 15 calendar days before you
                   prospectus          can exchange to another fund.

                                       Each class of Portfolio shares is
                                       generally exchangeable for shares of the
                                       same class of another fund. If you own
                                       Class A shares and wish to exchange into
                                       a fund in which you have no Class A
                                       shares (and are not eligible to buy Class
                                       A shares), you will exchange into Class D
                                       shares.

                                       Some of the Merrill Lynch mutual funds
                                       impose a different initial or deferred
                                       sales charge schedule. If you exchange
                                       Class A or Class D shares for shares of a
                                       fund with a higher initial sales charge
                                       than you originally paid, you will be
                                       charged the difference at the time of
                                       exchange. If you exchange Class B shares
                                       for shares of a fund with a different
                                       deferred sales charge schedule, the
                                       higher schedule will apply. The time you
                                       hold Class B or Class C shares in both
                                       funds will count when determining your
                                       holding period for calculating a deferred
                                       sales charge at redemption. If you
                                       exchange Class A or Class D shares for
                                       money market fund shares, you will
                                       receive Class A shares of Summit Cash
                                       Reserves Fund. Class B or Class C shares
                                       of a Portfolio will be exchanged for
                                       Class B shares of Summit.

                                       To exercise the exchange privilege
                                       contact your Merrill Lynch Financial
                                       Advisor or other financial intermediary
                                       or call the Transfer Agent at 1-800-MER-
                                       FUND.

                                       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.
- ---------------------------------------------------------------------------

               Short term or excessive trading into and out of a Portfolio may
               harm performance by disrupting portfolio management strategies
               and by increasing expenses. Accordingly, a Portfolio may reject
               any purchase orders, including exchanges, particularly from
               market timers or investors who, in a Portfolio management's
               opinion, have a pattern of short term or excessive trading or
               whose trading has been or may be disruptive to the Portfolio. For
               these purposes, Portfolio management may consider an investor's
               trading history in the Portfolio or other Merrill Lynch funds,
               and accounts under common ownership or control.
32
                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.



Net Asset Value -- the market value of a Portfolio's total assets after
deducting liabilities, divided by the number of shares outstanding.
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. Each Portfolio calculates its
net asset value (generally by using market quotations) each day the New York
Stock Exchange is open as of the close of business on the Exchange based on
prices at the time of closing. The Exchange generally closes at 4:00 p.m.
Eastern time. The net asset value used in determining your share price is the
next one calculated after your purchase or redemption order is placed.

The Fund 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

                  MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              33



[ICON] Your Account

Dividends -- exempt interest, ordinary income and capital gains paid to
shareholders. Dividends may be reinvested in additional Portfolio shares as they
are paid.

"BUYING A DIVIDEND"

You may want to avoid buying shares shortly before a Portfolio pays a dividend
although the impact on you will be significantly less than if you were invested
in a fund paying fully taxable dividends. The reason? If you buy shares when a
fund has realized but not yet distributed taxable 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.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of the particular Portfolio or into a money market
fund. The class you receive may be the class you originally owned when you
entered the program, or in certain cases, a different class. If the exchange is
into Class B shares, the period before conversion to Class D shares may be
modified. Any redemption or exchange will be at net asset value. However, if you
participate in the program for less than a specified period, you may be charged
a fee in accordance with the terms of the program.

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

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

Each Portfolio will distribute any net investment income monthly and any net
realized long or short term capital gains at least annually. Each Portfolio may
also pay a special distribution at the end of the calendar year to comply with
Federal tax requirements. If you would like to receive dividends in cash,
contact your Merrill Lynch Financial Advisor, selected securities dealer, other
financial intermediary or the Transfer Agent.

To the extent that the dividends distributed by a Portfolio are from municipal
bond interest income, they are exempt from Federal income tax but may be subject
to state and local taxes. Certain investors may be subject to a Federal
alternative minimum tax on dividends received from a Portfolio. Interest income
from other investments may produce taxable dividends. Dividends derived from
capital gains realized by a Portfolio will be subject to Federal tax.

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

34

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.



If you redeem Portfolio 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. Capital gains are generally taxed at
different rates than ordinary income dividends.

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

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

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              35



[ICON Management of the Fund]

FUND ASSET MANAGEMENT
- ---------------------------------------------------------------------------

Fund Asset Management, L.P., the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Portfolios.

Set forth below is the advisory fee paid by each Portfolio for the fiscal year
ended June 30, 2001, as a percentage of the average daily net assets of the
relevant Portfolio.

                                                Advisory Fee
                                               Paid For Fiscal
                                                 Year Ended
                                               June 30, 2001*
           -----------------------------------------------------
           Insured Portfolio                         0.37%
           -----------------------------------------------------
           National Portfolio                        0.48%
           -----------------------------------------------------
           Limited Maturity Portfolio                0.34%
           -----------------------------------------------------
* As a % of average daily net assets.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates had approximately $532 billion in
investment company and other portfolio assets under management as of August
2001.

36

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.



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

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



                                                                       Insured Portfolio
- --------------------------------------------------------------------------------------------------------
                                                                             Class A
                                        ----------------------------------------------------------------
                                                                For the Year Ended June 30,
                                        ----------------------------------------------------------------
Increase (Decrease) in Net Asset Value:             2001     2000       1999        1998        1997
- --------------------------------------------------------------------------------------------------------
                                                                              
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------
  Net asset value, beginning of year             $   7.36  $   7.79  $     8.25  $     8.06  $     7.91
- --------------------------------------------------------------------------------------------------------
  Investment income-- net                             .39       .40         .41         .43         .45
- --------------------------------------------------------------------------------------------------------
  Realized and unrealized gain (loss) on
  investments-- net                                   .33      (.32)       (.27)        .20         .15
- --------------------------------------------------------------------------------------------------------
  Total from investment operations                    .72       .08         .14         .63         .60
- --------------------------------------------------------------------------------------------------------
  Less dividends and distributions:
  Investment income-- net                            (.39)     (.40)       (.41)       (.43)       (.45)
  Realized gain on investments-- net                   --        --        (.19)       (.01)         --
  In excess of realized gain on
  investments-- net                                    --      (.11)         --          --          --
- --------------------------------------------------------------------------------------------------------
  Total dividends and distributions                  (.39)     (.51)       (.60)       (.44)       (.45)
- --------------------------------------------------------------------------------------------------------
  Net asset value, end of year                   $   7.69  $   7.36  $     7.79  $     8.25  $     8.06
- --------------------------------------------------------------------------------------------------------
  Total Investment Return:*
- --------------------------------------------------------------------------------------------------------
  Based on net asset value per share                10.01%     1.21%       1.56%       8.05%       7.72%
- --------------------------------------------------------------------------------------------------------
  Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------
  Expenses                                            .45%      .43%        .42%        .42%        .44%
- --------------------------------------------------------------------------------------------------------
  Investment income-- net                            5.19%     5.33%       5.02%       5.29%       5.58%
- --------------------------------------------------------------------------------------------------------
  Supplemental Data:
- --------------------------------------------------------------------------------------------------------
  Net assets, end of year (in thousands)         $920,597  $972,420  $1,216,346  $1,377,025  $1,441,785
- --------------------------------------------------------------------------------------------------------
  Portfolio turnover                                64.39%    94.08%      86.35%     102.89%      74.40%
- --------------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              37



[ICON] MANAGEMENT OF THE FUND

FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------



                                                                         Insured Portfolio
- ---------------------------------------------------------------------------------------------------
                                                                              Class B
                                        -----------------------------------------------------------
                                                                      For the Year Ended June 30,
                                        -----------------------------------------------------------
Increase (Decrease) in Net Asset Value:             2001      2000      1999       1998     1997
- ---------------------------------------------------------------------------------------------------
                                                                           
Per Share Operating Performance:
- ---------------------------------------------------------------------------------------------------
  Net asset value, beginning of year              $   7.36  $   7.78  $   8.24  $   8.05  $   7.91
- ---------------------------------------------------------------------------------------------------
  Investment income-- net                              .34       .34       .35       .37       .39
- ---------------------------------------------------------------------------------------------------
  Realized and unrealized gain (loss) on
  investments-- net                                    .32      (.31)     (.27)      .20       .14
- ---------------------------------------------------------------------------------------------------
  Total from investment operations                     .66       .03       .08       .57       .53
- ---------------------------------------------------------------------------------------------------
  Less dividends and distributions:
  Investment income-- net                             (.34)     (.34)     (.35)     (.37)     (.39)
  Realized gain on investments-- net                    --        --      (.19)     (.01)       --
  In excess of realized gain on
  investments-- net                                     --      (.11)       --        --        --
- ---------------------------------------------------------------------------------------------------
  Total dividends and distributions                   (.34)     (.45)     (.54)     (.38)     (.39)
- ---------------------------------------------------------------------------------------------------
  Net asset value, end of year                    $   7.68  $   7.36  $   7.78  $   8.24  $   8.05
- ---------------------------------------------------------------------------------------------------
  Total Investment Return:*
- ---------------------------------------------------------------------------------------------------
  Based on net asset value per share                  9.04%      .57%      .79%     7.24%     6.78%
- ---------------------------------------------------------------------------------------------------
  Ratios to Average Net Assets:
- ---------------------------------------------------------------------------------------------------
  Expenses                                            1.21%     1.19%     1.18%     1.18%     1.19%
- ---------------------------------------------------------------------------------------------------
  Investment income-- net                             4.43%     4.56%     4.26%     4.53%     4.82%
- ---------------------------------------------------------------------------------------------------
  Supplemental Data:
- ---------------------------------------------------------------------------------------------------
  Net assets, end of year (in
  thousands)                                      $223,710  $276,154  $414,135  $498,624  $560,105
- ---------------------------------------------------------------------------------------------------
  Portfolio turnover                                 64.39%    94.08%    86.35%   102.89%    74.40%
- ---------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

38

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.


FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------


                                                                                  Insured Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
                                                             Class C                                            Class D
                                        --------------------------------------------------------------------------------------------
                                                   For the Year Ended June 30,                        For the Year Ended June 30,
                                        --------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value:    2001      2000      1999     1998     1997     2001     2000    1999      1998      1997
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                              
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year        $  7.36  $  7.78  $  8.24  $  8.06  $  7.91  $   7.36  $  7.79  $  8.24  $  8.06  $  7.91
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income-- net                       .33      .34      .34      .37      .38       .37      .38      .39      .41      .43
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments-- net                             .32     (.31)    (.27)     .19      .15       .33     (.32)    (.26)     .19      .15
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations              .65      .03      .07      .56      .53       .70      .06      .13      .60      .58
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income-- net                      (.33)    (.34)    (.34)    (.37)    (.38)     (.37)    (.38)    (.39)    (.41)    (.43)
Realized gain on investments-- net             --       --     (.19)    (.01)      --        --       --     (.19)    (.01)      --
In excess of realized gain on
investments-- net                              --     (.11)      --       --       --        --     (.11)      --       --       --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions            (.33)    (.45)    (.53)    (.38)    (.38)     (.37)    (.49)    (.58)    (.42)    (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year                $7.68  $  7.36  $  7.78  $  8.24  $  8.06  $   7.69  $  7.36  $  7.79  $  8.24  $  8.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share           8.99%     .52%     .74%    7.05%    6.86%     9.74%     .96%    1.43%    7.65%    7.46%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses                                     1.26%    1.24%    1.23%    1.23%    1.25%      .70%     .68%     .67%     .67%     .69%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income-- net                      4.38%    4.52%    4.21%    4.48%    4.77%     4.94%    5.10%    4.77%    5.03%    5.33%
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands)    $14,392  $12,856  $16,850  $14,623  $11,922  $145,688  $99,326  $81,238  $48,706  $38,422
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover                          64.39%   94.08%   86.35%  102.89%   74.40%    64.39%   94.08%   86.35%  102.89%   74.40%
- ------------------------------------------------------------------------------------------------------------------------------------


   *   Total investment returns exclude the effects of sales charges.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              39


[ICON] Management of the Fund

FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------



                                                               National Portfolio
- -----------------------------------------------------------------------------------------
                                                                      Class A
                                        -------------------------------------------------
                                                            For the Year Ended June 30,
                                        -------------------------------------------------
Increase (Decrease) in Net Asset Value:    2001      2000      1999      1998      1997
- -----------------------------------------------------------------------------------------
                                                                 
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------
 Net asset value, beginning of year     $   9.70  $  10.22  $  10.64  $  10.38  $  10.11
- -----------------------------------------------------------------------------------------
 Investment income-- net                     .54       .56       .56       .59       .60
- -----------------------------------------------------------------------------------------
 Realized and unrealized gain (loss) on
 investments-- net                           .44      (.52)     (.42)      .26       .27
- -----------------------------------------------------------------------------------------
 Total from investment operations            .98       .04       .14       .85       .87
- -----------------------------------------------------------------------------------------
 Less dividends and distributions:
 Investment income-- net                    (.54)     (.56)     (.56)     (.59)     (.60)
 In excess of realized gain on
 investments-- net                            --        --        --+       --        --
- -----------------------------------------------------------------------------------------
 Total dividends and distributions          (.54)     (.56)     (.56)     (.59)     (.60)
- -----------------------------------------------------------------------------------------
 Net asset value, end of year           $  10.14  $   9.70  $  10.22  $  10.64  $  10.38
- -----------------------------------------------------------------------------------------
 Total Investment Return:*
- -----------------------------------------------------------------------------------------
 Based on net asset value per share        10.32%      .58%     1.28%     8.36%     8.84%
- -----------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------
 Expenses                                    .58%      .56%      .55%      .55%      .55%
- -----------------------------------------------------------------------------------------
 Investment income-- net                    5.42%     5.74%     5.26%     5.58%     5.86%
- -----------------------------------------------------------------------------------------
 Supplemental Data:
- -----------------------------------------------------------------------------------------
 Net assets, end of year (in thousands) $653,685  $682,553  $877,841  $964,940  $983,650
- -----------------------------------------------------------------------------------------
 Portfolio turnover                        80.88%   108.43%   125.75%   142.02%    99.52%
- -----------------------------------------------------------------------------------------


   * Total investment returns exclude the effects of sales charges.
   + Amount is less than $.01 per share.

40

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

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


FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------



                                                                National Portfolio
- -------------------------------------------------------------------------------------------
                                                                      Class B
                                        ---------------------------------------------------
                                                           For the Year Ended June 30,
                                        ---------------------------------------------------
Increase (Decrease) in Net Asset Value:    2001       2000       1999      1998      1997
- -------------------------------------------------------------------------------------------
                                                                   
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------
Net asset value, beginning of year       $   9.70  $  10.21   $  10.63  $  10.37  $  10.11
- -------------------------------------------------------------------------------------------
Investment income-- net                       .46       .49        .48       .51       .52
- -------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments-- net                             .44      (.51)      (.42)      .26       .26
- -------------------------------------------------------------------------------------------
Total from investment operations              .90      (.02)       .06       .77       .78
- -------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income-- net                      (.46)     (.49)      (.48)     (.51)     (.52)
In excess of realized gain on
investments-- net                              --        --         --+       --        --
- -------------------------------------------------------------------------------------------
Total dividends and distributions            (.46)     (.49)      (.48)     (.51)     (.52)
- -------------------------------------------------------------------------------------------
Net asset value, end of year             $  10.14  $   9.70   $  10.21  $  10.63  $  10.37
- -------------------------------------------------------------------------------------------
Total Investment Return:*
- -------------------------------------------------------------------------------------------
Based on net asset value per share           9.49%     (.09)%      .51%     7.55%     7.92%
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------
Expenses                                     1.34%     1.32%      1.31%     1.31%     1.31%
- -------------------------------------------------------------------------------------------
Investment income-- net                      4.67%     4.98%      4.50%     4.82%     5.10%
- -------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------
Net assets, end of year (in thousands)   $227,592  $254,860   $374,642  $406,798  $415,103
- -------------------------------------------------------------------------------------------
Portfolio turnover                          80.88%   108.43%    125.75%   142.02%    99.52%
- -------------------------------------------------------------------------------------------


   * Total investment returns exclude the effects of sales charges.
   + Amount is less than $.01 per share.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              41



[ICON] Management of the Fund

FINANCIAL HIGHLIGHTS (continued)



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

                                                                National Portfolio
- ----------------------------------------------------------------------------------------------------------------------
                                      For the Year Ended June 30,                   For the Year Ended June 30,
                             --------------------------------------------- ---------------------------------------------
                                                Class C                                       Class D
Increase (Decrease) in Net   --------------------------------------------- ---------------------------------------------
       Asset Value:            2001      2000     1999     1998     1997      2001     2000     1999     1998     1997
- ------------------------------------------------------------------------------------------------------------------------
                                                                                  
Per Share Operating
Performance:
- ------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  beginning of year          $  9.71  $  10.22  $ 10.64  $ 10.38  $ 10.11  $   9.71  $ 10.22  $ 10.64  $ 10.39  $ 10.12
- ------------------------------------------------------------------------------------------------------------------------
  Investment income--net         .46       .48      .47      .50      .52       .52      .54      .53      .56      .58
- ------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized
  gain (loss) on
  investments--net               .43      (.51)    (.42)     .26      .27       .44     (.51)    (.42)     .25      .27
- ------------------------------------------------------------------------------------------------------------------------
  Total from investment
  operations                     .89      (.03)     .05      .76      .79       .96      .03      .11      .81      .85
- ------------------------------------------------------------------------------------------------------------------------
  Less dividends and
  distributions:
  Investment income--net        (.46)     (.48)    (.47)    (.50)    (.52)     (.52)    (.54)    (.53)    (.56)    (.58)
  In excess of realized
   gain on investments--net       --        --       --+      --       --        --       --       --+      --       --
- ------------------------------------------------------------------------------------------------------------------------
  Total dividends and
  distributions                 (.46)     (.48)    (.47)    (.50)    (.52)     (.52)    (.54)    (.53)    (.56)    (.58)
- ------------------------------------------------------------------------------------------------------------------------
  Net asset value, end of
  year                       $ 10.14  $   9.71  $ 10.22  $ 10.64  $ 10.38  $  10.15  $  9.71  $ 10.22  $ 10.64  $ 10.39
- ------------------------------------------------------------------------------------------------------------------------
  Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------
  Based on net asset value
  per share                     9.33%     (.13)%    .47%    7.49%    7.97%    10.04%     .43%    1.03%    7.99%    8.57%
- ------------------------------------------------------------------------------------------------------------------------
  Ratios to Average Net
  Assets:
- ------------------------------------------------------------------------------------------------------------------------
  Expenses                      1.39%     1.37%    1.36%    1.36%    1.36%      .83%     .81%     .81%     .80%     .80%
- ------------------------------------------------------------------------------------------------------------------------
  Investment income--net        4.61%     4.92%    4.45%    4.76%    5.04%     5.16%    5.50%    5.01%    5.32%    5.60%
- ------------------------------------------------------------------------------------------------------------------------
  Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
  Net assets, end of year
  (in thousands)             $31,880  $ 30,303  $47,901  $41,087  $28,096  $124,082  $86,701  $93,201  $68,162  $51,038
- ------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover           80.88%   108.43%  125.75%  142.02%   99.52%    80.88%  108.43%  125.75%  142.02%   99.52%
- ------------------------------------------------------------------------------------------------------------------------


     *    Total investment returns exclude the effects of sales charges.
     +    Amount is less than $.01 per share.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

42


FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------



                                                             Limited Maturity Portfolio
- ------------------------------------------------------------------------------------------------------
                                                                      Class A
                                             ---------------------------------------------------------
                                                            For the Year Ended June 30,
                                             ---------------------------------------------------------
Increase (Decrease) in Net Asset Value:          2001      2000       1999      1998      1997
- ------------------------------------------------------------------------------------------------------
                                                                         
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------
   Net asset value, beginning of year          $   9.85   $   9.91  $   9.96  $   9.93  $   9.91
- ------------------------------------------------------------------------------------------------------
   Investment income--net                           .39        .38       .37       .39       .39
- ------------------------------------------------------------------------------------------------------
   Realized and unrealized gain (loss) on
   investments--net                                 .20       (.06)     (.04)      .03       .04
- ------------------------------------------------------------------------------------------------------
   Total from investment operations                 .59        .32       .33       .42       .43
- ------------------------------------------------------------------------------------------------------
   Less dividends and distributions:
   Investment income--net                          (.39)      (.38)     (.37)     (.39)     (.39)
   Realized gain on investments--net                 --         --        --        --      (.02)
   In excess of realized gain on
   investments--net                                  --         --      (.01)       --        --
- ------------------------------------------------------------------------------------------------------
   Total dividends and distributions               (.39)      (.38)     (.38)     (.39)     (.41)
- ------------------------------------------------------------------------------------------------------
   Net asset value, end of year                $  10.05   $   9.85  $   9.91  $   9.96  $   9.93
- ------------------------------------------------------------------------------------------------------
   Total Investment Return:*
- ------------------------------------------------------------------------------------------------------
   Based on net asset value per share              6.07%      3.31%     3.37%     4.26%     4.40%
- ------------------------------------------------------------------------------------------------------
   Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------
   Expenses                                         .44%       .40%      .43%      .43%      .39%
- ------------------------------------------------------------------------------------------------------
   Investment income--net                          3.91%      3.83%     3.75%     3.88%     3.93%
- ------------------------------------------------------------------------------------------------------
   Supplemental Data:
- ------------------------------------------------------------------------------------------------------
   Net assets, end of year (in thousands)      $191,481   $215,421  $261,970  $295,641  $343,641
- ------------------------------------------------------------------------------------------------------
   Portfolio turnover                             51.94%     51.42%    40.28%    72.69%    61.90%
- ------------------------------------------------------------------------------------------------------


     *    Total investment returns exclude the effects of sales charges.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              43


[ICON] Management of the Fund

FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------



                                                            Limited Maturity Portfolio
- -------------------------------------------------------------------------------------------------------
                                                                    Class B
                                        ---------------------------------------------------------------
                                                          For the Year Ended June 30,
                                        ---------------------------------------------------------------
Increase (Decrease) in Net Asset Value:       2001        2000        1999         1998          1997
- -------------------------------------------------------------------------------------------------------
                                                                                
 Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------
 Net asset value, beginning of year         $  9.86     $  9.92     $  9.97      $  9.94       $  9.91
- -------------------------------------------------------------------------------------------------------
 Investment income--net                         .35         .35         .34          .35           .36
- -------------------------------------------------------------------------------------------------------
 Realized and unrealized gain (loss) on
 investments--net                               .20        (.06)       (.04)         .03           .05
- -------------------------------------------------------------------------------------------------------
 Total from investment operations               .55         .29         .30          .38           .41
- -------------------------------------------------------------------------------------------------------
 Less dividends and distributions:
 Investment income--net                        (.35)       (.35)       (.34)        (.35)         (.36)
 Realized gain on investments--net               --          --          --           --          (.02)
 In excess of realized gain on
 investments--net                                --          --        (.01)          --            --
- -------------------------------------------------------------------------------------------------------
 Total dividends and distributions             (.35)       (.35)       (.35)        (.35)         (.38)
- -------------------------------------------------------------------------------------------------------
 Net asset value, end of year               $ 10.06     $  9.86     $  9.92      $  9.97       $  9.94
- -------------------------------------------------------------------------------------------------------
 Total Investment Return:*
- -------------------------------------------------------------------------------------------------------
 Based on net asset value per share            5.69%       2.94%       3.01%        3.89%         4.13%
- -------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------
 Expenses                                       .80%        .76%        .78%         .78%          .75%
- -------------------------------------------------------------------------------------------------------
 Investment income--net                        3.55%       3.47%       3.39%        3.43%         3.58%
- -------------------------------------------------------------------------------------------------------
 Supplemental Data:
- -------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)     $31,480     $32,742     $42,930      $44,714       $54,275
- -------------------------------------------------------------------------------------------------------
 Portfolio turnover                           51.94%      51.42%      40.28%       72.69%        61.90%
- -------------------------------------------------------------------------------------------------------


     *    Total investment returns exclude the effects of sales charges.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.
44


FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------

                                             Limited Maturity Portfolio
- ------------------------------------------------------------------------------
                                                    Class C
                                      ----------------------------------------
                                                  For the Year Ended
                                                       June 30,
  Increase (Decrease) in Net Asset    ----------------------------------------
             Value:                    2001     2000    1999    1998    1997
- ------------------------------------------------------------------------------
  Per Share Operating Performance:
- ------------------------------------------------------------------------------
  Net asset value, beginning of year  $ 9.82  $ 9.88  $ 9.94  $ 9.91  $ 9.88
- ------------------------------------------------------------------------------
  Investment income--net                 .35     .34     .34     .35     .35
- ------------------------------------------------------------------------------
  Realized and unrealized gain (loss)
  on investments--net                    .19    (.06)   (.05)    .03     .05
- ------------------------------------------------------------------------------
  Total from investment operations       .54     .28     .29     .38     .40
- ------------------------------------------------------------------------------
  Less dividends and distributions:
   Investment income--net               (.35)   (.34)   (.34)   (.35)   (.35)
   Realized gain on investments--net      --      --      --      --    (.02)
   In excess of realized gain on
    investments--net                      --      --    (.01)     --      --
- ------------------------------------------------------------------------------
Total dividends and distributions       (.35)   (.34)   (.35)   (.35)   (.37)
- ------------------------------------------------------------------------------
Net asset value, end of year          $10.01  $ 9.82   $9.88  $ 9.94  $ 9.91
- ------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------
Based on net asset value per share      5.59%   2.93%   2.89%   3.88%   4.11%
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------
Expenses                                 .81%    .76%    .79%    .79%    .75%
- ------------------------------------------------------------------------------
Investment income--net                  3.53%   3.46%   3.37%   4.27%   3.57%
- ------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------
Net assets, end of year (in
thousands)                            $  602  $  308  $  437  $   86  $  108
- ------------------------------------------------------------------------------
Portfolio turnover                     51.94%  51.42%  40.28%  72.69%  61.90%
- ------------------------------------------------------------------------------

                                                      [Additional columns below]

[Continued from above table, first column(s) repeated]



                                                 Limited Maturity Portfolio
- ----------------------------------------------------------------------------------------
                                                           Class D
                                      --------------------------------------------------
                                                      For the Year Ended
                                                           June 30,
Increase (Decrease) in Net Asset      --------------------------------------------------
             Value:                      2001      2000      1999      1998      1997
- ----------------------------------------------------------------------------------------
                                                                 
  Per Share Operating Performance:
- ----------------------------------------------------------------------------------------
  Net asset value, beginning of year    $  9.86   $  9.92   $  9.97   $  9.94   $  9.91
- ----------------------------------------------------------------------------------------
  Investment income--net                    .38       .37       .37       .38       .38
- ----------------------------------------------------------------------------------------
  Realized and unrealized gain
  (loss) on investments--net                .20      (.06)     (.04)      .03       .05
- ----------------------------------------------------------------------------------------
  Total from investment operations          .58       .31       .33       .41       .43
- ----------------------------------------------------------------------------------------
   Less dividends and distributions:
    Investment income--net                 (.38)     (.37)     (.37)     (.38)     (.38)
    Realized gain on investments--net        --        --        --        --      (.02)
    In excess of realized gain on
     investments--net                        --        --      (.01)       --        --
- ----------------------------------------------------------------------------------------
Total dividends and distributions          (.38)     (.37)     (.38)     (.38)     (.40)
- ----------------------------------------------------------------------------------------
Net asset value, end of year            $ 10.06   $  9.86   $  9.92   $  9.97   $  9.94
- ----------------------------------------------------------------------------------------
Total Investment Return:*
- ----------------------------------------------------------------------------------------
Based on net asset value per share         5.96%     3.20%     3.27%     4.16%     4.40%
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------------------------------------
Expenses                                    .54%      .50%      .53%      .54%      .48%
- ----------------------------------------------------------------------------------------
Investment income--net                     3.80%     3.72%     3.65%     3.89%     3.84%
- ----------------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------------
Net assets, end of year (in
thousands)                              $42,619   $39,090   $83,177   $68,562   $20,383
- ----------------------------------------------------------------------------------------
Portfolio turnover                        51.94%    51.42%    40.28%    72.69%    61.90%
- ---------------------------------------------------------------------------------------


     *    Total investment returns exclude the effects of sales charges.

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.

                                                                              45


                                    [CHART]

                    MERRILL LYNCH MUNICIPAL BOND FUND, INC.


[ICON] For More Information


          Shareholder Reports

          Additional information about each Portfolio's investments is available
          in the Fund's annual and semi-annual reports to shareholders. In the
          Fund's annual report you will find a discussion of the market
          conditions and investment strategies that significantly affected each
          Portfolio's performance during its last fiscal year. You may obtain
          these reports at no cost by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor, other financial
intermediary or the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

     Contact your Merrill Lynch Financial Advisor or other financial
     intermediary or contact the Fund, at the telephone number or address
     indicated above, if you have any questions.

Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's 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 the
information contained in this prospectus.

Investment Company Act File #811-02688
Code #10051-1001
(C)Fund Asset Management, L.P.
                                                   [LOGO] Merrill Lynch
                                                   Investment Managers

Merrill Lynch Municipal
Bond Fund, Inc.

EX-99.17B

                                                                   EXHIBIT 17(b)

                                                                 October 5, 2001
- --------------------------------------------------------------------------------

                       STATEMENT OF ADDITIONAL INFORMATION

                    Merrill Lynch Municipal Bond Fund, Inc.

  P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800

                          ___________________________

      Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally
managed, diversified, open-end investment company that seeks to provide
shareholders with as high a level of income exempt from Federal income taxes as
is consistent with the investment policies of each of its Portfolios. The Fund
is comprised of three separate Portfolios: the Insured Portfolio, the National
Portfolio and the Limited Maturity Portfolio (each, a "Portfolio"), each of
which invests primarily in a diversified portfolio of debt obligations issued by
or on behalf of states, territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax (such obligations are herein referred to as "Municipal Bonds").

      The Fund is a series fund and is comprised of three separate Portfolios.
Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant
to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. Class C shares of the Limited Maturity
Portfolio are available only through the Exchange Privilege. The Merrill Lynch
Select Pricing(SM) System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial, given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances.

                          ___________________________

      This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund dated October
5, 2001 (the "Prospectus") which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained without charge, by calling
(800) MER-FUND or by writing to the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 2001 Annual Report. You
may request a copy of the Annual Report at no charge by calling (800) 637-3863
between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.

                          ___________________________

                  Fund Asset Management -- Investment Adviser
                     FAM Distributors, Inc. -- Distributor

                          ___________________________

   The date of this Statement of Additional Information is October 5, 2001.



                               TABLE OF CONTENTS



                                                                 Page
                                                                 ----
                                                              
      Investment Objective and Policies                             4
       Investment Objective                                         4
      Investment Policies of the Portfolios                         5
        Insured Portfolio                                           5
        National Portfolio                                          6
        Limited Maturity Portfolio                                  8
       Description of Municipal Bonds                               8
       Municipal Lease Obligations                                  9
       Forward Commitments                                         10
       Description of Temporary Investments                        10
       Financial Futures Contracts and Derivatives                 11
       Description of Financial Futures Contracts                  12
       Indexed and Inverse Floating Obligations                    16
      Investment Restrictions                                      16
      Management of the Fund                                       18
       Directors and Officers                                      18
       Compensation of Directors                                   20
       Management and Advisory Arrangements                        20
       Transfer Agency Services                                    22
       Code of Ethics                                              23
      Purchase of Shares                                           23
       Initial Sales Charge Alternatives-- Class A and Class D
        Shares                                                     24
       Reduced Initial Sales Charges-- Class A and Class D Shares  27
        Right of Accumulation                                      27
        Letter of Intention                                        27
        Employee Access Accounts                                   28
        TMA Managed Trusts                                         28
        Merrill Lynch Blueprint Program                            28
        Purchase Privileges of Certain Persons                     28
        Acquisition of Certain Investment Companies                29
        Purchases by Banks                                         29
        Fee-Based Investment Programs                              29
       Deferred Sales Charge Alternatives-- Class B and Class C
         Shares                                                    30
        Contingent Deferred Sales Charge-- Class B Shares          30
        Contingent Deferred Sales Charges-- Class C Shares         31
        Conversion of Class B Shares to Class D Shares             32
       Distribution Plans                                          33
       Limitations on the Payment of Deferred Sales Charges        35
      Redemption of Shares                                         38
       Redemption                                                  38
       Repurchase                                                  39
       Reinstatement Privilege-- Class A and Class D Shares        39
       Deferred Sales Charge-- Class B and Class C Shares          40
        Merrill Lynch Blueprint Program                            40
      Determination of Net Asset Value                             40
      Portfolio Transactions and Brokerage Commissions             41
      Dividends and Taxes                                          43
       Dividends                                                   43
       Federal Income Taxes                                        43
       State and Local Taxes                                       46


                                       2




                                                          Page
                                                          ----
                                                       
      Shareholder Services                                  46
       Investment Account                                   47
       Automatic Investment Plans                           47
       Fee-Based Programs                                   47
       Automatic Reinvestment of Dividends                  48
       Systematic Withdrawal Plans                          48
       Exchange Privilege                                   49
      Performance Data                                      51
      Additional Information                                54
       Organization of the Fund                             54
       Transfer Agent                                       54
       Custodian                                            55
       Counsel and Auditor                                  55
       Shareholder Reports                                  55
       Shareholder Inquiries                                55
       Additional Information                               55
       Computation of Offering Price Per Share              56
       Financial Statements                                 56
      Appendix A-- Descriptions of Ratings                 A-1
      Appendix B-- Insurance on Portfolio Securities       B-1


                                       3


                       INVESTMENT OBJECTIVE AND POLICIES

      Reference is made to "How Each Portfolio Invests" in the Prospectus for a
discussion of the investment objective and policies of the Fund.

      At June 30, 2001, the average maturity of the Insured Portfolio, National
Portfolio and the Limited Maturity Portfolio was approximately 17.35 years,
17.87 years and 2.57 years, respectively.

Investment Objective

      The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes as is consistent with
the investment policies of each Portfolio. The Fund is comprised of three
separate portfolios: Insured Portfolio, National Portfolio and Limited Maturity
Portfolio, each of which is, in effect, a separate fund issuing its own shares.
Each Portfolio seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income tax. Municipal Bonds include general
obligations bonds, revenue or special obligation bonds, industrial development
bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes. Each Portfolio at all times, except
during temporary defensive periods, maintains at least 80% of its net assets
invested in Municipal Bonds. In addition, each Portfolio may not purchase
securities other than Municipal Bonds and certain temporary investments
described below. These are fundamental policies of each Portfolio and may not be
changed without a vote of the majority of the outstanding shares of the
Portfolio. Each Portfolio currently contemplates that it will not invest more
than 25% of its total assets (taken at market value) in Municipal Bonds whose
issuers are located in the same state. There can be no assurance that the
objective of any Portfolio can be attained.

      While the Fund does not intend to realize taxable investment income, each
Portfolio has the authority to invest as much as 20% of its net assets on a
temporary basis in taxable money market securities with remaining maturities not
in excess of one year from the date of purchase ("Temporary Investments") for
liquidity purposes or as a temporary investment of cash pending investment of
such cash in Municipal Bonds. In addition, the Fund reserves the right to invest
temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of Fund Asset Management, L.P. (the
"Investment Adviser" or "FAM"), market conditions warrant. Temporary Investments
consist of U.S. Government securities, U.S. Government agency securities,
domestic bank certificates of deposit and bankers' acceptances, short-term
corporate debt securities such as commercial paper, and repurchase agreements.
From time to time, the Fund may realize capital gains that will constitute
taxable income. In addition, the Fund may invest in certain tax-exempt
securities that are classified as "private activity bonds," which may subject
certain investors to an alternative minimum tax. See "Dividends and Taxes."

      Certain instruments in which the Fund may invest may be characterized as
derivative instruments. The Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio are authorized to engage in transactions in financial
futures contracts only for hedging purposes. For a more complete description of
futures transactions, see "Financial Futures Contracts and Derivatives" below.
Each Portfolio is also authorized to invest in indexed and inverse floating rate
obligations and swap agreements both for hedging purposes and to enhance income.
See "Indexed and Inverse Floating Obligations" and "Swaps" below.

      Investment in the Fund offers several potential benefits. The Fund offers
investors the opportunity to receive income exempt from Federal income taxes
from a diversified, professionally managed portfolio of Municipal Bonds. The
Fund also provides a comparatively high level liquidity because of its
redemption features and relieves the investor of the burdensome administrative
details involved in managing a portfolio of tax-exempt securities. These
potential benefits are at least partially offset by the fact that there are
expenses in operating an investment company such as the Fund. Such expenses
consist primarily of the investment advisory fee and operational expenses,
including, in the case of the Insured Portfolio, premiums for insurance on
portfolio securities.

                                       4


INVESTMENT POLICIES OF THE PORTFOLIOS

      Each Portfolio pursues its investment objective through the separate
investment policies described below. These policies differ with respect to the
maturity and quality of portfolio securities in which a Portfolio may invest,
and these policies can be expected to affect the yield on each Portfolio and the
degree of market, financial and interest rate risk to which the Portfolio is
subject. Generally, Municipal Bonds with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates ("interest rate risk") than are Municipal Bonds with
shorter maturities. In addition, lower rated Municipal Bonds generally will
provide a higher yield than higher rated Municipal Bonds of similar maturity but
are also generally subject to greater market risk and to a greater degree of
risk with respect to the ability of the issuer to meet its principal and
interest obligations ("credit risk"). A Portfolio's net asset value may fall
when interest rates rise and rise when interest rates fall. Because of its
emphasis on investments in Municipal Bonds, each portfolio should be considered
as a means of diversifying an investment portfolio and not in itself a balanced
investment plan. See "Appendix -- Description of Ratings" for information with
respect to ratings assigned to Municipal Bonds and Temporary Investments by
rating agencies.

Insured Portfolio

      The Insured Portfolio invests primarily in higher quality (investment
grade) Municipal Bonds covered by portfolio insurance guaranteeing the timely
payment of principal at maturity and interest when due. Investment grade
Municipal Bonds are those rated at the date of purchase in the four highest
rating categories of Standard & Poor's ("S&P") (AAA, AA, A and BBB), Fitch, Inc.
("Fitch") (AAA, AA, A and BBB) or Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1 through MIG 3 by
Moody's, rated F-1+ through F-3 by Fitch, or rated SP-1 through SP-2 by S&P in
the case of short-term notes, and rated P-1 or P-2 in the case of Moody's, rated
F-1+ through F-3 by Fitch or A-1 through A-3 by S&P in the case of tax-exempt
commercial paper. Depending on market conditions, it is expected that Municipal
Bonds with maturities beyond five years will comprise a major portion of this
Portfolio. See Appendix B "Insurance on Portfolio Securities" for more
information.

      The Insured Portfolio will invest only in Municipal Bonds that, at the
time of purchase, either (1) are insured under an insurance policy obtained by
the issuer thereof or any other party or (2) are insured under an insurance
policy purchased by the Fund. Such policies may only be purchased from an
insurance carrier meeting the criteria of the Fund set forth below. The Fund has
purchased from AMBAC Assurance Corporation ("AMBAC"), Municipal Bond Investors
Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA"),
separate Mutual Fund Insurance Policies (the "Policies"), each of which
guarantees the timely payment of principal and interest on specified eligible
Municipal Bonds purchased by the Insured Portfolio ("Insured Municipal Bonds").
Consequently, some of the Insured Municipal Bonds in the Insured Portfolio may
be insured by AMBAC, while others may be insured by MBIA or FSA. The Policies
generally have the same characteristics and features. A Municipal Bond is
eligible for coverage if it meets certain requirements of the insurance company
set forth in a Policy. In the event interest or principal on an Insured
Municipal Bond is not paid when due, AMBAC or MBIA or FSA (depending on which
Policy covers the bond) is obligated under its Policy to make payment not later
than 30 days after it has been notified by, and provided with documentation
from, the Fund that such nonpayment has occurred. The insurance feature reduces
financial risk, but the cost thereof and the restrictions on investments imposed
by the guidelines in the insurance policy may reduce the yield to shareholders.

      The Policies guarantee the payment of principal at maturity and interest
on all Municipal Bonds that are purchased by the Insured Portfolio at a time
when they are eligible for insurance. Municipal Bonds are eligible for insurance
if they are, at the time of purchase by the Insured Portfolio, identified
separately or by category in qualitative guidelines furnished by AMBAC, MBIA or
FSA and are in compliance with the aggregate limitations on amounts set forth in
such guidelines. AMBAC, MBIA and/or FSA may withdraw particular securities from
the classifications of securities eligible for insurance while continuing to
insure previously acquired bonds of such ineligible issues so long as they
remain in the Insured Portfolio and may limit the aggregate amount of each issue
or category of municipal securities thereof. The restrictions on investment
imposed by the eligibility requirement of the Policies may reduce the yield of
the Insured Portfolio.

                                       5


      The Policies will be effective only as to Insured Municipal Bonds
beneficially owned by the Insured Portfolio. In the event of a sale of any
Municipal Bonds held by the Insured Portfolio, the issuer of the relevant Policy
is liable only for those payments of interest and principal that are then due
and owing. The Policies do not guarantee the market value of the Insured
Municipal Bonds or the value of the shares of the Insured Portfolio. It is the
intention of the Insured Portfolio to retain any Insured Municipal Bonds that
are in default or in significant risk of default and to place a value on the
insurance, which ordinarily will be the difference between the market value of
the defaulted security and the market value of similar securities that are not
in default. In certain circumstances, however, the Fund's management may
determine that an alternate value for the insurance, such as the difference
between the market value of the defaulted security and its par value, is more
appropriate. As the result of the value placed on the insurance with respect to
securities held in the Insured Portfolio that were in default at the end of the
Fund's last fiscal year, such Insured Municipal Bonds were effectively valued at
par. The Insured Portfolio's ability to manage its portfolio will be limited to
the extent it holds defaulted Insured Municipal Bonds, which may limit its
ability in certain circumstances to purchase other Municipal Bonds. See
"Determination of Net Asset Value" for a more complete description of the
Insured Portfolio's method of valuing defaulted Insured Municipal Bonds and
Insured Municipal Bonds that have a significant risk of default.

      AMBAC, MBIA and FSA may not withdraw coverage on securities insured by
their Policies and held by the Insured Portfolio so long as they remain in the
Insured Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any
reason except failure to pay premiums when due. AMBAC and FSA have reserved the
right at any time upon written notice to the Fund to refuse to insure any
additional Municipal Bonds purchased by the Insured Portfolio after the
effective date of such notice. The Board of Directors of the Fund has reserved
the right to terminate any of the Policies if it determines that the benefits to
the Insured Portfolio of having its portfolio insured are not justified by the
expense involved.

      The premiums for the Policies are paid by the Insured Portfolio and the
yield on the Portfolio is reduced thereby. The Investment Adviser estimates that
the cost of insurance on bonds currently in the Portfolio will range from
approximately .05% to .40% of the Portfolio's average net assets during the
upcoming year. The estimate is based on the expected composition of the
Portfolio.

National Portfolio

      The National Portfolio may invest in Municipal Bonds rated in any rating
category or unrated Municipal Bonds, with maturities beyond five years. The
Investment Adviser considers ratings as one of several factors in its
independent credit analysis of issuers. This Portfolio normally can be expected
to offer the highest yields of the three Portfolios, but also be subject to the
highest market and financial risks.

      The investment policies of the National Portfolio are not governed by
specific rating categories. The National Portfolio may invest in Municipal Bonds
rated in any rating category or unrated Municipal Bonds. The Portfolio will
usually invest in Municipal Bonds having a maturity of five years or longer.
Portfolio management will choose Municipal Bond investments that it believes
offer a relatively high potential for total return relative to their total risk.
Although the Portfolio's investment policies are not governed by specific rating
categories, Portfolio management does not presently intend to invest more than
35% of the Portfolio's assets in Municipal Bonds rated below investment grade
(below BBB by S&P or Fitch or below Baa by Moody's) or unrated Municipal Bonds
that Portfolio management believes are of comparable quality. These lower-rated
obligations are commonly known as "junk bonds." Junk bonds have a high level of
financial risk and there is a greater potential for the Portfolio to lose income
and principal on these investments. The 35% limitation on junk bond investments
reflects only the present intention of Portfolio management, and may be changed
without approval by the Board of Directors of the Fund. Therefore, it is
possible that the Portfolio could invest up to 100% of its assets in junk bonds.
Because investment in medium to lower rated Municipal Bonds entails relatively
greater risks of loss of income or principal than an investment in higher rated
securities, an investment in the National Portfolio may not be appropriate for
all investors. Investors should consider these risks before investing.

                                       6


      Risk factors in transactions in Junk Bonds. Junk bonds are generally
considered to have varying degrees of speculative characteristics. Consequently,
although junk bonds can be expected to provide higher yields, such securities
may be subject to greater risk of default, volatility of price and risks to
principal and income than lower yielding, higher rated debt securities.
Investments in junk bonds will be made only when, in the judgment of Portfolio
management, such securities provide attractive total return potential relative
to the risk of such securities, as compared to higher rated debt securities. The
National Portfolio will not invest in debt securities in the lowest rating
categories (those rated CC or lower by S&P or Fitch or Ca or lower by Moody's)
unless Portfolio management believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The National Portfolio does not
intend to purchase debt securities that are in default or that Portfolio
management believes will be in default.

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

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

      The National Portfolio may have difficulty disposing of certain junk bonds
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all junk bonds, there is no established secondary
market for many of these securities, and the National Portfolio anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for junk
bonds does exist, it is generally not as liquid as the secondary market for
higher rated securities. Reduced secondary market liquidity may have an adverse
impact on market price and the National Portfolio's ability to dispose of
particular issues when necessary to meet its liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain securities also may make
it more difficult for the National Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio. Market quotations are
generally available on many junk bonds only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales.

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

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

                                       7


Limited Maturity Portfolio

      The Limited Maturity Portfolio invests primarily in a portfolio of
short-term investment grade Municipal Bonds. Municipal Bonds in the Limited
Maturity Portfolio will be either Municipal Bonds with a remaining maturity of
less than four years or short-term municipal notes, which typically are issued
with a maturity of not more than one year. The Limited Maturity Portfolio will
treat Municipal Bonds that it has the option to require the issuer to redeem
within four years as having a remaining maturity of less than four years, even
if the period to the stated maturity date of such Bonds is greater than four
years. Municipal notes include tax anticipation notes, bond anticipation notes
and revenue anticipation notes. The Limited Maturity Portfolio may generally be
expected to offer a lower yield than the other Portfolios. Interest rates on
short term Municipal Bonds may fluctuate more widely from time to time than
interest rates on longer term Municipal Bonds. However, because of the shorter
maturities, the market value of the Municipal Bonds held by the Limited Maturity
Portfolio may generally be expected to fluctuate less as a result of changes in
prevailing interest rates.

      The Limited Maturity Portfolio will invest primarily in Municipal Bonds
rated at the date of purchase in the four highest rating categories by S&P (AAA,
AA, A and BBB) Fitch (AAA, AA, A and BBB) or Moody's (Aaa, Aa, A and Baa) in the
case of long-term debt, rated by Moody's as MIG 1 through MIG 3, F-1+ through
F-3 by Fitch, or rated SP-1+ through SP-2 by S&P in the case of short-term
tax-exempt notes, and rated by Moody's P-1 through P-2, F-1+ through F-3 by
Fitch or rated A-1+ through A-3 by S&P in the case of tax-exempt commercial
paper. The Limited Maturity Portfolio will primarily invest in other Municipal
Bonds deemed to qualify for such ratings and in variable rate tax-exempt demand
notes. Securities rated in the lowest of these categories are considered to have
some speculative characteristics. The Limited Maturity Portfolio may continue to
hold securities that, after being purchased by the Portfolio, are downgraded to
a rating lower than those set forth above.

Description of Municipal Bonds

      Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to finance various privately operated facilities,
including pollution control facilities. Such obligations are included within the
term Municipal Bonds if the interest paid thereon is exempt from Federal income
tax. Municipal Bonds also include short term tax-exempt municipal obligations
such as tax anticipation notes, bond anticipation notes, revenue anticipation
notes, variable rate demand notes and Public Housing Authority notes that are
fully secured by a pledge of the full faith and credit of the United States.

      The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit and taxing power for
the payment of principal and interest. Revenue or special obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
Industrial development bonds are, in most cases, revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The payment of the principal of and interest on such industrial
revenue bonds depends solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the pledge, if any,
of real and personal property so financed as security for such payment. A
Portfolio may also include "moral obligation" bonds, which are normally issued
by special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state or municipality in question.

      Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by a Portfolio with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the buyer enters into the commitment.
The Fund will only make commitments to

                                       8


purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to the settlement date
if the Investment Adviser deems it advisable. Purchasing Municipal Bonds on a
when-issued basis involves the risk that the yields available in the market when
the delivery takes place may actually be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligation will generally decrease. When a Portfolio engages in when-issued and
delayed delivery transactions, the Portfolio relies on the buyer or seller, as
the case may be, to consummate the trade. Failure of the buyer or seller to do
so may result in a Portfolio missing the opportunity of obtaining a price
considered to be advantageous. The Fund will maintain a separate account at its
custodian bank consisting of cash or liquid Municipal Bonds (valued on a daily
basis) equal at all times to the amount of the when-issued commitment.

      Variable rate demand obligations ("VRDOs") are floating rate securities
that combine an interest in a long term municipal bond with the right to demand
payment before maturity from a bank or other financial institution. The interest
rates are adjustable at intervals ranging from daily up to six months to some
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDO at approximately the par
value of the VRDO upon the adjustment date. The adjustments are typically based
upon the prime rate of a bank or some other appropriate interest rate adjustment
index.

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

      The Fund has been advised by its counsel to the effect that the interest
received on Participating VRDOs will be treated as interest from tax-exempt
obligations as long as the Fund does not invest more than a limited amount (not
more than 20%) of its total assets in such investments and certain other
conditions are met. It is contemplated that the Fund will not invest more than a
limited amount of its total assets in Participating VRDOs.

      From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the ability of the
Portfolios to pay "exempt-interest" dividends might be adversely affected and
the Fund would re-evaluate its investment objective and policies and consider
changes in its structure. See "Dividends and Taxes."

      Yields. Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of a Portfolio to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Bonds in which the Portfolio invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Bonds, within a particular classification and
between classifications, depending on numerous factors. Furthermore, the rights
of holders of Municipal Bonds and the obligations of the issuers of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar
laws and court decisions affecting the rights of creditors generally and such
laws, if any, that may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payment of principal and interest on Municipal
Bonds.

Municipal Lease Obligations

      Also included within the general category of bonds are participation
certificates in a lease, an installment purchase contract or a conditional sales
contract (hereinafter collectively called "lease obligations") entered

                                       9


into by a state or political subdivision to finance the acquisition, development
or construction of equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the lessee's
unlimited taxing power is pledged, a lease obligation is frequently backed by
the lessee's covenant to budget for, appropriate and make the payments due under
the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the lessee has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. The Portfolios may not invest
in illiquid lease obligations if such investment, together with all other
illiquid investments, would exceed 15% of a Portfolio's net assets. A Portfolio
may, however, invest without regard to such limitation in lease obligations
which the Investment Adviser, pursuant to guidelines which have been adopted by
the Board of Directors and subject to the supervision of the Board, determines
to be liquid. The Investment Adviser will deem lease obligations liquid if they
are publicly offered and have received an investment grade rating of BBB or
better by S&P or Fitch, or Baa or better by Moody's. Unrated lease obligations,
or those rated below investment grade, will be considered liquid if the
obligations come to the market through an underwritten public offering and at
least two dealers are willing to give competitive bids. In reference to the
latter, the Investment Adviser must, among other things, also review the
creditworthiness of the entity obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the frequency
of trades or quotes for the obligation and the willingness of dealers to make a
market in the obligation.

Forward Commitments

      Each Portfolio may purchase Municipal Bonds on a forward commitment basis
at fixed purchase terms. The purchase will be recorded on the date the Portfolio
enters into the commitment and the value of the security will thereafter be
reflected in the calculation of the Portfolio's net asset value. The value of
the security on the delivery date may be more or less than its purchase price. A
separate account of the Portfolio will be established with its custodian
consisting of cash or liquid Municipal Bonds having a market value at all times
at least equal to the amount of the forward commitment.

Description of Temporary Investments

      The short term money market securities in which the Portfolios may invest
as temporary investments consist of U.S. Government securities, U.S. Government
agency securities, domestic bank certificates of deposit and bankers'
acceptances, short term corporate debt securities such as commercial paper and
repurchase agreements. The money market securities must have a stated maturity
not in excess of one year from the date of purchase. U.S. Government securities
consist of various types of marketable securities issued by or guaranteed as to
principal and interest by the U.S. Government and supported by the full faith
and credit of the U.S. Treasury. U.S. Government agency securities consist of
debt securities issued by government sponsored enterprises, federal agencies and
international institutions. Such securities are not direct obligations of the
Treasury but involve government sponsorship or guarantees by government agencies
or enterprises. The Fund has established the following standards with respect to
money market securities in which the Portfolios invest. Commercial paper
investments at the time of purchase must be rated "A" by S&P, "Prime" by Moody's
or F-1 by Fitch or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by S&P, Moody's or Fitch. Investments in corporate
bonds and debentures (which must have maturities at the date of purchase of one
year or less) must be rated at the time of purchase at least "A" by S&P, Moody's
or Fitch. The Portfolios may not invest in any securities issued by a commercial
bank or a savings and loan association unless the bank or association is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation.

                                      10


Financial Futures Contracts and Derivatives

      The Portfolios are authorized to purchase and sell certain financial
futures contracts ("futures contracts") and options on such futures contracts
solely for the purpose of hedging their investments in Municipal Bonds against
declines in value and to hedge against increases in the cost of securities the
Portfolios intend to purchase. A financial futures contract obligates the seller
of a contract to deliver and the purchaser of a contract to take delivery of the
type of financial instrument covered by the contract or, in the case of
index-based futures contracts, to make and accept a cash settlement, at a
specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the futures contracts. A purchase of
financial futures contracts may provide a hedge against an increase in the cost
of securities intended to be purchased, because such appreciation may be offset,
in whole or in part, by an increase in the value of the position in the futures
contracts. None of the Portfolios is required to engage in hedging transactions
and each may choose not to do so.

      The Portfolios intend to trade in futures contracts based upon The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large, recently issued tax-exempt bonds, and to engage in transactions in
exchange-traded futures contracts on U.S. Treasury securities and options on
such futures. If making or accepting delivery of the underlying commodity is not
desired, a position in a futures contract or an option on a futures contract may
be terminated only by entering into an offsetting transaction on the exchange on
which the position was established and only if there is a liquid market for such
contract. If it is not economically practicable, or otherwise possible to close
a futures position or certain option positions entered into by a Portfolio, the
Portfolio could be required to make continuing daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Portfolio has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Portfolio may be required to perform
under the terms of its contracts. The inability to close futures or options
positions could also have an adverse impact on the Portfolio's ability to hedge
effectively. There is also risk of loss by a Portfolio of margin deposits in the
event of bankruptcy of a broker with whom the Portfolio has an open position in
a futures contract, or the exchange or clearing organization on which that
contract is traded. The Portfolios may also engage in transactions in other
futures contracts, such as futures contracts on other municipal bond indexes
that may become available, if the Investment Adviser believes such contracts
would be appropriate for hedging the Portfolios' investments in Municipal Bonds.

      Utilization of futures or option contracts involves the risk of imperfect
correlation in movements in the price of such contracts and movements in the
price of the security or securities that are the subject of the hedge. If the
price of the futures or option contract moves more or less than the price of the
security or securities that are subject of the hedge, a Portfolio will
experience a gain or loss that will not be completely offset by movements in the
price of such security, which could occur as a result of many factors, including
where the securities underlying futures or option contracts have different
maturities, ratings, or geographic mixes than the security being hedged. In
addition, the correlation may be affected by additions to or deletions from the
index that serves as a basis for an index futures contract. The trading of
futures contracts or options on futures contracts based on indexes of securities
also involves a risk of imperfect correlation between the value of the futures
contracts and the value of the underlying index. The anticipated spread between
such values or in the correlation between the futures contract and the
underlying security may be affected by differences in markets, such as margin
requirements, market liquidity and the participation of speculators in the
futures markets. Moreover, when a Portfolio enters into transactions in futures
contracts on U.S. Treasury securities, or options on such contracts, the
underlying securities will not correspond to securities held by the Portfolio.
Finally, in the case of futures contracts on U.S. Treasury securities and
options on such futures contracts, the anticipated correlation of price
movements between U.S. Treasury securities underlying the futures or options and
Municipal Bonds may be adversely affected by economic, political, legislative or
other developments which have a disparate impact on the respective markets for
such securities.

      Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can

                                       11


result in substantial unrealized gains or losses. Because the Portfolios will
engage in the purchase and sale of financial futures contracts solely for
hedging purposes, however, any losses incurred in connection therewith should,
if the hedging strategy is successful, be offset in whole or in part by
increases in the value of securities held by the Portfolios or decreases in the
price of securities the Portfolios intend to acquire. Further, the Portfolios
will maintain cash, cash equivalents and high-grade securities with the Fund's
custodian, so that the amount segregated plus the initial margin equals the
value represented by the futures contract purchased by the Portfolios, thereby
ensuring that such transactions are not actually leveraged.

      The trading of futures contracts and options thereon is subject to certain
market risks, such as trading halts, suspensions, exchange or clearing house
equipment failures, government intervention or other disruptions of normal
trading activity, which could at times make it difficult or impossible to
liquidate existing positions

      The liquidity of the market in futures contracts may be further adversely
affected by "daily price fluctuation limits" established by contract markets,
which limit the amount of a fluctuation in the price of a futures contract or
option thereon during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open positions at prices beyond the
limit. Prices of existing contracts have in the past reached the daily limit on
a number of consecutive trading days. The Portfolios will enter into a futures
position only if, in the judgment of the Investment Adviser, there appears to be
an actively traded market for such futures contracts.

      The successful use of transactions in futures contracts and options
thereon depends on the ability of the Investment Adviser correctly to forecast
the direction and extent of price movements of these instruments, as well as
price movements of the securities held by the Portfolios within a given time
frame. To the extent these price movements are not correctly forecast or move in
a direction opposite to that anticipated, the Portfolios may realize a loss on
the hedging transaction that is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the participating Portfolio's
total return for such period may be less than if it had not engaged in the
hedging transaction. See "Additional Information -- Description of Financial
Futures Contracts" below for a further discussion of the risks of futures
trading.

      Under regulations of the Commodity Futures Trading Commission ("CFTC"),
the futures trading activities described herein will not result in the
Portfolios being deemed to be "commodity pools," as defined under such
regulations, provided that certain restrictions are adhered to. In particular,
among other requirements, the Portfolios may either (a) purchase and sell
futures contracts only for bona fide hedging purposes, as defined under CFTC
regulations, or (b) limit any transaction not qualifying as bona fide hedging so
that the sum of the amount of initial margin deposits and premiums paid on such
positions would not exceed 5% of the market value of a Portfolio's net assets.
Margin deposits may consist of cash or securities acceptable to the broker and
the relevant contract market.

      When a Portfolio purchases a futures contract, it will maintain an amount
of cash, cash equivalents or commercial paper or other liquid securities in a
segregated account with the Fund's custodian, so that the amount segregated plus
the amount of initial margin and option premiums held in the account of its
broker equals the value represented by the futures contract, as reflected by its
daily settlement price, thereby ensuring that the use of such futures contract
is unleveraged. It is not anticipated that transactions in the futures contracts
will have the effect of increasing portfolio turnover.

Description of Financial Futures Contracts

      Futures Contracts. A financial futures contract obligates the seller of a
contract to deliver and the purchaser of a contract to take delivery of the type
of financial instrument called for in the contract or, in some instances, to
make a cash settlement based upon the value of an instrument or an index of
values, at a specified future time for a specified price. Although the terms of
a contract call for actual delivery of the underlying financial instrument, or
for a cash settlement, in most cases the contracts are closed out before the
delivery date without the delivery taking place. Each Portfolio intends to close
out its futures contracts prior to the delivery date of such contracts.

                                      12


      The Portfolios may sell futures contracts in anticipation of a decline in
value of their investments in Municipal Bonds. The loss associated with any such
decline could be reduced without employing futures as a hedge by selling long
term securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs in the form of brokerage commissions and dealer
spreads and will typically reduce the Portfolio's average yields as a result of
the shortening of maturities.

      The purchase or sale of a futures contract differs from the purchase or
sale of a security in that the total cash value reflected by the futures
contract is not paid. Instead, an amount of cash or securities acceptable to the
Fund's futures commission merchant ("FCM") and the relevant contract market,
which varies but is generally about 5% or less of the contract amount, must be
deposited with the FCM. This amount is known as "initial margin," and represents
a "good faith" deposit assuring the performance of both the purchaser and the
seller under the futures contract. Subsequent payments to and from the FCM,
known as "maintenance" or "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long or short
position in the futures contract more or less valuable, a process known as
"marking to the market." Prior to the settlement date of the futures contract,
the position may be closed out by taking an opposite position which will operate
to terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the FCM and the purchaser realizes a loss or gain. In addition, a
commission is paid on each completed purchase and sale transaction.

      The sale of financial futures contracts provides an alternate means of
hedging a Portfolio against declines in the value of its investments in
Municipal Bonds. As such values decline, the value of the Portfolio's positions
in the futures contracts are expected to increase, thus offsetting all or a
portion of the depreciation in the market value of the Portfolios' fixed income
investments which are being hedged. While the Portfolios will incur commission
expenses in establishing and closing out futures positions, commissions on
futures transactions may be significantly lower than transaction costs incurred
in the purchase and sale of fixed income securities. In addition, the ability of
the Portfolios to trade in the standardized contracts available in the futures
market may offer a more effective hedging strategy than a program to reduce the
average maturity of portfolio securities, due to the unique and varied credit
and technical characteristics of the municipal debt instruments available to the
Portfolios. Employing futures as a hedge may also permit the Portfolios to
assume a hedging posture without reducing the yield on their investments beyond
any amounts required to engage in futures trading.

      The Portfolios engage in the purchase and sale of future contracts on an
index of municipal securities. These instruments provide for the purchase or
sale of a hypothetical portfolio of municipal bonds at a fixed price in a stated
delivery month. Unlike most other futures contracts, however, a municipal bond
index futures contract does not require actual delivery of securities but
results in a cash settlement based upon the difference in value of the index
between the time the contract was entered into and the time it is liquidated.

      The municipal bond index underlying the futures contracts traded by the
Portfolios is The Bond Buyer Municipal Bond Index, developed by The Bond Buyer
and the Chicago Board of Trade ("CBT"), the contract market on which the futures
contracts are traded. As currently structured, the index is comprised of 40
tax-exempt term municipal revenue and general obligation bonds. Each bond
included in the index must be rated either A- or higher by S&P or A or higher by
Moody's and must have a remaining maturity of 19 years or more. Twice a month
new issues satisfying the eligibility requirements are added to, and an equal
number of old issues will be deleted from, the index. The value of the index is
computed daily according to a formula based upon the price of each bond in the
Index, as evaluated by four dealer-to-dealers brokers.

      The Portfolios may also purchase and sell futures contracts on U.S.
Treasury bills, notes and bonds for the same types of hedging purposes. Such
futures contracts provide for delivery of the underlying security at a specified
future time for a fixed price, and the value of the futures contract generally
fluctuates with movements in interest rates.

      The municipal bond index futures contract, futures contracts on U.S.
Treasury securities and options on such futures contracts are traded on the CBT
and the Chicago Mercantile Exchange, which, like other contract markets, assures
the performance of the parties to each futures contract through a clearing

                                       13


corporation, a nonprofit organization managed by the exchange membership, which
is also responsible for handling daily accounting of deposits or withdrawals of
margin.

      The Portfolios may also purchase financial futures contracts when they are
not fully invested in municipal bonds in anticipation of an increase in the cost
of securities they intend to purchase. As such securities are purchased, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Portfolios will purchase municipal bonds
upon termination of the futures contracts. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without a
corresponding purchase of securities. Nevertheless, all purchases of futures
contracts by the Portfolios will be subject to certain restrictions, described
below.

      Options on Futures Contracts. An option on a futures contract provides the
purchaser with the right, but not the obligation, to enter into a long position
in the underlying futures contract (i.e., purchase the futures contract), in the
case of a "call" option, or to enter into a short position (i.e., sell the
futures contract), in the case of a "put" option, for a fixed price (the
"exercise" or "strike" price) up to a stated expiration date. The option is
purchased for a nonrefundable fee, known as the "premium." Upon exercise of the
option, the contract market clearing house assigns each party the appropriate
position in the underlying futures contract. In the event of exercise,
therefore, the parties are subject to all of the risks of futures trading, such
as payment of initial and variation margin. In addition, the seller, or
"writer," of the option is subject to margin requirements on the option
position. Options on futures contracts are traded on the same contract markets
as the underlying futures contracts.

      The Portfolios may purchase options on futures contracts for the same
types of hedging purposes described above in connection with futures contracts.
For example, in order to protect against an anticipated decline in the value of
securities it holds, a Portfolio could purchase put options on futures
contracts, instead of selling the underlying futures contracts. Conversely, in
order to protect against the adverse effects of anticipated increases in the
cost of securities to be acquired, a Portfolio could purchase call options on
futures contracts, instead of purchasing the underlying futures contracts. The
Portfolios generally will sell options on futures contracts only to close out an
existing position.

      The Portfolios will not engage in transactions in such instruments unless
and until the Investment Adviser determines that market conditions and the
circumstances of the Portfolios warrant such trading. To the extent the
Portfolios engage in the purchase and sale of futures contracts or options
thereon, they will do so only at a level that reflects the Investment Adviser's
view of the hedging needs of the Portfolios, the liquidity of the market for
futures contracts and the anticipated correlation between movements in the value
of the futures or option contract and the value of securities held by the
Portfolios.

      Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. Under regulations of the CFTC, the futures trading activities
described herein will not result in the Portfolios' being deemed to be
"commodity pools," as defined under such regulations, provided that certain
trading restrictions are adhered to. In particular, CFTC regulations require
that a notice of eligibility be filed and that all futures and option positions
entered into by the Portfolios qualify as bona fide hedge transactions, as
defined under CFTC regulations, or that any nonqualifying positions be limited
so that the sum of the amount of initial margin deposits and premiums paid on
such positions would not exceed 5% of the market value of the respective
Portfolio's net assets.

      When either Portfolio purchases a futures contract, it will maintain an
amount of cash, cash equivalents or commercial paper or liquid securities in a
segregated account with the Fund's custodian, so that the amount so segregated
plus the amount of initial margin held in the account of its broker equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.

      Risk Factors in Transactions in Futures Contracts and Options Thereon. The
particular municipal bonds comprising the index underlying the municipal bond
index futures contract may vary from the bonds held by the Portfolios. In
addition, the securities underlying futures contracts on U.S. Treasury
securities will not be the same as securities held by the Portfolios. As a
result, the Portfolios' ability effectively to hedge all or a portion of the
value of their municipal bonds through the use of futures contracts will depend
in part on the degree to which price movements in the index underlying the
municipal bond index futures contract, or the

                                       14


U.S. Treasury securities underlying other futures contracts traded, correlate
with price movements of the Municipal Bonds held by the Portfolios.

      For example, where prices of securities in the Portfolios do not move in
the same direction or to the same extent as the values of the securities or
index underlying a futures contract, the trading of such futures contracts may
not effectively hedge the Portfolios' investments and may result in trading
losses. The correlation may be affected by disparities in the average maturity,
ratings, geographical mix or structure of the Portfolios' investments as
compared to those comprising the index, and general economic or political
factors. In addition, the correlation between movements in the value of the
index underlying a futures contract may be subject to change over time, as
additions to and deletions from the index alter its structure. In the case of
futures contracts on U.S. Treasury securities and options thereon, the
anticipated correlation of price movements between the U.S. Treasury securities
underlying the futures or options and Municipal Bonds may be adversely affected
by economic, political, legislative or other developments that have a disparate
impact on the respective markets for such securities. In the event that the
Investment Adviser determines to enter into transactions in financial futures
contracts other than the municipal bond index futures contract or futures on
U.S. Treasury securities, the risk of imperfect correlation between movements in
the prices of such futures contracts and the prices of Municipal Bonds held by
the Portfolios may be greater.

      The trading of futures contracts on an index also entails the risk of
imperfect correlation between movements in the price of the futures contract and
the value of the underlying index. The anticipated spread between the prices may
be affected due to differences in the nature of the markets, such as margin
requirements, liquidity and the participation of speculators in the futures
markets. The risk of imperfect correlation, however, generally diminishes as the
delivery month specified in the futures contract approaches.

      Prior to exercise or expiration, and absent delivery, a position in
futures contracts or options thereon may be terminated only by entering into a
closing purchase or sale transaction on the relevant contract market. A
Portfolio will enter into a futures or option position only if there appears to
be a liquid market therefore, although there can be no assurance that such a
liquid market will exist for any particular contract at any specific time. Thus,
it may not be economically practicable, or otherwise possible, to close out a
position once it has been established. Under such circumstances, a portfolio
could be required to make continuing daily cash payments of variation margin in
the event of adverse price movements. In such situations, if the Portfolio has
insufficient cash, it may be required to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Portfolio may be required to perform under the terms of the
futures or option contracts it holds. The inability to close out futures or
options positions also could have an adverse impact on the Portfolio's ability
effectively to hedge its portfolio.

      When a Portfolio purchases an option on a futures contract, its risk is
limited to the amount of the premium, plus related transaction costs, although
this entire amount may be lost. In addition, in order to profit from the
purchase of an option on a futures contract, a Portfolio may be required to
exercise the option and liquidate the underlying futures contract, subject to
the availability of a liquid market. The trading of options on futures contracts
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option, although the
risk of imperfect correlation generally tends to diminish as the maturity date
of the futures contract or expiration date of the option approaches.

      "Position limits" are generally imposed on the maximum number of contracts
which any person may hold or control at a given time. A contract market may
order the liquidation of positions found to be in violation of these limits and
it may impose other sanctions or restrictions. The Investment Adviser does not
believe that position limits will have any adverse impact on the portfolio
strategies for hedging a Portfolio's investments.

      Further, the trading of futures contracts is subject to the risk of the
insolvency of a brokerage firm or the relevant exchange or clearing corporation,
which could make it difficult or impossible to liquidate existing positions or
to recover margin or other payments due.

      In addition to the risks of imperfect correlation and lack of a liquid
secondary market for such instruments, transactions in futures contracts involve
risks related to leveraging such that a change in the price of a futures
contract could result in substantial gains or losses. The potential for
incorrect forecasts of the

                                       15


direction and extent of interest rate movements within a given time frame also
involves the risk of loss in the event such forecasts are inaccurate.

Indexed and Inverse Floating Obligations

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

Swaps

      The Fund is authorized to enter into swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified bond, basket of bonds or index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities.

      Suitability. The economic benefit of an investment in any Portfolio
depends upon many factors beyond the control of that Portfolio, the Investment
Adviser and its affiliates. Because of each Portfolio's emphasis on Municipal
Bonds, each Portfolio 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 Portfolio will depend upon, among other things, such
investor's tax situation, investment objectives and ability to accept the risks
associated with investing in Municipal Bonds, including the risk of loss of
principal and the risk of receiving income that is not exempt from Federal
income tax.

                            INVESTMENT RESTRICTIONS

      The Fund has adopted the following fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, including a majority of the shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940, as amended (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).

                                      16


      Under the fundamental investment restrictions, none of the Portfolios of
the Fund may:

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

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

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

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

             5. Make loans to other persons, except that the acquisition of
      bonds, debentures or other corporate debt securities and investments 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 each Portfolio of the Fund may lend its portfolio
      securities, provided that the lending of portfolio securities may be made
      only in accordance with applicable law and the guidelines set forth in the
      Fund's Prospectus and Statement of Additional Information, as they may be
      amended from time to time.

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

             7. Borrow money, except that (i) each Portfolio of 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) each
      Portfolio of the Fund may, to the extent permitted by applicable law,
      borrow up to an additional 5% of its total assets for temporary purposes,
      (iii) each Portfolio of the Fund may obtain such short term credit as may
      be necessary for the clearance of purchases and sales of portfolio
      securities and (iv) each Portfolio of 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.

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

             9. Purchase or sell commodities or contracts on commodities, except
      to the extent that a Portfolio of 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.

      The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Board of Directors without approval by the Fund's
shareholders.

      Under the Fund's non-fundamental investment restrictions, none of the
Portfolios of the Fund may:

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

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

                                       17


             c. Invest in securities that cannot be readily resold because of
      legal or contractual restrictions or that cannot otherwise be marketed,
      redeemed or put to the issuer or a third party, if at the time of
      acquisition more than 15% of its total assets would be invested in such
      securities. This restriction shall not apply to securities which 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
      (a "Rule 144A Security") and determined to be liquid by the Fund's Board
      of Directors are not subject to the limitations set forth in this
      investment restriction.

             d. Notwithstanding fundamental investment restriction (7) above,
      the Fund currently does not intend to borrow amounts in any Portfolio in
      excess of 10% of the total assets of such Portfolio, 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. In addition,
      the Fund will not purchase securities while borrowings are outstanding.

                             MANAGEMENT OF THE FUND

Directors and Officers

      The Board of Directors of the Fund consists of eight 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.

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

      TERRY K. GLENN (61) -- President and Director (1)(2) -- Chairman (Americas
Region) since 2001 and Executive Vice President of the Investment Adviser and
Merrill Lynch Investment Managers, L.P. ("MLIM") (which terms as used herein
include their corporate predecessors) since 1983; President, Merrill Lynch
Mutual Funds since 1999; President of FAM Distributors, Inc. ("FAMD" or the
"Distributor") since 1986 and Director thereof since 1991; Executive Vice
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; President of Princeton Administrators, L.P. since 1988; Director of
Financial Data Services ("FDS") since 1985.

      RONALD W. FORBES (61) -- Director (2)(3) -- 1400 Washington Avenue,
Albany, New York 12222. Professor Emeritus of Finance, School of Business, State
University of New York at Albany since 2000 and Professor thereof from 1989 to
2000; International Consultant, Urban Institute, Washington, D.C. from 1995 to
1999.

      CYNTHIA A. MONTGOMERY (49) -- Director (2)(3) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School, since 1989; Associate Professor, J.L. Kellog Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from 1979
to 1985; Director, UnumProvident Corporation since 1990 and Director, Newell
Rubbermaid Inc. since 1995.

      CHARLES C. REILLY (70) -- Director (2)(3) -- 9 Hampton Harbor Road,
Hampton Bays, New York 11946. Self-employed financial consultant since 1990;
President and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990;
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business from 1990 to
1991; Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.

      KEVIN A. RYAN (68)-- Director (2)(3)-- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02467. Founder and currently Director Emeritus of the Boston
University Center for Advancement of Ethics

                                       18


and Character and Director thereof from 1989 to 1999; Professor from 1982 to
1999 and currently Professor Emeritus of Education at Boston University;
formerly taught on the faculties of The University of Chicago, Stanford
University and Ohio State University.

      ROSCOE S. SUDDARTH (66) -- Director (2)(3) -- 7403 MacKenzie Court,
Bethesda, Maryland 20817. Former President, Middle East Institute from 1995 to
2001; Foreign Service Officer, United States Foreign Service from 1961 to 1995;
Career Minister from 1989 to 1995; Deputy Inspector General, U.S. Department of
State from 1991 to 1994; U.S. Ambassador to the Hashemite Kingdom of Jordan from
1987 to 1990.

      RICHARD R. WEST (63)-- Director (2)(3)-- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993 and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company) and Alexanders Inc. (real
estate holding company).

      EDWARD D. ZINBARG (66) -- Director (2)(3) -- 5 Hardwell Road, Short Hills,
New Jersey 07078-2117. Self-employed financial consultant since 1994; Executive
Vice President of The Prudential Insurance Company of America from 1988 to 1994;
former Director of Prudential Reinsurance Company and former Trustee of The
Prudential Foundation.

      VINCENT R. GIORDANO (57) -- Senior Vice President (1)(2) -- Managing
Director of the Investment Adviser and MLIM since 2000; Senior Vice President of
the Investment Adviser and MLIM from 1994 to 2000; Senior Vice President of
Princeton Services since 1993.

      KENNETH A. JACOB (50) -- Vice President (1)(2) -- First Vice President of
MLIM since 1997; Vice President of MLIM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.

      DONALD C. BURKE (41) -- Vice President and Treasurer (1)(2) -- First Vice
President of the Investment Adviser and MLIM since 1997 and Treasurer thereof
since 1999; Senior Vice President and Treasurer of Princeton Services since
1999; Vice President of FAMD since 1999; Vice President of the Investment
Adviser and MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.

      PETER J. HAYES (42) -- Vice President and Portfolio Manager of Limited
Maturity Portfolio (1)(2) -- First Vice President of MLIM since 1997; Vice
President of MLIM from 1988 to 1997.

      ROBERT A. DIMELLA, CFA (35) -- Vice President and Portfolio Manager of
Insured Portfolio (1)(2) -- Vice President of MLIM since 1997; Assistant Vice
President of MLIM from 1995 to 1997; Assistant Portfolio Investment Adviser of
MLIM from 1993 to 1995.

      WALTER O'CONNOR (39) -- Vice President and Portfolio Manager of National
Portfolio (1)(2) -- Director (Municipal Tax-Exempt) of MLIM since 1997; Vice
President of MLIM from 1993 to 1997; Assistant Vice President of MLIM from 1991
to 1993.

      ALICE A. PELLEGRINO (41) -- Secretary (1)(2) -- Vice President of MLIM
since 1999; Attorney associated with MLIM since 1997; Associate with Kirkpatrick
& Lockhart LLP from 1992 to 1997.

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

(2)   The Directors and officers of the Fund are Directors and officers of
      certain other investment companies for which the Investment Adviser or
      MLIM acts as investment adviser.

(3)   Member of the Fund's Audit and Nominating Committee, which is responsible
      for the selection of the independent auditors and the selection and
      nomination of non-interested Directors.

      As of September 30, 2001, the Directors and officers of the Fund as a
group (15 persons) owned an aggregate of less than 1% of the outstanding shares
of each Portfolio. At that date, Mr. Glenn, a Director and officer of the Fund,
and the other officers of the Fund, owned an aggregate of less than 1% of the
outstanding common stock of ML & Co.

                                       19


Compensation of Directors

      Pursuant to the terms of the investment advisory agreement between FAM and
the Fund (the "Investment Advisory Agreement"), the Investment Adviser pays all
compensation of officers and employees of the Fund as well as the fees of all
Directors of the Fund who are affiliated persons of ML&Co. or its subsidiaries.

      The Fund pays each non-interested Director a combined fee of $5,900 per
year plus $200 per in person Board meeting attended. The Fund also compensates
members of its Audit and Nominating Committee (the "Committee"), which consists
of all the non-interested Directors, at a rate of $200 per in person Committee
meeting attended. Each of the Co-Chairman of the Committee receives an
additional amount 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 Committee meetings.

      The following table shows the compensation earned by the non-interested
Directors for the Fund's fiscal year ended June 30, 2001 and the aggregate
compensation paid to them by all investment companies advised by the Investment
Adviser and its affiliate, MLIM ("MLIM/ FAM-Advised Funds"), for the calendar
year ended December 31, 2000:

                                                                  Aggregate
                                            Pension or          Compensation
                                        Retirement Benefits  from Fund and Other
                         Compensation     Accrued as Part      MLIM/FAM-Advised
  Director/Trustee         from Fund      of Fund Expense           Funds(1)
- -------------------------------------------------------------------------------
Ronald W. Forbes(2)         $8,000             None                $295,008
Cynthia A. Montgomery       $7,500             None                $264,008
Charles C. Reilly(2)        $8,000             None                $352,050
Kevin A. Ryan               $7,500             None                $264,008
Roscoe S. Suddarth(3)       $7,008             None                $193,977
Richard R. West             $7,500             None                $373,000
Edward D. Zinbarg(3)        $7,008             None                $242,435
- --------------------------------------------------------------------------------

(1)   The Directors serve on the boards of MLIM/ FAM-advised funds as follows:
      Mr. Forbes (51 registered investment companies consisting of 58
      portfolios); Ms. Montgomery (51 registered investment companies consisting
      of 58 portfolios); Mr. Reilly (51 registered investment companies
      consisting of 58 portfolios); Mr. Ryan (51 registered investment companies
      consisting of 58 portfolios); Mr. Suddarth (51 registered investment
      companies consisting of 58 portfolios); Mr. West (66 registered investment
      companies consisting of 72 portfolios); and Mr. Zinbarg (51 registered
      investment companies consisting of 58 portfolios).

(2)   Effective July 2000, Mr. Forbes and Mr. Reilly became Co-Chairman of the
      Committee and each will receive an additional annual fee of $500 in
      connection with their service.

(3)   Mr. Suddarth and Mr. Zinbarg were elected Directors of the Fund on July
      10, 2000. Mr. Suddarth was elected a director of certain other MLIM/FAM-
      advised funds in January 2000.

      As of September 30, 2001, the following were the only shareholders of
record of 5% or more of the outstanding shares of the Limited Maturity Portfolio
of the Fund: Alfred C. Farrell TTEE U/A DTD 5/18/2001, by Alfred C. Farrell,
owning 31.0% of Class C, Ronald A. Schiavone TTEE, Pledged Collateral Acct.-MLL,
U/A DTD 06/21/91, by Ronald A. Schiavone, owning 14.8% of Class C, Jennifer D.
Long, owning 10.6% of Class C, Mrs. Lillian T. Reinhardt, owning 6.1% of Class
C, Ronit Adler MD and Jeffrey M. Epstein MD TIC, owning 5.9% of Class C, and
Harry Knowles, owning 5.8% of Class C.

Management and Advisory Arrangements

      Pursuant to the Investment Advisory Agreement, Fund Asset Management,
L.P., a subsidiary of ML & Co., acts as the investment adviser for the Fund and
provides the Fund with management services. Subject to the supervision of the
Board of Directors of the Fund, FAM is responsible for the actual management of
each Portfolio and constantly reviews the holdings of each Portfolio in light of
its own research analysis and analyses from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security

                                      20


rests with FAM. FAM provides the portfolio managers for each Portfolio, who
consider analyses from various sources, make the necessary investment decisions
and place transactions accordingly. FAM is also obligated to perform certain
administrative management services for the Fund and provides all the office
space, facilities, equipment and personnel necessary to perform its duties under
the Agreement.

      Securities held by the Fund may also be held by other funds for which FAM
or MLIM acts as an adviser or by investment advisory clients of MLIM. If
purchases or sales of securities for the Fund or other funds for which FAM or
MLIM acts as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or MLIM 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.

      Investment Advisory Fee. As compensation for its services to the
Portfolios, the Investment Adviser receives at the end of each month a fee with
respect to each Portfolio. The fee for each Portfolio is determined based on the
annual advisory fee rates for that Portfolio set forth in the table below. These
fee rates are applied to the average daily net assets of each Portfolio, with
the reduced rates shown below applicable to portions of the assets of each
Portfolio to the extent that the aggregate of the average daily net assets of
the three combined Portfolios exceeds $250 million, $400 million, $550 million
and $1.5 billion (each such amount being a "breakpoint level"). The portion of
the assets of a Portfolio to which the rate at each breakpoint level applies
will be determined on a "uniform percentage" basis. The uniform percentage
applicable to a breakpoint level is determined by dividing the amount of the
aggregate of the average daily net assets of the three combined Portfolios that
falls within that breakpoint level by the aggregate of the average daily net
assets of the three combined Portfolios. The amount of the fee for a Portfolio
at each breakpoint level is determined by multiplying the average daily net
assets of that Portfolio by the uniform percentage applicable to that breakpoint
level and multiplying the product by the advisory fee rate.



                                                                       Rate of Advisory Fee
                                                                 --------------------------------
                                                                                         Limited
        Aggregate of average daily net assets                     Insured   National     Maturity
           of the three combined Portfolios                      Portfolio  Portfolio   Portfolio
     --------------------------------------------------------------------------------------------
                                                                               
     Not exceeding $250 million                                     0.40%     0.50%       0.40%
     In excess of $250 million but not exceeding $400 million       0.375     0.475       0.375
     In excess of $400 million but not exceeding $550 million       0.375     0.475        0.35
     In excess of $550 million but not exceeding $1.5 billion       0.375     0.475       0.325
     In excess of $1.5 billion                                       0.35     0.475       0.325


      For the last three fiscal years ended June 30, FAM received advisory fees
as follows:

                                                                       Limited
                                             Insured     National      Maturity
         Fiscal Year Ended June 30,         Portfolio    Portfolio    Portfolio
     ---------------------------------------------------------------------------
     1999                                   $6,832,049   $7,068,892   $1,350,646
     2000                                   $5,507,883   $5,692,201   $1,145,746
     2001                                   $4,865,278   $5,011,968   $  922,155

      Payment of Expenses. The Investment Advisory Agreement obligates FAM to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with economic
research, investment research, trading and investment management of the Fund, as
well as the fees of all Directors of the Fund who are affiliated persons of ML &
Co. or any of its subsidiaries. Each Portfolio pays all other expenses incurred
in its operation and a portion of the Fund's general administrative expenses
allocated on the basis of the asset size of the respective Portfolios. Expenses
that will be borne directly by the Portfolios include redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, portfolio
insurance maintained and paid by the Insured Portfolio, expenses of registering
the shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of the
custodian and Transfer Agent and other expenses

                                       21


attributable to a particular Portfolio. Expenses that will be allocated on the
basis of the size of the respective Portfolios include Directors' fees, legal
expenses, state franchise taxes, auditing services, costs of preparing, printing
and mailing proxies, stock certificates, shareholder reports and prospectuses
(except to the extent paid by FAMD), Commission fees, accounting costs and other
expenses properly payable by the Fund and allocable on the basis of the size of
the respective Portfolios. Depending upon the nature of a lawsuit, litigation
costs may be directly applicable to the Portfolios or allocated on the basis of
the size of the respective Portfolios. The Board of Directors has determined
that this is an appropriate method of allocation of expenses. The Fund's total
expenses for the fiscal year ended June 30, 2001 was $18,016,081, of which
$8,271,187 was attributable to the Insured Portfolio (representing .45%, 1.21%,
1.26% and .70% of average net assets for Class A, Class B, Class C and Class D
shares, respectively), $8,381,514 was attributable to the National Portfolio
(representing .58%, 1.34%, 1.39% and .83% of average net assets for Class A,
Class B, Class C and Class D shares, respectively), and $1,363,380 was
attributable to the Limited Maturity Portfolio (representing .44%, .80%, .81%
and .54% of average net assets for Class A, Class B, Class C and Class D shares,
respectively). FAM was not required to reduce its fee or reimburse any of the
Fund's expenses for the fiscal year ended June 30, 2001.

      As required by the distribution agreement between FAMD and the Fund (the
"Distribution Agreement"), FAMD will pay certain of the expenses of each
Portfolio incurred in connection with the offering of shares of each Portfolio,
including the expense of printing the prospectuses used in connection with the
continuous offering of shares by each Portfolio. See "Purchase of Shares --
Distribution Plans."

      The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.

      Duration and Termination. Unless earlier terminated as described below,
the Investment Advisory Agreement will continue in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding voting shares of each Portfolio 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. Such contract terminates upon
assignment 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.

      If the Directors or shareholders (as applicable) of any Portfolio fail to
approve the continuance of the Investment Advisory Agreement as set forth above,
the Investment Advisory Agreement will continue in effect as to any other
Portfolio if the Directors or shareholders (as applicable) of such Portfolio
have approved the contract as set forth above.

Transfer Agency Services

      Financial Data Services, Inc. (the "Transfer Agent"), a subsidiary of ML &
Co., acts as the Fund's Transfer Agent pursuant to a Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement (the "Transfer
Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and the
opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of $16.00 per Class A or
Class D account and $23.00 per Class B or Class C account and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement. For purposes
of the 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.

      Accounting Services. The Fund entered into an agreement with State Street
effective January 1, 2001, pursuant to which State Street provides certain
accounting services to the Fund. The Fund pays a fee for these services. Prior
to January 1, 2001, the Investment Adviser provided accounting services to the
Fund and was reimbursed by the Fund at its cost in connection with such
services. The Investment Adviser continues to

                                       22


provide certain accounting services to the Fund and the Fund reimburses the
Investment Adviser for these services.

      The table below shows the amounts paid by the Fund to State Street and to
the Investment Adviser for the periods indicated:

                                                           Paid to the
                                             Paid to        Investment
                     Period               State Street       Adviser
        --------------------------------------------------------------
        Fiscal year ended June 30, 1999          N/A         $429,103
        Fiscal year ended June 30, 2000          N/A         $416,856
        Fiscal year ended June 30, 2001     $362,706+        $265,020
- --------------------------------------------------------------------------------
+  Represents payments pursuant to the agreement with State Street commencing
January 1, 2001.

Code of Ethics

      The Board of Directors of the Fund has approved a Code of Ethics under
Rule 17j-1 of the Investment Company Act that covers the Fund, the Investment
Adviser and Distributor (the "Code of Ethics"). 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.

                              PURCHASE OF SHARES

      Reference is made to "Your Account -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus for certain information as to the purchase of
Fund shares. The Fund has entered into a Distribution Agreement with FAMD (the
"Distributor") in connection with the offering of each class of shares of the
three Portfolios. The Distribution Agreement obligates the Distributor to pay
certain expenses in connection with the offering of the Fund's shares. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution Agreement
is subject to the same renewal requirements and termination provisions as the
Investment Advisory Agreement described above.

      Each of the Portfolios issues four classes of shares under the Merrill
Lynch Select Pricing(SM) System, which permits each investor to choose the
method of purchasing shares that the investor believes is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D shares
are sold to investors choosing the initial sales charge alternatives and shares
of Class B and Class C shares are sold to investors choosing the deferred sales
charge alternatives. Class C shares of the Limited Maturity Portfolio are
available only through the Exchange Privilege and may not be purchased except
through exchange of Class C shares of another Portfolio or another MLIM/FAM-
advised mutual fund.

      Investors should determine whether under their particular circumstances it
is more advantageous to incur the initial sales charge or to have the initial
purchase price invested with the Portfolio with the investment thereafter being
subject to the contingent deferred sales charge ("CDSC") and ongoing
distribution fees. Each Class A, Class B, Class C and Class D share of a
Portfolio represents an identical interest in the Portfolio and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution fees and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges

                                       23


will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by a Portfolio
for each class of shares will be calculated in the same manner at the same time
and will differ only to the extent that account maintenance and distribution
fees and any incremental transfer agency costs relating to a particular class
are borne exclusively by that class. Class B, Class C and Class D shares each
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/ or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Purchase of Shares -- Distribution Plans" below. Each Class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."

      Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.

      The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLIM or FAM. Funds advised by MLIM or
FAM that use the Merrill Lynch Select Pricing(SM) System are referred to herein
as "Select Pricing Funds."

      Each Portfolio offers its shares at a public offering price equal to the
next determined net asset value per share plus any sales charge applicable to
the class of shares selected by the investor. The applicable offering price for
purchase orders is based upon the net asset value of the Portfolio next
determined after receipt of the purchase order by the Distributor. As to
purchase orders received by securities dealers or other financial intermediaries
prior to the close of business on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m., Eastern time) which includes orders received after the
determination of net asset value on the previous day, the applicable offering
price will be based on the net asset value on the day the order is placed with
the Distributor, provided that the orders are received by the Distributor prior
to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received prior to 30 minutes after the close of business
on the NYSE on that day, such orders shall be deemed received on the next
business day. Dealers or other financial intermediaries have the responsibility
of submitting purchase orders to the Fund not later than 30 minutes after the
close of business on the NYSE in order to purchase Portfolio shares at that
day's offering price.

      The Fund or the Distributor may suspend the continuous offering of a
Portfolio's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the 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.
Certain securities dealers or other financial intermediaries may charge a
processing fee to confirm a sale of shares. For example, the fee currently
charged by Merrill Lynch is $5.35 to confirm a sale of shares to such customers.
Purchases made directly through the Transfer Agent are not subject to the
processing fee.

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

      The Fund sells its Class A and Class D shares through the Distributor and
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") as dealers.
Investors who prefer an initial sales charge alternative may elect to purchase
Class D shares or, if an eligible investor, Class A shares. Investors choosing
the initial sales charge alternative who are eligible to purchase Class A shares
should purchase Class A shares rather than Class D shares because there is an
account maintenance fee imposed on Class D shares. Investors qualifying for
significantly reduced initial sales charges may find the initial sales charge
alternative particularly attractive because similar sales charge reductions are
not available with respect to the deferred sales charges imposed in connection
with purchases of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to

                                       24


purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who previously purchased Class A shares
may no longer be eligible to purchase Class A shares of other Select Pricing
Funds, those previously purchased Class A shares, together with Class B, Class C
and Class D share holdings, will count toward a right of accumulation which may
qualify the investor for reduced initial sales charge on new initial sales
charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.

      The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of a Portfolio, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company," as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of a Portfolio or shares of other registered
investment companies at a discount; provided, however, that it does not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.

      Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares of a
Portfolio in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM)program, are entitled to purchase additional Class A shares of that
Portfolio in that account. Class A 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 branch has $3 million or more
initially invested in MLIM/ FAM-Advised Funds. Also eligible to purchase Class A
shares at net asset value are participants in certain investment programs,
including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee, certain Merrill Lynch investment programs
that offer pricing alternatives for securities transactions and purchases made
in connection with certain fee-based programs. In addition, Class A shares will
be offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLIM/ FAM-Advised Funds,
including the Fund. Certain persons who acquired shares of certain
MLIM/FAM-Advised closed-end funds in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund also may purchase Class A shares of the Fund if
certain conditions set forth below are met (for closed-end funds that commenced
operations prior to October 21, 1994). In addition, Class A shares of the Fund
and certain other MLIM/ FAM-Advised Funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
pursuant to a tender offer conducted by such funds in shares of the Fund and
certain other MLIM/ FAM-Advised Funds.

                                       25


     Class A and Class D Sales Charge Information



                                                Class A Shares
- ---------------------------------------------------------------------------------------------------------------
                                            Gross Sales   Sales Charges   Sales Charges     CDSCs Received on
                                              Charges      Retained by       Paid to          Redemption of
    For the fiscal year ended June 30,       Collected     Distributor    Merrill Lynch     Load-Waived Shares
- --------------------------------------------------------------------------------------------------------------
                                                                                
Insured Portfolio
1999                                          $209,154       $20,407         $188,747              $  0
2000                                          $ 84,731       $ 9,943         $ 74,788              $  0
2001                                          $ 79,400       $10,264         $ 69,136              $  0

National Portfolio
1999                                          $124,058       $12,027         $112,031              $  0
2000                                          $ 56,355       $ 5,914         $ 50,441              $  0
2001                                          $ 75,835       $11,883         $ 63,952              $  0

Limited Maturity Portfolio
1999                                          $  7,074       $   736         $  6,338              $  0
2000                                          $  6,353       $   703         $  5,650              $843
2001                                          $  4,047       $   416         $  3,631              $  0


                                                  Class D Shares
- ---------------------------------------------------------------------------------------------------------------
                                            Gross Sales   Sales Charges   Sales Charges     CDSCs Received on
                                              Charges      Retained by       Paid to          Redemption of
    For the fiscal year ended June 30,       Collected     Distributor    Merrill Lynch     Load-Waived Shares
- --------------------------------------------------------------------------------------------------------------
                                                                                
Insured Portfolio
1999                                          $181,373       $ 8,778         $172,595           $49,520
2000                                          $ 31,460       $ 3,063         $ 28,397           $     0
2001                                          $ 46,859       $ 6,019         $ 40,840           $   451

National Portfolio
1999                                          $322,813       $12,332         $310,481           $37,014
2000                                          $ 35,869       $ 3,415         $ 32,454           $ 1,009
2001                                          $ 75,888       $ 6,922         $ 68,966           $     0

Limited Maturity Portfolio
1999                                          $ 22,334       $ 2,020         $ 20,314           $42,224
2000                                          $  5,726       $   343         $  5,383           $   430
2001                                          $  9,654       $   962         $  8,692           $   400


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

      Subject to the conditions set forth below, shares of each Portfolio are
offered at net asset value to holders of the common stock of certain
MLIM/FAM-advised continuously offered closed-end funds who wish to reinvest the
net proceeds from a sale of such shares. Upon exercise of this reinvestment
option, shareholders of

                                       26


Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of a
Portfolio, shareholders of Merrill Lynch Senior Floating Rate Fund II, Inc. will
receive Class C shares of a Portfolio and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of a Portfolio, except that shareholders of
Merrill Lynch Municipal Strategies Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who already own Class A shares of a Portfolio may be
eligible to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing Class
A shares and the other requirements pertaining to the reinvestment privilege are
met. In order to exercise this reinvestment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of a Portfolio. This option is available only with respect to
eligible shares as to which no Early Withdrawal Charge or CDSC (each as defined
in the eligible fund's prospectus) is applicable. Purchase orders from eligible
fund shareholders 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 the Portfolio 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. Such waiver
is subject to the requirement that the investor have 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.

Reduced Initial Sales Charges-- Class A and Class D Shares

      A reduced sales charge is available for any purchase in excess of $25,000
(in the case of the Insured Portfolio and National Portfolio) and $100,000 for
the Limited Maturity Portfolio of Class A or Class D shares of a Portfolio.

      No initial sales charges are imposed upon Class A and Class D shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.

      Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which investors are permitted to purchase shares of
any of the three Portfolios 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 the shares of all of the Portfolios and of other MLIM/ FAM-Advised
Funds. For any such right of accumulation to be made available, the Distributor
must be provided at the time of purchase, by the purchaser or the purchaser's
securities dealer or other financial intermediary, with sufficient information
to permit confirmation of qualification, and acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or custodian under
pension, profit-sharing or other employee benefits 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 of
Class A and Class D shares of the Portfolios, or any other MLIM/ FAM-Advised
Funds, where purchases of such shares aggregating $25,000 or more for the
Insured Portfolio and National Portfolio or $100,000 or more for the Limited
Maturity Portfolio are made through any dealer within a 13-month period starting
with the first purchase pursuant to a Letter of Intent in the form provided by
the Distributor. The Letter of Intent is not a binding obligation to purchase
any amount of Class A or Class D shares, but its execution will result in the
purchaser's paying a lower sales charge at the appropriate quantity purchase
level. The Letter of Intent is available only to investors whose accounts are
maintained at the Fund's Transfer Agent. A purchase not originally made pursuant
to a Letter of Intent may be included under a subsequent letter executed within
90 days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. The value of Class A and Class D shares of the
Portfolios and of other MLIM/ FAM-Advised Funds (or eligible shares) presently
held, at cost or maximum offering price (whichever is higher) 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 applicable to the
amount covered by the Letter of Intent will be applied only to new purchases. If
the total amount of shares

                                       27


purchased does not equal the amount stated in the Letter of Intent (minimum of
$25,000 for the National and Insured Portfolio or $100,000 for the Limited
Maturity Portfolio), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A and
Class D shares equal to five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose and will be involuntarily redeemed to pay the
additional sales charge, if necessary. The first purchase under the Letter of
Intent must be at least five percent of the dollar amount of such Letter. If
during the term of such Letter a purchase brings the total amount invested to an
amount equal to or in excess of the amount indicated in the Letter, the
purchaser will be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a single purchase
equal to the total dollar value of the shares then being purchased plus the
total cost of all shares previously purchased under such Letter, but there will
be no retroactive reduction of the sales charges on any previous purchase.

      The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted from
the total purchases made under such Letter. An exchange from a MLIM/FAM-advised
money market fund into any Portfolio that creates a sales charge will count
toward completing a new or existing Letter of Intent in any Portfolio.

      Employee Access(SM) Accounts. Class A or Class D shares are offered at net
asset value to Employee Access(SM) Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum investment for such
accounts is $500, except that the initial minimum investment for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.

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

      Merrill Lynch Blueprint(SM) Program. Class D shares of any of the three
Portfolios are offered to participants in the Merrill Lynch Blueprint(SM)
Program ("Blueprint"). In addition, participants in Blueprint who own Class A
shares of a Portfolio may purchase additional Class A shares of the Portfolio
through Blueprint. Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions and trade
associations. Investors placing orders to purchase Class A or Class D shares of
a Portfolio through Blueprint will acquire the shares at net asset value plus a
sales charge calculated in accordance with Blueprint sales charge schedule
(i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to $5,000 at
3.5% for the Insured Portfolio or National Portfolio, and $5,000.01 or more at
the standard disclosed sales charge rate in the Prospectus). However, services,
including the exchange privilege, available to Class A or Class D shareholders
through Blueprint may differ from those available to other investors. Class A
and Class D shares are offered at net asset value, to Blueprint participants
through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program")
available from Merrill Lynch Business Financial Services, a business unit of
Merrill Lynch. Orders for purchases and redemptions of Class A or Class D shares
of the Portfolios may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan. Additional information concerning
purchases through Blueprint, including any annual fees and transaction charges,
is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

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

                                       28


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

      Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Advisor and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.

      Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Advisor and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual fund and that such shares have been outstanding for a period of no
less than six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.

      A purchase of $1 million or more in a single transaction by an investor,
or a purchase by a TMA(SM) Managed Trust, of Class A and Class D Shares of the
Fund's Portfolios may not be subject to an initial sales charge. Such purchases
may instead be subject to a 1.0% contingent deferred sales charge if the shares
are redeemed within one year after purchase in lieu of paying an initial sales
charge.

      Acquisition of Certain Investment Companies. Class D 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 D shares of a Portfolio
through certain financial advisers, selected securities dealers and other
financial intermediaries that meet and adhere to standards established by the
Investment Adviser from time to time.

      Purchases by Banks. Class A shares of the Fund's Insured Portfolio may be
purchased at net asset value, without a sales charge, by banks that have
invested a minimum of $25 million in such shares.

      Fee-Based Investment Programs. Certain Merrill Lynch fee-based investment
programs, including pricing alternatives for securities transactions, (each
referred to in this paragraph as a "Program") may permit the purchase of Class A
shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class A shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified. Termination of
participation in a Program may result in the redemption of such shares or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based
upon the current value of such shares. These Programs also generally prohibit
such shares from being transferred to another account at Merrill Lynch, to
another broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the imposition
of initial or deferred sales charges and distribution and

                                       29


account maintenance fees) in order for the investment not to be subject to
Program fees. Additional information regarding a specific Program (including
charges and limitations on transferability applicable to shares that may be held
in such Program) is available in the Program's client agreement and from the
Transfer Agent at 1-800-MER-FUND or 1-800-637-3863.

Deferred Sales Charge Alternatives -- Class B and Class C Shares

      The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares of the Insured and National
Portfolios are subject to a four year CDSC charged on redemption and Class B
shares of the Limited Maturity Portfolio are subject to a one year CDSC, while
Class C shares of each Portfolio are subject only to a one year 1.00% CDSC.
Approximately ten years after Class B shares are issued, such Class B shares,
together with Class B shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the relevant
Portfolio and thereafter will be subject to lower continuing fees. See
"Conversion of Class B Shares to Class D Shares" below. Class C shares of the
Limited Maturity Portfolio are available only through the Exchange Privilege.
Both Class B and Class C shares of each Portfolio are subject to an account
maintenance fee of 0.25% (in the case of the National and Insured Portfolios)
and 0.15% (in the case of the Limited Maturity Portfolio) of net assets. Class B
and Class C shares of the Insured and National Portfolios are subject to
distribution fees equal to 0.50% and 0.55%, respectively, of net assets. Class B
and Class C shares of the Limited Maturity Portfolio are subject to a
distribution fee of 0.20% of net assets. See "Distribution Plans." The proceeds
from account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.

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

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

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

      Contingent Deferred Sales Charge -- Class B Shares. Class B shares of the
Insured and National Portfolios redeemed within four years of purchase and Class
B shares of the Limited Maturity Portfolio redeemed within one year of purchase,
may be subject to a CDSC at the rates set forth below charged as a percentage of
the dollar amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed. Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC will be assessed on
the redemption of shares received upon the reinvestment of dividends or capital
gains distributions.

                                       30


      The following table sets forth the rates of the CDSC on Class B shares
applicable for the period starting October 21, 1994:

                                                         Contingent Deferred
                                                          Sales Charge as a
                                                            Percentage of
                  Insured or National Portfolio;            Dollar Amount
                 Year Since Purchase Payment Made         Subject to Charge
        -------------------------------------------------------------------
        0-1                                                     4.00%
        1-2                                                     3.00%
        2-3                                                     2.00%
        3-4                                                     1.00%
        4 and thereafter                                        0.00%

                                                         Contingent Deferred
                                                          Sales Charge as a
                                                            Percentage of
                    Limited Maturity Portfolio;             Dollar Amount
                 Year Since Purchase Payment Made         Subject to Charge
        -------------------------------------------------------------------
        0-1                                                     1.0%
        1 and thereafter                                        0.0%

      For the fiscal year ended June 30, 2001, the Distributor received $481,802
in CDSCs with respect to redemptions of Class B shares amounting to $206,769,
$258,500 and $16,533 for the Insured, National and Limited Maturity Portfolios,
respectively, all of which were paid to Merrill Lynch. For the fiscal year ended
June 30, 2000, the Distributor received $968,411 in CDSCs with respect to
redemptions of Class B shares, amounting to $404,887, $540,744 and $22,780 for
the Insured, National and Limited Maturity Portfolios, respectively, all of
which were paid to Merrill Lynch. For the fiscal year ended June 30, 1999, the
Distributor received CDSCs of $321,449 for the Insured Portfolio, $491,369 for
the National Portfolio, and $35,386 for the Limited Maturity Portfolio, with
regard to redemptions of Class B shares, all of which were paid to Merrill
Lynch. Additional 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.

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

      To provide an example, assume an investor purchased 100 Class B shares of
the Insured Portfolio at $10 per share (at a cost of $1,000) and in the third
year after purchase, the net asset value per share is $12 and, during such time,
the investor has acquired 10 additional shares upon dividend reinvestment. If at
such time the investor makes his or her first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the CDSC is applied only
to the original cost of $10 per share and not the increase in net asset value of
$2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at
a rate of 2.00% (the applicable rate in the third year after purchase for shares
purchased on or after October 21, 1994).

      Additional information concerning the waiver of the Class B CDSC is set
forth in "Redemption of Shares -- Deferred Sales Charge -- Class B and Class C
Shares."

      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

                                       31


thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly, no
Class C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions. The Class C CDSC
may be waived in connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs." The Class C CDSC of the Fund and certain other
MLIM/ FAM-Advised Funds may be waived with respect to Class C shares purchased
by an investor with the net proceeds of a tender offer made by certain
MLIM/FAM-advised closed end funds, including Merrill Lynch Senior Floating Rate
Fund II, Inc. Such waiver is subject to the requirement that the tendered shares
shall have been held by the investor for a minimum of one year, and to such
other conditions as are set forth in the prospectus for the related closed end
fund.

      The following table sets forth the rates of the contingent deferred sales
charge on the Class C shares of the Insured, National and Limited Maturity
Portfolios:

                                                         Contingent Deferred
                                                          Sales Charge as a
                                                            Percentage of
                                                            Dollar Amount
                 Year Since Purchase Payment Made         Subject to Charge
        -------------------------------------------------------------------
        0-1                                                     1.00%
        Thereafter                                              0.00%

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

      For the fiscal year ended June 30, 2001, the Distributor received $7,947
in CDSCs with respect to redemptions of Class C shares, amounting to $525,
$7,422 and $0 for the Insured, National and Limited Maturity Portfolios,
respectively, all of which were paid to Merrill Lynch. For the fiscal year ended
June 30, 2000, the Distributor received $28,148 in CDSCs with respect to
redemptions of Class C shares, amounting to $2,183, $24,262 and $1,703 for the
Insured, National and Limited Maturity Portfolios, respectively, all of which
were paid to Merrill Lynch. For the fiscal year ended June 30, 1999, the
Distributor received CDSCs of $11,099 for the Insured Portfolio, $20,051 for the
National Portfolio, and $866 for the Limited Maturity Portfolio, with regard to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
Additional 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.

      Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"). Class B shares of a Portfolio will be converted
automatically into Class D shares of the relevant Portfolio. Class D shares are
subject to an ongoing account maintenance fee of 0.25% (in the case of Insured
Portfolio and National Portfolio) and 0.10% (in the case of the Limited Maturity
Portfolio) of net assets but are not subject to the distribution fee that is
borne by Class B shares. Automatic conversion of Class B shares into Class D
shares will occur at least once each month (on the "Conversion Date") on the
basis of the relative net asset values of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a purchase or
sale of the shares for federal income tax purposes.

      In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single

                                       32


account will result in less than $50 worth of Class B shares being left in the
account, all of the Class B shares of the Fund held in the account on the
Conversion Date will be converted to Class D shares of the Fund.

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

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

      The Conversion Period also may be modified in connection with certain
fee-based programs. See "Shareholder Services-- Fee Based Programs."

Distribution Plans

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

      The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class of a Portfolio, accrued daily and paid
monthly, at the annual rate of 0.25% (in the case of the Class B, Class C and
Class D shares of the Insured Portfolio and the National Portfolio) and 0.15%
(in the case of Class B and Class C shares of the Limited Maturity) and 0.10%
(in the case of the Class D shares of the Limited Maturity Portfolio) of the
average daily net assets of the Portfolio attributable to shares of the relevant
class in order to compensate the Distributor, Merrill Lynch, a selected
securities dealer or other financial intermediary (pursuant to a sub-agreement)
in connection with account maintenance activities.

      The Distribution Plans for Class B and Class C shares each provide that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class of a Portfolio, accrued daily and paid monthly, at the annual
rate of .50% and .55% for the Class B and Class C shares, respectively, of the
Insured and National Portfolios and .20% for the Class B and Class C shares of
the Limited Maturity Portfolio of the average daily net assets of the Portfolio
attributable to the shares of the relevant class in order to compensate 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 advisors or other financial intermediaries
for selling Class B and Class C shares of the Portfolio. The Distribution Plans
relating to Class B and Class C shares are designed to permit an investor to
purchase Class B and Class C shares through selected securities dealers and
other financial intermediaries without the assessment of an initial sales charge
and at the same time permit the dealer to compensate its financial advisors, a
selected securities dealer or other financial intermediary in connection with
the sale of the Class B and Class C shares. In this regard, the purpose and
function of the ongoing distribution fees and the CDSC are the same as those of
the initial sales charge with respect to the Class A and Class D shares of the
Fund in that the deferred sales charges provide for the financing of the
distribution of the Fund's Class B and Class C shares.

      Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 0.75%
(in the case of the Insured Portfolio and National Portfolio) and 0.35% (in the
case of the Limited Maturity Portfolio) of the average daily net assets of the
Class B shares of the

                                       33


respective Portfolio (the "Prior Plan") to compensate the Distributor and
Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are nearly identical to the aggregate fee
rates payable and the services provided under the Distribution Plan, the
difference being that the account maintenance and distribution services have
been unbundled. For the fiscal year ended June 30, 2001, the Insured, National
and Limited Maturity Portfolios paid the Distributor $1,858,159, $1,800,970 and
$108,007, respectively, pursuant to the Class B Distribution Plan (based on
average net assets subject to the Class B Distribution Plan of approximately
$248.4 million, $240.8 million and $30.9 million, respectively), all of which
were 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 June 30, 2001, the Insured, National and Limited
Maturity Portfolios paid the Distributor $102,801, $238,409 and $1,540,
respectively, pursuant to the Class C Distribution Plan (based on average net
assets subject to the Class C Distribution Plan of approximately $12.9 million,
$29.9 million and $.4 million, respectively), all of which were 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 June 30,
2001, the Insured, National and Limited Maturity Portfolios paid the Distributor
$297,399, $261,323 and $40,287, respectively, pursuant to the Class D
Distribution Plan (based on average net assets subject to the Class D
Distribution Plan of approximately $119.3 million, $104.8 million and $40.4
million, respectively), all of which were paid to Merrill Lynch for providing
account maintenance services in connection with Class D shares.

      The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues from
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses
incurred by the Distributor and Merrill Lynch is presented to the Directors for
their consideration in connection with their deliberations as to the continuance
of the Class B and Class C Distribution Plans. This information is presented
annually as of December 31, of each year on a "fully allocated accrual" basis
and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of account maintenance fees, the
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction procession expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and the CDSCs, and expenses consist of
financial consultant compensation.

      As of June 30, 2001, direct cash revenues received with respect to the
Class B shares of the Insured Portfolio for the period since October 21, 1988
(commencement of operations) exceeded direct cash expenses by $41,068,768
(representing 18.35% of Insured Portfolio Class B net assets at that date) and
direct cash revenues received with respect to Class B shares of the National
Portfolio for the same period exceeded direct cash expenses by $24,661,492
(representing 10.83% of National Portfolio Class B net assets at that date). As
of June 30, 2001, direct cash revenues received with respect to the Class B
shares of the Limited Maturity Portfolio for the period since November 2, 1992
(commencement of operations) exceeded direct cash expenses by $2,144,286
(representing 6.81% of Limited Maturity Portfolio Class B net assets at that
date).

      As of June 30, 2001, direct cash revenues received with respect to the
Class C shares of the Insured Portfolio for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $465,374
(representing 3.24% of Insured Portfolio Class C net assets at that date), and
the direct cash revenues received with respect to the Class C shares of the
National Portfolio for the same period exceeded direct cash expenses by
$1,025,673 (representing 3.22% of National Portfolio Class C net assets at that
date) and the direct cash revenues with respect to Class C shares of the Limited
Maturity Portfolio exceeded direct cash expenses by $7,286 (representing 1.21%
of Limited Maturity Portfolio Class C net assets at that date).

      Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan,

                                       34


the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and the
related class of shareholders of the relevant Portfolio. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
shall be committed to the discretion of the Independent Directors then in
office. In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is reasonable likelihood that such
Distribution Plan will benefit the Fund and the related class of shareholders of
the Portfolio. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding related voting securities of the
relevant Portfolio. A Distribution Plan cannot be amended to increase materially
the amount to be spent by any Portfolio without the approval of the related
class of shareholders of such Portfolio and all material amendments are required
to be approved by the vote of directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each class of Distribution Plan and
any report made pursuant to such plan for a period of not less than six years
from the date of such Distribution Plan or such report, the first two years in
an easily accessible place.

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

Limitations on the Payment of Deferred Sales Charges

      The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class of each Portfolio. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund with respect to Class B
or Class C shares of a Portfolio to (1) 6.25% of eligible gross sales of such
shares, computed separately for each class of a Portfolio (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
of a Portfolio is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares of the relevant Portfolio,
and any CDSCs with respect to that class will be paid to the Fund rather than to
the Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.

                                       35


      The following tables set forth comparative information as of June 30, 2001
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period October 21, 1988
(commencement of operations) to June 30, 2001 for the Class B shares of the
National and Insured Portfolios, for the period November 2, 1992 (commencement
of operations) to June 30, 2001 for Class B shares of the Limited Maturity
Portfolio, and for the period October 21, 1994 (commencement of operations) to
June 30, 2001 for the shares of the Insured, National and Limited Maturity
Portfolios.



                                                  Data Calculated as of June 30, 2001
                          --------------------------------------------------------------------------------------
                                                             Insured Portfolio
                          --------------------------------------------------------------------------------------
                                                               (in thousands)
                                                                                                       Annual
                                                                                                    Distribution
                                       Allowable   Allowable                Amounts                    Fee At
                          Eligible     Aggregate    Interest   Maximum    Previously     Aggregate     Current
                           Gross         Sales     On Unpaid    Amount      Paid To        Unpaid     Net Asset
                          Sales(1)      Charges    Balance(2)  Payable   Distributor(3)   Balance     Level(4)
                          --------------------------------------------------------------------------------------
                                                                               
Class B
Under NASD Rule
  as Adopted              1,361,650      84,373      70,701     155,074      47,634        107,440      1,119
Under Distributor's
  Voluntary Waiver        1,361,650      84,373       7,538      91,911      47,634         44,277      1,119
Class C
Under NASD Rule
  as Adopted                 39,010       2,435       1,047       3,482         529          2,953         79


                                                             National Portfolio
                          --------------------------------------------------------------------------------------
                                                               (in thousands)
                                                                                                       Annual
                                                                                                    Distribution
                                       Allowable   Allowable                Amounts                    Fee At
                          Eligible     Aggregate    Interest   Maximum    Previously     Aggregate     Current
                           Gross         Sales     On Unpaid    Amount      Paid To        Unpaid     Net Asset
                          Sales(1)      Charges    Balance(2)  Payable   Distributor(3)   Balance     Level(4)
                          --------------------------------------------------------------------------------------
                                                                               
Class B
Under NASD Rule
  as Adopted                809,201      50,024      35,878      85,902      27,970         57,932      1,139
Under Distributor's
  Voluntary Waiver          809,201      50,024       4,597      54,621      27,970         26,651      1,139
Class C
Under NASD Rule
  as Adopted                 67,731       4,223       1,500       5,723       1,076          4,647        175


                                                         Limited Maturity Portfolio
                          --------------------------------------------------------------------------------------
                                                               (in thousands)
                                                                                                       Annual
                                                                                                    Distribution
                                       Allowable   Allowable                Amounts                    Fee At
                          Eligible     Aggregate    Interest   Maximum    Previously     Aggregate     Current
                           Gross         Sales     On Unpaid    Amount      Paid To        Unpaid     Net Asset
                          Sales(5)      Charges    Balance(2)  Payable   Distributor(6)   Balance     Level(4)
                          --------------------------------------------------------------------------------------
                                                                               
Class B
Under NASD Rule
  as Adopted                191,984      11,930       9,786      21,716       2,264         19,452         63
Under Distributor's
  Voluntary Waiver          191,984      11,930       1,029      12,959       2,264         10,695         63
Class C
Under NASD Rule
  as Adopted                  3,361         225         167         392          14            378          1
- ----------------------------------------------------------------------------------------------------------------


(1)   Purchase price of all eligible Class B shares sold since October 21, 1988
      (commencement of Class B operations) other than shares acquired through
      dividend reinvestment and the exchange privilege.

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

(3)   Consists of CDSC payments, distribution fee payments and accruals. Of
      these distribution fee payments made prior to July 6, 1993 under the Prior
      Plan at the 0.75% rate, 0.50% of average daily net assets has been treated
      as a distribution fee and 0.25% of average daily net assets has been
      deemed to have been a service fee and not subject to the NASD maximum
      sales charge rule. 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 A shares in conjunction with the Shareholder's
      participation in the Merrill Lynch Mutual Funds Advisor ("MFA") Program.
      The CDSC is booked as a contingent obligation that may be payable if the
      shareholder terminates participation in the MFA Program.

                                       36


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

(5)   Purchase price of all eligible Class B shares sold since November 2, 1992
      (commencement of Class B operations) other than shares acquired through
      dividend reinvestment and exchange privilege.

(6)   Consists of CDSC payments, distribution fee payments and accruals. Of
      these distribution fee payments made prior to July 6, 1993 under the Prior
      Plan at the 0.35% rate, 0.25% of average daily net assets has been treated
      as a distribution fee and 0.10% of average daily net assets has been
      deemed to have been a service fee and not subject to the NASD maximum
      sales charge rule.

                                       37


                              REDEMPTION OF SHARES

      Reference is made to "Your Account -- How to Buy, Sell, Transfer and
Exchange Shares" in the Prospectus.

      The Fund is required to redeem for cash all shares of each Portfolio upon
receipt of a written request in proper form. The redemption price is the net
asset value per share of the Portfolio next determined after the initial receipt
of proper notice of redemption. Except for any CDSC that may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends declared through the date of redemption.
If a shareholder redeems all of the shares in his account, he will receive, in
addition to the net asset value of the shares redeemed, a separate check
representing all dividends declared but unpaid.

      If a shareholder redeems a portion of the shares in his account, the
dividends declared but unpaid on the shares redeemed will be distributed on the
next dividend payment date. As set forth below, special procedures are available
pursuant to which shareholders may redeem by check. The right to redeem shares
or to receive payment with respect to any such redemption may be suspended for
more than seven days for any period during which trading on the New York Stock
Exchange (the "NYSE") is restricted as determined by the Commission or the NYSE
is closed (other than customary weekend and holiday closings), for any period
during which an emergency exists, as defined by the Commission, as a result of
which disposal of portfolio securities or determination of the net asset value
of any Portfolio is not reasonably practicable, and for such other periods as
the Commission may by order permit for the protection of shareholders of each
Portfolio.

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

      The Fund has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its affiliates 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 Fund shareholders in
extraordinary or emergency circumstances.

Redemption

      A shareholder wishing to redeem shares held with the Transfer Agent may do
so by tendering the shares directly to the Transfer Agent, Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by the
certificate(s) for the shares to be redeemed. The notice in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as their name(s) appear(s) on the Transfer Agent's
register or on the certificate(s), as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution" as
such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. Notarized signatures
are not sufficient. Examples of eligible guarantor institutions include most
commercial banks and other broker dealers (including for example, Merrill Lynch
branch offices). Information regarding other financial institutions that qualify
as "eligible guarantor institutions" may be obtained from the Transfer Agent. In
certain instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payment will be mailed
within seven days of receipt of proper notice of redemption.

      At various times the Fund may be requested to redeem shares of a Portfolio
for which it has not yet received good payment. The Fund may delay or cause to
be delayed the mailing of a redemption check until such time as it has assured
itself that good payment (e.g., cash, Federal funds, or a certified check drawn
on a

                                       38


United States bank) has been collected for the purchase of such shares. Normally
this delay will not exceed ten days.

      A shareholder may also redeem shares held with the Transfer Agent by
telephone request. To request a redemption from your account, call the Transfer
Agent at 1-800-MER-FUND. The request must be made by the shareholder of record
and 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 in the following situations:
the accountholder is deceased, the proceeds are to be sent to someone other than
the shareholder of record, funds are to be wired to the client's bank account, a
systematic withdrawal plan is in effect, the request is by an individual other
than the accountholder of record, the account is held by joint tenants who are
divorced, the address on the account has changed within the last 30 days or
share certificates have been issued on the account.

      Since this account feature involves a risk of loss from unauthorized or
fraudulent transactions, the Transfer Agent will take certain precautions to
protect your account from fraud. Telephone redemption may be refused 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
Fund or the Transfer Agent may temporarily suspend telephone transactions at any
time.

Repurchase

      The Fund will also repurchase shares of each Portfolio through a selected
securities dealer or other financial intermediary. The Fund will normally accept
orders to repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the order by the
selected securities dealer or other financial intermediary, provided that the
request for repurchase is received by the selected securities dealer or other
financial intermediary prior to the close of business on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the day received and is received
by the Fund from the selected securities dealer or other financial intermediary
not later than 30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price. These repurchase arrangements are for
the convenience of shareholders and do not involve a charge by the Fund (other
than any applicable CDSC). Securities dealers that do not have selected dealer
agreements with the Distributor may impose a charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch, selected
securities dealers or other financial intermediaries may charge its customers a
processing fee (Merrill Lynch currently charges $5.35) to confirm a repurchase
of shares. Redemptions made directly through the Fund's Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase. The exercise of this right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure.

      For shareholders redeeming through their listed securities dealer, payment
for full and fractional shares will be made by the securities dealer within
seven days of the proper tender of the certificates, if any, and stock power or
letter requesting redemption, in each instance with signatures guaranteed as
noted above.

Reinstatement Privilege -- Class A and Class D Shares

      Holders of Class A or Class D shares of any Portfolio who have redeemed
their shares have a one-time privilege to reinstate their accounts by purchasing
Class A or Class D shares, as the case may be, of the Portfolio in which they
had invested at net asset value without a sales charge up to the dollar amount
redeemed. The reinstatement privilege may be exercised as follows. A notice to
exercise this privilege along with a check for the amount to be reinstated must
be received by the Transfer Agent within 30 days after the date the request for
redemption was executed 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. Alternatively, the reinstatement privilege may be

                                       39


exercised through the investor's Merrill Lynch Financial Advisor within 30 days
after the date the request for redemption was accepted by the Transfer Agent or
Distributor.

Deferred Sales Charge-- Class B and Class C Shares

      As discussed in "Purchase of Shares -- Deferred Sales Charge Alternatives
- -- Class B and Class C Shares," herein, while under most circumstances, Class B
shares of the Insured Portfolio and National Portfolio redeemed within four
years of purchase and Class B shares of the Limited Maturity Portfolio redeemed
within one year of purchase are subject to a CDSC, the charge is waived on
redemptions of Class B shares in certain instances, including following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawal are any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability.

      Merrill Lynch Blueprint(SM) Program. Class B shares of all three
Portfolios are offered to certain participants in the Merrill Lynch
Blueprint(SM) Program ("Blueprint"). Blueprint is directed to small investors
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares are offered through Blueprint only to members of
certain affinity groups. The CDSC is waived for shareholders who are members of
such affinity groups at the time of placing orders to purchase Class B shares
through Blueprint. However, services, including the exchange privilege,
available to Class B shareholders through Blueprint may differ from those
available to other Class B investors. Orders for purchases and redemptions of
Class B shares of any of the three Portfolios 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 throughout
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of the Blueprint automatic investment plan. Additional
information concerning Blueprint, including any annual fees or transaction
charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

                        DETERMINATION OF NET ASSET VALUE

      Reference is made to "How Shares are Priced" in the Prospectus.

      The net asset value of the shares of all classes of the Fund is determined
by the Investment Adviser once daily Monday through Friday as of the close of
business on the NYSE on each day the NYSE is open for trading (a "Pricing Day")
based on prices at the time of closing. The NYSE generally closes at 4:00 p.m.,
Eastern time. 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 is computed by dividing the value of the securities held
by each Portfolio 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, rounded to the
nearest cent. Expenses, including the fees payable to the Investment Adviser and
Distributor, are accrued daily.

      The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A 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, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D 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 of the Fund. The per share net asset value of Class C
shares will generally be lower than the per share net asset value of Class B
shares reflecting the daily expense accruals of the higher distribution fees
applicable with respect to Class C shares. It is

                                       40


expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.

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

      It is the intention of FAM, subject to guidelines established by the Board
of Directors of the Fund, to hold Insured Municipal bonds in the Insured
Portfolio that are in default, or in significant risk of default, in the payment
of principal or interest until the default has been cured or the principal and
interest are paid by the issuer or the insurer. In accordance with such
guidelines, FAM will consider the following factors in determining the effective
value of Insured Municipal Bonds in the Insured Portfolio that are in default,
or in significant risk of default, in the payment of principal or interest: (1)
the market value of the bonds; (2) the market value of securities of similar
Issuers whose securities carry similar interest rates; and (3) the value of the
insurance guaranteeing interest and principal payments. Absent unusual or
unforseen circumstances, the value ascribed to the insurance feature of the
bonds would be the difference between the market value of the bonds and the
market value of securities of a similar nature which are not in default or
significant risk of default. It is the position of the Board of Directors that
this is a fair method of valuing the insurance feature and reflects a proper
valuation method in accordance with the provisions of the Investment Company
Act. This method of valuing securities will mean that shareholders of the
Insured Portfolio, whether they decide to redeem or decide to retain their
investment in the Insured Portfolio, will in normal circumstances receive the
benefit of the insurance.

                PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS

      No Portfolio has any obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Municipal
Bonds and money market securities in which each Portfolio invests are traded
primarily in the over-the-counter market. Where possible, each Portfolio deals
directly with the dealers who make a market in the securities involved except in
those circumstances where better prices and execution are available elsewhere.
It is the policy of the Fund to obtain the best net results taking into account
such factors as price (including the applicable dealer spread), the size, type
and difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Fund generally seeks reasonably competitive spreads or commissions,
the Fund will not necessarily be paying the lowest spread or commission
available. Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as economic data and market forecasts) to
FAM may receive orders for transactions by any Portfolio. Information so
received will be in addition to and not in lieu of the services required to be
performed by FAM under its Investment Advisory Agreement and FAM's expenses will
not necessarily be reduced as a result of the receipt of such supplemental
information.

      Municipal Bonds and money market securities are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. The cost of the portfolio securities transactions of each Portfolio
consists primarily of dealer or underwriter spreads. Under the Investment
Company Act, persons

                                       41


affiliated with the Fund are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless an exemptive order
allowing such transactions is obtained from the Commission. Since
over-the-counter ("OTC") transactions are usually principal transactions,
affiliated persons of the Fund, including Merrill Lynch, may not serve as a
dealer in connection with transactions with the Fund. However, the Fund has
obtained an exemptive order permitting it to engage in certain principal
transactions involving high quality short-term Municipal Bonds. Affiliated
persons of the Fund may serve as its broker in over-the-counter transactions
conducted on an agency basis. Certain court decisions have raised questions as
to the extent to which investment companies should seek exemptions under the
Investment Company Act in order to seek to recapture underwriting and dealer
spreads from affiliated entities. The Directors have considered the
possibilities of seeking to recapture spreads for the benefit of the Fund and,
after considering factors deemed relevant, have made a determination not to seek
such recapture at this time. The Board will reconsider this matter from time to
time. For the fiscal years ended June 30, 1999, 2000 and 2001, each Portfolio
paid total brokerage commissions as set forth below, none of which was paid to
Merrill Lynch.

                        Fiscal Year Ended           Total Brokerage
                            June 30,               Commissions Paid
        -----------------------------------------------------------
        Insured Portfolio
        1999                                            $ 9,750
        2000                                            $39,000
        2001                                            $     0

        National Portfolio
        1999                                            $19,500
        2000                                            $45,500
        2001                                            $     0

        Limited Maturity Portfolio
        1999                                            $     0
        2000                                            $     0
        2001                                            $     0

      The aggregate amount of transactions for each Portfolio during the fiscal
year ended June 30, 2001 in securities effected on an agency basis through a
broker in consideration of, among other things, research services provided was
$0 for the Insured Portfolio, $0 for the National Portfolio and $0 for the
Limited Maturity Portfolio, and the commissions and concessions related to such
transactions were $0 for the Insured Portfolio, $0 for the National Portfolio
and $0 for the Limited Maturity Portfolio.

      In addition, no Portfolio may purchase Municipal Bonds during the
existence of any underwriting syndicate of which Merrill Lynch is a member or in
a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors which either comply
with rules adopted by the Securities and Exchange Commission (the "Commission")
or with interpretations of the Commission staff.

      FAM expects that the portfolio turnover rate for the Insured Portfolio and
the National Portfolio should not generally exceed 100%. Because of the
short-term nature of the Limited Maturity Portfolio, its turnover rate may be
substantially higher. In any particular year, however, market conditions could
result in portfolio activity of a Portfolio at a greater or lesser rate than
anticipated. High portfolio turnover involves correspondingly higher transaction
costs in the form of commissions and dealer spreads, which are borne directly by
the applicable Portfolio.

                                       42


                              DIVIDENDS AND TAXES

      Reference is made to "Dividends and Taxes" in the Prospectus.

Dividends

      The net investment income of each Portfolio is declared as dividends daily
immediately prior to the determination of the net asset value of each Portfolio
on that day. The net investment income of each Portfolio for dividend purposes
consists of interest earned on portfolio securities, less expenses, in each case
computed since the most recent determination of net asset value. Expenses of
each Portfolio, including the advisory fee and Class B, Class C and Class D
account maintenance and Class B and Class C distribution fees (if applicable),
are accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of each
Portfolio at net asset value unless the shareholder elects to receive such
dividends in cash. The per share dividends on each class of shares of each of
the three Portfolios will be reduced as a result of any account maintenance,
distribution and transfer agency fees applicable to that class. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding as of the settlement date of a purchase order to the settlement
date of a redemption order.

      Net realized capital gains dividends, if any, are declared and paid to the
Fund's shareholders at least annually. Capital gains dividends will be
automatically reinvested in shares unless the shareholder elects to receive such
distributions in cash.

      See "Shareholder Services -- Automatic Reinvestment of Dividends" for
information as to how to elect either dividend reinvestment or cash payments.
Any portions of dividends that are taxable to shareholders as described below
are subject to income tax whether they are reinvested in shares of any Portfolio
or received in cash.

Federal Income Taxes

      Each Portfolio of the Fund generally will be treated as a separate
corporation for Federal income tax purposes. Each Portfolio has qualified and
expects to continue to qualify for the special tax treatment afforded regulated
investment companies under the Code. If each Portfolio qualifies for that tax
treatment, it will not be subject to Federal income tax on that part of its net
ordinary income and net realized long term capital gains that it distributes to
its shareholders.

      Each Portfolio intends to qualify to pay "exempt-interest" dividends as
defined in Section 852(b)(5) of the Code. Under that section if, at the close of
each quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations"), pursuant to Section 103(a) of the Code (relating to obligations
of a state, territory, or a possession of the United States, or any political
sub-division of any of the foregoing, or of the District of Columbia), the
Portfolio will be qualified to pay exempt-interest dividends to its
shareholders. Exempt-interest dividends are dividends or any part thereof (other
than any capital gain distributions) paid by the Portfolio which are
attributable to interest on tax-exempt obligations and designated by the
Portfolio as exempt-interest dividends in a written notice mailed to the
Portfolio's shareholders within sixty days after the close of its taxable year.
The percentage of the total dividends paid by the Portfolio during any taxable
year which qualifies as exempt-interest dividends will be the same for all
shareholders of each Portfolio receiving dividends during such year.
Exempt-interest dividends may be treated by shareholders for all purposes as
items of interest excludible from their gross income under Section 103(a) of the
Code. However, a shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Section
103(a) if such shareholder would be treated as a "substantial user" under
Section 147(a)(1) with respect to some or all of the tax-exempt obligations held
by the Portfolio. Also, any losses realized by individuals who dispose of shares
of the Fund within six months of their purchase are disallowed to the extent of
any exempt-interest dividends received with respect to such shares.

                                       43


      Dividends paid by each Portfolio from its taxable income (i.e ., interest
on money market securities) and dividends of net realized short term capital
gains (whether from tax-exempt or taxable obligations) are taxable to
shareholders as ordinary income. Any dividends of designated as net long term
capital gains (whether from tax-exempt or taxable obligations) in a written
notice furnished annually to shareholders are taxable to shareholders as gains
from the sale or exchange of a capital asset held for more than one year,
regardless of a shareholder's holding period for shares of a Portfolio. If a
Portfolio acquires tax-exempt obligations having market discount (generally,
obligations acquired for a price less than their principal amount) after April
30, 1993, gain on the disposition or retirement of such obligations will be
treated as ordinary income to the extent of accrued market discount. To the
extent the Portfolio has both taxable and tax-exempt income, expenses of the
Fund will be allocated between the taxable and the tax-exempt income on a
proportional basis. Since the Portfolios will not invest in the stock of
domestic corporations, the dividends-received deduction for corporations will
not be available to shareholders. The per share dividends on Class B and Class C
shares of any Portfolio will be lower than the per share dividends on Class A
and Class D shares of those Portfolios as a result of the account maintenance
distribution and higher transfer agency fees applicable to Class B and Class C
shares; similarly, the per share dividends on Class D shares will be lower than
the per share dividends and distributions on Class A shares as a result of the
account maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value." The Code provides that interest on
indebtedness incurred or continued to purchase or carry shares of the Portfolio
is not deductible to the extent attributable to exempt-interest dividends.

      Some shareholders may be subject to a 31% withholding tax ("backup
withholding") on reportable dividends and redemption payments. Backup
withholding is not required with respect to exempt-interest dividends.
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 penalties of perjury that such number is
correct and that he is not otherwise subject to backup withholding.

      As a result of trading in futures contracts, a Portfolio may realize net
capital gains which, when distributed to shareholders, would be taxable in the
hands of the shareholders. For example, if the Portfolios sold municipal bond
index futures contracts in anticipation of a decline in the value of securities
they own and that index in fact declines in value, the Portfolios would realize
a capital gain upon the closing out of that futures contract. Furthermore, if a
Portfolio holds such a futures contract on the last day of its taxable year, it
would be deemed under the Code to have sold that futures contract at its fair
market value on the last day of its taxable year and thus would realize a gain
or loss. Such gain or loss is treated as 60% long term capital gain or loss and
40% short term capital gain or loss (hereinafter "blended gain or loss"),
notwithstanding the holding period of the futures contract. Since the futures
transaction was entered into to hedge the anticipated decline in the portfolio
securities of the Portfolio in question, it is likely that the gain on the
futures transactions would be partly or completely offset by a corresponding
decline in the value of the portfolio securities of such Portfolio. However,
unless the Portfolios sell such securities so as to "realize" such losses in a
manner to offset the blended gain for Federal income tax purposes, the Portfolio
would have a blended gain. Such blended gain would result in taxable income to
the shareholders of the Fund.

      A redemption resulting in a gain is a taxable event whether or not the
reinstatement privilege is exercised. A redemption resulting in a loss will not
be a taxable event to the extent the reinstatement privilege is exercised and an
adjustment will be made to the shareholder's tax basis in shares acquired
pursuant to the reinstatement. For shares of a Portfolio acquired after October
3, 1989, if a shareholder disposes of those shares and subsequently reacquires
shares of the Portfolio pursuant to the reinstatement privilege, then the
shareholder's tax basis in those shares will be reduced to the extent the sales
charge paid to the Portfolio reduces any sales charge such shareholder would
have been required to pay on the subsequent acquisition in the absence of the
reinstatement privilege. Instead, such sales charge will be treated as an
additional amount paid for the subsequently acquired shares and will be included
in the shareholder's tax basis for such shares.

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

                                       44


basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period of the converted Class B shares.

      If a shareholder exercises his exchange privilege within 90 days after the
date such shares were acquired to acquire shares in such fund or another fund
("New Fund"), then the loss, if any, recognized on the exchange will be reduced
(or the gain, if any, increased) to the extent the load charge paid to the Fund
reduces any load charge such shareholder would have been required to pay on the
acquisition of the New Fund shares in the absence of the exchange privilege.
Instead, such load charge will be treated as an amount paid for the New Fund
shares and will be included in the shareholder's basis for such shares.

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

      An exchange between funds pursuant to the Exchange Privilege (as described
below on page 42) is treated as a sale of the exchanged shares and a purchase of
the acquired shares for Federal income tax purposes and, depending upon the
circumstances, a short or long term capital gain or loss may be realized. In
addition, any shareholder of the Fund who exercises the Exchange Privilege and
becomes a shareholder of another fund must certify to such other fund his or her
Social Security Number or Taxpayer Identification Number and that he is not
subject to the backup withholding tax if he or she wishes to avoid a 31% backup
withholding tax on the gross proceeds paid by such other fund on redemption of
shares and on dividend distributions made to him or to her by such other fund.

      Any dividend declared by a Portfolio in October, November or December of
any year and made payable to shareholders of record in such a month will be
deemed to be received on December 31 of such year if actually paid during the
following January. Accordingly, those dividends, to the extent taxable, will be
taxable to shareholders in the year declared, and not in the year in which
shareholders actually receive the dividend.

      Not later than sixty days after the end of each fiscal year of the Fund,
the Fund will send to its shareholders the written notice required by the Code
designating the amount of its dividends that constitute exempt-interest
dividends, the amount of the dividends which are ordinary taxable income and the
amount of dividends which are taxable to shareholders as long term capital
gains.

      Every person required to file a tax return must disclose on that return
the amount of exempt-interest dividends received from a Portfolio during the
taxable year. The disclosure of this amount is for information purposes only. In
addition, with respect to a shareholder who receives exempt-interest dividends
on shares held for less than six months, any loss on the sale or exchange of
such shares will, to the extent of the amount of such exempt-interest dividends,
be disallowed.

      Interest income with respect to certain tax-exempt bonds, known as
"private activity" bonds, is a preference item for purposes of the corporate and
individual alternative minimum tax. To the extent that a Portfolio invests in
private activity bonds, shareholders of the Portfolio will have preference items
attributable to their proportionate shares of the interest income received by
the Portfolio from such bonds, thereby increasing a shareholder's alternative
minimum taxable income. In addition, a corporation must increase its alternative
minimum taxable income by 75 percent of the amount by which adjusted current
earnings exceed alternative minimum taxable income (without regard to this
provision or the alternative net operating loss deduction). Adjusted current
earnings are computed by making certain adjustments, which generally follow the
rules applicable to corporations in computing earnings and profits. All
tax-exempt dividends received by the corporate shareholders of a Portfolio are
included in their current earnings, thus, increasing a corporate shareholders'
alternative minimum taxable income. In general, an individual shareholder filing
a joint return who does not have any tax preference items subject to the
alternative minimum tax other than income received from the Fund derived from
private activity bonds would have to receive more than $45,000 of such income
from the Fund before becoming subject to the alternative minimum tax.

      Exempt-interest dividends paid by the Fund, whether or not attributable to
private activity bonds, may increase a corporate shareholder's alternative
minimum taxable income. In addition, the payment of exempt-

                                       45


interest dividends may increase a corporate shareholder's liability for the
environmental tax imposed on a corporation's alternative minimum taxable income
(computed without regard to either the alternative tax net operating loss
deduction or the environmental tax deduction) at a rate of $12 per $10,000
(0.12%) of alternative minimum taxable income in excess of $2,000,000. The tax
will be imposed even if the corporation is not required to pay an alternative
minimum tax.

      The Code imposes a four percent nondeductible excise tax on a regulated
investment company, such as a Portfolio of the Fund, if the company does not
distribute to its shareholders during the calendar year an amount equal to 98
percent of the investment company's taxable income, with certain adjustments,
for such calendar year, plus 98 percent of the company's capital gain net income
for the one-year period ending on October 31 of such calendar year. In addition,
an amount equal to any undistributed investment company taxable income or
capital gain net income from the previous calendar year must also be distributed
to avoid the excise tax. The excise tax is imposed on the amount by which a
company does not meet the foregoing distribution requirements. The excise tax
will not, however, generally apply to the tax-exempt income of a regulated
investment company, such as a Portfolio of the Fund, that pays exempt-interest
dividends. In addition, if a Portfolio has taxable income that would be subject
to the excise tax, the Fund intends to distribute the income of such Portfolio
so as to avoid payment of the excise tax.

      At June 30, 2001, the Insured Portfolio had a net capital loss
carryforward of approximately $50,189,000, of which $17,630,000 expires in 2008
and $32,559,000 expires in 2009; the National Portfolio had a net capital loss
carryforward of approximately $44,931,000, of which $25,616,000 expires in 2008
and $19,315,000 expires in 2009; and the Limited Maturity Portfolio had a net
capital loss carryforward of approximately $2,474,000, of which $1,928,000
expires in 2003, $120,000 expires in 2008 and $426,000 expires in 2009. These
amounts will be available to offset like amounts of any future taxable gains.

      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 these Regulations
are subject to change by legislative or administrative action.

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

State and Local Taxes

      Depending upon the extent of the Fund's activities in those states and
localities in which its offices are maintained or in which its agents or
independent contractors are located, the Fund may be subject to the tax laws of
such states or localities. In addition, the exemption of interest income for
Federal income tax purposes does not necessarily result in exemption under the
income or other tax laws of any state or local taxing authority. The laws of the
several states and local taxing authorities vary with respect to the taxation of
such interest income, and each holder of shares of the Fund is advised to
consult his or her own tax adviser in that regard. The Fund will report annually
the percentage of interest income received by each Portfolio during the
preceding year on tax-exempt obligations, indicating, on a state-by-state basis,
the source of such income.

                              SHAREHOLDER SERVICES

      The Fund offers a number of shareholder services, described below, that
are designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans and instructions as to how to
participate in the various services or plans, or how to change options with
respect thereto described below can be obtained from the Fund, by calling the
telephone number on the cover page hereof, or from the Distributor, Merrill
Lynch, a selected securities dealer or other financial intermediary. Certain of
these services are available only to United States investors and certain of
these services are not available to investors who place purchase orders for the
Fund's shares through the Merrill Lynch Blueprint(SM) Program.

                                       46


Investment Account

      Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and long
term capital gains distributions. The quarterly statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long term capital gains distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check directly
to the Transfer Agent. Upon the transfer of shares out of a Merrill Lynch
brokerage account or an account maintained with a selected securities dealer or
other financial intermediary, an Investment Account in the transferring
shareholder's name will be opened automatically, at the Transfer Agent.

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

      Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for his or her shares, and
then must turn the certificates over to the new firm for re-registration in the
new brokerage firm's name. Certain shareholder services may not be available for
the transferred shares.

Automatic Investment Plans

      A shareholder may make additions to the Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to the
investors' bank account is required. Investors who maintain CMA(R) or CBA(R)
Accounts may arrange to have periodic investments made in the Fund, in the
CMA(R) or CBA(R) Accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automatic Investment Program. The Automatic
Investment Plan is not available for Class C shares of the Limited Maturity
Portfolio.

Fee-Based Programs

      Certain fee-based programs offered by Merrill Lynch and other financial
intermediaries, including pricing alternatives for securities transactions (each
referred to in this paragraph as a "Program"), may permit the purchase of Class
A shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares that will be exchanged for
Class A shares. Initial or deferred sales charges otherwise due in connection
with such exchanges may be waived or modified, as may the Conversion Period
applicable to the deposited shares. Termination of participation in a Program
may result in the redemption of shares held therein or the automatic exchange
thereof to another class at net asset value, which may be shares

                                       47


of a money market fund. In addition, upon termination of participation in a
Program, shares that have been held for less than specified periods within such
Program may be subject to a fee based upon the current value of such shares.
These Programs also generally prohibit such shares from being transferred to
another account at Merrill Lynch, to another financial intermediary, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or 1-800-637-3863.

Automatic Reinvestment of Dividends

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

      Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch, or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent, that they no longer wish to have their
dividends reinvested in shares of the Fund or vice versa and, commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected, except that any dividend or distribution of less than $10
payable to an account maintained directly with the Fund's Transfer Agent will
not be paid in cash but will be reinvested in shares of the Fund. If the
shareholder's account is maintained with the Transfer Agent, he or she may
contact the Transfer Agent in writing or by telephone (1-800-MER-FUND). For
other accounts, the shareholder should contact his or her Merrill Lynch
Financial Advisor, selected securities dealer or other financial intermediary.
The Fund is not responsible for any failure of delivery to the shareholder's
addresses of record and no interest will accrue on amounts represented by
uncashed distribution or redemption checks. Cash payments can also be directed
to the shareholder's bank account. No CDSC will be imposed upon redemption of
shares issued as a result of the automatic reinvestment of dividends.

Systematic Withdrawal Plans

      A shareholder of any of the three Portfolios may elect to make systematic
withdrawals from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to such shareholder's bank account on either a monthly or calendar
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on cost
or the current offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000 or more.

      At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. Redemptions will be made at net asset
value as determined once daily by FAM immediately after the declaration of
dividends as of the close of business on the NYSE (generally 4:00 p.m. Eastern
time) 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 that
day, 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 for the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
shares in the Investment Account are reinvested automatically in shares of the
Fund. A shareholder's systematic withdrawal plan may be terminated at any time,
without a charge or penalty, by the shareholder, the Fund, the Transfer Agent or
the Distributor.

                                       48


      Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a systematic withdrawal plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals. With respect to redemptions of Class B and Class C shares pursuant
to a systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall 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 otherwise 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 otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charge -- Class B Shares" and "Contingent Deferred Sales Charges
- -- 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 D
shares, the systematic withdrawal plan will automatically be applied thereafter
to Class D shares if the shareholder so elects. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares;" if an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her Financial Advisor.

      Alternatively, a shareholder whose shares are held within a CMA(R) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed all redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Advisor.

Exchange Privilege

      U.S. shareholders of each class of shares of a Portfolio of the Fund who
have held all or part of their shares in the Portfolio for at least 15 days have
an exchange privilege (the "Exchange Privilege") with other Portfolios of the
Fund and with certain other MLIM/ FAM-Advised Funds. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of a
Portfolio for Class A shares of another Portfolio or a second MLIM/FAM-Advised
Fund if the shareholder holds any Class A shares of the other Portfolio or
second fund in the account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of
another Portfolio or a second MLIM/FAM-Advised Fund, and the shareholder does
not hold Class A shares of the other Portfolio or second fund in his account at
the time of the exchange and is not otherwise eligible to acquire Class A shares
of the other Portfolio or second fund, the shareholder will receive Class D
shares of the other Portfolio or second fund as a result of the exchange. Class
D shares also may be exchanged for Class A shares of another Portfolio or a
second MLIM/FAM-Advised Fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the other Portfolio or second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the other Portfolio or second fund. Class B, Class C
and Class D of a Portfolio shares will be exchangeable

                                      49


with shares of the same class of another Portfolio or other MLIM/ FAM-Advised
Funds. For purposes of computing the CDSC that may be payable upon a disposition
of the shares acquired in the exchange, the holding period for the previously
owned shares of the Portfolio is "tacked" to the holding period of the newly
acquired shares of the other Portfolio or other MLIM/FAM-Advised Fund as more
fully described below. Class A and Class D shares also will be exchangeable for
Class A shares, and Class B and Class C shares also will be exchangeable for
Class B shares, of Summit Cash Reserves Fund, a series of Financial Institutions
Series Trust, which is a Merrill Lynch-sponsored money market fund specifically
designated as available for exchange by holders of Class A, Class B, Class C and
Class D shares as more fully described below. The Exchange Privilege available
to participants in the Merrill Lynch Blueprint(SM) Program may be different from
that available to other investors.

      Exchanges of Class A and Class D shares of a Portfolio outstanding
("outstanding Class A and Class D shares") for Class A or Class D shares of
another Portfolio or another MLIM/FAM-Advised Fund ("new Class A or Class D
shares) are transacted on the basis of relative net asset value per Class A or
Class D share respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A or Class D
shares and the sales charge payable at the time of the exchange on the new Class
A or Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the sales charge previously paid will
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the Exchange Privilege, dividend reinvestment Class A or Class D shares will be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A or Class D money market funds without a sales charge.

      In addition, the Fund offers to exchange Class B and Class C shares of a
Portfolio outstanding ("outstanding Class B or Class C shares") for Class B or
Class C shares respectively of another Portfolio or any of the other MLIM/
FAM-Advised Funds ("new Class B or Class C shares") on the basis of relative net
asset value per Class B or Class C share, without the payment of any CDSC that
might otherwise be due on redemption of the outstanding shares. Class B
shareholders of a Portfolio exercising the Exchange Privilege will continue to
be subject to that Portfolio's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through the use of the
Exchange Privilege. In addition, Class B shares of the Portfolio acquired
through the use of the Exchange Privilege will be subject to that Portfolio's
CDSC schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares of the fund or Portfolio from which the exchange has been made.
For purposes of computing the sales charge that may be payable on a disposition
of the new Class B or Class C shares, the holding period for the outstanding
Class B or Class C shares is "tacked" to the holding period of the new Class B
or Class C shares. For example, an investor may exchange Class B or Class C
shares of the National Portfolio for those of the Merrill Lynch Small Cap Value
Fund, Inc. after having held the National Portfolio Class B shares for two and a
half years. The 2% contingent deferred sales charge that generally would apply
to a redemption would not apply to the exchange. Two years later the investor
may decide to redeem the Class B shares of Merrill Lynch Basic Value Fund, Inc.
and receive cash. There will be no CDSC due on this redemption, since by
"tacking" the two and a half year holding period of National Portfolio Class B
shares to the two year holding period for the Merrill Lynch Small Cap Value
Fund, Inc. Class B shares, the investor will be deemed to have held the new
Class B shares for more than four years.

      Shareholders also may exchange their shares into shares of Summit Cash
Reserves Fund, a series of Financial Institutions Series Trust ("Summit"). Class
A and Class D shares will be exchangeable for Class A shares of Summit, and
Class B and Class C shares will be exchangeable for Class B shares of Summit.
Class A shares of Summit have an exchange privilege back into Class A or Class D
shares of MLIM/FAM-Advised Funds; Class B shares of Summit have an exchange
privilege back into Class B shares or Class C shares of MLIM/FAM-Advised Funds.
The period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any CDSC
and, with respect to Class B shares, toward satisfaction of any conversion
period. 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. The
exchange

                                       50


privilege described in this paragraph does not apply with respect to certain
Merrill Lynch fee-based programs, for which alternative exchange arrangements
may exist. Please see your Merrill Lynch Financial Advisor for further
information.

      Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the Exchange Privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short or long term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such shareholder is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes" above.

      To exercise the Exchange Privilege, shareholders should contact their
listed dealer, who will advise the Fund of the exchange, or the shareholder may
write to the Transfer Agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with signature(s)
guaranteed by "eligible guarantor institution" (including, for example, Merrill
Lynch branch offices and certain other financial institutions), as such is
defined in Rule 17Ad-15 under the Exchange Act, the existence and validity of
which may be verified by the transfer agent through the use of industry
publications. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued may
exercise the Exchange Privilege by wire through their securities dealers or
other financial intermediaries. The Fund reserves the right to require a
properly completed Exchange Application. These funds may suspend the continuous
offering of their shares to the public at any time and may thereafter resume
such offering from time to time.

      Telephone exchange requests are also available in accounts held with the
Transfer Agent for amounts up to $50,000. To request an exchange from your
account, call the Transfer Agent at 1-800-MER-FUND. 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 in the following situations: the account holder is
deceased, the request is by an individual other than the account holder of
record, the account is held by joint tenants who are divorced or the address on
the account has changed within the last 30 days. Telephone exchanges may be
refused 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 Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.

      The Exchange Privilege may be modified or terminated at any time on 60
days' notice. The Fund reserves the right to limit the number of times an
investor may exercise the Exchange Privilege. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.

                                PERFORMANCE DATA

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

      Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period

                                       51


in the case of Class B and Class C shares. Dividends paid with respect to all
shares of a Portfolio, to the extent any dividends are paid, will be calculated
in the same manner at the same time on the same day and will be in the same
amount, except that distribution fees, account maintenance fees and any
incremental transfer agency costs relating to a class of shares will be borne
exclusively by that class. The Fund will include performance data for all
classes of shares of the Portfolios in any advertisement or information
including performance data for such Portfolios.

      The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical 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 (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 calculation 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. The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical investment in
the Fund at the beginning of each specified period.

      On occasion, the Fund may compare its performance to that of the Standard
& Poor's 500 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, other market indices or performance data contained in publications such
as Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine, Fortune Magazine or other industry publications. When
comparing its performance to a market index, the Fund may refer to various
statistical measures derived from the historic performances of the Fund and the
index, such as standard deviation and beta. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

      Set forth below is total return information for each class of shares of
each Portfolio for the periods indicated.

                          Average Annual Total Return
                  (including maximum applicable sales charges)

                                                  Expressed as a Percentage
                                                          Based on a
                                                Hypothetical $1,000 Investment
                                               ---------------------------------
                                                                        Limited
                                                Insured     National    Maturity
                                               Portfolio   Portfolio   Portfolio
                                               ---------   ---------   ---------

        One Year Ended June 30, 2001
         Class A                                  5.61%       5.91%       5.01%
         Class B                                  5.04%       5.49%       4.69%
         Class C                                  7.99%       8.33%       4.59%
         Class D                                  5.35%       5.64%       4.90%

        Five Years Ended June 30, 2001
         Class A                                  4.79%       4.94%       4.07%
         Class B                                  4.82%       5.00%       3.93%
         Class C                                  4.77%       4.95%       3.88%
         Class D                                  4.53%       4.67%       3.98%

        Ten Years Ended June 30, 2001
         Class A                                  6.08%       6.37%       4.31%
         Class B                                  5.70%       6.01%         --
         Class B (11/02/92-6/30/01)                 --          --        3.74%

                                       52




                                                           Expressed as a Percentage
                                                                   Based on a
                                                         Hypothetical $1,000 Investment
                                                        ---------------------------------
                                                                                 Limited
                                                         Insured     National    Maturity
                                                        Portfolio   Portfolio   Portfolio
                                                        ---------   ---------   ---------
                                                                       
        Inception (October 21, 1994) to June 30, 2001
         Class C                                          5.58%        5.79%      3.87%
         Class D                                          5.54%        5.75%      4.07%


      In order to reflect the reduced sales charges applicable to certain
investors the performance data in advertisements distributed to investors whose
purchases are subject to reduced sales load, in the case of Class A or Class D
shares, or waiver of the contingent deferred sales charge in the case of the
Class B and Class C shares, may take into account the reduced, and not the
maximum, sales charge or may not take into account the contingent deferred sales
charge and therefore may reflect greater total return since, due to the reduced
sales charge, a lower amount of expenses is deducted.

      The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate such total return on a hypothetical
investment in the Fund at the beginning of each specified period.

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

      The following table sets forth the yield for the 30-day period ended June
30, 2001 for each class of each Portfolio.



                                      For the Period Ended June 30, 2001
                    -----------------------------------------------------------------
                                                  Yield
                    -----------------------------------------------------------------
                    Insured Portfolio  National Portfolio  Limited Maturity Portfolio
                    -----------------  ------------------  --------------------------
                                                  
Class A                    4.56%              4.62%                 3.05%
Class B                    3.99%              4.05%                 2.72%
Class C                    3.94%              4.00%                 2.72%
Class D                    4.32%              4.38%                 2.95%


      The tax equivalent yield for the same period (based on a tax rate of 28%)
was:



                    Insured Portfolio  National Portfolio  Limited Maturity Portfolio
                    -----------------  ------------------  --------------------------
                                                  
Class A                    6.33%              6.42%                 4.24%
Class B                    5.54%              5.63%                 3.78%
Class C                    5.47%              5.56%                 3.78%
Class D                    6.00%              6.08%                 4.10%


      Total return, yield and tax equivalent yield figures are based on each
Portfolio's historical performance and are not intended to indicate future
performance. Each Portfolio's total return, yield and tax equivalent yield will
vary depending on market conditions, the securities comprising the Portfolio,
the Portfolio'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
Portfolio will fluctuate and an investor's shares, when redeemed, may be worth
more or less than their original cost.

      Each Portfolio may provide information designed to help investors
understand how the Portfolio is seeking to achieve its investment objectives.
This may include information about past, current or possible economic, market,
political, or other conditions, descriptive information on general principles of
investing such

                                       53


as asset allocation, diversification and risk tolerance, discussion of the
Portfolio's portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Portfolio'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. Each Portfolio
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. As with other performance data, performance
comparisons should not be considered indicative of the Portfolios' relative
performance for any future period.

                             ADDITIONAL INFORMATION

Organization of the Fund

      The Fund is a diversified, open-end management investment company
organized under the laws of the State of Maryland that commenced operations on
October 21, 1977. Prior to September 21, 1979, the Fund consisted solely of the
Insured Portfolio. Currently, the Fund is comprised of three separate
Portfolios: Insured Portfolio, National Portfolio and Limited Maturity
Portfolio.

      The authorized capital stock of the Fund consists of 3,850,000,000 shares
of Common Stock, divided into three series, each of which is divided into four
classes, having a par value of $0.10 per share. The shares of Insured Portfolio
Series Common Stock (500,000,000 Class A, 375,000,000 Class B shares,
375,000,000 Class C shares, 500,000,000 Class D shares authorized), National
Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class B shares,
375,000,000 Class C shares, 375,000,000 Class D shares authorized), and Limited
Maturity Portfolio Series Common Stock (150,000,000 Class A, 150,000,000 Class B
shares, 150,000,000 Class C shares, 150,000,000 Class D shares authorized) are
divided into four classes, designated Class A, Class B, Class C and Class D
Common Stock. Each Class A, Class B, Class C and Class D share of common stock
of each of the Portfolios represents an interest in the same assets of such
Portfolio and are identical in all respects to the shares of the other classes
except that the Class B, Class C and Class D shares bear certain expenses
related to the account maintenance associated with such shares, and Class B and
Class C shares bear certain expenses related to the distribution of such shares.
Each Class of shares of a Portfolio has exclusive voting rights with respect to
matters relating to account maintenance services and distribution expenditures
relative to that Portfolio, as applicable (except that Class B shareholders have
certain voting rights with respect to the Class D Distribution Plan). Only
shares of each respective Portfolio are entitled to vote on matters concerning
only that Portfolio.

      Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Portfolios and in net assets of the respective Portfolios upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities, except, as
noted above, the Class B, Class C and Class D shares of the Portfolios bear
certain expenses related to the distribution of such shares. The shares of each
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, pre-emptive, conversion, exchange or similar rights. Shares have the
conversion rights described in the Prospectus. Holders of shares of any
Portfolio are entitled to redeem their shares as set forth under "Redemption of
Shares." Shares do not have cumulative voting rights, and the holders of more
than 50% of the shares of the Fund voting for the election of Directors can
elect all of the Directors of the Fund if they choose to do so and in such event
the holders of the remaining shares would not be able to elect any Directors.
Stock certificates will be issued by the Transfer Agent only on specific
request. Certificates for fractional shares are not issued in any case.
Shareholders are entitled to redeem their shares as set forth under "Redemption
of Shares."

Transfer Agent

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

                                       54


Custodian

      The Bank of New York, 100 Church Street, New York, New York 10007, is the
Fund's Custodian. The Custodian is responsible for maintaining, safeguarding and
controlling each Portfolio's cash and securities, handling receipt and delivery
of securities and collecting interest on the investments.

Counsel and Auditor

      Clifford Chance Rogers & Wells LLP, counsel to the Fund, passes upon legal
matters for the Fund in connection with the shares offered by this Prospectus.
Deloitte & Touche LLP, independent auditors, are auditors of the Fund.

Shareholder Reports

      The Fund issues to its shareholders reports, at least semi-annually,
containing unaudited financial statements and annual reports containing
financial statements examined by auditors approved annually by the Directors.
Only one copy of each shareholder report and certain shareholder communications
will be mailed to each identified shareholder regardless of the number of
accounts such shareholder has. If a shareholder wishes to receive separate
copies of each report and communication for each of the shareholder's related
accounts the shareholder should notify in writing:

                Financial Data Services, Inc.
                P.O. Box 45289
                Jacksonville, Florida 32232-5289

      The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/ or mutual fund account numbers.

Shareholder Inquiries

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

Additional Information

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

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

                                       55


Computation of Offering Price Per Share

      The offering price for Class A, Class B, Class C and Class D shares of
the Insured, National and Limited Maturity, based on the value of each
Portfolio's net assets and the number of shares outstanding as of June 30, 2001,
is calculated as set forth below.

Insured Portfolio:



                                                        Class A          Class B       Class C        Class D
                                                      ---------------------------------------------------------
                                                                                       
        Net Assets                                    $920,597,114    $223,710,594   $14,391,766   $145,687,725
        Number of Shares Outstanding                   119,749,898      29,119,830     1,872,946     18,954,121
        Net Asset Value Per Share
          (net assets divided by number of shares
          outstanding)                                        7.69            7.68          7.68           7.69
        Sales Charge (Class A and Class D
          shares:
         4.00% of offering price (4.17% of net
          asset value per share))*                             .32              --**          --**          .32
        Offering Price                                $       8.01    $       7.68   $      7.68   $       8.01




National Portfolio:
                                                        Class A          Class B       Class C        Class D
                                                      ---------------------------------------------------------
                                                                                       
        Net Assets                                    $653,685,063    $227,592,229   $31,879,825   $124,081,663
        Number of Shares Outstanding                    64,446,120      22,446,024     3,142,464     12,228,620
        Net Asset Value Per Share
          (net assets divided by number of shares
          outstanding)                                       10.14           10.14         10.14          10.15
        Sales Charge (Class A and Class D
          shares:
         4.00% of offering price (4.17% of net
          asset value per share))*                             .42              --**          --**          .42
        Offering Price                                $      10.56    $      10.14   $     10.14   $      10.57




Limited Maturity Portfolio:
                                                        Class A          Class B       Class C        Class D
                                                      ---------------------------------------------------------
                                                                                       
        Net Assets                                    $191,480,421     $31,480,018      $602,062    $42,619,121
        Number of Shares Outstanding                    19,046,921       3,130,768        60,117      4,236,955
        Net Asset Value Per Share
          (net assets divided by number of shares
          outstanding)                                       10.05           10.06         10.01          10.06
        Sales Charge (Class A and Class D
          shares:
         1.00% of offering price (1.01% of the net
          asset value per share))*                             .10              --**          --**          .10
        Offering Price                                $      10.15     $     10.06      $  10.01    $     10.16
- ---------------------------------------------------------------------------------------------------------------


*  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 within four years of purchase
   (for Class B shares of Insured Portfolio and National Portfolio) or within
   one year of purchase (for Class B shares of Limited Maturity Portfolio and
   Class C shares). See "Purchase of Shares -- Deferred Sales Charge
   Alternatives -- Class B and Class C Shares" in the Prospectus and "Redemption
   of Shares -- Deferred Sales Charge -- Class B and Class C Shares" herein.

Financial Statements

      The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to the Fund's 2001 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. on any business day.

                                      56


                                                                      APPENDIX A

                            DESCRIPTIONS OF RATINGS

Descriptions of Moody's Investors Service, Inc.'s Municipal Bond Ratings

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

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

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

Baa     Bonds which are rated Baa are considered 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. Other 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.

      Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

      Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification form Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.

                                      A-1


      Short-term Notes: The three ratings of Moody's for short-term notes are
MIG 1, MIG 2 and MIG 3. MIG 1 denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2 denotes high quality.
Margins of protection are ample although not so large as in the preceding group;
MIG 3 denotes favorable quality. All security elements are accounted for but
there is lacking the undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for refinancing is likely
to be less well established.

Descriptions of Moody's Commercial Paper Ratings

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

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

             Issuers rated Prime-2 (or related supporting institutions) have a
      strong capacity for repayment of short-term promissory obligations.

             Issuers rated Prime-3 (or related supporting institutions) have an
      acceptable capacity for repayment of short-term promissory obligations.

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

      Descriptions of Moody's Short-Term Note Ratings The two highest ratings of
Moody's for short-term notes are MIG-1 and MIG-2; MIG-1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG-2 denotes "high
quality" with "ample margins of protection."

      Descriptions of Moody's Variable Rate Demand Obligation Ratings Moody's
has separate rating categories for variable rate demand obligations ("VRDOs").
VRDOs will receive two ratings. The first rating, depending of the maturity of
the VRDO, will be assigned either a bond or MIG rating which represents an
evaluation of the risk associated with scheduled principal and interest
payments. The second rating, designated as "VMIG," represents an evaluation of
the degree of risk associated with the demand feature. The VRDO demand feature
ratings symbols are:

             VMIG 1: strong protection by established cash flows, superior
      liquidity support, demonstrated access to the market for refinancing.

             VMIG 2: ample margins of protection, high quality.

             VMIG 3: favorable quality, liquidity and cash flow protection may
      be narrow, market access for refinancing may be less well established.

Descriptions of Standard & Poor's Municipal Debt Ratings

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

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

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

                                      A-2


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

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

      (ii).  Nature of and provisions of the obligation;

      (iii). Protection afforded by, and relative position of, the obligation in
             the event of bankruptcy, reorganization or other arrangement under
             the laws of bankruptcy and other laws affecting creditor's rights.

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

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

A       Debt rated "A" have a strong capacity to pay interest and repay
        principal although they are somewhat more susceptible to the adverse
        effects of changes in circumstances and economic conditions than debts
        in higher rated categories.

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

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

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

D       Debt rated "D" is in default, and payment of interest and/or repayment
        of principal is in arrears.

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

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


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

Descriptions of Standard & Poor's Commercial Paper Ratings

      A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:

A       Issues assigned this highest rating are regarded as having the greatest
        capacity for timely payment. Issues in this category are delineated with
        the numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1     This designation indicates that the degree of safety regarding timely
        payment is very strong.

                                      A-3


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

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

B       Issues rated "B" are regarded as having only an adequate capacity for
        timely payment. However, such capacity may be damaged by changing
        conditions or short-term adversities.

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

D       This rating indicates that the issue is either in default or is expected
        to be in default upon maturity.

      The 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.

Descriptions of Standard & Poor's Note Ratings

      A Standard & Poor's note rating reflects the liquidity concerns 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    Very strong, or strong, capacity to pay principal and interest. Those
        issues determined to possess overwhelming safety characteristics will be
        given a plus (+) designation.

SP-2    Satisfactory capacity to pay principal and interest.

SP-3    Speculative capacity to pay principal and interest.

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

     Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The 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

                                      A-4


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.

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       Bond 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.


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.

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 obligations 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.

                                      A-5


      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 which, if not remedied,
        may lead to default. The ability to meet obligations requires an
        advantageous business and economic environment.

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

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

DDD     Bonds are in default in interest and/or principal payments. Such bonds
DD D    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.

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 municipal 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's 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-5     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.

                                      A-6


                                                                      APPENDIX B


                       INSURANCE ON PORTFOLIO SECURITIES

      Set forth below is further information with respect to the Mutual Fund
Insurance Policies (the "Policies") which the Fund has obtained from AMBAC
Assurance Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA") and Financial Security Assurance Inc. ("FSA"), with respect to Insured
Municipal Bonds held by the Insured Portfolio (see "Investment Policies of the
Portfolios -- Insured Portfolio"). During the fiscal year ended June 30, 2001,
the premium for the Policies aggregated $4,970 or approximately .0004% of the
average net assets of the Insured Portfolio.

      In determining eligibility for insurance, AMBAC, MBIA and FSA have applied
their own standards, which correspond generally to the standards they normally
use in establishing the insurability of new issues of Municipal Bonds and which
are not necessarily the criteria which would be used in regard to the purchase
of Municipal Bonds by the Insured Portfolio. The Policies do not insure (i)
municipal securities ineligible for insurance, or (ii) municipal securities that
are no longer owned by the Insured Portfolio. In addition, the AMBAC policy does
not insure municipal obligations which were insured as to the payment of
principal and interest at the time of their issuance by AMBAC.

      The Policies do not guarantee the market value of the Insured Municipal
Bonds or the value of the shares of the Insured Portfolio. In addition, if the
provider of an original issuance insurance policy is unable to meet its
obligations under such policy or if the rating assigned to the claims paying
ability of any such insurer deteriorates, neither AMBAC, MBIA nor FSA has any
obligation to insure any issue held by the Insured Portfolio which is adversely
affected by either of the above described events. The AMBAC policy provides for
an annual policy period, which is renewable by the Fund for successive annual
periods for so long as the Fund is in compliance with the terms of the AMBAC
policy. In addition to the payment of premiums, the Policies require that the
Insured Portfolio notify AMBAC and MBIA as to all Municipal Bonds in the Insured
Portfolio and permit AMBAC and MBIA to audit records. The insurance premiums are
payable monthly by the Insured Portfolio in accordance with a premium schedule
which was furnished by AMBAC, MBIA and FSA at the time the Policies were issued.
Premiums are based upon the amounts covered and the composition of the
portfolio. AMBAC has reserved the right to change the premium schedule for any
renewal policy period as to any municipal securities purchased by the Insured
Portfolio during such renewal period. The FSA policy and the MBIA policy both
provide that the premium rate for subsequent purchases by the Insured Portfolio
of the same obligations will be determined by FSA or MBIA as of the date of such
purchases.

      AMBAC has received a letter ruling from the Internal Revenue Service,
which holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Portfolio, under policy provisions
substantially identical to the policy described herein, will be excludable from
federal gross income under Section 103(a) of the Internal Revenue Code.

      AMBAC insures the portfolio of the Insured Portfolio and the prompt
payment of the interest and principal of new issues of Municipal Bonds and
Municipal Bond portfolios of individuals, banks, trust companies, corporations,
insurance companies and units trusts. As of June 30, 2001, the admitted assets
of AMBAC were approximately $4.83 billion (unaudited) with a qualified capital
of approximately $2.87 billion (unaudited). Qualified capital consists of the
statutory contingency reserve and policyholders' surplus of the insurance
company.

      FSA insures the prompt payment of interest and principal of new issues of
Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit trusts. As of June 30,
2001, the total admitted assets (unaudited) of FSA were approximately $2.35
billion with a total capital and surplus (unaudited) of approximately $1.48
billion as reported to the Insurance Department of the State of New York.

      MBIA insures the prompt payment of interest and principal of new issues of
Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust
companies, corporations, insurance companies and unit

                                      B-1


trusts. As of June 30, 2001, the total admitted assets of MBIA were
approximately $8.1 billion (unaudited) with total capital and surplus of
approximately $2.3 billion (unaudited).

      AMBAC has entered into reinsurance agreements with a number of
unaffiliated reinsurers, relating to the municipal bond insurance programs of
AMBAC including the insurance obtained by the Fund for the portfolio of the
Insured Portfolio.

      The contracts of insurance relating to the Insured Portfolio and the
negotiations in respect thereof represent the only significant relationship
between AMBAC, MBIA and FSA and the Fund. Otherwise neither AMBAC or any
associate thereof, nor MBIA or any associate thereof, nor FSA or any associate
thereof has any material business relationship, direct or indirect, with the
Fund.

      AMBAC, MBIA and FSA are subject to regulation by the department of
insurance in each state in which they are qualified to do business. Such
regulation, however, is not a guarantee that any of AMBAC, MBIA or FSA will be
able to perform on its contractual insurance in the event a claim should be made
thereunder at some time in the future.

      The information relating to AMBAC, MBIA and FSA set forth above, including
the financial information, has been furnished by such corporations. Financial
information with respect to AMBAC, MBIA and FSA appears in reports filed by
AMBAC, MBIA and FSA with state insurance regulatory authorities and is subject
to audit and review by such authorities. No representation is made herein as to
the accuracy or adequacy of such information with respect to AMBAC, MBIA or FSA
or as to the absence of material adverse changes in such information subsequent
to the date thereof.

                                      B-2

EX-99.17C

                                                                   EXHIBIT 17(C)


                                  Prospectus

                   [LOGO] Merrill Lynch Investment Managers

                     Merrill Lynch Arizona Municipal Bond
                     Fund
                     of Merrill Lynch Multi-State Municipal Series Trust

                                                               November 14, 2001

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
                                                                         
[ICON] KEY FACTS
       _________________________________________________________________________
       Merrill Lynch Arizona Municipal Bond Fund at a Glance                   3
       Risk/Return Bar Chart                                                   5
       Fees and Expenses                                                       6

[ICON] DETAILS ABOUT THE FUND
       _________________________________________________________________________
       How the Fund Invests                                                    8
       Investment Risks                                                        9

[ICON] YOUR ACCOUNT
       _________________________________________________________________________
       Merrill Lynch Select Pricing(SM) System                                14
       How to Buy, Sell, Transfer and Exchange Shares                         20
       Participation in Fee-Based Programs                                    24

[ICON] MANAGEMENT OF THE FUND
       _________________________________________________________________________
       Fund Asset Management                                                  27
       Financial Highlights                                                   28

[ICON] FOR MORE INFORMATION
       _________________________________________________________________________
       Shareholder Reports                                            Back Cover
       Statement of Additional Information                            Back Cover


                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND



Key Facts [ICON]

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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Arizona Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in Arizona or other qualifying issuer that pays interest
exempt from Arizona income taxes as well as from Federal income tax.

MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal and Arizona income taxes.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade Arizona
municipal bonds. These may be obligations of a variety of issuers including
governmental entities in Arizona and issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam. The Fund will invest at least 80% of its net assets in
Arizona municipal bonds. The Fund may invest up to 20% of its assets in high
yield bonds (also known as "junk" bonds); however, the Fund will not invest in
bonds that are in default or that Fund management believes will be in default.
The Fund also may invest in certain types of derivative securities. When
choosing investments, Fund management considers various factors, including the
credit quality of issuers, yield analysis, maturity analysis and the call
features of the obligations. Under normal conditions, the Fund's weighted
average maturity will be more than ten years. The Fund cannot guarantee that it
will achieve its objective.

What are the main risks of investing in the Fund?

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

In addition, since the Fund invests at least 80% of its assets in Arizona
municipal bonds, it is more exposed to negative political or economic factors in
Arizona than a fund that invests more widely. Derivatives and high yield bonds
may be volatile and subject to liquidity, leverage and credit risks.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                   3


[ICON] Key Facts

Who should invest?

The Fund may be an appropriate investment for you if you:
     . Are looking for income that is exempt from Federal and Arizona income
       taxes
     . Want a professionally managed portfolio without the administrative
       burdens of direct investments in municipal bonds
     . Are looking for liquidity
     . Can tolerate the risk of loss caused by negative political or economic
       developments in Arizona, changes in interest rates or adverse changes in
       the price of bonds in general

4                  MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND



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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

  1992     1993    1994     1995     1996      1997     1998     1999     2000
  9.45%   12.91%  -6.50%   17.52%    1.58%     7.62%    5.06%   -3.64%   10.08%

During the period shown in the bar chart, the highest return for a quater was
7.14% (quarter ended March 31, 1995) and the lowest return for a quarter was
(6.27)% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 5.14%.



Average Annual Total Returns                                           Past           Past           Since
(as of December 31, 2000)                                            One Year      Five Years      Inception
- ------------------------------------------------------------------------------------------------------------
                                                                                       
  Merrill Lynch Arizona Municipal Bond Fund*              A            6.21%         3.71%          6.08%+
- ------------------------------------------------------------------------------------------------------------
  Lehman Brothers Municipal Bond Index**                              11.68%         5.84%          6.98%++
- ------------------------------------------------------------------------------------------------------------
  Merrill Lynch Arizona Municipal Bond Fund*              B            6.08%         4.03%          6.03%+
- ------------------------------------------------------------------------------------------------------------
  Lehman Brothers Municipal Bond Index**                              11.68%         5.84%          6.98%++
- ------------------------------------------------------------------------------------------------------------
  Merrill Lynch Arizona Municipal Bond Fund*              C            8.87%         3.91%          5.65%#
- ------------------------------------------------------------------------------------------------------------
  Lehman Brothers Municipal Bond Index**                              11.68%         5.84%          7.54%##
- ------------------------------------------------------------------------------------------------------------
  Merrill Lynch Arizona Municipal Bond Fund*              D            6.11%         3.60%          5.50%#
- ------------------------------------------------------------------------------------------------------------
  Lehman Brothers Municipal Bond Index**                              11.68%         5.84%          7.54%##
- ------------------------------------------------------------------------------------------------------------


 *  Includes all applicable fees and sales charges.
**  This unmanaged Index consists of long term revenue bonds, prerefunded bonds,
    general obligation bonds and insured bonds. Past performance is not
    predictive of future performance.
 +  Inception date is November 29, 1991.
++  Since November 29, 1991.
 #  Inception date is October 21, 1994.
##  Since October 31, 1994.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                   5


[ICON] Key Facts

UNDERSTANDING
EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors 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.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

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



Shareholder Fees (fees paid directly from your                            Class B
investment)(a):                                             Class A         (b)        Class C      Class D
- ---------------------------------------------------------------------------------------------------------------
                                                                                        
 Maximum Sales Charge (Load) imposed on
  purchases (as a percentage of offering price)             4.00%(c)       None        None         4.00%(c)
- ---------------------------------------------------------------------------------------------------------------
 Maximum Deferred Sales Charge (Load) (as a
  percentage of original purchase price or
  redemption proceeds, whichever is lower)                   None(d)       4.0%(c)     1.0%(c)       None(d)
- ---------------------------------------------------------------------------------------------------------------
 Maximum Sales Charge (Load) imposed on
 Dividend Reinvestments                                      None          None        None          None
- ---------------------------------------------------------------------------------------------------------------
 Redemption Fee                                              None          None        None          None
- ---------------------------------------------------------------------------------------------------------------
 Exchange Fee                                                None          None        None          None
- ---------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses
that are deducted from Fund assets):
- ---------------------------------------------------------------------------------------------------------------
 Management Fee(e)                                          0.55%         0.55%       0.55%         0.55%
- ---------------------------------------------------------------------------------------------------------------
 Distribution and/or Service (12b-1) Fees(f)                 None         0.50%       0.60%         0.10%
- ---------------------------------------------------------------------------------------------------------------
 Other Expenses (including transfer agency fees)(g)         0.45%         0.46%       0.46%         0.45%
- ---------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses                        1.00%         1.51%       1.61%         1.10%
- ---------------------------------------------------------------------------------------------------------------


(a) In addition, Merrill Lynch may charge clients a processing fee (currently
    $5.35) 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 D shares approximately ten
    years after you buy them, will no longer be subject to distribution fees
    and will pay lower account maintenance fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
    you redeem within one year.
(e) The Fund pays the Manager a fee at the annual rate of 0.55% of the average
    daily net assets of the Fund for the first $500 million; 0.525% of the
    average daily net assets from $500 million to $1 billion; and 0.50% of the
    average daily net assets above $1 billion.
(f) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
    Maintenance Fee is the term used elsewhere in this Prospectus and in all
    other Fund materials. If you hold Class B or Class C shares over time, it
    may cost you more in distribution (12b-1) fees than the maximum sales charge
    that you would have paid if you had bought one of the other classes.
(g) Financial Data Services, Inc., an affiliate of the Manager, provides
    transfer agency services to the Fund. The Fund pays a fee for these
    services. The Manager or its affiliates also provide certain accounting
    services to the Fund and the Fund reimburses the Manager or its affiliates
    for such services.

6                  MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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                   $498             $706            $930          $1,576
- --------------------------------------------------------------------------------
Class B                   $554             $677            $824          $1,802
- --------------------------------------------------------------------------------
Class C                   $264             $508            $876          $1,911
- --------------------------------------------------------------------------------
Class D                   $508             $736            $982          $1,687
- --------------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                         1 Year          3 Years         5 Years        10 Years
- --------------------------------------------------------------------------------
Class A                   $498             $706            $930          $1,576
- --------------------------------------------------------------------------------
Class B                   $154             $477            $824          $1,802
- --------------------------------------------------------------------------------
Class C                   $164             $508            $876          $1,911
- --------------------------------------------------------------------------------
Class D                   $508             $736            $982          $1,687
- --------------------------------------------------------------------------------

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                   7


Details About the Fund   [ICON]

ABOUT THE PORTFOLIO MANAGER

Walter O'Connor is the portfolio manager and a Vice President of the Fund. He
has been a Director (Municipal Tax Exempt) of Merrill Lynch Investment Managers
since 1997 and was a Vice President thereof from 1993 to 1997.

ABOUT THE MANAGER

The Fund is managed by Fund Asset Management.

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

The Fund's main objective is to seek income that is exempt from Federal and
Arizona income taxes. The Fund invests primarily in long term, investment grade
Arizona municipal bonds. These may be obligations of a variety of issuers
including governmental entities or other qualifying issuers. Issuers may be
located in Arizona or in other qualifying jurisdictions such as Puerto Rico, the
U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.

The Fund will invest at least 80% of its net assets in Arizona municipal bonds.
Under normal conditions, the Fund's weighted average maturity will be more than
ten years. For temporary periods, however, the Fund may invest up to 35% of its
assets in short term tax exempt or taxable money market obligations, although
the Fund will not generally invest more than 20% of its net assets in taxable
money market obligations. As a temporary measure for defensive purposes, the
Fund may invest without limitation in short term tax exempt or taxable money
market obligations. These short term investments may limit the potential for the
Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.     The Fund's investments may include private
activity bonds that may subject certain shareholders to a Federal alternative
minimum tax.

Arizona's economy is influenced by numerous factors, including developments in
the aerospace, high technology, light manufacturing, government and service
industries. The Manager believes that current economic conditions in Arizona
will enable the Fund to continue to invest in high quality Arizona municipal
bonds.

8                 MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


Fund management considers a variety of factors when choosing investments, such
as:
  . Credit Quality Of Issuers -- based on bond ratings and other factors
    including economic and financial conditions.
  . Yield Analysis -- takes into account factors such as the different yields
    available on different types of obligations and the shape of the yield curve
    (longer term obligations typically have higher yields).
  . Maturity Analysis -- the weighted average maturity of the portfolio will be
    maintained within a desirable range as determined from time to time. Factors
    considered include portfolio activity, maturity of the supply of available
    bonds and the shape of the yield curve.

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

INVESTMENT RISKS
- --------------------------------------------------------------------------------

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

Bond Market And Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                   9


[ICON]  Details About the Fund

State Specific Risk -- The Fund will invest primarily in Arizona municipal
bonds. As a result, the Fund is more exposed to risks affecting issuers of
Arizona Municipal Bonds than is a municipal bond fund that invests more widely.

During the 1990's, Arizona's efforts to diversify its economy have enabled it to
realize and sustain increasing growth rates. Arizona has adopted a new method of
financing its public school system following the Arizona Supreme Court's 1994
ruling that the former system was unconstitutional. The State of Arizona is not
authorized to issue general obligation bonds.

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.

Borrowing And Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

General Obligation Bonds -- The faith, credit and taxing power of the issuer of
a general obligation bond secures payment of interest and repayment of
principal. Timely payments depend on the issuer's credit quality, ability to
raise tax revenues and ability to maintain an adequate tax base. The State of
Arizona does not issue general obligation bonds; however, counties,
municipalities and school districts in Arizona may issue general obligation
bonds.

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

Industrial Development Bonds -- Municipalities and other public authorities
issue industrial development bonds to finance development of industrial
facilities for use by a private enterprise. The private enterprise pays

10                MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


the principal and interest on the bond, and the issuer does not pledge its
faith, credit and taxing power for repayment. If the private enterprise defaults
on its payments, the Fund may not receive any income or get its money back from
the investment.

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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or that Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                  11



[ICON]  Details About the Fund

When Issued Securities, Delayed Delivery Securities And Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at current value or that
have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

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

12                 MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND



The Fund may use derivatives for hedging purposes including anticipatory hedges.
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. 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.

Indexed And Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                  13



Your Account  [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.


14                MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


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



                   Class A                 Class B                 Class C               Class D
- ----------------------------------------------------------------------------------------------------------------
                                                                             
Availability       Limited to certain      Generally available     Generally available   Generally available
                   investors including:    through Merrill         through Merrill       through Merrill
                   .  Current Class A      Lynch. Limited          Lynch. Limited        Lynch. Limited
                   shareholders            availability through    availability          availability through
                   .  Participants in      selected securities     through selected      selected securities
                      certain Merrill      dealers and other       securities dealers    dealers and other
                   Lynch-sponsored         financial               and other financial   financial
                      programs             intermediaries.         intermediaries.       intermediaries.
                   .  Certain
                   affiliates of
                      Merrill Lynch,
                      selected
                   securities
                      dealers and other
                   financial
                      intermediaries.
- ----------------------------------------------------------------------------------------------------------------
Initial Sales      Yes. Payable at time    No. Entire purchase     No. Entire purchase   Yes. Payable at time
Charge?            of purchase. Lower      price is invested in    price is invested     of purchase. Lower
                   sales charges           shares of the Fund.     in shares of the      sales charges
                   available for larger                            Fund.                 available for larger
                   investments.                                                          investments.
- ----------------------------------------------------------------------------------------------------------------
Deferred Sales     No. (May be charged     Yes. Payable if you     Yes. Payable if you   No. (May be charged
Charge?            for purchases over      redeem within four      redeem within one     for purchases over
                   $1 million that are     years of purchase.      year of purchase.     $1 million that are
                   redeemed within one                                                   redeemed within one
                   year.)                                                                year.)
- ----------------------------------------------------------------------------------------------------------------
Account            No.                     0.25% Account           0.25% Account         0.10% Account
Maintenance and                            Maintenance Fee.        Maintenance Fee.      Maintenance Fee.
Distribution                               0.25% Distribution      0.35% Distribution    No Distribution Fee.
Fees?                                      Fee.                    Fee.
- ----------------------------------------------------------------------------------------------------------------
Conversion to      No.                     Yes, automatically      No.                   N/A
Class D shares?                            after approximately
                                           ten years.
- ----------------------------------------------------------------------------------------------------------------


                  MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                  15


[ICON]  Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares -- Initial Sales Charge Options

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


                                                                      Dealer
                                                                   Compensation
                             As a % of            As a % of          as a % of
  Your Investment         Offering Price       Your Investment*   Offering Price
  ------------------------------------------------------------------------------
  Less than $25,000            4.00%                4.17%              3.75%
  ------------------------------------------------------------------------------
  $25,000 but less
  than $50,000                 3.75%                3.90%              3.50%
  ------------------------------------------------------------------------------
  $50,000 but less
  than $100,000                3.25%                3.36%              3.00%
  ------------------------------------------------------------------------------
  $100,000 but less
  than $250,000                2.50%                2.56%              2.25%
  ------------------------------------------------------------------------------
  $250,000 but less
  than $1,000,000              1.50%                1.52%              1.25%
  ------------------------------------------------------------------------------
  $1,000,000 and over**        0.00%                0.00%              0.00%
  ------------------------------------------------------------------------------
   *    Rounded to the nearest one-hundredth percent.

  **    If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

     .     Purchases under a Right of Accumulation or Letter of Intent

     .     TMA(SM) Managed Trusts

     .     Certain Merrill Lynch investment or central asset accounts

     .     Purchases using proceeds from the sale of certain Merrill Lynch
           closed-end funds under certain circumstances

     .     Certain investors, including directors or trustees of Merrill Lynch
           mutual funds and Merrill Lynch employees

16                MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND



     .   Certain fee-based programs of Merrill Lynch and other financial
         intermediaries that have agreements with the Distributor or its
         affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                 17


[ICON]  Your Account

Class B Shares

If you redeem Class B shares within four 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                               3.00%

                   ----------------------------------------------
                   2 - 3                               2.00%

                   ----------------------------------------------
                   3 - 4                               1.00%

                   ----------------------------------------------
                   4 and thereafter                    0.00%

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

*   The percentage charge will apply to the lesser of the original cost of the
    shares being redeemed or the proceeds of your redemption. Shares acquired
    through reinvestment of dividends are not subject to a deferred sales
    charge. Not all Merrill Lynch 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:

    .     Redemption in connection with participation in certain fee-based
          programs of Merrill Lynch 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

    .     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

    .     Withdrawal 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

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

18                MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

                  MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                  19


[ICON]  Your Account

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

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

20                MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND





If You Want to     Your Choices                 Information Important for You to Know
- ---------------------------------------------------------------------------------------------------------------------------
                                        
Buy Shares         First, select the share      Refer to the Merrill Lynch Select Pricing table on page
                   class appropriate for you    15. Be sure to read this prospectus carefully.
- ---------------------------------------------------------------------------------------------------------------------------

                   Next, determine the          The minimum initial investment for the Fund is $1,000
                   amount of your investment    for all accounts except that certain Merrill Lynch
                                                fee-based programs have a $250 initial minimum
                                                investment.

                                                (The minimums for initial investments may be waived under
                                                certain circumstances.)
- ---------------------------------------------------------------------------------------------------------------------------

                   Have your Merrill            The price of your shares is based on the next
                   Lynch Financial Advisor,     calculation of net asset value after your order is
                   selected securities          placed. Any purchase orders placed prior to the close of
                   dealer or other financial    business on the New York Stock Exchange (generally 4:00
                   intermediary submit your     p.m. Eastern time) will be priced at the net asset value
                   purchase order               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, including Merrill Lynch,
                                                may charge a processing fee to confirm a purchase. Merrill Lynch
                                                currently charges a fee of $5.35.
- ---------------------------------------------------------------------------------------------------------------------------

                   Or contact the Transfer      To purchase shares directly, call the Transfer Agent at
                   Agent                        1-800-MER-FUND and request a purchase application. 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          The minimum investment for additional purchases is
Investment         shares                       generally $50 except that certain programs, such as
                                                automatic investment plans, may have higher minimums.

                                                (The minimum for additional purchases may be waived
                                                under certain circumstances.)
- ---------------------------------------------------------------------------------------------------------------------------
                   Acquire additional           All dividends are automatically reinvested without a
                   shares through the           sales charge.
                   automatic dividend
                   reinvestment plan
- ---------------------------------------------------------------------------------------------------------------------------

                   Participate in the           You may invest a specific amount on a periodic basis
                   automatic investment         through certain Merrill Lynch investment or central
                   plan                         asset accounts.
- ---------------------------------------------------------------------------------------------------------------------------
Transfer Shares    Transfer to a                You may transfer your Fund shares only to another
to Another         participating                securities dealer that has entered into an agreement
Securities         securities dealer or         with the Distributor. Certain shareholder services may
Dealer or Other    other financial              not be available for the transferred shares. You may  only
Financial          intermediary                 purchase additional shares of funds previously owned before
Intermediary                                    the transfer. All future trading of these assets must be
                                                coordinated by the receiving firm.
- ---------------------------------------------------------------------------------------------------------------------------

                   Transfer to a                You must either:
                   non-participating              .  Transfer your shares to an account with the
                   securities dealer or         Transfer Agent; or
                   other financial                .  Sell your shares, paying any applicable deferred
                   intermediary                 sales  charge.
- ---------------------------------------------------------------------------------------------------------------------------


                  MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                   21





If You Want to          Your Choices                 Information Important for You to Know
- ---------------------------------------------------------------------------------------------------------------------------
                                              
Sell Your Shares        Have your Merrill            The price of your shares is based on the next
                        Lynch Financial Advisor,     calculation of net asset value after your order is
                        selected securities          placed. For your redemption request to be priced at the
                        dealer or other              net asset value on the day of your request, you must
                        financial intermediary       submit your request to your dealer or other financial
                        submit your sales order      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,
                                                     including Merrill Lynch, may charge a fee to process
                                                     a redemption of shares. Merrill Lynch currently
                                                     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    You may sell shares held at the Transfer Agent by writing to
                        Agent                        the Transfer Agent at the address on the inside back cover
                                                     of this prospectus. All shareholders on the account must sign
                                                     the letter. A signature guarantee will generally be required but
                                                     may be waived in certain limited circumstances. You can obtain
                                                     a signature guarantee from a bank, securities dealer, securities
                                                     broker, credit union, savings association, national securities
                                                     exchange or registered securities association. A notary public seal
                                                     will not be acceptable. If you hold stock certificates, return
                                                     the certificates with the letter. The Transfer Agent will normally
                                                     mail redemption proceeds within seven days following receipt of a
                                                     properly completed request. If you make a redemption request before
                                                     the Fund has collected payment for the purchase of shares, the Fund
                                                     or the Transfer Agent may delay mailing your proceeds. This delay
                                                     will usually not exceed ten days.

                                                     You may also sell shares held at the Transfer Agent by telephone
                                                     request if the amount being sold is less than $50,000 and if
                                                     certain other conditions are met. Contact the Transfer Agent
                                                     at 1-800-MER-FUND for details.
- ---------------------------------------------------------------------------------------------------------------------------
Sell Shares             Participate in the Fund's    You can choose to receive systematic payments from your
Systematically          Systematic Withdrawal Plan   Fund 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 Merrill Lynch CMA(R)
                                                     or CBA(R) Account 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
                                                     Merrill Lynch Financial Advisor or other financial
                                                     intermediary for details.
- ---------------------------------------------------------------------------------------------------------------------------


22                          MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND



If You Want to   Your Choices           Information Important for You to Know
- --------------------------------------------------------------------------------
Exchange Your    Select the fund into   You can exchange your shares Fund for
Shares           which you want to      shares of many other Merrill Lynch
                 exchange. Be sure      mutual funds. You must have held the
                 to read that           shares used in the exchange for at
                 fund's prospectus      least 15 calendar days before you can
                                        exchange to another fund.

                                        Each class of Fund shares is generally
                                        exchangeable for shares of the same
                                        class of another fund. If you own Class
                                        A shares and wish to exchange into a
                                        fund in which you have no Class A shares
                                        (and are not eligible to purchase Class
                                        A shares), you will exchange into Class
                                        D shares.

                                        Some of the Merrill Lynch mutual funds
                                        impose a different initial or deferred
                                        sales charge schedule. If you exchange
                                        Class A or Class D shares for shares of
                                        a fund with a higher initial sales
                                        charge than you originally paid, you
                                        will be charged the difference at the
                                        time of exchange. If you exchange Class
                                        B shares for shares of a fund with a
                                        different deferred sales charge
                                        schedule, the higher schedule will
                                        apply. The time you hold Class B or
                                        Class C shares in both funds will count
                                        when determining your holding period for
                                        calculating a deferred sales charge at
                                        redemption. If you exchange Class A or
                                        Class D 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.

                                        To exercise the exchange privilege
                                        contact your Merrill Lynch Financial
                                        Advisor or other financial intermediary
                                        or call the Transfer Agent at 1-800-MER-
                                        FUND.

                                        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.
- --------------------------------------------------------------------------------
                                 Short-term or excessive trading into and out of
                                 the Fund may harm performance by disrupting
                                 portfolio management strategies and by
                                 increasing expenses. Accordingly, the Fund may
                                 reject any purchase orders, including
                                 exchanges, particularly from market timers or
                                 investors who, in Fund management's opinion,
                                 have a pattern of short-term or excessive
                                 trading or whose trading has been or may be
                                 disruptive to the Fund. For these purposes,
                                 Fund management may consider an investor's
                                 trading history in that Fund or other Merrill
                                 Lynch funds, and accounts under common
                                 ownership or control.

                 MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                   23


[ICON]  Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                 24



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

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer, other financial intermediary or the Transfer Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax but may be subject to
state or local income taxes. Certain investors may be subject to a Federal
alternative minimum tax on dividends received from the Fund. To the extent that
the dividends distributed by the Fund are derived from Arizona municipal bond
interest income, they are also exempt from Arizona income taxes. Interest income
from other investments may produce taxable dividends. Dividends derived from
capital gains realized by the Fund will be subject to Federal tax, and generally
will be subject to Arizona tax as well. However, thirty percent of capital gain
dividends are excluded from income for Arizona income tax purposes. If you are
subject to income tax in a state other than Arizona, the dividends derived from
Arizona municipal bonds will generally not be exempt from income tax in that
state.

                  MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                  25



[ICON]  Your Account

"BUYING A DIVIDEND"

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

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

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

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. Capital gains are generally taxed at
different rates than ordinary income dividends.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and Arizona tax laws. It is not a substitute for personal
tax advice. You should consult your personal tax adviser about the potential tax
consequences to you of an investment in the Fund under all applicable tax laws.


26                MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


Management of the Fund [ICON]

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
2001, the Manager received a fee equal to 0.55% of the Fund's average daily net
assets.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates had approximately $506 billion in
investment company and other portfolio assets under management as of September
2001.

                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                 27


[ICON]  Management of the Fund

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

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



                                        Class A                                              Class B
                     ---------------------------------------------      -------------------------------------------------
                              For the Year Ended July 31,                          For the Year Ended July 31,
                     ---------------------------------------------      -------------------------------------------------
                                                                                
Increase
(Decrease) in
Net Asset
Value:                  2001      2000      1999      1998      1997      2001     2000      1999      1998      1997
- ---------------------------------------------------------------------------------------------------------------------------
Per Share
Operating
Performance:
- ---------------------------------------------------------------------------------------------------------------------------
Net asset
value,
beginning
of year              $  10.26  $  10.53  $  10.88  $  10.87  $  10.54  $  10.26 $  10.53  $  10.88  $  10.87  $  10.54
- ---------------------------------------------------------------------------------------------------------------------------
Investment
income-- net              .52       .54       .52       .55       .55       .47      .49       .46       .49       .50
- ---------------------------------------------------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments-- net         .37      (.26)     (.24)      .01       .33       .37     (.26)     (.24)      .01       .33
- ---------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations                .89       .28       .28       .56       .88       .84      .23       .22       .50       .83
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends
and distributions:
Investment
income-- net             (.52)     (.54)     (.52)     (.55)     (.55)     (.47)    (.49)     (.46)     (.49)     (.50)
In excess
of realized gain
on
investments
- --net                     --+      (.01)     (.11)       --        --        --+    (.01)     (.11)       --        --
- ---------------------------------------------------------------------------------------------------------------------------
Total
dividends and
distributions            (.52)     (.55)     (.63)     (.55)     (.55)     (.47)    (.50)     (.57)     (.49)     (.50)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset
value, end of
year                 $  10.63  $  10.26  $  10.53  $  10.88  $  10.87  $  10.63 $  10.26  $  10.53  $  10.88  $  10.87
- ---------------------------------------------------------------------------------------------------------------------------
Total
Investment
Return:*
- ---------------------------------------------------------------------------------------------------------------------------
Based on net
asset value
per share                8.93%     2.82%     2.52%     5.25%     8.63%     8.38%    2.30%     2.01%     4.71%     8.08%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to
Average Net
Assets:
- ---------------------------------------------------------------------------------------------------------------------------
Expenses                 1.00%      .86%      .94%      .82%      .79%     1.51%    1.37%     1.44%     1.32%     1.30%
- ---------------------------------------------------------------------------------------------------------------------------
Investment
income-- net             5.00%     5.31%     4.77%     5.01%     5.21%     4.50%    4.80%     4.26%     4.50%     4.70%
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental
Data:
- ---------------------------------------------------------------------------------------------------------------------------
Net assets,
end of year
(in thousands)       $ 11,413  $ 11,525  $ 12,975  $ 13,875  $ 14,012  $ 33,972 $ 34,565  $ 42,758  $ 51,503  $ 58,282
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio
turnover                41.00%    41.15%    25.16%    53.75%    29.68%    41.00%   41.15%    25.16%    53.75%    29.68%
- ---------------------------------------------------------------------------------------------------------------------------


   *    Total investment returns exclude the effects of sales charges.

   +    Amount is less than $.01 per share.

28                 MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND



FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------



                                                            Class C                                           Class D
                                              -------------------------------                       -------------------------------
                                                For the Year Ended July 31,                            For the Year Ended July 31,
                                              -------------------------------                       -------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
   Increase (Decrease) in Net Asset Value:  2001     2000     1999      1998     1997     2001     2000     1999     1998      1997
- -----------------------------------------------------------------------------------------------------------------------------------
   Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------------------------
   Net asset value, beginning of year       $10.25  $10.52  $10.88    $10.87    $10.54   $10.25   $10.52   $10.87   $10.86   $10.53
- -----------------------------------------------------------------------------------------------------------------------------------
   Investment income-- net                     .46     .48     .45       .48       .49      .51      .53      .51      .54      .54
- -----------------------------------------------------------------------------------------------------------------------------------
   Realized and unrealized gain (loss)
   on investments-- net                        .37    (.26)   (.25)      .01       .33      .37     (.26)    (.24)     .01      .33
- -----------------------------------------------------------------------------------------------------------------------------------
   Total from investment operations            .83     .22     .20       .49       .82      .88      .27      .27      .55      .87
- -----------------------------------------------------------------------------------------------------------------------------------
   Less dividends and distributions:
   Investment income --net                    (.46)   (.48)   (.45)     (.48)     (.49)    (.51)    (.53)    (.51)    (.54)    (.54)
- -----------------------------------------------------------------------------------------------------------------------------------
   In excess of realized gain on
   investments-- net                           --+    (.01)   (.11)       --        --       --+    (.01)    (.11)      --       --
- -----------------------------------------------------------------------------------------------------------------------------------
   Total dividends and distributions          (.46)   (.49)   (.56)     (.48)     (.49)    (.51)    (.54)    (.62)    (.54)    (.54)
- -----------------------------------------------------------------------------------------------------------------------------------
   Net asset value, end of year             $10.62  $10.25  $10.52    $10.88    $10.87   $10.62   $10.25   $10.52   $10.87   $10.86
- -----------------------------------------------------------------------------------------------------------------------------------
   Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------------------------------
   Based on net asset value per share         8.28%   2.20%   1.81%     4.61%     7.97%    8.82%    2.72%    2.42%    5.14%    8.52%
- -----------------------------------------------------------------------------------------------------------------------------------
   Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
   Expenses                                   1.61%   1.47%   1.54%     1.42%     1.40%    1.10%     .96%    1.05%     .92%     .89%
- -----------------------------------------------------------------------------------------------------------------------------------
   Investment income-- net                    4.40%   4.71%   4.16%     4.39%     4.59%    4.90%    5.20%    4.67%    4.90%    5.11%
- -----------------------------------------------------------------------------------------------------------------------------------
   Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
   Net assets, end of year (in thousands)   $1,723  $1,244  $  996    $1,233    $  957   $6,086   $4,406   $4,053   $2,740   $2,188
- -----------------------------------------------------------------------------------------------------------------------------------
   Portfolio turnover                        41.00%  41.15%  25.16%    53.75%    29.68%   41.00%   41.15%   25.16%   53.75%   29.68%
- -----------------------------------------------------------------------------------------------------------------------------------


   *    Total investment returns exclude the effects of sales charges.
   +    Amount is less than $.01 per share.

               MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND                      29





                                              POTENTIAL
                                              INVESTORS
                  [1]                                                                   [2]
                                           Open an account
                                           (two options).
                                                                  
             MERRILL LYNCH
          FINANCIAL ADVISOR                                                        TRANSFER AGENT
         OR SECURITIES DEALER
                                                                            Financial Data Services, Inc.
  Advises shareholders on their Fund
             investments.                                                      ADMINISTRATIVE OFFICES
                                                                              4800 Deer Lake Drive East
                                                                          Jacksonville, Florida 32246-6484

                                                                                   MAILING ADDRESS
                                                                                   P.O. Box 45289
                                                                          Jacksonville, Florida 32232-5289

                                                                        Performs 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                          THE FUND                           CUSTODIAN

           Sidley Austin Brown              The Board of Trustees                 State Street Bank
              & Wood LLP                      oversees the Fund.                  and Trust Company

           875 Third Avenue                                                         P.O. Box 351
     New York, New York 10022                                               Boston, Massachussetts 02101

  Provides legal advice to the Fund.                                         Holds the Fund's assets for
                                                                                    safekeeping.


             INDEPENDENT                         ACCOUNTING                          MANAGER
               AUDITORS                       SERVICES PROVIDER
                                                                               Fund Asset Management,
         Deloitte & Touche LLP                State Street Bank                        L.P.
         Two World Financial                  and Trust Company
                Center                                                         ADMINISTRATIVE OFFICES
          New York, New York                500 College Road East              800 Scudders Mill Road
            10281-1008                      Princeton, New Jersey           Plainsboro, New Jersey 08536
                                                   08540
                                                                                   MAILING ADDRESS
         Audits the financial                 Provides certain                      P.O. Box 9011
           statements of the                     accounting                   Princeton, New Jersey 08543-
           Fund on behalf of                services to the Fund.                        9011
           the shareholders.
                                                                                  TELEPHONE NUMBER
                                                                                   1-800-MER-FUND

                                                                                Manages the Fund's
                                                                               day-to-day activities


                   MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND


For More Information  [ICON]

Shareholder Reports

Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or call the Transfer
Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Advisor or other financial intermediary, or
contact the Fund at the telephone number or address indicated above on the
inside back cover of this Prospectus if you have any questions.

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

You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375

Code #13974-11-01

(C) Fund Asset Management, L.P.

EX-99.17D

                                                                   EXHIBIT 17(d)

                                   Prospectus

                                        [LOGO] Merrill Lynch Investment Managers

                  Merrill Lynch Connecticut Municipal Bond Fund
               of Merrill Lynch Multi-State Municipal Series Trust

                                                        November 14, 2001

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
                                                                                                 
      [ICON] KEY FACTS
             ---------
             -------------------------------------------------------------------------------------------

             Merrill Lynch Connecticut Municipal Bond Fund at a Glance                                 3
             ---------------------------------------------------------
             Risk/Return Bar Chart                                                                     5
             ---------------------
             Fees and Expenses                                                                         6
             -----------------


      [ICON] DETAILS ABOUT THE FUND
             ----------------------
             -------------------------------------------------------------------------------------------

             How the Fund Invests                                                                      8
             --------------------
             Investment Risks                                                                          9
             ----------------


      [ICON] YOUR ACCOUNT
             ------------
             -------------------------------------------------------------------------------------------

             Merrill Lynch Select Pricing(SM) System                                                  14
             ---------------------------------------
             How to Buy, Sell, Transfer and Exchange Shares                                           20
             ----------------------------------------------
             Participation in Fee-Based Programs                                                      24
             -----------------------------------


      [ICON] MANAGEMENT OF THE FUND
             ----------------------
             -------------------------------------------------------------------------------------------

             Fund Asset Management                                                                    27
             ---------------------
             Financial Highlights                                                                     28
             --------------------


      [ICON] FOR MORE INFORMATION
             --------------------
             -------------------------------------------------------------------------------------------

             Shareholder Reports                                                              Back Cover
             -------------------
             Statement of Additional Information                                              Back Cover
             -----------------------------------


                  MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


Key Facts   [ICON]

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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Connecticut Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in Connecticut or other qualifying issuer that pays interest
exempt from Connecticut personal income tax as well as from Federal income tax.

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal income tax and Connecticut personal income tax.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade
Connecticut municipal bonds. These may be obligations of a variety of issuers
including governmental entities in Connecticut and issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam. The Fund will invest at least 80% of its
net assets in Connecticut municipal bonds. The Fund may invest up to 20% of its
assets in high yield bonds (also known as "junk" bonds); however, the Fund will
not invest in bonds that are in default or that Fund management believes will be
in default. The Fund also may invest in certain types of derivative securities.
When choosing investments, Fund management considers various factors, including
the credit quality of issuers, yield analysis, maturity analysis and the call
features of the obligations. Under normal conditions, the Fund's weighted
average maturity will be more than ten years. The Fund cannot guarantee that it
will achieve its objective.

What are the main risks of investing in the Fund?

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

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. For
this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance. In addition, since the Fund invests at least
80% of its net assets in Connecticut municipal bonds, it is more exposed to
negative political or economic factors in Connecticut than a fund that invests
more widely. Derivatives and high yield bonds may be volatile and subject to
liquidity, leverage and credit risks.

                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 3


[ICON] Key Facts

Who should invest?

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

     .    Are looking for income that is exempt from Federal income tax and
          Connecticut personal income tax

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

     .    Are looking for liquidity

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

4                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


RISK/RETURN BAR CHART

1995           16.67%
1996            3.17%
1997            8.13%
1998            6.08%
1999           -4.94%
2000           10.66%

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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

During the period shown in the bar chart, the highest return for a
quarter was 6.90% (quarter ended March 31, 1995) and the lowest return for a
quarter was -2.01% (quarter ended June 30, 1999). The Fund's year-to-date return
as of September 30, 2001 was 4.35%.




Average Annual Total Returns                                     Past           Past           Since
(as of December 31, 2000)                                      One Year      Five Years      Inception
- --------------------------------------------------------------------------------------------------------
                                                                                 
Merrill Lynch Connecticut Municipal Bond Fund*         A         6.77%          4.15%          5.60%+
Lehman Brothers Municipal Bond Index**                          11.68%          5.84%          6.96%++
- --------------------------------------------------------------------------------------------------------
Merrill Lynch Connecticut Municipal Bond Fund*         B         6.66%          4.48%          5.73%+
Lehman Brothers Municipal Bond Index**                          11.68%          5.84%          6.96%++
- --------------------------------------------------------------------------------------------------------
Merrill Lynch Connecticut Municipal Bond Fund*         C         9.66%          4.37%          5.96%#
Lehman Brothers Municipal Bond Index**                          11.68%          5.84%          7.54%##
- --------------------------------------------------------------------------------------------------------
Merrill Lynch Connecticut Municipal Bond Fund*         D         6.66%          4.05%          5.78%#
Lehman Brothers Municipal Bond Index**                          11.68%          5.84%          7.54%##
- --------------------------------------------------------------------------------------------------------


   *    Includes all applicable fees and sales charges.
  **    This unmanaged Index consists of long-term revenue bonds, prerefunded
        bonds, general obligation bonds and insured bonds. Past performance is
        not predictive of future performance.
   +    Inception date is July 1, 1994.
  ++    Since June 30, 1994.
   #    Inception date is October 21, 1994.
  ##    Since October 31, 1994.

                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 5


[ICON]  Key Facts

UNDERSTANDING EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and
promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries for account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

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



Shareholder Fees (fees paid directly from
your investment)(a):                                    Class A      Class B(b)     Class C      Class D
- -----------------------------------------------------------------------------------------------------------
                                                                                     
  Maximum Sales Charge (Load) imposed on
  purchases (as a percentage of offering price)         4.00%(c)        None         None        4.00%(c)
- -----------------------------------------------------------------------------------------------------------
  Maximum Deferred Sales Charge (Load) (as
  a percentage of original purchase price or
  redemption proceeds, whichever is lower)               None(d)        4.0%(c)      1.0%(c)      None(d)
- -----------------------------------------------------------------------------------------------------------
  Maximum Sales Charge (Load) imposed on
  Dividend Reinvestments                                 None           None         None         None
- -----------------------------------------------------------------------------------------------------------
  Redemption Fee                                         None           None         None         None
- -----------------------------------------------------------------------------------------------------------
  Exchange Fee                                           None           None         None         None
- -----------------------------------------------------------------------------------------------------------
 Annual Fund Operating Expenses (expenses that
 are deducted from Fund assets):
- -----------------------------------------------------------------------------------------------------------
  Management Fee(e)                                     0.55%          0.55%        0.55%        0.55%

  Distribution and/or Service (12b-1) Fees(f)            None          0.50%        0.60%        0.10%
- -----------------------------------------------------------------------------------------------------------
  Other Expenses (including transfer agency
  fees)(g)                                              0.42%          0.43%        0.42%        0.42%
- -----------------------------------------------------------------------------------------------------------
 Total Annual Fund Operating Expenses                   0.97%          1.48%        1.57%        1.07%
- -----------------------------------------------------------------------------------------------------------



(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution fees
     and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of average
     daily net assets from $500 million to $1 billion; and 0.50% of average
     daily net assets above $1 billion. For the fiscal year ended July 31, 2001,
     the Manager received a fee equal to 0.55% of the Fund's average daily net
     assets, but the Manager voluntarily waived $55,743 of the management fee
     due. Total Annual Fund Operating Expenses in the fee table have been
     restated to assume the absence of the waiver because it may be discontinued
     or reduced by the Manager at any time without notice. For the fiscal year
     ended July 31, 2001, the Manager waived management fees totaling 0.10% for
     Class A shares, 0.10% for Class B shares, 0.10% for Class C shares and
     0.10% for Class D shares, after which the Fund's Total Annual Fund
     Operating Expenses would be 0.87% for Class A shares, 1.38% for Class B
     shares, 1.47% for Class C shares and 0.97% for Class D shares.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such services.

6                  MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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                       $495        $697         $915         $1,542
- --------------------------------------------------------------------------------
  Class B                       $551        $668         $808         $1,768
- --------------------------------------------------------------------------------
  Class C                       $260        $496         $855         $1,867
- --------------------------------------------------------------------------------
  Class D                       $505        $727         $967         $1,653
- --------------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
                -------

                               1 Year      3 Years      5 Years      10 Years
- --------------------------------------------------------------------------------
Class A                         $495        $697         $915         $1,542
- --------------------------------------------------------------------------------
Class B                         $151        $468         $808         $1,768
- --------------------------------------------------------------------------------
Class C                         $160        $496         $855         $1,867
- --------------------------------------------------------------------------------
Class D                         $505        $727         $967         $1,653
- --------------------------------------------------------------------------------

These examples do not reflect the effects of the voluntary fee waivers currently
in effect for the Fund.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                  7


Details About the Fund   [ICON]

ABOUT THE PORTFOLIO MANAGER

William R. Bock is the Vice President and portfolio manager of the Fund and
has been a Vice President and a portfolio manager of Merrill Lynch Investment
Managers since 1989.

ABOUT THE MANAGER

The Fund is managed by Fund Asset Management.

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

The Fund's main objective is to seek income that is exempt from Federal income
tax and Connecticut personal income tax. The Fund invests primarily in long
term, investment grade Connecticut municipal bonds. These may be obligations of
a variety of issuers including governmental entities or other qualifying issuers
in Connecticut or issuers located in other qualifying jurisdictions, such as
Puerto Rico, the U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities.

The Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities. The Fund will invest at least 80% of its net assets
in Connecticut municipal bonds. Under normal conditions, the Fund's weighted
average maturity will be more than ten years. For temporary periods, however,
the Fund may invest up to 35% of its assets in short term tax exempt or taxable
money market obligations, although the Fund will not generally invest more than
20% of its net assets in taxable money market obligations. As a temporary
measure for defensive purposes, the Fund may invest without limitation in short
term tax-exempt or taxable money market obligations. These short term
investments may limit the potential for the Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

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

Connecticut's economy is influenced by numerous factors, including developments
in manufacturing industries, such as transportation equipment, non-electrical
machinery, fabricated metal products and electrical equipment, and other
activities that may be adversely affected by cyclical change. Personal incomes
have remained among the highest in the nation despite severe poverty in some of
Connecticut's largest cities. Fund management believes that current economic
conditions in Connecticut will enable the Fund to continue to invest in high
quality Connecticut municipal bonds.

8                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


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

     .    Credit Quality Of Issuers -- based on bond ratings and other factors
          including economic and financial conditions.

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

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

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

INVESTMENT RISKS
- --------------------------------------------------------------------------------

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

Bond Market And Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 9


[ICON]  Details About the Fund

State Specific Risk -- The Fund will invest primarily in Connecticut
municipal bonds. As a result, the Fund is more exposed to risks affecting
issuers of Connecticut municipal bonds than is a municipal bond fund that
invests more widely. Moody's, Standard & Poor's and Fitch currently rate
Connecticut's general obligation bonds Aa2, AA and AA, respectively.

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.

Borrowing And Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

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

10                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or that Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 11


[ICON]  Details About the Fund

When Issued Securities, Delayed Delivery Securities And Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at the current value or
that have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

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

12                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


The Fund may use derivatives for hedging purposes including anticipatory
hedges. 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 losses on the holdings being hedged may
not be reduced. 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.

Indexed And Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 13


Your Account   [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.

14                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


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



                      Class A                 Class B                 Class C                 Class D
- -----------------------------------------------------------------------------------------------------------------------
                                                                                  
  Availability        Limited to certain      Generally available     Generally available     Generally available
                      investors including:    through Merrill         through Merrill         through Merrill
                      . Current Class A       Lynch. Limited          Lynch. Limited          Lynch. Limited
                        shareholders          availability through    availability through    availability through
                      . Participants in       selected securities     selected securities     selected securities
                        certain Merrill       dealers and other       dealers and other       dealers and other
                        Lynch-sponsored       financial               financial               financial
                        programs              intermediaries          intermediaries          intermediaries.
                      . Certain affiliates
                        of Merrill Lynch,
                        selected securities
                        dealers and other
                        financial
                        intermediaries.
- -----------------------------------------------------------------------------------------------------------------------
  Initial Sales       Yes. Payable at time    No. Entire purchase     No. Entire purchase     Yes. Payable at time
  Charge?             of purchase. Lower      price is invested in    price is invested in    of purchase. Lower
                      sales charges           shares of the Fund.     shares of the Fund.     sales charges
                      available for larger                                                    available for larger
                      investments.                                                            investments.
- -----------------------------------------------------------------------------------------------------------------------
  Deferred            No. (May be charged     Yes. Payable if you     Yes. Payable if you     No. (May be charged
  Sales               for purchases over      redeem within four      redeem within one       for purchases over
  Charge?             $1 million that are     years of purchase.      year of purchase.       $1 million that are
                      redeemed within one                                                     redeemed within one
                      year.)                                                                  year.)
- -----------------------------------------------------------------------------------------------------------------------
  Account             No.                     0.25% Account           0.25% Account           0.10% Account
  Maintenance                                 Maintenance Fee.        Maintenance Fee.        Maintenance Fee.
  and Distribution                            0.25% Distribution      0.35% Distribution      No Distribution Fee.
  Fees?                                       Fee.                    Fee.
- -----------------------------------------------------------------------------------------------------------------------
  Conversion          No.                     Yes, automatically      No.                     N/A
  to  Class D                                 after approximately
  shares?                                     ten years.
- -----------------------------------------------------------------------------------------------------------------------


                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 15


[ICON]  Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares-- Initial Sales Charge Options

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



                                                                               Dealer
                                                                            Compensation
                                 As a % of               As a % of            as a % of
  Your Investment             Offering Price          Your Investment*     Offering Price
- ---------------------------------------------------------------------------------------------
                                                                  
  Less than $25,000                4.00%                   4.17%                3.75%
- ---------------------------------------------------------------------------------------------
  $25,000 but less
  than $50,000                     3.75%                   3.90%                3.50%
- ---------------------------------------------------------------------------------------------
  $50,000 but less
  than $100,000                    3.25%                   3.36%                3.00%
- ---------------------------------------------------------------------------------------------
  $100,000 but less than
  $250,000                         2.50%                   2.56%                2.25%
- ---------------------------------------------------------------------------------------------
  $250,000 but less
  than $1,000,000                  1.50%                   1.52%                1.25%
- ---------------------------------------------------------------------------------------------
  $1,000,000 and over**            0.00%                   0.00%                0.00%
- ---------------------------------------------------------------------------------------------


   *    Rounded to the nearest one-hundredth percent.

  **    If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

     .    Purchases under a Right of Accumulation or Letter of Intent

     .    TMA(SM) Managed Trusts

     .    Certain Merrill Lynch investment or central asset accounts

     .    Purchases using proceeds from the sale of certain Merrill Lynch
          closed-end funds under certain circumstances

     .    Certain investors, including directors or trustees of Merrill Lynch
          mutual funds and Merrill Lynch employees

16                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


     .    Certain fee-based programs of Merrill Lynch and other financial
          intermediaries that have agreements with the Distributor or its
          affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 17


[ICON]  Your Account

Class B Shares

If you redeem Class B shares within four 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                                  3.00%
             ------------------------------------------------------
               2 - 3                                  2.00%
             ------------------------------------------------------
               3 - 4                                  1.00%
             ------------------------------------------------------
               4 and thereafter                       0.00%
             ------------------------------------------------------

*    The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

     .    Redemption in connection with participation in certain fee-based
          programs of Merrill Lynch 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

     .    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

     .    Withdrawal 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

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

18                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. Class C shares
do not offer a conversion privilege.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 19


[ICON]  Your Account

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

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

20                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND




If You Want to         Your Choices                        Information Important for You to Know
- ---------------------------------------------------------------------------------------------------------------
                                                     
Buy Shares             First, select the share class       Refer to the Merrill Lynch Select Pricing(SM) table
                       appropriate for you                 on page 15. Be sure to read this Prospectus
                                                           carefully.
                     ------------------------------------------------------------------------------------------

                       Next, determine the amount of       The minimum initial investment for the Fund is
                       your investment                     $1,000 for all accounts except that certain
                                                           Merrill Lynch fee-based programs have a $250 initial
                                                           minimum investment.

                                                           (The minimums for initial investments may be waived
                                                           under certain circumstances.)
                     ------------------------------------------------------------------------------------------

                       Have your Merrill Lynch             The price of your shares is based on the next
                       Financial Advisor selected          calculation of net asset value after your order is
                       securities dealer or other          placed. Any purchase orders placed prior to the
                       financial intermediary submit       close of business on the New York Stock Exchange
                       your purchase order                 (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 financial
                                                           intermediaries, including Merrill Lynch, may charge
                                                           a processing fee to confirm a purchase. Merrill Lynch
                                                           currently charges a fee of $5.35.
                     --------------------------------------------------------------------------------------------
                       Or contact the Transfer Agent       To purchase shares directly, call the Transfer Agent
                                                           at 1-800-MER-FUND and request a purchase application.
                                                           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
Investment                                                 generally $50 except that certain programs, such
                                                           as automatic investment plans, may have higher
                                                           minimums.

                                                           (The minimums for additional purchases may be waived
                                                           under certain circumstances.)
                     --------------------------------------------------------------------------------------------
                       Acquire additional shares           All dividends are automatically reinvested without
                       through the automatic               a sales charge.
                       dividend reinvestment plan
                     --------------------------------------------------------------------------------------------
                       Participate in the automatic        You may invest a specific amount on a periodic
                       investment plan                     basis through certain Merrill Lynch investment or
                                                           central asset accounts.
- -----------------------------------------------------------------------------------------------------------------
Transfer Shares to     Transfer to a participating         You may transfer your Fund shares only to
Another Securities     securities dealer or other          another securities dealer that has entered into an
Dealer or Other        financial intermediary              agreement with the Distributor. Certain
Financial                                                  shareholder services may not be available for the
Intermediary                                               transferred shares. You may only purchase
                                                           additional shares of funds previously owned before
                                                           the transfer. All future trading of these assets
                                                           must be coordinated by the receiving firm.
                     --------------------------------------------------------------------------------------------
                       Transfer to a non-participating     You must either:
                       securities dealer or other              . Transfer your shares to an account with the
                       financial intermediary                    TransferAgent; or
                                                               . Sell your shares, paying any applicable
                                                                 deferred sales charge.
- -----------------------------------------------------------------------------------------------------------------


                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 21


[ICON]  Your Account



If You Want to          Your Choices               Information Important for You to Know
- --------------------------------------------------------------------------------------------------------------
                                             
Sell Your Shares        Have your Merrill          The price of your shares is based on the next calculation
                        Lynch Financial            of net asset value after your order is placed. For your
                        Advisor, selected          redemption request to be priced at the net asset value on
                        securities dealer or       the day of your request, you must submit your request to
                        other financial            your dealer or other financial intermediary prior to that
                        intermediary submit        day's close of business on the New York Stock Exchange
                        your sales order           (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,
                                                   including Merrill Lynch, may charge a fee to process a
                                                   redemption of shares. Merrill Lynch currently 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           You may sell shares held at the Transfer Agent by writing
                        Transfer Agent             to the Transfer Agent at the address on the inside back
                                                   cover of this prospectus. All shareholders on the account
                                                   must sign the letter. A signature guarantee will generally
                                                   be required but may be waived in certain limited
                                                   circumstances. You can obtain a signature guarantee from a
                                                   bank, securities dealer, securities broker, credit union,
                                                   savings association, national securities exchange or
                                                   registered securities association. A notary public seal
                                                   will not be acceptable. If you hold stock certificates,
                                                   return the certificates with the letter. The Transfer
                                                   Agent will normally mail redemption proceeds within seven
                                                   days following receipt of a properly completed request.
                                                   If you make a redemption request before the Fund has
                                                   collected payment for the purchase of shares, the Fund or
                                                   the Transfer Agent may delay mailing your proceeds. This
                                                   delay will usually not exceed ten days.

                                                   You may also sell shares held at the Transfer Agent by
                                                   telephone request if the amount being sold is less than
                                                   $50,000 and if certain other conditions are met. Contact
                                                   the Transfer Agent at 1-800-MER-FUND for details.
- --------------------------------------------------------------------------------------------------------------
Sell Shares             Participate in the         You can choose to receive systematic payments from your
Systematically          Fund's Systematic          Fund account either by check or through direct deposit to
                        Withdrawal Plan            your bank account on a monthly or quarterly basis. If you
                                                   hold your Fund shares in a Merrill Lynch CMA(R)or CBA(R)
                                                   Account 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 Merrill Lynch Financial
                                                   Advisor or other financial intermediary for details.
- --------------------------------------------------------------------------------------------------------------


22                 MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND




If You Want to          Your Choices                Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------
                                              
Exchange Your Shares    Select the fund into        You can exchange your shares of the Fund for shares of
                        which you want to           many other Merrill Lynch mutual funds. You must have held
                        exchange. Be sure to        the shares used in the exchange for at least 15 calendar
                        read that fund's            days before you can exchange to another fund.
                        prospectus

                                                    Each class of Fund shares is generally exchangeable for
                                                    shares of the same class of another fund. If you own Class A
                                                    shares and wish to exchange into a fund in which you have no
                                                    Class A shares (and are not eligible to purchase Class A
                                                    shares), you will exchange into Class D shares.

                                                    Some of the Merrill Lynch mutual funds impose a different
                                                    initial or deferred sales charge schedule. If you exchange
                                                    Class A or Class D 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 generally apply. The time you hold Class B or
                                                    Class C shares in both funds will count when determining your
                                                    holding period for calculating a deferred sales charge at
                                                    redemption. If you exchange Class A or Class D 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.

                                                    To exercise the exchange privilege contact your Merrill Lynch
                                                    Advisor or other financial intermediary or call the Transfer
                                                    Agent at 1-800-MER-FUND.

                                                    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.
- -------------------------------------------------------------------------------------------------------------------


Short-term or excessive trading into and out of the Fund may harm performance
by disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short-term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds, and
accounts under common ownership or control.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 23


[ICON]  Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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


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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


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

If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money market
fund. The class you receive may be the class you originally owned when you
entered the program, or in certain cases, a different class. If the exchange is
into Class B shares, the period before conversion to Class D shares may be
modified. Any redemption or exchange will be at net asset value. However, if you
participate in the program for less than a specified period, you may be charged
a fee in accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer, other financial intermediary or the Transfer Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax but may be subject to
state or local income tax. Certain investors may be subject to a Federal
alternative minimum tax on dividends received from the Fund. To the extent that
the exempt-interest dividends distributed by the Fund are derived from
Connecticut municipal bond interest income, they are also exempt from the
Connecticut personal income tax on individuals, trusts and estates and are
exempt from the net Connecticut minimum tax imposed on investors subject to the
Connecticut personal income tax who are required to pay the Federal alternative
minimum tax. Interest income distributed from other investments will produce
taxable dividends. Capital gain dividends will be subject to Federal tax, but
for Connecticut personal income tax purposes are not taxed at all to the extent
they are derived from Connecticut municipal bonds issued by governmental
entities located in Connecticut in the case of investors who hold their Fund
shares as capital assets. If you are subject to

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 25


[ICON]  Your Account

"BUYING A DIVIDEND"

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

income tax in a state other than Connecticut, the dividends derived from
Connecticut municipal bonds will generally not be exempt from income tax in that
state.

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

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

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. For Federal income tax purposes, long term
capital gains are generally taxed at more favorable rates than ordinary income
dividends.

This section summarizes some of the consequences of an investment in the Fund by
individual investors under current Federal and Connecticut tax laws. It is not a
substitute for personal tax advice. You should consult your personal tax adviser
about the potential tax consequences to you of an investment in the Fund under
all applicable tax laws.

26                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


Management of the Fund  [ICON]

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
2001, the fee payable to the Manager from the Fund was equal to 0.55% of the
Fund's average daily net assets, but the Manager voluntarily waived a portion of
the management fee due for the fiscal year.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates, had approximately $506 billion in
investment company and other portfolio assets under management as of September
2001.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 27


[ICON]  Management of the Fund

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

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



                                                           Class A                                    Class B
                                        --------------------------------------------  -------------------------------------------
                                                  For the Year Ended July 31,                For the Year Ended July 31,
                                        --------------------------------------------  --------------------------------------------
  Increase (Decrease) in
  Net Asset Value:                     2001       2000        1999        1998      1997        2001          2000          1999
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                  
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
year                                $  10.21    $  10.53    $  10.79    $ 10.68    $ 10.29    $  10.21       $  10.53     $  10.79
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net                 .50         .50         .48        .52        .56         .45            .45          .43
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net             .43        (.32)       (.21)       .11        .39         .43           (.32)        (.21)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations         .93         .18         .27        .63        .95         .88            .13          .22
- -----------------------------------------------------------------------------------------------------------------------------------
 Less dividends and
distributions:
- -----------------------------------------------------------------------------------------------------------------------------------
 Investment income -- net               (.50)       (.50)       (.48)      (.52)      (.56)       (.45)          (.45)        (.43)
- -----------------------------------------------------------------------------------------------------------------------------------
  In excess of realized gain
  investments -- net                      --          --+       (.05)        --         --          --             --+        (.05)
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions       (.50)       (.50)       (.53)      (.52)      (.56)       (.45)          (.45)        (.48)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year        $  10.64    $  10.21    $  10.53    $ 10.79    $ 10.68    $  10.64       $  10.21     $  10.53
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share      9.32%       1.96%       2.50%      6.00%      9.51%       8.77%          1.45%        1.99%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement           .87%        .77%        .84%       .77%       .52%       1.38%          1.27%        1.35%
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses                                 .97%        .87%        .94%       .89%       .92%       1.48%          1.37%        1.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net                4.80%       4.98%       4.43%      4.79%      5.38%       4.29%          4.48%        3.93
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of year (in
thousands)                          $  6,951    $  6,905    $  9,013    $ 8,855    $ 8,380    $ 41,669       $ 34,989     $ 41,835
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover                     57.42%      85.68%      47.62%     53.99%     32.46%      57.42%         85.68%       47.62%
- -----------------------------------------------------------------------------------------------------------------------------------


                                                     Class B
                                     ---------------------------------------
                                            For the Year Ended July 31,
                                     ---------------------------------------
  Increase (Decrease) in
  Net Asset Value:                            1998           1997
- ----------------------------------------------------------------------------
                                                    
Per Share Operating Performance:
- ----------------------------------------------------------------------------
Net asset value, beginning of year          $  10.68       $  10.29
- ----------------------------------------------------------------------------
Investment income -- net                         .46            .51
- ----------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net                     .11            .39
- ----------------------------------------------------------------------------
Total from investment operations                 .57            .90
- ----------------------------------------------------------------------------
 Less dividends and distributions:
- ----------------------------------------------------------------------------
 Investment income -- net                       (.46)          (.51)
- ----------------------------------------------------------------------------
  In excess of realized gain
  investments -- net                              --             --
- ----------------------------------------------------------------------------
Total dividends and distributions               (.46)          (.51)
- ----------------------------------------------------------------------------
Net asset value, end of year                $  10.79       $  10.68
- ----------------------------------------------------------------------------
Total Investment Return:*
- ----------------------------------------------------------------------------
Based on net asset value per share              5.47%          8.96%
- ----------------------------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------------------------
Expenses, net of reimbursement                  1.27%          1.02%
- ----------------------------------------------------------------------------
Expenses                                        1.40%          1.43%
- ----------------------------------------------------------------------------
Investment income -- net                        4.28%          4.87%
- ----------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------
Net assets, end of year (in thousands)      $ 41,964       $ 35,563
- ----------------------------------------------------------------------------
Portfolio turnover                            53.99%          32.46%
- ----------------------------------------------------------------------------


+    Amount is less than $.01 per share.

*    Total investment returns exclude the effects of sales charges.

28                 MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND


FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------



                                                                      Class C
                                        -------------------------------------------------------------------
                                                            For the Year Ended July 31,
                                        -------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
                                                                                 
Increase (Decrease in
Net Asset Value:                             2001          2000          1999          1998          1997
- -----------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of year      $   10.22       $ 10.53     $   10.80     $   10.69     $   10.30
- -----------------------------------------------------------------------------------------------------------
Investment income -- net                      .44           .44           .41           .45           .50
- -----------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net                  .42          (.31)         (.22)          .11           .39
- -----------------------------------------------------------------------------------------------------------
Total from investment operations              .86           .13           .19           .56           .89
- -----------------------------------------------------------------------------------------------------------
Less dividends and distributions:
- -----------------------------------------------------------------------------------------------------------
  Investment income -- net                   (.44)         (.44)         (.41)         (.45)         (.50)
- -----------------------------------------------------------------------------------------------------------
  In excess of realized gain on
  investments -- net                           --            --+         (.05)           --            --
- -----------------------------------------------------------------------------------------------------------
Total dividends and distributions            (.44)         (.44)         (.46)         (.45)         (.50)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of year            $   10.64       $ 10.22     $   10.53     $   10.80     $   10.69
- -----------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------
Based on net asset value per share           8.56%         1.45%         1.79%         5.36%         8.84%
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement               1.47%         1.37%         1.45%         1.37%         1.12%
- -----------------------------------------------------------------------------------------------------------
Expenses                                     1.57%         1.47%         1.55%         1.50%         1.53%
- -----------------------------------------------------------------------------------------------------------
Investment income -- net                     4.20%         4.38%         3.82%         4.17%         4.77%
- -----------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands   $   5,690       $ 5,085     $   6,837     $   4,399     $   2,016
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover                          57.42%        85.68%        47.62%        53.99%        32.46%
- -----------------------------------------------------------------------------------------------------------


                                                                      Class D
                                          -------------------------------------------------------------------
                                                              For the Year Ended July 31,
                                          -------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Increase (Decrease in
Net Asset Value:                               2001          2000          1999          1998          1997
- -------------------------------------------------------------------------------------------------------------
                                                                                   
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year        $   10.21     $   10.53     $   10.79     $   10.68     $   10.29
- -------------------------------------------------------------------------------------------------------------
Investment income -- net                        .49           .49           .47           .51           .55
- -------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments -- net                    .43          (.32)         (.21)          .11           .39
- -------------------------------------------------------------------------------------------------------------
Total from investment operations                .92           .17           .26           .62           .94
- -------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
- -------------------------------------------------------------------------------------------------------------
  Investment income -- net                     (.49)         (.49)         (.47)         (.51)         (.55)
- -------------------------------------------------------------------------------------------------------------
  In excess of realized gain on
  investments -- net                             --            --+         (.05)           --            --
- -------------------------------------------------------------------------------------------------------------
Total dividends and distributions              (.49)         (.49)         (.52)         (.51)         (.55)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year              $   10.64     $   10.21     $   10.53     $   10.79     $   10.68
- -------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -------------------------------------------------------------------------------------------------------------
Based on net asset value per share             9.21%         1.86%         2.40%         5.90%         9.40%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement                  .97%          .87%          .95%          .87%          .62%
- -------------------------------------------------------------------------------------------------------------
Expenses                                       1.07%          .97%         1.05%          .99%         1.03%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net                       4.71%         4.88%         4.32%         4.67%         5.27%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands     $   5,778     $   5,723     $   7,182     $   4,634     $   3,440
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover                            57.42%        85.68%        47.62%        53.99%        32.46%
- -------------------------------------------------------------------------------------------------------------


+  Amount is less than $.01 per share.
*  Total investment returns exclude the effects of sales charges.

                MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND                 29


                                    POTENTIAL
                                    INVESTORS
               [1]                                           [2]
                          Open an account (two options)
          MERRILL LYNCH
        FINANCIAL ADVISOR                               TRANSFER AGENT
      OR SECURITIES DEALER
                                                  Financial Data Services, Inc.
Advises shareholders on their Fund
           investments.                              ADMINISTRATIVE OFFICES
                                                    4800 Deer Lake Drive East
                                                Jacksonville, Florida 32246-6484

                                                          MAILING ADDRESS
                                                          P.O. Box 45289
                                                       Jacksonville, Florida
                                                           32232-5289

                                            Performs 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                        THE FUND              CUSTODIAN

      Sidley Austin Brown           The Board of Trustees    State Street Bank
          & Wood LLP                  oversees the Fund.     and Trust Company
       875 Third Avenue                                        P.O. Box 351
   New York, New York 10022                               Boston, Massachusetts
                                                                  02101

Provides legal advice to the Fund.                          Holds the Fund's
                                                         assets for safekeeping.

   INDEPENDENT AUDITORS
                                    ACCOUNTING                MANAGER
  Deloitte & Touche LLP         SERVICES PROVIDER
Two World Financial Center                           Fund Asset Management, L.P.
 New York, New York 10281      State Street Bank
                               and Trust Company         ADMINISTRATIVE OFFICES
   Audits the financial       500 College Road East      800 Scudders Mill Road
    statements of the       Princeton, New Jersey 08540  Plainsboro, New Jersey
    Fund on behalf of                                              08536
    the shareholders.
                             Provides certain accounting     MAILING ADDRESS
                                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 CONNECTICUT MUNICIPAL BOND FUND


For More Information   [ICON]

Shareholder Reports

Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or other financial
intermediary or the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Advisor or other financial intermediary or
contact the Fund at the telephone number or address indicated above if you have
any questions.

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

You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375 Code #18110-11-01 (C) Fund Asset
Management, L.P.

                                   Prospectus
                                                        [LOGO]   Merrill Lynch

                                                             Investment Managers
Merrill Lynch Connecticut
Municipal Bond Fund
of Merrill Lynch Multi-State
Municipal Series Trust
                                                               November 14, 2001

EX-99.17E

                                                                   EXHIBIT 17(e)

                                        [LOGO] Merrill Lynch Investment Managers

                                  Prospectus

                  Merrill Lynch Maryland Municipal Bond Fund
              of Merrill Lynch Multi-State Municipal Series Trust

                                                               November 14, 2001

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
                                                                        
[ICON]  KEY FACTS
        ---------
        -----------------------------------------------------------------------
        Merrill Lynch Maryland Municipal Bond Fund at a Glance                3
        ------------------------------------------------------
        Risk/Return Bar Chart                                                 5
        ----------------------
        Fees and Expenses                                                     6
        -----------------

[ICON]  DETAILS ABOUT THE FUND
        ----------------------
        -----------------------------------------------------------------------
        How the Fund Invests                                                  8
        --------------------
        Investment Risks                                                      9
        ----------------

[ICON]  YOUR ACCOUNT
        ------------
        Merrill Lynch Select Pricing(SM) System                              14
        --------------------------------------
        How to Buy, Sell, Transfer and Exchange Shares                       20
        -----------------------------------------------
        Participation in Fee-Based Programs                                  24
        -----------------------------------

[ICON]  MANAGEMENT OF THE FUND
        ----------------------
        -----------------------------------------------------------------------
        Fund Asset Management                                                27
        ---------------------
        Financial Highlights                                                 28
        --------------------

[ICON]  FOR MORE INFORMATION
        --------------------
        -----------------------------------------------------------------------
        Shareholder Reports                                           Back Cover
        --------------------
        Statement of Additional Information                           Back Cover
        -----------------------------------


                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


Key Facts [ICON]


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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Maryland Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in Maryland or other qualifying issuer that pays interest
exempt from Maryland income taxes as well as from Federal income tax.

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND AT A GLANCE
- ------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal and Maryland income taxes.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade Maryland
municipal bonds. These may be obligations of a variety of issuers including
governmental entities in Maryland and issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam. The Fund will invest at least 80% of its net assets in
Maryland municipal bonds. The Fund may invest up to 20% of its assets in high
yield bonds (also known as "junk" bonds); however, the Fund will not invest in
bonds that are in default or that Fund management believes will be in default.
The Fund also may invest in certain types of derivative securities. When
choosing investments, Fund management considers various factors, including the
credit quality of issuers, yield analysis, maturity analysis and the call
features of the obligations. Under normal conditions, the Fund's weighted
average maturity will be more than ten years. The Fund cannot guarantee that it
will achieve its objective.

What are the main risks of investing in the Fund?

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

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. For
this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance. In addition, since the Fund invests at least
80% of its net assets in Maryland municipal bonds, it is more exposed to
negative political or economic factors in Maryland than a fund that invests more
widely. Derivatives and high yield bonds may be volatile and subject to
liquidity, leverage and credit risks.

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                   3


[ICON] Key Facts

Who should invest?

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

     .   Are looking for income that is exempt from Federal and Maryland income
         taxes

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

     .   Are looking for liquidity

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

4                 MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

                                    [IMAGE]

During the period shown in the bar chart, the highest return for a quarter was
7.17% (quarter ended March 31, 1995) and the lowest return for a quarter was-
8.53% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 4.82%.

Average Annual Total Returns                    Past       Past        Since
(as of December 31, 2000)                       One Year   Five Years  Inception
- --------------------------------------------------------------------------------
Merrill Lynch Maryland Municipal Bond     A
Fund*                                             6.73%       4.44%     4.08%++
Lehman Brothers Municipal Bond Index**           11.68%       5.84%     5.79%+
- --------------------------------------------------------------------------------
Merrill Lynch Maryland Municipal Bond     B
Fund*                                             6.73%       4.76%     4.16%++
Lehman Brothers Municipal Bond Index**           11.68%       5.84%     5.79%+
- --------------------------------------------------------------------------------
Merrill Lynch Maryland Municipal Bond     C
Fund*                                             9.50%       4.65%     6.11%##
Lehman Brothers Municipal Bond Index**           11.68%       5.84%     7.54%#
- --------------------------------------------------------------------------------
Merrill Lynch Maryland Municipal Bond     D
Fund*                                             6.62%       4.33%     5.94%##
Lehman Brothers Municipal Bond Index**           11.68%       5.84%     7.54%#
- --------------------------------------------------------------------------------

  * Includes all applicable fees and sales charges

 ** This unmanaged Index consists of long term revenue bonds, prerefunded bonds,
    general obligation bonds and insured bonds.  Past performance is not
    predictive of future performance.

  + Inception date is October 29, 1993.

 ++ Since October 29, 1993.

  # Inception date is October 21, 1994.

 ## Since October 31, 1994.

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                   5


[ICON] Key Facts

UNDERSTANDING EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries for account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

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



Shareholder Fees (fees paid directly from                  Class B
your investment)(a):                           Class A       (b)       Class C     Class D
- --------------------------------------------------------------------------------------------
                                                                       
 Maximum Sales Charge (Load) imposed on
 purchases (as a percentage of offering price)  4.00%(c)      None       None       4.00%(c)
- --------------------------------------------------------------------------------------------
 Maximum Deferred Sales Charge (Load) (as
 a percentage of original purchase price or
 redemption proceeds, whichever is lower)        None(d)      4.0%(c)    1.0%(c)     None(d)
- --------------------------------------------------------------------------------------------
 Maximum Sales Charge (Load) imposed on
 Dividend Reinvestments                          None         None       None        None
- --------------------------------------------------------------------------------------------
 Redemption Fee                                  None         None       None        None
- --------------------------------------------------------------------------------------------
 Exchange Fee                                    None         None       None        None
- --------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses

that are deducted from Fund assets):
- --------------------------------------------------------------------------------------------
 Management Fee(e)                               0.55%        0.55%      0.55%       0.55%
- --------------------------------------------------------------------------------------------
 Distribution and/or Service (12b-1) Fees(f)     None         0.50%      0.60%       0.10%
- --------------------------------------------------------------------------------------------
 Other Expenses (including transfer
 agency fees)(g)                                 0.81%        0.82%      0.82%       0.82%
- --------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(e)          1.36%        1.87%      1.97%       1.47%
- --------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution fees
     and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion. For the fiscal year ended July
     31, 2001, the Manager received a fee equal to 0.55% of the Fund's average
     daily net assets, but the Manager voluntarily waived $74,992 of the
     management fee due. Total Annual Fund Operating Expenses in the fee table
     have been restated to assume the absence of the waiver because it may be
     discontinued or reduced by the Manager at any time without notice. For the
     fiscal year ended July 31, 2001, the Manager waived a portion of the
     management fee totaling 0.30% for Class A shares, 0.30% for Class B shares,
     0.30% for Class C shares and 0.30% for Class D shares, after which the
     Fund's total expense ratio was 1.06% for Class A shares, 1.57% for Class B
     shares, 1.67% for Class C shares and 1.17% for Class D shares.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

                                              (footnotes continued on next page)

6                 MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


                                        (footnotes continued from previous page)

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such 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. This assumption is 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 this example. 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                $533         $814         $1,115       $1,970
- ------------------------------------------------------------------------
Class B                $590         $788         $1,011       $2,190
- ------------------------------------------------------------------------
Class C                $300         $618         $1,062       $2,296
- ------------------------------------------------------------------------
Class D                $544         $846         $1,171       $2,087
- ------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                       1 Year       3 Years      5 Years      10 Years
- ------------------------------------------------------------------------
Class A                $533         $814         $1,115       $1,970
- ------------------------------------------------------------------------
Class B                $190         $588         $1,011       $2,190
- ------------------------------------------------------------------------
Class C                $200         $618         $1,062       $2,296
- ------------------------------------------------------------------------
Class D                $544         $846         $1,171       $2,087
- ------------------------------------------------------------------------

These examples do not reflect the effects of the voluntary fee waivers currently
in effect for the Fund.

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                   7


Details About the Fund [ICON]


ABOUT THE PORTFOLIO MANAGER


Robert D. Sneeden is the Portfolio
Manager of the Fund and a Vice President of
the Fund. Mr. Sneeden has been Vice
President and Portfolio Manager of Merrill
Lynch Investment Managers since 1994.


ABOUT THE MANAGER


The Fund is managed by Fund Asset
Management.

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

The Fund's main objective is to seek income that is exempt from Federal and
Maryland income taxes. The Fund invests primarily in long term, investment grade
Maryland municipal bonds. These may be obligations of a variety of issuers
including governmental entities or other qualifying issuers. Issuers may be
located in Maryland or in other qualifying jurisdictions such as Puerto Rico,
the U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.

The Fund will invest at least 80% of its net assets in Maryland municipal bonds.
Under normal conditions, the Fund's weighted average maturity will be more than
ten years. For temporary periods, however, the Fund may invest up to 35% of its
assets in short term tax exempt or taxable money market obligations, although
the Fund will not generally invest more than 20% of its net assets in taxable
money market obligations. As a temporary measure for defensive purposes, the
Fund may invest without limitation in short term tax-exempt or taxable money
market obligations. These short term investments may limit the potential for the
Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

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

Maryland's economy is influenced by, among other things, developments in the
state's leading areas of employment, which are services, retail and wholesale
trade, government, and manufacturing. Although in 2000 Maryland had more
residents employed in the service and Federal government sectors than the United
States average, its per capita income in 2000 was significantly above the
national average. Although Maryland's economy has been increasing in strength
over the past few years, a continuing decline in the national economy, along
with recent local and international developments, has had and could continue to
have an adverse effect on Maryland's economy. The Manager believes that current
economic conditions in Maryland will enable the Fund to continue to invest in
high quality Maryland bonds.

8                 MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


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

         .   Credit Quality Of Issuers -- based on bond ratings and other
             factors including economic and financial conditions.

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

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

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

INVESTMENT RISKS
- --------------------------------------------------------------------------------

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

Bond Market And Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                   9


[ICON] Details About the Fund

State Specific Risk -- The Fund will invest primarily in Maryland municipal
bonds. As a result, the Fund is more exposed to risks affecting issuers of
Maryland municipal bonds than is a municipal bond fund that invests more widely.
Although Maryland's economy grew over the past few years, a continuing decline
in the national economy, along with recent domestic and international
developments, has had and could continue to have an adverse effect on Maryland's
economy and fiscal integrity. Maryland recently announced a $205 million budget
cut, and indicated that more cutbacks might be necessary in the near future.
Some State legislators have suggested that, even with such cuts, Maryland might
face budget difficulties next year, which might require additional cuts or tax
increases. Moody's, Standard & Poor's and Fitch currently rate the State of
Maryland's general obligation bonds Aaa, AAA and AAA, respectively. Other State
agencies, counties, and municipalities issue municipal obligations which do not
constitute debts or pledges of the full faith and credit of the State of
Maryland. The issuers of these obligations are subject to various economic risks
and uncertainties, and the credit quality of the securities issued by them may
vary considerably from the quality of obligations backed by the full faith and
credit of the State.

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.

Borrowing And Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular class of

10                MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


facilities or the proceeds of a special tax or other revenue source. These
payments depend on the money earned by the particular facility or class of
facilities. Industrial development bonds are one type of revenue bond.

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

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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or that Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                  11


[ICON] Details About the Fund

higher rated debt securities. The issuers of junk bonds may have a larger amount
of outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.

When Issued Securities, Delayed Delivery Securities And Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at current value or that
have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures, and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

12                MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


     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. 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. 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.

Indexed And Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                  13


Your Account [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.

14               MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


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



                Class A             Class B         Class C           Class D
- -------------------------------------------------------------------------------------------
                                                           
Availability    Limited to          Generally       Generally          Generally
                certain investors   available       available          available through
                including:          through         through Merrill    Merrill Lynch.
                . Current Class A   Merrill Lynch.  Lynch. Limited     Limited
                shareholders        Limited         availability       availability
                . Participants in   availability    through            through selected
                certain Merrill     through         selected           securities
                Lynch- sponsored    selected        securities         dealers and other
                programs            securities      dealers and        financial
                . Certain           dealers and     other financial    intermediaries.
                affiliates of       other           intermediaries.
                Merrill Lynch,      financial
                selected            intermediaries.
                securities
                dealers and other
                financial
                intermediaries.
- -------------------------------------------------------------------------------------------
Initial Sales   Yes. Payable at     No. Entire      No. Entire         Yes. Payable at
Charge?         time of purchase.   purchase price  purchase price     time of purchase.
                Lower sales         is invested in  is invested in     Lower sales
                charges available   shares of the   shares of the      charges available
                for larger          Fund.           Fund.              for larger
                investments.                                           investments.
- -------------------------------------------------------------------------------------------
Deferred        No. (May be         Yes. Payable    Yes. Payable if    No. (May be
Sales           charged for         if you redeem   you redeem         charged for
Charge?         purchases over $1   within four     within one year    purchases over $1
                million that are    years of        of purchase.       million that are
                redeemed within     purchase.                          redeemed within
                one year.)                                             one year.)
- -------------------------------------------------------------------------------------------
Account         No.                 0.25% Account   0.25% Account      0.10% Account
Maintenance                         Maintenance     Maintenance        Maintenance Fee.
and                                 Fee. 0.25%      Fee. 0.35%         No Distribution
Distribution                        Distribution    Distribution       Fee.
Fees?                               Fee.            Fee.
- -------------------------------------------------------------------------------------------
Conversion      No.                 Yes,            No.                N/A
to Class D                          automatically
shares?                             after
                                    approximately
                                    ten years.
- -------------------------------------------------------------------------------------------


                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                  15


[ICON] Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares -- Initial Sales Charge Options

If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase as shown in the following table.
                                                                     Dealer
                           As a % of           As a % of          Compensation
Your Investment          Offering Price     Your Investment*        as a % of
                                                                  Offering Price
- --------------------------------------------------------------------------------
Less than $25,000             4.00%               4.17%                 3.75%

$25,000 but less                                  3.90%
than $50,000                  3.75%                                     3.50%

$50,000 but less                                  3.36%
than $100,000                 3.25%                                     3.00%

$100,000 but less                                 2.56%
than $250,000                 2.50%                                     2.25%

$250,000 but less                                 1.52%
than $1,000,000               1.50%                                     1.25%

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

  *  Rounded to the nearest one-hundredth percent.

 **  If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

         .   Purchases under a Right of Accumulation or Letter of Intent

         .   TMA(SM) Managed Trusts

         .   Certain Merrill Lynch investment or central asset accounts

         .   Purchases using proceeds from the sale of certain Merrill Lynch
             closed-end funds under certain circumstances

         .   Certain investors, including directors or trustees of Merrill Lynch
             mutual funds and Merrill Lynch employees


16       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


         .   Certain fee-based programs of Merrill Lynch and other financial o
             intermediaries that have agreements with the Distributor or its
             affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                       17


[ICON] Your Account

Class B Shares

If you redeem Class B shares within four 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                                      3.00%

              2 - 3                                      2.00%

              3 - 4                                      1.00%

              4 and thereafter                           0.00%



  *  The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

       .   Redemption in connection with participation in certain fee-based
           programs of Merrill Lynch 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

       .   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

       .   Withdrawal 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

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

18       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                        19


[ICON] Your Account

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES


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

20       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


                                          
If You Want to    Your Choices                  Information Important for You to Know


Buy Shares        First, select the share       Refer to the Merrill Lynch Select
                  class appropriate for you     Pricing(SM) table on page 15. Be sure to
                                                read this Prospectus carefully.


                  Next, determine the amount    The minimum initial investment for the
                  of your investment            Fund is $1,000 for all accounts except
                                                that certain Merrill Lynch fee-based
                                                programs have a $250 initial minimum investment.

                                                (The minimums for initial investments
                                                may be waived under certain circumstances.)

                  Have your Merrill Lynch       The price of your shares is based on
                  Financial Advisor, selected   the next calculation of net asset value
                  securities dealer or other    after your order is placed. Any
                  financial intermediary        purchase orders placed prior to the
                  submit your purchase          close of business on the New York Stock
                  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,
                                                including Merrill Lynch, may
                                                charge a processing fee to
                                                confirm a purchase. Merrill
                                                Lynch currently charges a fee of
                                                $5.35.

                  Or contact the Transfer       To purchase shares directly, call the
                  Agent                         Transfer Agent at 1-800-MER-FUND and
                                                request a purchase application.
                                                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
Investment                                      purchases is generally $50 except that
                                                certain programs, such as automatic
                                                investment plans, may have higher
                                                minimums.

                                                (The minimum for additional purchases may be
                                                waived under certain circumstances.)

                  Acquire additional shares     All dividends are automatically
                  through the automatic         reinvested without a sales charge.
                  dividend reinvestment plan

                  Participate in the            You may invest a specific amount on a
                  automatic investment plan     periodic basis through certain Merrill
                                                Lynch investment or central
                                                asset accounts.

Transfer Shares   Transfer to a participating   You may transfer your Fund shares
to Another        securities dealer or other    only to another securities dealer that
Securities        financial intermediary        has entered into an agreement with the
Dealer or Other                                 Distributor. Certain shareholder
Financial                                       services may not be available for the
Intermediary                                    transferred shares. You may only
                                                purchase additional shares of funds
                                                previously owned before the transfer.
                                                All future trading of these assets must
                                                be coordinated by the receiving
                                                firm.

                  Transfer to a                 You must either:
                  non-participating             . Transfer your shares to an account
                  securities dealer or other    with the Transfer Agent; or
                  financial intermediary        . Sell your shares, paying any
                                                applicable deferred sales charge.



         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                      21


[ICON] Your Account

                                   
If You Want to     Your Choices          Information Important for You to Know

Sell Your Shares   Have your             The price of your shares is based on the next
                   Merrill Lynch         calculation of net asset value after your
                   Financial Advisor,    order is placed. For your redemption request
                   selected securities   to be priced at the net asset value on the day
                   dealer or other       of your request, you must submit your request
                   financial             to your dealer or other financial intermediary
                   intermediary submit   prior to that day's close of business on the
                   your sales            New York Stock Exchange (generally 4:00 p.m.
                   order                 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, including Merrill
                                         Lynch, may charge a fee to process a
                                         redemption of shares. Merrill Lynch
                                         currently 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      You may sell shares held at the Transfer
                   Transfer Agent        Agent by writing to the Transfer Agent at the
                                         address on the inside back cover of
                                         this prospectus. All shareholders on
                                         the account must sign the letter. A
                                         signature guarantee will generally be
                                         required but may be waived in certain
                                         limited circumstances. You can obtain a
                                         signature guarantee from a bank,
                                         securities dealer, securities broker,
                                         credit union, savings association,
                                         national securities exchange or
                                         registered securities association. A
                                         notary public seal will not be
                                         acceptable. If you hold stock
                                         certificates, return the certificates
                                         with the letter. The Transfer Agent
                                         will normally mail redemption proceeds
                                         within seven days following receipt of
                                         a properly completed request. If you
                                         make a redemption request before the
                                         Fund has collected payment for the
                                         purchase of shares, the Fund or the
                                         Transfer Agent may delay mailing your
                                         proceeds. This delay will usually not
                                         exceed ten days.

                                         You may also sell shares held at the
                                         Transfer Agent by telephone request if
                                         the amount being sold is less than
                                         $50,000 and if certain other conditions
                                         are met. Contact the Transfer Agent at
                                         1-800-MER-FUND for details.

Sell Shares        Participate in the    You can choose to receive systematic
Systematically     Fund's Systematic     payments from your Fund account either by
                   Withdrawal Plan       check or through direct deposit to your bank
                                         account on a monthly or quarterly basis. If
                                         you hold your Fund shares in a Merrill Lynch
                                         CMA(R) or CBA(R) Account 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 Merrill Lynch Financial Advisor or
                                         other financial intermediary for details.



22       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


                                   
If You Want to      Your Choices         Information Important for You to Know

Exchange Your       Select the fund      You can exchange your shares of the Fund for
Shares              into which you       shares of many other Merrill Lynch mutual
                    want to exchange.    funds. You must have held the shares used in
                    Be sure to read      the exchange for at least 15 calendar days
                    that fund's          before you can exchange to another fund.
                    prospectus
                                         Each class of Fund shares is generally
                                         exchangeable for shares of the same
                                         class of another fund. If you own Class
                                         A shares and wish to exchange into a
                                         fund in which you have no Class A
                                         shares (and are not eligible to
                                         purchase Class A shares), you will
                                         exchange into Class D shares.

                                         Some of the Merrill Lynch mutual
                                         funds impose a different initial or
                                         deferred sales charge schedule. If you
                                         exchange Class A or Class D 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
                                         generally apply. The time you hold
                                         Class B or Class C shares in both funds
                                         will count when determining your
                                         holding period for calculating a
                                         deferred sales charge at redemption. If
                                         you exchange Class A or Class D 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.

                                         To exercise the exchange privilege
                                         contact your Merrill Lynch Financial
                                         Advisor or other financial intermediary
                                         or call the Transfer Agent at
                                         1-800-MER-FUND.

                                         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.



Short-term or excessive trading into and out of the Fund may harm performance
by disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short-term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds, and
accounts under common ownership or control.

         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                       23


[ICON] Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund 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.

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

PARTICIPATION IN FEE-BASED PROGRAMS


If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


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

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.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

DIVIDENDS AND TAXES


The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary or the Transfer
Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax but may be subject to
state or local income taxes. Interest income from other investments may produce
taxable dividends. Dividends derived from capital gains realized by the Fund
will be subject to Federal tax. Certain investors may be subject to a Federal
alternative minimum tax on dividends received from the Fund. To the extent that
the dividends distributed by the Fund are derived from Maryland municipal bond
interest income or from gains from Maryland municipal bonds (other than
obligations issued by U.S. possessions), they are also exempt from Maryland
income taxes; distributions derived from

         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                       25


[ICON] Your Account

"BUYING A DIVIDEND"


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

other types of income are generally subject to Maryland income taxes. If you are
subject to income tax in a state other than Maryland, the dividends derived from
Maryland municipal bonds generally will not be exempt from income tax in that
state.

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

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

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. Capital gains are generally taxed at
different rates than ordinary income dividends.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and Maryland tax laws. It is not a substitute for personal
tax advice. You should consult your personal tax adviser about the potential tax
consequences to you of an investment in the Fund under all applicable tax
laws.

26       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


Management of the Fund [ICON]

FUND ASSET MANAGEMENT

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
2001, the Manager received a fee equal to 0.55% of the Fund's average daily net
assets, but the Manager voluntarily waived a portion of the management fee due
for the fiscal year.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates had approximately $506 billion in
investment company and other portfolio assets under management as of September
2001.

         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                 27


[ICON] Management of the Fund

FINANCIAL HIGHLIGHTS

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



                                              Class A                                   Class B
                                   ------------------------------------     --------------------------------------
                                        For the Year Ended July 31,               For the Year Ended July 31,
                                   ------------------------------------     --------------------------------------
Increase (Decrease) in
Net Asset Value:                   2001     2000   1999    1998    1997      2001      2000    1999    1998       1997
- ----------------------------------------------------------------------------------------------------------------------
                                                                                 
Per Share Operating

Performance

Net asset value,
beginning of year                $ 9.40  $ 9.56  $ 9.80    $ 9.66  $ 9.21  $   9.40  $  9.56   $ 9.80  $  9.66  $  9.21

Investment income-- net             .44     .45     .43       .47     .48       .39      .40      .38      .42      .43


Realized and unrealized
gain (loss) on
investments-- net                   .43    (.16)   (.24)      .14     .45       .43     (.16)    (.24)     .14      .45

Total from investment
operations                          .87     .29     .19       .61     .93       .82      .24      .14      .56      .88


Less dividends from
investment
income-- net                       (.44)   (.45)   (.43)     (.47)   (.48)     (.39)    (.40)    (.38)    (.42)    (.43)

Net asset value, end of year     $ 9.83  $ 9.40  $ 9.56    $ 9.80  $ 9.66  $   9.83  $  9.40   $ 9.56  $  9.80  $  9.66

Total Investment Return:*

Based on net asset value per
share                              9.43%   3.19%   1.87%     6.46%  10.35%     8.88%    2.67%    1.36%    5.92%    9.79%

Ratios to Average Net Assets:

Expenses, net of
reimbursement                      1.06%    .91%    .94%      .73%    .47%     1.57%    1.42%    1.45%    1.23%     .97%

Expenses                           1.36%   1.21%   1.26%     1.21%   1.32%     1.87%    1.72%    1.77%    1.72%    1.82%


Investment income-- net            4.56%   4.82%   4.35%     4.80%   5.11%     4.04%    4.31%    3.84%    4.29%    4.59%

Supplemental Data:

Net assets, end of year (in
thousands)                      $ 1,788  $1,771  $2,309    $2,303  $1,928  $ 21,655  $19,257  $24,775  $23,306  $21,851

Portfolio turnover                37,69% $35.57%  30.98%    88.89%  94.90%    37.69%   35.57%   30.98%   88.89%   94.90%


  *Total investment returns exclude the effects of sales charges.

28       MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


FINANCIAL HIGHLIGHTS (concluded)



                                                    Class C                                           Class D
- --------------------------------------------------------------------------------------------------------------------------
                                         For the Year Ended July 31,                        For the Year Ended July 31,
                                      --------------------------------------------    ------------------------------------
Increase (Decrease) in
Net Asset Value:                      2001      2002       1999       1998      1997      2001      2000     1999     1998     1997
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                
Per Share Operating
Performance:

Net asset value, beginning of year  $  9.40  $  9.56    $  9.80    $  9.67   $  9.22   $   9.39   $  9.55   $  9.80  $ 9.66  $ 9.21

Investment income-- net                 .38      .39        .37        .41       .42        .43       .44       .42     .46     .47


Realized and unrealized gain
(loss) on investments-- net             .44     (.16)      (.24)       .13       .45        .44      (.16)     (.25)    .14     .45

Total from investment
operations                              .82      .23        .13        .54       .87        .87       .28       .17     .60     .92

Less dividends from investment
income-- net                           (.38)    (.39)      (.37)      (.41)     (.42)      (.43)     (.44)     (.42)   (.46)   (.47)

Net asset value, end of year        $  9.84  $  9.40    $  9.56    $  9.80   $  9.67   $   9.83   $  9.39   $  9.55  $ 9.80  $ 9.66

Total Investment Return:*

Based on net asset value per
share                                  8.87%    2.57%      1.26%      5.70%     9.67%      9.44%     3.09%     1.67%   6.35%  10.24%

Ratios to Average Net Assets:

Expenses, net of reimbursement         1.67%    1.52%      1.56%      1.34%     1.07%      1.17%     1.01%     1.04%    .83%    .56%

Expenses                               1.97%    1.82%      1.88%      1.82%     1.92%      1.47%     1.31%     1.36%   1.31%   1.41%

Investment income-- net                3.94%    4.19%      3.73%      4.19%     4.47%      4.42%     4.73%     4.25%   4.70%   5.00%

Supplemental Data:

Net assets, end of year (in
thousands)                          $ 2,204  $ 2,002   $  2,762    $ 2,307   $ 2,038   $  1,726   $   978   $ 1,091  $1,107  $  883

Portfolio turnover                    37.69%   35.57%     30.98%     88.89%    94.90%     37.69%    35.57%    30.98%  88.89%  94.90%


  *  Total investment returns exclude the effects of sales charges.

         MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND                     29


                               POTENTIAL
                               INVESTORS

[1]                                                             [2]

                          Open an account (two
                               options).

   MERRILL LYNCH                                 TRANSFER AGENT
  FINANCIAL ADVISOR                        Financial Data Services, Inc.
OR SECURITIES DEALER
                                            ADMINISTRATIVE OFFICES
Advises shareholders on their              4800 Deer Lake Drive East
     Fund investments.                  Jacksonville, Florida 32246-6484

                                               MAILING ADDRESS
                                               P.O. Box 45289
                                            Jacksonville, Florida
                                                 32232-5289

                                           Performs recordkeeping
                                           and reporting services.

                                  DISTRIBUTOR


                             AM Distributors, Inc.
                                 P.O. Box 9081
                             Princeton, New Jersey
                                  08543-9081


                           Arranges for the sale of
                                 Fund shares.



     COUNSEL                      THE FUND               CUSTODIAN

Sidley Austin Brown         The Board of Trustees     State Street Bank
    & Wood LLP                oversees the Fund.      and Trust Company
 875 Third Avenue                                        P.O. Box 351
New York, New York 10022                          Boston, Massachusetts 02101


Provides legal advice to the                       Holds the Fund's assets for
          Fund.                                            safekeeping.

INDEPENDENT AUDITORS              ACCOUNTING             MANAGER
                               SERVICES PROVIDER
Deloitte & Touche LLP                               Fund Asset Management, L.P.
Two World Financial          State Street Bank
     Center                  and Trust Company        ADMINISTRATIVE OFFICES
New York, New York 10281-    500 College Road East     800 Scudders Mill Road
         1008                Princeton, New Jersey  Plainsboro, New Jersey 08536
                                     08540
Audits the financial                                     MAILING ADDRESS
 statements of the            Provides certain           P.O. Box 9011
 Fund on behalf of               accounting              Princeton, New Jersey
 the shareholders.          services to the Fund.        08543-9011

                                                         TELEPHONE NUMBER
                                                         1-800-MER-FUND

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

                  MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND


For More Information [ICON]


Shareholder Reports

Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary, or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or other financial
intermediary, or call the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Advisor or other financial intermediary,
or contact the Fund at the telephone number or address indicated above if you
have any questions.

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

publicinfo@sec.gov, or by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.


You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375 Code #16858-11-01 (C)Fund Asset
Management, L.P.

                                  Prospectus

[LOGO] Merrill Lynch
Investment Managers

Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State
Municipal Series Trust

                                                          November 14, 2001

EX-99.17F

                                                                   EXHIBIT 17(f)


Prospectus

[LOGO] Merrill Lynch Investment Managers

Merrill Lynch Massachusetts Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust

                                                     November 14, 2001

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
                                                                         
[ICON] KEY FACTS
       -------------------------------------------------------------------------
       Merrill Lynch Massachusetts Municipal Bond Fund at a Glance             3
       Risk/Return Bar Chart                                                   5
       Fees and Expenses                                                       6

[ICON] DETAILS ABOUT THE FUND
       -------------------------------------------------------------------------
       How the Fund Invests                                                    8
       Investment Risks                                                        9

[ICON] YOUR ACCOUNT
       -------------------------------------------------------------------------
       Merrill Lynch Select Pricing(SM) System                                14
       How to Buy, Sell, Transfer and Exchange Shares                         20
       Participation in Fee-Based Programs                                    24

[ICON] MANAGEMENT OF THE FUND
       -------------------------------------------------------------------------
       Fund Asset Management                                                  27
       Financial Highlights                                                   28

[ICON] FOR MORE INFORMATION
       -------------------------------------------------------------------------
                                                                            Back
       Shareholder Reports                                                 Cover
                                                                            Back
       Statement of Additional Information                                 Cover


                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


Key Facts [ICON]

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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Massachusetts Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in Massachusetts or other qualifying issuer that pays
interest exempt from Massachusetts personal income taxes as well as from
Federal income tax.

MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal income tax and Massachusetts personal income tax.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade
Massachusetts municipal bonds. These may be obligations of a variety of issuers
including governmental entities in Massachusetts and the governments of Puerto
Rico, the U.S. Virgin Islands and Guam. The Fund will invest at least 80% of
its net assets in Massachusetts municipal bonds. The Fund may invest up to 20%
of its assets in high yield bonds (also known as "junk" bonds); however, the
Fund will not invest in bonds that are in default or that Fund management
believes will be in default. The Fund also may invest in certain types of
derivative securities. When choosing investments, Fund management considers
various factors, including the credit quality of issuers, yield analysis,
maturity analysis and the call features of the obligations. Under normal
conditions, the Fund's weighted average maturity will be more than ten years.
The Fund cannot guarantee that it will achieve its objective.

What are the main risks of investing in the Fund?

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

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund.
For this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance. In addition, since the Fund invests at least
80% of its net assets in Massachusetts municipal bonds, it is more exposed to
negative political or economic factors in Massachusetts than a fund that
invests more widely. Derivatives and high yield bonds may be volatile and
subject to liquidity, leverage and credit risks.

                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND               3


[ICON] Key Facts

Who should invest?

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

  .   Are looking for income that is exempt from Federal income tax and
      Massachusetts personal income tax

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

  .   Are looking for liquidity

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


4           MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


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 complete calendar year since the Fund's inception.
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 for the
periods shown with those of the Lehman Brothers Municipal Bond Index. How the
Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.

[Image]

During the period shown in the bar chart, the highest return for a quarter
was 7.30% (quarter ended March 31, 1995) and the lowest return for a quarter
was -7.24% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 4.81%.

Average Annual Total Returns                Past      Past       Since
(as of December 31, 2000)                 One Year Five Years  Inception
- --------------------------------------------------------------------------
  Merrill Lynch Massachusetts          A
  Municipal Bond Fund*                     7.94%    3.54%    5.81%+
  Lehman Brothers Municipal Bond
  Index**                                 11.68%    5.84%    6.90%++
- --------------------------------------------------------------------------
  Merrill Lynch Massachusetts          B
  Municipal Bond Fund*                     7.87%    3.87%    5.76%+
  Lehman Brothers Municipal Bond
  Index**                                 11.68%    5.84%    6.90%++
- --------------------------------------------------------------------------
  Merrill Lynch Massachusetts          C
  Municipal Bond Fund*                    10.77%    3.76%    5.53%#
  Lehman Brothers Municipal Bond
  Index**                                 11.68%    5.84%    7.54%##
- --------------------------------------------------------------------------
  Merrill Lynch Massachusetts          D
  Municipal Bond Fund*                     7.94%    3.46%    5.41%#
  Lehman Brothers Municipal Bond
  Index**                                 11.68%    5.84%    7.54%##
- --------------------------------------------------------------------------
 *   Includes all applicable fees and sales charges.

 **  This unmanaged Index consists of long term revenue bonds, prerefunded
     bonds, general obligation bonds and insured bonds. Past performance is not
     predictive of future performance.

 +   Inception date is February 28, 1992.

 ++  Since February 28, 1992.

 #   Inception date is October 21, 1994.

 ##  Since October 31, 1994.


                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                5


[ICON] Key Facts

UNDERSTANDING EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and
promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities
dealers and other financial intermediaries for account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will
be invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Advisor can help you with this decision.

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

Shareholder Fees (fees paid
directly from your
investment)(a):                   Class A  Class B   Class C   Class D
                                              (b)
- ------------------------------------------------------------------------
  Maximum Sales Charge (Load)
  imposed on purchases (as
  a percentage of offering
  price)                           4.00%(c)  None     None      4.00%(c)
- ------------------------------------------------------------------------
  Maximum Deferred Sales
  Charge (Load) (as a
  percentage of original
  purchase price or
  redemption proceeds,
  whichever is lower)              None(d)    4.0%(c)  1.0%(c)  None(d)
- ------------------------------------------------------------------------
  Maximum Sales Charge (Load)
  imposed on Dividend
  Reinvestments                    None      None     None      None
- ------------------------------------------------------------------------
  Redemption Fee                   None      None     None      None
- ------------------------------------------------------------------------
  Exchange Fee                     None      None     None      None
- ------------------------------------------------------------------------
Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets):
- ------------------------------------------------------------------------
  Management Fee(e)                0.55%     0.55%    0.55%     0.55%
- ------------------------------------------------------------------------
  Distribution and/or Service
  (12b-1) Fees(f)                  None      0.50%    0.60%     0.10%
- ------------------------------------------------------------------------
  Other Expenses (including
  transfer agency fees)(g)         0.47%     0.48%    0.48%     0.48%
- ------------------------------------------------------------------------
Total Annual Fund Operating
Expenses                           1.02%     1.53%    1.63%     1.13%
- ------------------------------------------------------------------------

(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution
     fees and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other
     classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain
     accounting services to the Fund and the Fund reimburses the Manager
     or its affiliates for such services.

6              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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            $500          $712           $941           $1,598
- ---------------------------------------------------------------------------
Class B            $556          $683           $834           $1,824
- ---------------------------------------------------------------------------
Class C            $266          $514           $887           $1,933
- ---------------------------------------------------------------------------
Class D            $511          $745           $997           $1,720
- ---------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                 1 Year        3 Years        5 Years        10 Years
- --------------------------------------------------------------------------
Class A           $500          $712           $941           $1,598
- --------------------------------------------------------------------------
Class B           $156          $483           $834           $1,824
- --------------------------------------------------------------------------
Class C           $166          $514           $887           $1,933
- --------------------------------------------------------------------------
Class D           $511          $745           $997           $1,720
- --------------------------------------------------------------------------

                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                7


Details About the Fund [ICON]

ABOUT THE PORTFOLIO MANAGER

Theodore R. Jaeckel, Jr. has been the portfolio manager and Vice President of
the Fund since 1997 and has been Director (Tax-Exempt Fund Management) of
Merrill Lynch Investment Managers since 1997 and was Vice President thereof
from 1991 to 1997.

ABOUT THE MANAGER

The Fund is managed by Fund Asset Management.

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

The Fund's main goal is to seek income that is exempt from Federal income tax
and Massachusetts personal income tax. The Fund invests primarily in long term,
investment grade Massachusetts municipal bonds. Issuers may be government
entities located in Massachusetts or the governments of Puerto Rico, the U.S.
Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations
than investment grade securities.

The Fund will invest at least 80% of its net assets in Massachusetts municipal
bonds. Under normal conditions, the Fund's weighted average maturity will be
more than ten years. For temporary periods, however, the Fund may invest up to
35% of its assets in short term tax-exempt or taxable money market obligations,
although the Fund generally will not invest more than 20% of its net assets in
taxable money market obligations. As a temporary measure for defensive
purposes, the Fund may invest without limitation in short term tax-exempt or
taxable money market obligations. These short term investments may limit the
potential for the Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

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

While economic growth in the Commonwealth of Massachusetts slowed considerably
during the recession of 1990-91, indicators such as retail sales, housing
permits, construction and employment levels have since shown a strong recovery.
However, current events and the resulting economic uncertainty have had a
negative impact on the Masachusetts economy. Fund management believes that
current economic conditions in Massachusetts will enable the Fund to continue
to invest in high quality Massachusetts municipal bonds.

8               MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


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

  .   Credit Quality of Issuers -- based on bond ratings and other factors
      including economic and financial conditions.

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

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

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

INVESTMENT RISKS
- -------------------------------------------------------------------------------

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

Bond Market and Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. 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 municipal
bonds 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.


                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                9


[ICON] Details About the Fund

State Specific Risk -- The Fund will invest primarily in Massachusetts
municipal bonds. As a result, the Fund is more exposed to risks affecting
issuers of Massachusetts municipal bonds than is a municipal bond fund that
invests more widely. Massachusetts has enjoyed a strong economic recovery and
has run positive budget operating fund balances for the last half of the 1990s.
However, the general economic decline of the past several months, which has
apparently been exacerbated by the terrorist attacks to the World Trade Center
and the Pentagon on September 11, 2001, has had a negative impact on the
Massachusetts economy. The long-term effects and extent of this negative
economic impact are uncertain, although a significant revenue shortfall is
expected for the current fiscal year, based on current projections. Moody's,
Standard & Poor's and Fitch currently rate the Commonwealth of Massachusetts
general obligation bonds Aa2, AA- and AA-, respectively.

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.

Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The costs of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, when issued securities, forward commitments
and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

Industrial Development Bonds -- Municipalities and other public authorities
issue industrial development bonds to finance development of industrial
facilities for use by a private enterprise. The private enterprise pays

10              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND



the principal and interest on the bond, and the issuer does not pledge its
faith, credit and taxing power for repayment. If the private enterprise defaults
on its payments, the Fund may not receive any income or get its money back from
the investment.

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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or which Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                     11


[ICON]  Details About the Fund

When Issued Securities, Delayed Delivery Securities and Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at current value or that
have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

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

12              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


The Fund may use derivatives for hedging purposes including anticipatory hedges.
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. 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.

Indexed and Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax-exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                     13


Your Account   [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.

14              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


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



                Class A              Class B             Class C            Class D
- -------------------------------------------------------------------------------------------
                                                                
Availability    Limited to certain   Generally           Generally          Generally
                investors            available           available          available
                including:           through Merrill     through Merrill    through Merrill
                . Current Class A    Lynch. Limited      Lynch. Limited     Lynch. Limited
                  shareholders       availability        availability       availability
                . Participants in    through             through            through
                  certain Merrill    selected            selected           selected
                  Lynch-sponsored    securities          securities         securities
                  programs           dealers and         dealers and        dealers and
                . Certain            other financial     other financial    other financial
                  affiliates of      intermediaries.     intermediaries.    intermediaries.
                  Merrill Lynch,
                  selected
                  securities
                  dealers and
                  other
                  financial
                  intermediaries.
- -------------------------------------------------------------------------------------------
Initial         Yes. Payable at      No. Entire          No. Entire         Yes. Payable at
Sales           time                 purchase            purchase           time of
Charge?         of purchase.         price is            price is           purchase.
                Lower                invested            invested in        Lower sales
                sales charges        in shares of        shares of the      charges
                available            the                 Fund.              available for
                for larger           Fund.                                  larger
                investments.                                                investments.
- -------------------------------------------------------------------------------------------
Deferred        No. (May be          Yes. Payable if     Yes. Payable if    No. (May be
Sales           charged              you                 you                charged
Charge?         for purchases        redeem within       redeem within      for purchases
                over                 four                one                over
                $1 million that      years of            year of            $1 million that
                are                  purchase.           purchase.          are
                redeemed within                                             redeemed within
                one year.)                                                  one year.)
- -------------------------------------------------------------------------------------------
Account         No.                  0.25% Account       0.25% Account      0.10% Account
Maintenance                          Maintenance         Maintenance        Maintenance
and                                  Fee.                Fee.               Fee.
Distribution                         0.25%               0.35%              No Distribution
Fees?                                Distribution        Distribution       Fee.
                                     Fee.                Fee.
- -------------------------------------------------------------------------------------------
Conversion to   No.                  Yes,                No.                N/A
                                     automatically
Class D                              after
shares?                              approximately
                                     ten years.
- -------------------------------------------------------------------------------------------


               MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                15


[ICON]  Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares-- Initial Sales Charge Options

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



                                                               Dealer
                                                            Compensation
                           As a % of        As a % of         as a % of
Your Investment          Offering Price  Your Investment*  Offering Price
- ---------------------------------------------------------------------------
                                                  
Less than $25,000            4.00%            4.17%             3.75%
- ---------------------------------------------------------------------------
$25,000 but less
than $50,000                 3.75%            3.90%             3.50%
- ---------------------------------------------------------------------------
$50,000 but less
than $100,000                3.25%            3.26%             3.00%
- ---------------------------------------------------------------------------
$100,000 but less
than $250,000                2.50%            2.56%             2.25%
- ---------------------------------------------------------------------------
$250,000 but less
than $1,000,000              1.50%            1.52%             1.25%
- ---------------------------------------------------------------------------
$1,000,000 and over**        0.00%            0.00%             0.00%
- ---------------------------------------------------------------------------


 * Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

   .   Purchases under a Right of Accumulation or Letter of Intent

   .   TMA(SM) Managed Trusts

   .   Certain Merrill Lynch investment or central asset accounts

   .   Purchases using proceeds from the sale of certain Merrill Lynch
       closed-end funds under certain circumstances

   .   Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees

   .   Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates

16              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                     17


[ICON] Your Account

Class B Shares

If you redeem Class B shares within four 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                                3.00%
           ---------------------------------------------------
             2 - 3                                2.00%
           ---------------------------------------------------
             3 - 4                                1.00%
           ---------------------------------------------------
             4 and thereafter                     0.00%
           ---------------------------------------------------
  *  The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

  .   Redemption in connection with participation in certain fee-based programs
      of Merrill Lynch 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

  .   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

  .   Withdrawal 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

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

18              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                     19


[ICON] Your Account

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

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

20              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


If You Want to      Your Choices          Information Important for You to Know
- --------------------------------------------------------------------------------
Buy Shares          First, select the     Refer to the Merrill Lynch Select
                    share class           Pricing table on page 15. Be sure to
                    appropriate for you   read this prospectus carefully.
                ----------------------------------------------------------------
                    Next, determine the   The minimum initial investment for
                    amount of your        the Fund is $1,000 for all accounts
                    investment            except that certain Merrill Lynch fee-
                                          based programs have a $250 initial
                                          minimum investment.

                                          (The minimums for initial investments
                                          may be waived under certain
                                          circumstances.)
                ----------------------------------------------------------------
                    Have your             The price of your shares is based
                    Merrill Lynch         on the next calculation of net asset
                    Financial Advisor,    value after your order is placed. Any
                    selected securities   purchase orders placed prior to the
                    dealer or other       close of business on the New York
                    financial             Stock Exchange (generally 4:00 p.m.
                    intermediary submit   Eastern time) will be priced at the
                    your purchase         net asset value determined that day.
                    order                 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, including Merrill
                                          Lynch, may charge a processing fee to
                                          confirm a purchase. Merrill Lynch
                                          currently charges a fee of $5.35.
                ----------------------------------------------------------------

                    Or contact the        To purchase shares directly, call
                    Transfer              Agent the Transfer Agent at
                                          1-800-MER-FUND and request a purchase
                                          application. 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   The minimum investment for additional
Investment          shares                purchases is generally $50 except that
                                          certain programs, such as automatic
                                          investment plans, may have higher
                                          minimums.

                                          (The minimum for additional purchases
                                          may be waived under certain
                                          circumstances.)
                ----------------------------------------------------------------
                    Acquire additional    All dividends are automatically
                    shares through the    reinvested without a sales charge.
                    automatic dividend
                    reinvestment plan
                ----------------------------------------------------------------
                    Participate in the    You may invest a specific amount on a
                    automatic             periodic basis through certain Merrill
                    investment plan       Lynch investment or central asset
                                          accounts.
- --------------------------------------------------------------------------------
Transfer            Transfer to a         You may transfer your Fund shares
Shares to           participating         only to another securities dealer that
Another             securities dealer     has entered into an agreement with the
Securities          or other financial    Distributor. Certain shareholder
Dealer or           intermediary          services may not be available for the
Other                                     transferred shares. You may only
Financial                                 purchase additional shares of funds
Intermediary                              previously owned before the transfer.
                                          All future trading of these assets
                                          must be coordinated by the receiving
                                          firm.
- --------------------------------------------------------------------------------
                    Transfer to a         You must either:
                    non-participating      . Transfer your shares to an account
                    securities dealer     with the Transfer Agent; or
                    or other financial     . Sell your shares, paying any
                    intermediary          applicable deferred sales charge.
- --------------------------------------------------------------------------------

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                     21


[ICON] Your Account

If You Want to    Your Choices        Information Important for You to Know
- --------------------------------------------------------------------------------
Sell Your Shares  Have your           The price of your shares is based on the
                  Merrill Lynch       next calculation of net asset value after
                  Financial           your order is placed. For your redemption
                  Advisor,            request to be priced at the net asset
                  selected            value on the day of your request, you must
                  securities          submit your request to your dealer or
                  dealer or other     other financial intermediary prior to that
                  financial           day's close of business on the New York
                  intermediary        Stock Exchange (generally 4:00 p.m.
                  submit your         Eastern time). Certain financial
                  sales order         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, including Merrill Lynch,
                                      may charge a fee to process a redemption
                                      of shares. Merrill Lynch currently 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    You may sell shares held at the Transfer
                  Transfer Agent      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 at the Transfer
                                      Agent by telephone request if the amount
                                      being sold is less than $50,000 and if
                                      certain other conditions are met. Contact
                                      the Transfer Agent at 1-800-MER-FUND for
                                      details.
- --------------------------------------------------------------------------------
Sell Shares       Participate         You can choose to receive systematic
Systematically    in the Fund's       payments from your Fund account either by
                  Systematic          check or through direct deposit to your
                  Withdrawal Plan     bank account on a monthly or quarterly
                                      basis. If you hold your Fund shares in a
                                      Merrill Lynch CMA (R) or CBA (R) Account,
                                      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 Merrill
                                      Lynch Financial Advisor or other financial
                                      intermediary for details.
- --------------------------------------------------------------------------------

22              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


If You Want to    Your Choices       Information Important for You to Know
- ---------------------------------------------------------------------------
Exchange Your     Select the fund    You can exchange your shares of the Fund
Shares            into which you     for shares of many other Merrill Lynch
                  want to exchange.  mutual funds. You must have held the shares
                  Be sure to read    used in the exchange for at least 15
                  that fund's        calendar days before you can exchange to
                  prospectus         another fund.

                                     Each class of Fund shares is generally
                                     exchangeable for shares of the same class
                                     of another fund. If you own Class A shares
                                     and wish to exchange into a fund in which
                                     you have no Class A shares (and are not
                                     eligible to purchase Class A shares), you
                                     will exchange into Class D shares.

                                     Some of the Merrill Lynch mutual funds
                                     impose a different initial or deferred
                                     sales charge schedule. If you exchange
                                     Class A or Class D shares for shares of a
                                     fund with a higher initial sales charge
                                     than you originally paid, you will be
                                     charged the difference at the time of
                                     exchange. If you exchange Class B shares
                                     for shares of a fund with a different
                                     deferred sales charge schedule, the higher
                                     schedule will apply. The time you hold
                                     Class B or Class C shares in both funds
                                     will count when determining your holding
                                     period for calculating a deferred sales
                                     charge at redemption. If you exchange Class
                                     A or Class D 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.

                                     To exercise the exchange privilege contact
                                     your Merrill Lynch Financial Advisor or
                                     other financial intermediary or call the
                                     Transfer Agent at 1-800-MER-FUND.

                                     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.
- --------------------------------------------------------------------------------

Short term or excessive trading into and out of the Fund may harm performance by
disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds, and
accounts under common ownership or control.

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                    23


[ICON] Your Account

Net Asset Value -- the market value of the
Fund's total assets after deducting
liabilities, divided by the number of shares
outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


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

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer, other financial intermediary or the Transfer Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax but may be subject to
state or local taxes. Certain investors may be subject to a Federal alternative
minimum tax on dividends received from the Fund. To the extent that the
dividends distributed by the Fund are derived from Massachusetts municipal bond
interest income, they are also exempt from Massachusetts personal income tax.
Interest income from other investments may produce taxable dividends. Dividends
derived from capital gains realized by the Fund will be subject to Federal
income tax, and generally will be subject to Massachusetts income tax as well.
If you are subject to income tax in a state other than Massachusetts, the
dividends derived from Massachusetts municipal bonds generally will not be
exempt from income tax in that state.

          MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND                     25


 [ICON] Your Account

 "BUYING A DIVIDEND"

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

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

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

 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. Capital gains are generally taxed at
 different rates than ordinary income dividends.

 This section summarizes some of the consequences of an investment in the Fund
 under current Federal and Massachusetts tax laws. It is not a substitute for
 personal tax advice. You should consult your personal tax adviser about the
 potential tax consequences to you of an investment in the Fund under all
 applicable tax laws.

26            MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


 Management of the Fund  [ICON]

 FUND ASSET MANAGEMENT
 -------------------------------------------------------------------------------

 Fund Asset Management, the Fund's Manager, manages the Fund's investments and
 its business operations under the overall supervision of the Trust's Board of
 Trustees. The Manager has the responsibility for making all investment
 decisions for the Fund. The Fund pays the Manager a fee at the annual rate of
 0.55% of the average daily net assets of the Fund for the first $500 million;
 0.525% of the average daily net assets from $500 million to $1 billion; and
 0.50% of the average daily net assets above $1 billion. For the fiscal year
 ended July 31, 2001, the Manager received a fee equal to 0.55% of the Fund's
 average daily net assets.

 Fund Asset Management was organized as an investment adviser in 1977 and
 offers investment advisory services to more than 50 registered investment
 companies. Fund Asset Management and its affiliates had approximately
 $506 billion in investment company and other portfolio assets under
 management as of September 2001.


                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND              27


[ICON]  Management of the Fund

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

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



                                                             Class A                                  Class B
                                               ------------------------------------- --------------------------------------------
                                                   For the Year Ended July 31,              For the Year Ended July 31,
                                               ------------------------------------- --------------------------------------------
                                                                                        
 Increase (Decrease) in
 Net Asset Value:                               2001   2000    1999    1998    1997    2001     2000    1999      1998    1997
- ---------------------------------------------------------------------------------------------------------------------------------
 Per Share Operating
 Performance:
- ---------------------------------------------------------------------------------------------------------------------------------
 Net asset value,
 beginning of year                           $10.17  $10.63   $11.15  $11.07  $10.60 $ 10.17  $ 10.63  $ 11.15   $ 11.07  $ 10.60
- ---------------------------------------------------------------------------------------------------------------------------------
 Investment income-- net                        .50     .51      .51     .56     .56     .44      .46      .45       .50      .51
- ---------------------------------------------------------------------------------------------------------------------------------
 Realized and unrealized gain
 (loss) on investments-- net                    .50    (.39)    (.52)    .08     .47     .50     (.39)    (.52)      .08      .47
- ---------------------------------------------------------------------------------------------------------------------------------
 Total from investment
 operations                                    1.00     .12     (.01)    .64    1.03     .94      .07     (.07)      .58      .98
- ---------------------------------------------------------------------------------------------------------------------------------
 Less dividends and
 distributions:
 Investment income-- net                       (.50)   (.51)    (.51)   (.56)   (.56)   (.44)    (.46)    (.45)     (.50)    (.51)
 In excess of realized gain
 on investments -- net                           --    (.07)      --      --      --      --     (.07)      --        --       --
- ---------------------------------------------------------------------------------------------------------------------------------
 Total dividends and
 distributions                                 (.50)   (.58)    (.51)   (.56)   (.56)   (.44)    (.53)    (.45)     (.50)    (.51)
- ---------------------------------------------------- ------- ----------------------------------------- --------- -------- -------
 Net asset value, end of year                $10.67  $10.17   $10.63  $11.15  $11.07 $ 10.67  $ 10.17  $ 10.63   $ 11.15  $ 11.07
- ---------------------------------------------------------------------------------------------------------------------------------
 Total Investment Return:*
- ---------------------------------------------------------------------------------------------------------------------------------
 Based on net asset value per share            9.99%   1.38%    (.21)%  5.92%  10.02%   9.44%     .86%    (.71)%    5.38%    9.46%
- ---------------------------------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
- ---------------------------------------------------------------------------------------------------------------------------------
 Expenses                                      1.02%   1.00%     .95%    .86%    .83%   1.53%    1.50%    1.46%     1.37%    1.34%
- ---------------------------------------------------------------------------------------------------------------------------------
 Investment income-- net                       4.75%   5.07%    4.58%   5.02%   5.22%   4.24%    4.56%    4.07%     4.51%    4.71%
- ---------------------------------------------------------------------------------------------------------------------------------
 Supplemental Data:
- ---------------------------------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)      $3,928  $3,930   $5,080  $5,705  $5,757 $35,952  $37,035  $45,988   $51,255  $53,336
- ---------------------------------------------------------------------------------------------------------------------------------
 Portfolio turnover                           32.60%  25.66%   89.30%  23.32%  24.64%  32.60%   25.66%   89.30%    23.32%   24.64%
- ---------------------------------------------------------------------------------------------------------------------------------


 *   Total investment returns exclude the effects of sales charges.

28              MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


 FINANCIAL HIGHLIGHTS (concluded)
 -------------------------------------------------------------------------------



                                                                       Class C                                Class D
                                                         ------------------------------------- -------------------------------------
                                                             For the Year Ended July 31,            For the Year Ended July 31,
                                                         ------------------------------------- -------------------------------------
                                                                                                
 Increase (Decrease) in
 Net Asset Value:                                         2001   2000    1999    1998    1997   2001    2000   1999     1998   1997
- ------------------------------------------------------------------------------------------------------------------------------------
 Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
 Net asset value, beginning of
 year                                                  $ 10.16 $10.62  $11.14  $11.06  $10.60 $10.17  $10.63 $11.15   $11.07 $10.61
- ------------------------------------------------------------------------------------------------------------------------------------
 Investment income-- net                                   .43    .45     .44     .49     .49    .49     .50    .50      .55    .55
- ------------------------------------------------------------------------------------------------------------------------------------
 Realized and unrealized gain
 (loss) on investments-- net                               .50   (.39)   (.52)    .08     .46    .50    (.39)  (.52)     .08    .46
- ------------------------------------------------------------------------------------------------------------------------------------
 Total from investment operations                          .93    .06    (.08)    .57     .95    .99     .11   (.02)     .63   1.01
- ------------------------------------------------------------------------------------------------------------------------------------
 Less dividends and distributions:
  Investment income-- net                                (.43)  (.45)   (.44)   (.49)   (.49)  (.49)   (.50)  (.50)    (.55)  (.55)
  In excess of realized gain
  on investments -- net                                    --   (.07)     --      --      --     --    (.07)    --       --     --
- -----------------------------------------------------------------------------------------------------------------------------------
 Total dividends and distributions                       (.43)  (.52)   (.44)   (.49)   (.49)  (.49)   (.57)  (.50)    (.55)  (.55)
- -----------------------------------------------------------------------------------------------------------------------------------
 Net asset value, end of year                          $10.66 $10.16  $10.62  $11.14  $11.06 $10.67  $10.17 $10.63   $11.15 $11.07
- -----------------------------------------------------------------------------------------------------------------------------------
 Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------------------------------
 Based on net asset value per share                      9.34%   .76%   (.81)%  5.28%   9.25%  9.88%   1.28%  (.30)%   5.82%  9.80%
- -----------------------------------------------------------------------------------------------------------------------------------
 Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
 Expenses                                                1.63%  1.60%   1.57%   1.47%   1.43%  1.13%   1.09%  1.06%     .96%   .93%
- -----------------------------------------------------------------------------------------------------------------------------------
 Investment income-- net                                 4.13%  4.46%   3.96%   4.40%   4.63%  4.65%   4.97%  4.47%    4.91%  5.13%
- -----------------------------------------------------------------------------------------------------------------------------------
 Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
 Net assets, end of year (in thousands)                $2,565 $2,664  $3,814  $1,835  $1,495 $3,326  $2,931 $3,647   $2,837 $1,602
- -----------------------------------------------------------------------------------------------------------------------------------
 Portfolio turnover                                    32.60% 25.66%  89.30%  23.32%  24.64% 32.60%  25.66% 89.30%   23.32% 24.64%
- -----------------------------------------------------------------------------------------------------------------------------------


 *   Total investment returns exclude the effects of sales charges.

                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND               29


                                    POTENTIAL
                                    INVESTORS
            [1]                                              [2]
                            Open an account (two
                                 options).
       MERRILL LYNCH                                   TRANSFER AGENT
    FINANCIAL ADVISOR
   OR SECURITIES DEALER                           Financial Data Services,
                                                            Inc.
  Advises shareholders on
  their Fund investments.                          ADMINISTRATIVE OFFICES
                                                  4800 Deer Lake Drive East
                                                    Jacksonville, Florida
                                                         32246-6484

                                                       MAILING ADDRESS
                                                       P.O. Box 45289
                                                   Jacksonville, Florida
                                                         32232-5289

                                                   Performs 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                 THE FUND                CUSTODIAN

     Sidley Austin Brown    The Board of Trustees    State Street Bank
        & Wood LLP           oversees the Fund.      and Trust Company
     875 Third Avenue                                   P.O. Box 351
 New York, New York 10022                           Boston, Massachusetts
                                                            02101

 Provides legal advice to                          Holds the Fund's assets
         the Fund.                                    for safekeeping.


   INDEPENDENT AUDITORS            ACCOUNTING              MANAGER
                                SERVICES PROVIDER
  Deloitte & Touche LLP                            Fund Asset Management,
     Two World Financial      State Street Bank             L.P.
          Center             and Trust Company
    New York, New York      500 College Road East  ADMINISTRATIVE OFFICES
      10281-1008            Princeton, New Jersey  800 Scudders Mill Road
                                    08540          Plainsboro, New Jersey
   Audits the financial                                     08536
     statements of the        Provides certain
     Fund on behalf of           accounting            MAILING ADDRESS
     the shareholders.         services to the          P.O. Box 9011
                                 Fund.              Princeton, New Jersey
                                                         08543-9011

                                                      TELEPHONE NUMBER
                                                       1-800-MER-FUND

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


                MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND


 For More Information [ICON]

 Shareholder Reports

 Additional information about the Fund's investments is available in the Fund's
 annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

 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 Merrill Lynch
 Financial Advisor or other financial intermediary, or write to the Transfer
 Agent at its mailing address. Include your name, address, tax identification
 number and Merrill Lynch brokerage or mutual fund account number. If you have
 any questions, please call your Merrill Lynch Financial Advisor or other
 financial intermediary, or call the Transfer Agent at 1-800-MER-FUND.


 Statement of Additional Information

 The Fund's Statement of Additional Information contains further information
 about the Fund and is incorporated by reference (legally considered to be part
 of this prospectus). You may request a free copy by writing the Fund at
 Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
 or by calling 1-800-MER-FUND.

 Contact your Merrill Lynch Financial Advisor or other financial intermediary,
 or contact the Fund at the telephone number or address indicated above if you
 have any questions.

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

 You should rely only on the information contained in this prospectus. No one is
 authorized to provide you with information that is different from information
 contained in this Prospectus.

 Investment Company Act file #811-4375
 ode #16148-11-01
 (C) Fund Asset Management, L.P.

                                   Prospectus

 [LOGO] Merrill Lynch
 Investment Managers

 Merrill Lynch Massachusetts
 Municipal Bond Fund
 of Merrill Lynch Multi-State
 Municipal Series Trust

                                                     November 14, 2001

EX-99.17G

                                                                   EXHIBIT 17(g)

                               [LOGO]   Merrill Lynch Investment Managers

                                   Prospectus

                    Merrill Lynch Michigan Municipal Bond Fund
                    of Merrill Lynch Multi-State Municipal Series Trust

                                                     November 14, 2001

 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
                                                                    
[ICON]  KEY FACTS
        -------------------------------------------------------------------
        Merrill Lynch Michigan Municipal Bond Fund at a
        Glance                                                            3
        Risk/Return Bar Chart                                             5
        Fees and Expenses                                                 6

[ICON]  DETAILS ABOUT THE FUND
        -------------------------------------------------------------------
        How the Fund Invests                                              8
        Investment Risks                                                  9

[ICON]  YOUR ACCOUNT
        -------------------------------------------------------------------
        Merrill Lynch Select Pricing(SM) System                          14
        How to Buy, Sell, Transfer and Exchange Shares                   20
        Participation in Fee-Based Programs                              24

[ICON]  MANAGEMENT OF THE FUND
        -------------------------------------------------------------------
        Fund Asset Management                                            27
        Financial Highlights                                             28

[ICON]  FOR MORE INFORMATION
        -------------------------------------------------------------------
        Shareholder Reports                                      Back Cover
        Statement of Additional Information                      Back Cover


                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 Key Facts  [ICON]

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

 Investment Grade -- any of the four highest debt obligation ratings by
 recognized rating agencies, including Moody's Investors Service, Inc., Standard
 & Poor's or Fitch, Inc.

 Michigan Municipal Bond -- a debt obligation issued by or on behalf of a
 governmental entity in Michigan or other qualifying issuer that pays interest
 exempt from Michigan income taxes as well as from Federal income tax.

 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND AT A GLANCE
 -------------------------------------------------------------------------------

 What is the Fund's investment objective?

 The investment objective of the Fund is to provide shareholders with income
 exempt from Federal and Michigan income taxes.

 What are the Fund's main investment strategies?

 The Fund invests primarily in a portfolio of long term investment grade
 Michigan municipal bonds. These may be obligations of a variety of issuers
 including governmental entities in Michigan and issuers located in Puerto Rico,
 the U.S. Virgin Islands and Guam. The Fund will invest at least 80% of its net
 assets in Michigan municipal bonds. The Fund may invest up to 20% of its assets
 in high yield bonds (also known as "junk" bonds); however, the Fund will not
 invest in bonds that are in default or that Fund management believes will be in
 default. The Fund also may invest in certain types of derivative securities.
 When choosing investments, Fund management considers various factors, including
 the credit quality of issuers, yield analysis, maturity analysis and the call
 features of the obligations. Under normal conditions, the Fund's weighted
 average maturity will be more than ten years. The Fund cannot guarantee that it
 will achieve its objective.

 What are the main risks of investing in the Fund?

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

 The Fund is a non-diversified fund, which means that it may invest more of its
 assets in obligations of a single issuer than if it were a diversified fund.
 For this reason, developments affecting an individual issuer may have a greater
 impact on the Fund's performance. In addition, since the Fund invests at least
 80% of its net assets in Michigan municipal bonds, it is more exposed to
 negative political or economic factors in Michigan than a fund that invests
 more widely. Derivatives and high yield bonds may be volatile and subject to
 liquidity, leverage and credit risks.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                   3


 [ICON]  Key Facts

 Who should invest?

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

   .   Are looking for income that is exempt from Federal and Michigan
       income taxes

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

   .   Are looking for liquidity

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

 4                MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 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 complete calendar year since the Fund's inception.
 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 for the
 periods shown with those of the Lehman Brothers Municipal Bond Index. How the
 Fund performed in the past is not necessarily an indication of how the Fund
 will perform in the future.

[CHART]

1994   -7.85%
1995   16.99%
1996    2.94%
1997    7.47%
1998    4.17%
1999   -6.61%
2000   11.48%

 During the period shown in the bar chart, the highest return for a quarter was
 7.63% (quarter ended March 31, 1995) and the lowest return for a quarter was -
 7.07% (quarter ended March 31, 1994). The Fund's year-to-date return as of
 September 30, 2001 was 4.56%.

Average Annual Total Returns                  Past         Past        Since
(as of December 31, 2000)                   One Year    Five Years   Inception
- --------------------------------------------------------------------------------
Merrill Lynch Michigan Municipal Bond
 Fund*                                  A     7.56%        3.39%        4.60%+
Lehman Brothers Municipal Bond
 Index**                                     11.68%        5.84%        6.46%++
- --------------------------------------------------------------------------------
Merrill Lynch Michigan Municipal Bond
 Fund*                                  B     7.48%        3.71%        4.61%+
Lehman Brothers Municipal Bond Index**       11.68%        5.84%        6.46%++
- --------------------------------------------------------------------------------
Merrill Lynch Michigan Municipal Bond
 Fund*                                  C    10.37%        3.60%        5.32%#
Lehman Brothers Municipal Bond
 Index**                                     11.68%        5.84%        7.54%##
- --------------------------------------------------------------------------------
Merrill Lynch Michigan Municipal Bond
 Fund*                                  D     7.35%        3.27%        5.16%#
Lehman Brothers Municipal Bond Index**       11.68%        5.84%        7.54%##
- --------------------------------------------------------------------------------
 *   Includes all applicable fees and sales charges.

 **  This unmanaged Index consists of long term revenue bonds, prerefunded
     bonds, general obligation bonds and insured bonds. Past performance is not
     predictive of future performance.

  +  Inception date is January 29, 1993.

 ++  Since January 29, 1993.

  #  Inception date is October 21, 1994.

 ##  Since October 31, 1994.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                   5


 [ICON]  Key Facts

 UNDERSTANDING EXPENSES

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

 Expenses paid directly by the shareholder:

 Shareholder Fees -- these include sales charges which 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 advisors, intermediaries, advertising
 and promotion.

 Service (Account Maintenance) Fees -- fees used to compensate securities
 dealers and other financial intermediaries for account maintenance activities.

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

 The Fund offers four different classes of shares. Although your money will be
 invested the same way no matter which class of shares you buy, there are
 differences among the fees and expenses associated with each class. Not
 everyone is eligible to buy every class. After determining which classes you
 are eligible to buy, decide which class best suits your needs. Your Merrill
 Lynch Financial Advisor can help you with this decision.

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


Shareholder Fees (fees paid                          Class B
directly from your investment)(a):          Class A   (b)      Class C  Class D
- --------------------------------------------------------------------------------
  Maximum Sales Charge (Load) imposed on
  purchases (as a percentage of offering
  price)                                    4.00%(c)  None     None     4.00%(c)
  ------------------------------------------------------------------------------
  Maximum Deferred Sales Charge (Load)
  (as a percentage of original purchase
  price or redemption proceeds, whichever
  is lower)                                 None(d)    4.0%(c)  1.0%(c) None(d)
  ------------------------------------------------------------------------------
  Maximum Sales Charge (Load) imposed on
  Dividend Reinvestments                    None      None     None     None
  ------------------------------------------------------------------------------
  Redemption Fee                            None      None     None     None
  ------------------------------------------------------------------------------
  Exchange Fee                              None      None     None     None
  ------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses
that are deducted from Fund assets):
- --------------------------------------------------------------------------------
  Management Fee(e)                         0.55%     0.55%    0.55%    0.55%
  ------------------------------------------------------------------------------
  Distribution and/or Service (12b-1)
  Fees(f)                                   None      0.50%    0.60%    0.10%
  ------------------------------------------------------------------------------
  Other Expenses (including transfer
  agency fees)(g)                           0.49%     0.50%    0.50%    0.49%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses        1.04%     1.55%    1.65%    1.14%
- --------------------------------------------------------------------------------

(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution
     fees and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such services.

6                 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 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. This assumption is 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 this example. 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            $502           $718          $  951            $1,620
- ---------------------------------------------------------------------------
Class B            $558           $690          $  845            $1,845
- ---------------------------------------------------------------------------
Class C            $268           $520          $  897            $1,955
- ---------------------------------------------------------------------------
Class D            $512           $748          $1,003            $1,731
- ---------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                   1 Year        3 Years         5 Years         10 Years
- ---------------------------------------------------------------------------
Class A             $502           $718          $  951           $1,620
- ---------------------------------------------------------------------------
Class B             $158           $490          $  845           $1,845
- ---------------------------------------------------------------------------
Class C             $168           $520          $  897           $1,955
- ---------------------------------------------------------------------------
Class D             $512           $748          $1,003           $1,731
- ---------------------------------------------------------------------------

             MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                        7


 Details About the Fund  [ICON]

 ABOUT THE PORTFOLIO MANAGER

 Fred K. Stuebe is the portfolio manager and Vice President of the Fund and has
 been a Portfolio Manager of Merrill Lynch Investment Managers since 1995 and a
 Vice President thereof since 1989.

 ABOUT THE MANAGER

 The Fund is managed by Fund Asset Management.

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

 The Fund's main objective is to seek income that is exempt from Federal and
 Michigan income taxes. The Fund invests primarily in long term, investment
 grade Michigan municipal bonds. These may be obligations of a variety of
 issuers including governmental entities or other qualifying issuers. Issuers
 may be located in Michigan or in other qualifying jurisdictions such as Puerto
 Rico, the U.S. Virgin Islands and Guam.

 The Fund may invest in either fixed rate or variable rate obligations. At least
 80% of the Fund's assets will be invested in investment grade securities. The
 Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
 bonds are generally more speculative and involve greater price fluctuations
 than investment grade securities.

 The Fund will invest at least 80% of its net assets in Michigan municipal
 bonds. Under normal conditions, the Fund's weighted average maturity will be
 more than ten years. For temporary periods, however, the Fund may invest up to
 35% of its assets in short term tax exempt or taxable money market obligations,
 although the Fund will not generally invest more than 20% of its net assets in
 taxable money market obligations. As a temporary measure for defensive
 purposes, the Fund may invest without limitation in short term tax-exempt or
 taxable money market obligations. These short term investments may limit the
 potential for the Fund to achieve its objective.

 The Fund may use derivatives including futures, options, indexed securities,
 inverse securities and swap agreements. Derivatives are financial instruments
 whose value is derived from another security or an index such as the Lehman
 Brothers Municipal Bond Index.

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

 Michigan's economy is influenced by numerous factors, including developments in
 automobile production, especially consolidation and plant closings resulting
 from competitive pressures and overcapacity. The Manager believes that current
 economic conditions in Michigan will enable the Fund to continue to invest in
 high quality Michigan municipal bonds.

8                 MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


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

   .   Credit Quality Of Issuers -- based on bond ratings and other factors
       including economic and financial conditions.

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

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

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

 INVESTMENT RISKS
 -------------------------------------------------------------------------------

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

 Bond Market And Selection Risk -- Bond market risk is the risk that the bond
 market will go down in value, including the possibility that the market will go
 down sharply and unpredictably. Selection risk is the risk that the securities
 that Fund management selects will underperform the market or other funds with
 similar investment objectives and investment strategies.

 Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
 the interest or principal when due. 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 municipal
 bonds 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.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                   9


 [ICON]  Details About the Fund

 State Specific Risk -- The Fund will invest primarily in Michigan municipal
 bonds. As a result, the Fund is more exposed to risks affecting issuers of
 Michigan municipal bonds than is a municipal bond fund that invests more
 widely.

 Michigan's economy is closely tied to the economic cycles of the automobile
 industry. Current increased automobile production and an increasingly
 diversified economy have led to an unemployment rate that, for the last five
 years, has been below the national average. Michigan has reported balanced
 budgets and year-end General Fund surpluses for six of the last seven years.
 Moody's, Standard & Poor's, and Fitch's currently rate the State of Michigan's
 general obligation bonds Aaa, AAA, and AA+, respectively.

 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.

 Borrowing And Leverage -- The Fund may borrow for temporary emergency purposes
 including to meet redemptions. Borrowing may exaggerate changes in the net
 asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
 will cost the Fund interest expense and other fees. The costs of borrowing may
 reduce the Fund's return. Certain securities that the Fund buys may create
 leverage including, for example, when issued securities, forward commitments
 and options.

 Risks associated with certain types of obligations in which the Fund may invest
 include:

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

 Revenue Bonds -- Payments of interest and principal on revenue bonds are made
 only from the revenues generated by a particular facility, class of facilities
 or the proceeds of a special tax or other revenue source. These payments depend
 on the money earned by the particular facility or class of facilities.
 Industrial development bonds are one type of revenue bond.

 Industrial Development Bonds -- Municipalities and other public authorities
 issue industrial development bonds to finance development of industrial
 facilities for use by a private enterprise. The private enterprise pays

 10               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 the principal and interest on the bond, and the issuer does not pledge its
 faith, credit and taxing power for repayment. If the private enterprise
 defaults on its payments, the Fund may not receive any income or get its money
 back from the investment.

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

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

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

 Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
 insurance that guarantees timely interest payments and repayment of principal
 on maturity. If a bond's insurer fails to fulfill its obligations or loses its
 credit rating, the value of the bond could drop. Insured bonds are subject to
 market risk.

 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. The Fund does not intend to
 purchase debt securities that are in default or which Fund management believes
 will be in default. Although junk bonds generally pay higher rates of interest
 than investment grade bonds, they are high risk investments that may cause
 income and principal losses for the Fund. Junk bonds generally are less liquid
 and experience more price volatility than higher rated debt securities. The
 issuers of junk bonds may have a larger amount of outstanding debt relative to
 their assets than issuers of investment grade bonds. In the event of an
 issuer's bankruptcy, claims of other creditors may have priority over the
 claims of junk bond holders, leaving few or no assets available to repay junk
 bond holders. Junk bonds may be subject to greater call and redemption risk
 than higher rated debt securities.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  11


 [ICON]  Details About the Fund

 When Issued Securities, Delayed Delivery Securities And Forward Commitments --
 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 to
 the Fund. There also is the risk that the security will not be issued or that
 the other party will not meet its obligation, in which case the Fund loses the
 investment opportunity of the assets it has set aside to pay for the security
 and any gain in the security's price.

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

 Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
 securities that it cannot easily sell within seven days at current value or
 that have contractual or legal restrictions on resale. 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.

 Derivatives -- The Fund may use derivative instruments including indexed and
 inverse securities, options on portfolio positions, options on securities or
 other financial indices, financial futures and options on such futures, and
 swap agreements. Derivatives allow the Fund to increase or decrease its risk
 exposure more quickly and efficiently than other types of instruments.

 Derivatives are volatile and involve significant risks, including:

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

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

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

 12               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 The Fund may use derivatives for hedging purposes including anticipatory
 hedges. 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. 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.

 Indexed And Inverse Floating Rate Securities -- The Fund may invest in
 securities whose potential returns are directly related to changes in an
 underlying index or interest rate, known as indexed securities. The return on
 indexed securities will rise when the underlying index or interest rate rises
 and fall when the index or interest rate falls. The Fund may also invest in
 securities whose return is inversely related to changes in an interest rate
 (inverse floaters). In general, income on inverse floaters will decrease when
 short term interest rates increase and increase when short term interest rates
 decrease. Investments in inverse floaters may subject the Fund to the risks of
 reduced or eliminated interest payments and losses of principal. In addition,
 certain indexed securities and inverse floaters may increase or decrease in
 value at a greater rate than the underlying interest rate, which effectively
 leverages the Fund's investment. As a result, the market value of such
 securities will generally be more volatile than that of fixed rate, tax exempt
 securities. Indexed securities and inverse floaters are derivative securities
 and can be considered speculative.

 STATEMENT OF ADDITIONAL INFORMATION
 -------------------------------------------------------------------------------

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

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  13


 Your Account  [ICON]

 MERRILL LYNCH SELECT PRICING(SM) SYSTEM
 -------------------------------------------------------------------------------

 The Fund offers four share classes, each with its own sales charge and expense
 structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
 Financial Advisor can help you determine which share class is best suited to
 your personal financial goals.

 For example, if you select Class A or Class D shares, you generally pay a sales
 charge at the time of purchase. If you buy Class D shares, you also pay an
 ongoing account maintenance fee of 0.10%. 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
 may 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 or for shareholder servicing activities.

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

 The Fund's shares are distributed by FAM Distributors, Inc., an affiliate
 of Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State
 Municipal Series Trust.

 14               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


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



                     Class A          Class B          Class C          Class D
- ------------------------------------------------------------------------------------------
                                                            
Availability         Limited to       Generally        Generally        Generally
                     certain          available        available        available
                     investors        through Merrill  through Merrill  through Merrill
                     including:       Lynch. Limited   Lynch. Limited   Lynch. Limited
                     .  Current       availability     availability     availability
                        Class A       through          through          through
                        shareholders  selected         selected         selected
                     .  Participants  securities       securities       securities
                        in certain    dealers and      dealers and      dealers and
                        Merrill       other financial  other financial  other financial
                        Lynch-        intermediaries.  intermediaries.  intermediaries.
                        sponsored
                        programs
                     .  Certain
                        affiliates
                        of Merrill
                        Lynch,
                        selected
                        securities
                        dealers and
                        other
                        financial
                        intermediaries.
- ------------------------------------------------------------------------------------------
Initial Sales        Yes. Payable at  No. Entire       No. Entire       Yes. Payable at
Charge?              time of          purchase price   purchase price   time of
                     purchase. Lower  is invested in   is invested in   purchase. Lower
                     sales charges    shares of the    shares of the    sales charges
                     available for    Fund.            Fund.            available for
                     larger                                             larger
                     investments.                                       investments.
- ------------------------------------------------------------------------------------------
Deferred Sales       No. (May be      Yes. Payable if  Yes. Payable if  No. (May be
Charge?              charged for      you redeem       you redeem       charged for
                     purchases over   within four      within one year  purchases over
                     $1 million that  years of         of purchase.     $1 million that
                     are redeemed     purchase.                         are redeemed
                     within one                                         within one
                     year.)                                             year.)
- ------------------------------------------------------------------------------------------
Account              No.              0.25% Account    0.25% Account    0.10% Account
Maintenance and                       Maintenance      Maintenance      Maintenance
Distribution Fees?                    Fee. 0.25%       Fee. 0.35%       Fee. No
                                      Distribution     Distribution     Distribution
                                      Fee.             Fee.             Fee.
- ------------------------------------------------------------------------------------------
Conversion to        No.              Yes,             No.              N/A
Class D shares?                       automatically
                                      after
                                      approximately
                                      ten years.
- ------------------------------------------------------------------------------------------


                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  15


 [ICON]  Your Account

 Right of Accumulation -- permits you to pay the sales charge that would apply
 to the cost or value (whichever is higher) of all shares you own in the Merrill
 Lynch mutual funds that offer Select Pricing(SM) options.

 Letter of Intent -- permits you to pay the sales charge that would be
 applicable if you add up all shares of Merrill Lynch Select Pricing(SM) System
 funds that you agree to buy within a 13 month period. Certain restrictions
 apply.

 Class A and Class D Shares-- Initial Sales Charge Options

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



                                                                Dealer
                           As a % of                         Compensation
                           Offering          As a % of         as a % of
  Your Investment           Price        Your Investment*   Offering Price
 --------------------------------------------------------------------------
                                                   
  Less than $25,000          4.00%             4.17%             3.75%
 --------------------------------------------------------------------------
  $25,000 but less
  than $50,000               3.75%             3.90%             3.50%
 --------------------------------------------------------------------------
  $50,000 but less
  than $100,000              3.25%             3.36%             3.00%
 --------------------------------------------------------------------------
  $100,000 but less
  than $250,000              2.50%             2.56%             2.25%
 --------------------------------------------------------------------------
  $250,000 but less
  than $1,000,000            1.50%             1.52%             1.25%
 --------------------------------------------------------------------------
  $1,000,000 and over**      0.00%             0.00%             0.00%
 --------------------------------------------------------------------------


  *  Rounded to the nearest one-hundredth percent.

 **  If you invest $1,000,000 or more in Class A or Class D 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.

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

 A reduced or waived sales charge on a purchase of Class A or Class D shares may
 apply for:

   .   Purchases under a Right of Accumulation or Letter of Intent

   .   TMA(SM) Managed Trusts

   .   Certain Merrill Lynch investment or central asset accounts

   .   Purchases using proceeds from the sale of certain Merrill Lynch
       closed-end funds under certain circumstances

   .   Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees

 16               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


   .   Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates

 Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
 Financial Advisor can help you determine whether you are eligible to buy Class
 A 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 D shares, you should buy Class A
 since Class D shares are subject to a 0.10% account maintenance fee, while
 Class A shares are not.

 If you redeem Class A or Class D 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 Merrill Lynch
 Financial Advisor, selected securities dealer, other financial intermediary or
 the Fund's Transfer Agent at 1-800-MER-FUND.

 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 four
 years after purchase, or your Class C shares within one year after purchase,
 you may be required to pay a deferred sales charge. You will also pay
 distribution fees of 0.25% for Class B shares and 0.35% for Class C shares and
 account maintenance fees of 0.25% for Class B and Class C shares each year
 under distribution plans that the Fund has adopted under Rule 12b-1. Because
 these fees are paid out of the Fund's assets on an ongoing basis, over time
 these fees increase the cost of your investment and may cost you more than
 paying other types of sales charges. The Distributor uses the money that it
 receives from the deferred sales charges and the distribution fees to cover the
 costs of marketing, advertising and compensating the Merrill Lynch Financial
 Advisor, selected securities dealer or other financial intermediary who assists
 you in purchasing Fund shares.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  17


 [ICON]  Your Account

 Class B Shares

 If you redeem Class B shares within four 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                                  3.00%
           ------------------------------------------------------
             2 - 3                                  2.00%
           ------------------------------------------------------
             3 - 4                                  1.00%
           ------------------------------------------------------
             4 and thereafter                       0.00%
           ------------------------------------------------------

 *   The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

   .   Redemption in connection with participation in certain fee-based
       programs of Merrill Lynch 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

   .   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

   .   Withdrawal 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

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

 18               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 Different conversion schedules apply to Class B shares of different Merrill
 Lynch mutual funds. For example, Class B shares of a fixed-income fund
 typically convert approximately ten years after purchase compared to
 approximately eight years for equity funds. If you acquire your Class B shares
 in an exchange from another fund with a shorter conversion schedule, the Fund's
 ten year 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 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 and
 withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

 Class C shares do not offer a conversion privilege.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  19


 [ICON]  Your Account

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

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

 20               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 If You Want to  Your Choices          Information Important for You to Know
 -------------------------------------------------------------------------------
 Buy Shares      First, select the     Refer to the Merrill Lynch Select
                 share class           Pricing table on page 15. Be sure to
                 appropriate for       read this prospectus carefully.
                 you
                 ---------------------------------------------------------------
                 Next, determine       The minimum initial investment for
                 the amount of your    the Fund is $1,000 for all accounts
                 investment            except that certain Merrill Lynch
                                       fee-based programs have a $250
                                       initial minimum investment.

                                       (The minimums for initial investments may
                                       be waived under certain circumstances.)
                 ---------------------------------------------------------------
                 Have your Merrill     The price of your shares is based on
                 Lynch Financial       the next calculation of net asset
                 Advisor, selected     value after your order is placed. Any
                 securities dealer     purchase orders placed prior to the
                 or other financial    close of business on the New York
                 intermediary          Stock Exchange (generally 4:00 p.m.
                 submit your           Eastern time) will be priced at the
                 purchase order        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, including
                                       Merrill Lynch, may charge a processing
                                       fee to confirm a purchase. Merrill Lynch
                                       currently charges a fee of $5.35.
                 ---------------------------------------------------------------
                 Or contact the        To purchase shares directly, call the
                 Transfer Agent        Transfer Agent at 1-800-MER-FUND and
                                       request a purchase application. Mail the
                                       completed purchase application to the
                                       Transfer Agent at the address on the
                                       inside back cover of this Prospectus.
 -------------------------------------------------------------------------------
 Add to Your     Purchase              The minimum investment for additional
 Investment      additional shares     purchases is generally $50 except
                                       that certain programs, such as automatic
                                       investment plans, may have higher
                                       minimums.

                                       (The minimum for additional purchases may
                                       be waived under certain circumstances.)
                 ---------------------------------------------------------------
                 Acquire additional    All dividends are automatically
                 shares through the    reinvested without a sales charge.
                 automatic dividend
                 reinvestment plan
                 ---------------------------------------------------------------
                 Participate in the    You may invest a specific amount on a
                 automatic             periodic basis through certain
                 investment plan       Merrill Lynch investment or central
                                       asset accounts.
 -------------------------------------------------------------------------------
 Transfer        Transfer to a         You may transfer your Fund shares
 Shares          participating         only to another securities dealer
 to Another      securities dealer     that has entered into an agreement
 Securities      or other financial    with the Distributor. Certain
 Dealer          intermediary          shareholder services may not be
 or Other                              available for the transferred shares.
 Financial                             You may only purchase additional
 Intermediary                          shares of funds previously owned
                                       before the transfer. All future
                                       trading of these assets must be
                                       coordinated by the receiving
                                       firm.
                 ---------------------------------------------------------------
                 Transfer to a         You must either:
                 non-participating         .  Transfer your shares to an
                 securities dealer            account with the Transfer
                 or other financial           Agent; or
                 intermediary              .  Sell your shares, paying any
                                              applicable deferred sales
                                              charge.
- --------------------------------------------------------------------------------

                MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                    21


 [ICON]  Your Account

 If You Want to   Your Choices          Information Important for You to Know
 -------------------------------------------------------------------------------
 Sell Your        Have your             The price of your shares is based on
 Shares           Merrill Lynch         the next calculation of net asset
                  Financial Advisor,    value after your order is placed. For
                  selected securities   your redemption request to be priced
                  dealer or other       at the net asset value on the day of
                  financial             your request, you must submit your
                  intermediary submit   request to your dealer or other
                  your sales order      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, including Merrill Lynch,
                                        may charge a fee to process a redemption
                                        of shares. Merrill Lynch currently
                                        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      You may sell shares held at the
                  Transfer Agent        Transfer Agent by writing to the
                                        Transfer Agent at the address on the
                                        inside back cover of this prospectus.
                                        All shareholders on the account must
                                        sign the letter. A signature guarantee
                                        will generally be required but may be
                                        waived in certain limited circumstances.
                                        You can obtain a signature guarantee
                                        from a bank, securities dealer,
                                        securities broker, credit union, savings
                                        association, national securities
                                        exchange or registered securities
                                        association. A notary public seal will
                                        not be acceptable. If you hold stock
                                        certificates, return the certificates
                                        with the letter. The Transfer Agent will
                                        normally mail redemption proceeds within
                                        seven days following receipt of a
                                        properly completed request. If you make
                                        a redemption request before the Fund has
                                        collected payment for the purchase of
                                        shares, the Fund or the Transfer Agent
                                        may delay mailing your proceeds. This
                                        delay will usually not exceed ten days.

                                        You may also sell shares held at the
                                        Transfer Agent by telephone request if
                                        the amount being sold is less than
                                        $50,000 and if certain other conditions
                                        are met. Contact the Transfer Agent at
                                        1-800-MER-FUND for details.
 -------------------------------------------------------------------------------
 Sell Shares      Participate in the    You can choose to receive systematic
 Systematically   Fund's Systematic     payments from your Fund account either
                  Withdrawal Plan       by check or through direct deposit to
                                        your bank account on a monthly or
                                        quarterly basis. If you hold your Fund
                                        shares in a Merrill Lynch CMA(R) or
                                        CBA(R) Account 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 Merrill
                                        Lynch Financial Advisor or other
                                        financial intermediary for details.

 22               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 If You Want to  Your Choices         Information Important for You to Know
 --------------------------------------------------------------------------
 Exchange Your   Select the fund      You can exchange your shares of the
 Shares          into which you       Fund for shares of many other Merrill
                 want to              Lynch mutual funds. You must have
                 exchange. Be         held the shares used in the exchange
                 sure to read         for at least 15 calendar days before
                 that fund's          you can exchange to another fund.
                 prospectus
                                      Each class of Fund shares is generally
                                      exchangeable for shares of the same class
                                      of another fund. If you own Class A shares
                                      and wish to exchange into a fund in which
                                      you have no Class A shares (and are not
                                      eligible to purchase Class A shares), you
                                      will exchange into Class D shares.

                                      Some of the Merrill Lynch mutual funds
                                      impose a different initial or deferred
                                      sales charge schedule. If you exchange
                                      Class A or Class D shares for shares of a
                                      fund with a higher initial sales charge
                                      than you originally paid, you will be
                                      charged the difference at the time of
                                      exchange. If you exchange Class B shares
                                      for shares of a fund with a different
                                      deferred sales charge schedule, the higher
                                      schedule will apply. The time you hold
                                      Class B or Class C shares in both funds
                                      will count when determining your holding
                                      period for calculating a deferred sales
                                      charge at redemption. If you exchange
                                      Class A or Class D 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.

                                      To exercise the exchange privilege contact
                                      your Merrill Lynch Financial Advisor or
                                      other financial intermediary or call the
                                      Transfer Agent at 1-800-MER-FUND.

                                      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.
 -------------------------------------------------------------------------------

 Short-term or excessive trading into and out of the Fund may harm performance
 by disrupting portfolio management strategies and by increasing expenses.
 Accordingly, the Fund may reject any purchase orders, including exchanges,
 particularly from market timers or investors who, in Fund management's opinion,
 have a pattern of short-term or excessive trading or whose trading has been or
 may be disruptive to the Fund. For these purposes, Fund management may consider
 an investor's trading history in that Fund or other Merrill Lynch funds, and
 accounts under common ownership and control.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  23


 [ICON]  Your Account

 Net Asset Value -- the market value of the Fund's total assets after deducting
 liabilities, divided by the number of shares outstanding.

 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 its net
 asset value (generally by using market quotations) each day the New York Stock
 Exchange is open, as of the close of business on the Exchange based on prices
 at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern
 time. The net asset value used in determining your share price is the next one
 calculated after your purchase or redemption order is placed.

 The Fund may accept orders from certain authorized financial intermediaries or
 their designees. The Fund will be deemed to receive an order when accepted by
 the financial 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.

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

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

 If you participate in certain fee-based programs offered by Merrill Lynch or
 other financial intermediaries, you may be able to buy Class A 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.

 24             MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


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

 If you leave one of these programs, your shares may be redeemed or
 automatically exchanged into another class of Fund shares or into a money
 market fund. The class you receive may be the class you originally owned when
 you entered the program, or in certain cases, a different class. If the
 exchange is into Class B shares, the period before conversion to Class D shares
 may be modified. Any redemption or exchange will be at net asset value.
 However, if you participate in the program for less than a specified period,
 you may be charged a fee in accordance with the terms of the program.

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

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

 The Fund will distribute net investment income monthly and net realized capital
 gains at least annually. The Fund may also pay a special distribution at the
 end of the calendar year to comply with Federal tax requirements. If you would
 like to receive dividends in cash, contact your Merrill Lynch Financial
 Advisor, selected securities dealer or other financial intermediary or the
 Transfer Agent.

 To the extent that the dividends distributed by the Fund are from municipal
 bond interest income, they are exempt from Federal income tax but may be
 subject to state or local income taxes. Certain investors may be subject to a
 Federal alternative minimum tax on dividends received from the Fund. To the
 extent that the dividends distributed by the Fund are derived from Michigan
 municipal bond interest income, they are also exempt from Michigan income
 taxes. Interest income from other investments may produce taxable dividends.
 Dividends derived from capital gains realized by the Fund will be subject to
 Federal income tax, and generally will be subject to Michigan income tax as
 well. If you are subject to income tax in a state other than Michigan, the
 dividends derived from Michigan municipal bonds generally will not be exempt
 from income tax in that state.

                MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                    25


 [ICON] Your Account

 "BUYING A DIVIDEND"

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

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

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

 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. Capital gains are generally taxed at
 different rates than ordinary income dividends.

 This section summarizes some of the consequences of an investment in the Fund
 under current Federal and Michigan tax laws. It is not a substitute for
 personal tax advice. You should consult your personal tax adviser about the
 potential tax consequences to you of an investment in the Fund under all
 applicable tax laws.

 26               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 Management of the Fund  [ICON]

 FUND ASSET MANAGEMENT
 -------------------------------------------------------------------------------

 Fund Asset Management, the Fund's Manager, manages the Fund's investments
 and its business operations under the overall supervision of the Trust's Board
 of Trustees. The Manager has the responsibility for making all investment
 decisions for the Fund. The Fund pays the Manager a fee at the annual rate of
 0.55% of the average daily net assets of the Fund for the first $500 million;
 0.525% of the average daily net assets from $500 million to $1 billion; and
 0.50% of the average daily net assets above $1 billion. For the fiscal year
 ended July 31, 2001, the Manager received a fee equal to 0.55% of the Fund's
 average daily net assets.

 Fund Asset Management was organized as an investment adviser in 1977 and offers
 investment advisory services to more than 50 registered investment companies.
 Fund Asset Management and its affiliates, including Merrill Lynch Investment
 Managers, had approximately $506 billion in investment company and other
 portfolio assets under management as of September 2001. This amount includes
 assets managed for Merrill Lynch affiliates.


                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  27


 [ICON]  Management of the Fund

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

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



                                                    Class A                                          Class B
                                 ---------------------------------------------   -----------------------------------------------
                                          For the Year Ended July 31,                      For the Year Ended July 31,
                                 ---------------------------------------------   -----------------------------------------------
  Increase (Decrease) in
  Net Asset Value:                2001     2000      1999      1998      1997      2001      2000      1999      1998      1997
- --------------------------------------------------------------------------------------------------------------------------------
                                                                                           
  Per Share Operating
  Performance:
- --------------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  beginning of year              $ 9.53   $ 9.91   $ 10.33   $ 10.34   $  9.92   $  9.53   $  9.91   $ 10.33   $ 10.34   $  9.92
- --------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net           .46      .48       .46       .50       .52       .41       .43       .41       .45       .47
- --------------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized
  gain (loss) on
  investments-- net                 .44     (.38)     (.42)     (.01)      .42       .44      (.38)     (.42)     (.01)      .42
- --------------------------------------------------------------------------------------------------------------------------------
  Total from investment
  operations                        .90      .10       .04       .49       .94       .85       .05      (.01)      .44       .89
- --------------------------------------------------------------------------------------------------------------------------------
  Less dividends from
  investment income-- net          (.46)    (.48)     (.46)     (.50)     (.52)     (.41)     (.43)     (.41)     (.45)     (.47)
- --------------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  end of year                    $ 9.97   $ 9.53   $  9.91   $ 10.33   $ 10.34   $  9.97   $  9.53   $  9.91   $ 10.33   $ 10.34
- --------------------------------------------------------------------------------------------------------------------------------
  Total Investment
  Return:*
- --------------------------------------------------------------------------------------------------------------------------------
  Based on net asset
  value per share                  9.61%    1.21%      .34%     4.84%     9.79%     9.06%      .70%     (.17)%    4.31%     9.23%
- --------------------------------------------------------------------------------------------------------------------------------
  Ratios to Average Net
  Assets:
- --------------------------------------------------------------------------------------------------------------------------------
  Expenses, net of
  reimbursement                    1.04%     .79%      .93%      .80%      .57%     1.55%     1.30%     1.44%     1.31%     1.08%
- --------------------------------------------------------------------------------------------------------------------------------
  Expenses                         1.04%     .79%      .93%      .83%      .80%     1.55%     1.30%     1.44%     1.34%     1.31%
- --------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net          4.68%    5.10%     4.51%     4.81%     5.21%     4.17%     4.59%     4.00%     4.30%     4.70%
- --------------------------------------------------------------------------------------------------------------------------------
  Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
  Net assets, end of year
  (in thousands)                 $7,860   $9,310   $ 9,384   $11,762   $11,841   $33,220   $37,514   $54,259   $61,918   $65,166
- --------------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover              59.61%   85.25%   129.08%    65.39%    35.09%    59.61%    85.25%   129.08%    65.39%    35.09%
- --------------------------------------------------------------------------------------------------------------------------------


 * Total investment returns exclude the effects of sales charges.

                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND                  28


 FINANCIAL HIGHLIGHTS (concluded)
 -------------------------------------------------------------------------------



                                                       Class C                                        Class D
                                     --------------------------------------------   --------------------------------------------
                                             For the Year Ended July 31,                    For the Year Ended July 31,
                                     --------------------------------------------   --------------------------------------------
                                                                                             
  Increase (Decrease) in
  Net Asset Value:                     2001     2000      1999     1998      1997     2001     2000      1999     1998      1997
- --------------------------------------------------------------------------------------------------------------------------------
  Per Share Operating
  Performance:
- --------------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  beginning of year                  $ 9.53   $ 9.91   $ 10.32   $10.33    $ 9.92   $ 9.52   $ 9.91   $ 10.32   $10.33    $ 9.91
- --------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net               .40      .42       .40      .43       .46      .45      .47       .45      .49       .51
- --------------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized gain
  (loss) on investments-- net           .44     (.38)     (.41)    (.01)      .41      .44     (.39)     (.41)    (.01)      .42
- --------------------------------------------------------------------------------------------------------------------------------
  Total from investment operations      .84      .04      (.01)     .42       .87      .89      .08       .04      .48       .93
- --------------------------------------------------------------------------------------------------------------------------------
  Less dividends from
  investment income-- net              (.40)    (.42)     (.40)    (.43)     (.46)    (.45)    (.47)     (.45)    (.49)     (.51)
- --------------------------------------------------------------------------------------------------------------------------------
  Net asset value, end of year       $ 9.97   $ 9.53   $  9.91   $10.32    $10.33   $ 9.96   $ 9.52   $  9.91   $10.32    $10.33
- --------------------------------------------------------------------------------------------------------------------------------
  Total Investment Return:*
- --------------------------------------------------------------------------------------------------------------------------------
  Based on net asset value
  per share                            8.95%     .60%     (.17)%   4.20%     9.01%    9.51%    1.00%      .34%    4.74%     9.69%
- --------------------------------------------------------------------------------------------------------------------------------
  Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------------------
  Expenses, net of reimbursement       1.65%    1.40%     1.55%    1.42%     1.18%    1.14%     .90%     1.04%     .90%      .68%
- --------------------------------------------------------------------------------------------------------------------------------
  Expenses                             1.65%    1.40%     1.55%    1.45%     1.41%    1.14%     .90%     1.04%     .93%      .90%
- --------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net              4.07%    4.49%     3.89%    4.18%     4.60%    4.58%    4.98%     4.40%    4.71%     5.11%
- --------------------------------------------------------------------------------------------------------------------------------
  Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
  Net assets, end of year
  (in thousands)                     $3,473   $3,440   $ 3,950   $2,802    $1,319   $2,582   $2,230   $ 4,312   $3,806    $3,494
- --------------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover                  59.61%   85.25%   129.08%   65.39%    35.09%   59.61%   85.25%   129.08%   65.39%    35.09%
- --------------------------------------------------------------------------------------------------------------------------------


 * Total investment returns exclude the effects of sales charges.

 29               MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


                                    POTENTIAL
                                    INVESTORS
           [1]                                               [2]
                            Open an account (two
                                  options)
      MERRILL LYNCH                                     TRANSFER AGENT
    FINANCIAL ADVISOR
   OR SECURITIES DEALER                            Financial Data Services,
                                                            Inc.
 Advises shareholders on
 their Fund investments.                            ADMINISTRATIVE OFFICES
                                                  4800 Deer Lake Drive East
                                                    Jacksonville, Florida
                                                          32246-6484

                                                       MAILING ADDRESS
                                                        P.O. Box 45289
                                                    Jacksonville, Florida
                                                          32232-5289

                                                  Performs 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                  THE FUND                CUSTODIAN

    Sidley Austin Brown    The Board of Trustees      State Street Bank
       & Wood LLP            oversees the Fund.       and Trust Company
     875 Third Avenue                                    P.O. Box 351
    New York, New York                              Boston, Massachusetts
          10022                                             02101

 Provides legal advice to                          Holds the Fund's assets
        the Fund.                                      for safekeeping.


   INDEPENDENT AUDITORS           ACCOUNTING               MANAGER
                                SERVICES PROVIDER
  Deloitte & Touche LLP                             Fund Asset Management,
     Two World Financial     State Street Bank               L.P.
          Center             and Trust Company
    New York, New York     500 College Road East    ADMINISTRATIVE OFFICES
        10281-1008         Princeton, New Jersey    800 Scudders Mill Road
                                   08540            Plainsboro, New Jersey
   Audits the financial                                     08536
    statements of the         Provides certain
    Fund on behalf of            accounting            MAILING ADDRESS
    the shareholders.         services to the           P.O. Box 9011
                                   Fund.            Princeton, New Jersey
                                                          08543-9011

                                                       TELEPHONE NUMBER
                                                        1-800-MER-FUND

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


                  MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND


 For More Information  [ICON]

 Shareholder Reports

 Additional information about the Fund's investments is available in the Fund's
 annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

 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 Merrill Lynch
 Financial Advisor or other financial intermediary, or write to the Transfer
 Agent at its mailing address. Include your name, address, tax identification
 number and Merrill Lynch brokerage or mutual fund account number. If you have
 any questions, please call your Merrill Lynch Financial Advisor or other
 financial intermediary, or call the Transfer Agent at 1-800-MER-FUND.

 Statement of Additional Information

 The Fund's Statement of Additional Information contains further information
 about the Fund and is incorporated by reference (legally considered to be part
 of this prospectus). You may request a free copy by writing the Fund at
 Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
 or by calling 1-800-MER-FUND.

 Contact your Merrill Lynch Financial Advisor or other financial intermediary,
 or contact the Fund at the telephone number or address indicated above if you
 have any questions.

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

 You should rely only on the information contained in this Prospectus. No one is
 authorized to provide you with information that is different from information
 contained in this Prospectus.

 Investment Company Act file #811-4375
 Code #16560-11-01
 (C) Fund Asset Management, L.P.

                                   Prospectus

 [LOGO] Merrill Lynch
 Investment Managers

 Merrill Lynch Michigan
 Municipal Bond Fund
 of Merrill Lynch Multi-State
 Municipal Series Trust

                                                     November 14, 2001

EX-99.17H

                                                                   Exhibit 17(h)

                                  Prospectus

[LOGO] Merrill Lynch Investment Managers

        Merrill Lynch Minnesota Municipal Bond Fund
        of Merrill Lynch Multi-State Municipal Series Trust

                                                           November 14, 2001

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
                                                                    
[ICON] KEY FACTS

        --------------------------------------------------------------------
        Merrill Lynch Minnesota Municipal Bond Fund at a Glance            3
        -------------------------------------------------------
        Risk/Return Bar Chart                                              5
        ---------------------
        Fees and Expenses                                                  6
        -----------------

[ICON] DETAILS ABOUT THE FUND

        --------------------------------------------------------------------
        How the Fund Invests                                               8
        --------------------
        Investment Risks                                                   9
        ----------------

[ICON] YOUR ACCOUNT

        --------------------------------------------------------------------
        Merrill Lynch Select Pricing(SM) System                           14
        ---------------------------------------
        How to Buy, Sell, Transfer and Exchange Shares                    20
        ----------------------------------------------
        Participation in Fee-Based Programs                               24
        -----------------------------------

[ICON] MANAGEMENT OF THE FUND

        --------------------------------------------------------------------
        Fund Asset Management                                             27
        ---------------------
        Financial Highlights                                              28
        --------------------

[ICON] FOR MORE INFORMATION

        --------------------------------------------------------------------
        Shareholder Reports                                             Back
        -------------------
                                                                       Cover

        Statement of Additional Information                             Back
        -----------------------------------
                                                                       Cover


                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


Key Facts [ICON]

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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Minnesota Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in Minnesota that pays interest exempt from Minnesota
personal income tax as well as from Federal income tax.

MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND AT A GLANCE
- ------------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal income tax and Minnesota personal income tax.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade
Minnesota municipal bonds. These may be obligations of a variety of issuers
including governmental entities and Indian tribal governments located in
Minnesota, which pay interest exempt from Federal income tax and Minnesota
personal income tax. The Fund may also invest in obligations of other qualifying
issuers, such as those located in Puerto Rico, the U.S. Virgin Islands and Guam.
The Fund will invest at least 80% of its net assets in Minnesota municipal
bonds. The Fund may invest up to 20% of its assets in high yield bonds (also
known as "junk" bonds); however, the Fund will not invest in bonds that are in
default or that Fund management believes will be in default. The Fund also may
invest in certain types of derivative securities. When choosing investments,
Fund management considers various factors, including the credit quality of
issuers, yield analysis, maturity analysis and the call features of the
obligations. Under normal conditions, the Fund's weighted average maturity will
be more than ten years. The Fund cannot guarantee that it will achieve its
objective.

If 95% or more of the exempt-interest dividends paid by the Fund is derived from
tax-exempt interest on Minnesota municipal bonds ("95% threshold"), that portion
of the dividends is exempt from regular Minnesota personal income tax. If the
Fund does not meet the 95% threshold, the Fund's exempt-interest dividends
derived from Minnesota municipal bonds will not be exempt from regular Minnesota
personal income tax. While the Fund will endeavor to meet the 95% threshold, it
may not always be possible to do so.

What are the main risks of investing in the Fund?

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

                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  3



[ICON] Key Facts

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. For
this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance. In addition, since the Fund invests at least
80% of its net assets in Minnesota municipal bonds, it is more exposed to
negative political or economic factors in Minnesota than a fund that invests
more widely.

Derivatives and high yield bonds may be volatile and subject to liquidity,
leverage and credit risks.

Who should invest?

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

  .  Are looking for income that is exempt from Federal income tax and Minnesota
     personal income tax

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

  .  Are looking for liquidity

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

4                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

                                    [CHART]

During the period shown in the bar chart, the highest return for a quarter was
6.80% (quarter ended March 31, 1995) and the lowest return for a quarter was-
5.54% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 4.02%.



Average Annual Total Returns                                Past         Past       Since
(as of December 31, 2000)                                 One Year    Five Years  Inception
- ---------------------------------------------------------------------------------------------
                                                                      
 Merrill Lynch Minnesota Municipal Bond Fund*     A         6.89%       4.22%       5.82%++

 Lehman Brothers Municipal Bond Index**                    11.68%       5.84%       6.96%+
- ---------------------------------------------------------------------------------------------
 Merrill Lynch Minnesota Municipal Bond Fund*     B         6.89%       4.56%       5.79%+

 Lehman Brothers Municipal Bond Index**                    11.68%       5.84%       6.96%++
- ---------------------------------------------------------------------------------------------
 Merrill Lynch Minnesota Municipal Bond Fund*     C         9.77%       4.46%       5.68%#

 Lehman Brothers Municipal Bond Index**                    11.68%       5.84%       7.54%##
- ---------------------------------------------------------------------------------------------
 Merrill Lynch Minnesota Municipal Bond Fund*     D         6.78%       4.12%       5.53%#

 Lehman Brothers Municipal Bond Index**                    11.68%       5.84%       7.54%##
- ---------------------------------------------------------------------------------------------


 *   Includes all applicable fees and sales charges.

**   This unmanaged Index consists of long term revenue bonds, prerefunded
     bonds, general obligation bonds and insured bonds. Past performance is not
     predictive of future performance.

 +   Inception date is March 27, 1992.

++   Since March 31, 1992.

 #   Inception date is October 21, 1994.

##   Since October 31, 1994.

                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  5


[ICON] Key Facts

UNDERSTANDING
EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries for account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

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



Shareholder Fees (fees paid directly from                       Class B
your investment)(a):                               Class A        (b)          Class C       Class D
                                                                                 
- -----------------------------------------------------------------------------------------------------
 Maximum Sales Charge (Load) imposed on
 purchases (as a percentage of offering price)     4.00%(c)      None           None         4.00%(c)
- -----------------------------------------------------------------------------------------------------
 Maximum Deferred Sales Charge (Load) (as
 a percentage of original purchase price or         None(d)      4.0%(c)        1.0%(c)       None(d)
 redemption proceeds, whichever is lower)
- -----------------------------------------------------------------------------------------------------
 Maximum Sales Charge (Load) imposed on
 Dividend Reinvestments                             None         None           None          None
- -----------------------------------------------------------------------------------------------------
 Redemption Fee                                     None         None           None          None
- -----------------------------------------------------------------------------------------------------
 Exchange Fee                                       None         None           None          None
- -----------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
- -----------------------------------------------------------------------------------------------------
 Management Fee(e)                                 0.55%        0.55%          0.55%         0.55%
- -----------------------------------------------------------------------------------------------------
 Distribution and/or Service (12b-1) Fees(f)        None        0.50%          0.60%         0.10%
- -----------------------------------------------------------------------------------------------------
 Other Expenses (including transfer agency
 fees)(g)                                          0.48%        0.48%          0.49%         0.48%
- -----------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses               1.03%        1.53%          1.64%         1.13%
- -----------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them, will no longer be subject to distribution fees
     and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such services.

6                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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                $501              $715            $946            $1,609
- ---------------------------------------------------------------------------------
Class B                $556              $683            $834            $1,824
- ---------------------------------------------------------------------------------
Class C                $267              $517            $892            $1,944
- ---------------------------------------------------------------------------------
Class D                $511              $745            $997            $1,720
- ---------------------------------------------------------------------------------


EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                      1 Year            3 Years         5 Years         10 Years
- ---------------------------------------------------------------------------------
                                                            
Class A                $501              $715            $946            $1,609
- ---------------------------------------------------------------------------------
Class B                $156              $483            $834            $1,824
- ---------------------------------------------------------------------------------
Class C                $167              $517            $892            $1,944
- ---------------------------------------------------------------------------------
Class D                $511              $745            $997            $1,720
- ---------------------------------------------------------------------------------


                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  7


Details About the Fund [ICON]

ABOUT THE PORTFOLIO
MANAGER

Michael Kalinoski is the Vice President and portfolio manager of the Fund. He
has been a Vice President of Merrill Lynch Investment Managers since 1999. He
was the Head Municipal Bond Trader with Strong Funds from 1996 to 1999 and was
employed by the Municipal Bond Investment Team of Strong Funds from 1993 to
1996.

ABOUT THE MANAGER

The Fund is managed by Fund Asset Management.

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

The Fund's main objective is to seek income that is exempt from Federal income
tax and Minnesota personal income tax. The Fund invests primarily in long term,
investment grade Minnesota municipal bonds. These may be obligations of a
variety of issuers including governmental entities, Indian tribal governments
located in Minnesota or other qualifying issuers.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.

The Fund will invest at least 80% of its net assets in Minnesota municipal
bonds. Under normal conditions, the Fund's weighted average maturity will be
more than ten years. For temporary periods, however, the Fund may invest up to
35% of its assets in short term tax exempt or taxable money market obligations
although the Fund will not generally invest more than 20% of its net assets in
taxable money market obligations. As a temporary measure for defensive purposes,
the Fund may invest without limitation in short term tax-exempt or taxable money
market obligations. These short term investments may limit the potential for the
Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

The Fund's investments may include private activity bonds that may subject
certain shareholders to Federal and Minnesota alternative minimum taxes.

The State of Minnesota relies heavily on a progressive individual income tax and
a retail sales tax for revenue, which results in a fiscal system that is
sensitive to economic conditions. The Manager believes that current economic
conditions in Minnesota will enable the Fund to continue to invest in high
quality Minnesota municipal bonds.

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

  .  Credit Quality Of Issuers -- based on bond ratings and other factors
     including economic and financial conditions.

8                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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

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

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

INVESTMENT RISKS
- --------------------------------------------------------------------------------

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

Bond Market And Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

State Specific Risk -- The Fund will invest substantially all of its assets in
Minnesota municipal bonds. As a result, the Fund is more exposed to risks
affecting issuers of Minnesota municipal bonds than is a municipal bond fund
that invests more widely. Moody's, Standard & Poor's and Fitch currently rate
the State of Minnesota's general obligation bonds Aaa, AAA and AAA,
respectively.

                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  9


[ICON] Details About the Fund

Minnesota Taxation -- If 95% or more of the exempt-interest dividends paid by
the Fund is derived from interest on Minnesota municipal bonds (95% threshold),
that portion of the dividends is exempt from regular Minnesota personal income
tax. If for any reason there is not an adequate supply of Minnesota municipal
bonds, the Fund may have to hold cash in order to meet the 95% threshold and
ensure that dividends paid by the Fund are exempt from Minnesota personal income
taxes, and this may lower the Fund's yield. On the other hand, if the Fund does
not meet the 95% threshold, the Fund's exempt-interest dividends derived from
Minnesota municipal bonds will not be exempt from regular Minnesota personal
income tax. While the Fund will endeavor to meet the 95% threshold, it may not
always be possible to do so.

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.

Borrowing And Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

10                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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

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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or that Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment

            MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                       11


[ICON] Details About the Fund

grade bonds. In the event of an issuer's bankruptcy, claims of other creditors
may have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.

When Issued Securities, Delayed Delivery Securities And Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at current value or that
have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices and financial futures and options on such futures, and
swap agreements. Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

12                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


     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.
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. 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.

Indexed And Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                   13


Your Account [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.

14                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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



                 Class A               Class B              Class C             Class D
- ----------------------------------------------------------------------------------------------------------
                                                                    
Availability     Limited to            Generally            Generally           Generally
                 certain investors     available            available           available
                 including:            through Merrill      through Merrill     through  Merrill
                 . Current Class       Lynch.  Limited      Lynch.  Limited     Lynch. Limited
                 A                     availability         availability        availability
                   shareholders        through selected     through selected    through
                 . Participants in     securities           Securities          selected
                   certain Merrill     dealers and          daealers and        securities
                   Lynch-              other financial      other Minancial     dealers and
                 sponsored             intermediaries.      intermediaries.     other financial
                   programs                                                     intermediaries.
                 . Certain
                 affiliates of
                   Merrill Lynch,
                   selected
                 securities
                   dealers and
                 other
                   financial
                   intermediaries.
- ----------------------------------------------------------------------------------------------------------
Initial Sales    Yes. Payable at       No. Entire           No. Entire          Yes. Payable at
Charge?          time of               purchase price       purchase price      time of
                 purchase. Lower       is invested in       is invested in      purchase.
                 sales charges         shares of the        shares of the       Lower sales
                 available for         Fund.                Fund.               charges
                 larger                                                         available for
                 investments.                                                   larger
                                                                                investments.
- ----------------------------------------------------------------------------------------------------------
Deferred Sales   No. (May be           Yes. Payable if      Yes. Payable if     No. (May be
Charge?          charged for           you redeem           you redeem          charged for
                 purchases over        within Your          within one year     purchases over
                 $1 million that       years of             of purchase.        $1 million that
                 are redeemed          purchase.                                are redeemed
                 within one                                                     within one
                 year.)                                                         year.)
- ----------------------------------------------------------------------------------------------------------
Account          No.                   0.25% Account        0.25% Account       0.10% Account
Maintenance                            Maintenance          Maintenance         Maintenance
and Distribution                       Fee. 0.25%           Fee. 0.35%          Fee.
Fees?                                  Distribution         Distribution        No Distribution
                                       Fee.                 Fee.                Fee.
- ----------------------------------------------------------------------------------------------------------
Conversion to    No.                  Yes,                  No.                 N/A
                                      automatically
                                      after
Class D                               approximately
shares?                               ten years.
- ----------------------------------------------------------------------------------------------------------


                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                   15


[ICON] Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares -- Initial Sales Charge Options

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



                                                                    Dealer
                                                                 Compensation
                           As a % of           As a % of           as a % of
Your Investment         Offering Price     Your Investment*     Offering Price
- ----------------------------------------------------------------------------------------
                                                       
Less than $25,000            4.00%               4.17%              3.75%
- ----------------------------------------------------------------------------------------
$25,000 but less
than $50,000                 3.75%               3.90%              3.50%
- ----------------------------------------------------------------------------------------
$50,000 but less
than $100,000                3.25%               3.36%              3.00%
- ----------------------------------------------------------------------------------------
$100,000 but less
than $250,000                2.50%               2.56%              2.25%
- ----------------------------------------------------------------------------------------
$250,000 but less
than $1,000,000              1.50%               1.52%              1.25%
- ----------------------------------------------------------------------------------------
$1,000,000 and over**        0.00%               0.00%              0.00%
- ----------------------------------------------------------------------------------------


  * Rounded to the nearest one-hundredth percent.

 ** If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

   .   Purchases under a Right of Accumulation or Letter of Intent

   .   TMA(SM) Managed Trusts

   .   Certain Merrill Lynch investment or central asset accounts

   .   Purchases using proceeds from the sale of certain Merrill Lynch closed-
       end funds under certain circumstances

   .   Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees

   .   Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates.

16                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                 17


[ICON] Your Account

Class B Shares

If you redeem Class B shares within four 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                                          3.00%
            ------------------------------------------------------------
            2 - 3                                          2.00%
            ------------------------------------------------------------
            3 - 4                                          1.00%
            ------------------------------------------------------------
            4 and thereafter                               0.00%
            ------------------------------------------------------------

*    The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

 .  Redemption in connection with participation in certain fee-based programs of
   Merrill Lynch 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

 .  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

 .  Withdrawal 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

18                MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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

Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                 19


[ICON] Your Account

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

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

20               MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND




If You Want to        Your Choices                       Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
                                                   
Buy Shares            First, select the share            Refer to the Merrill Lynch Select
                      class appropriate for you          Pricing(SM) table on page 15. Be sure to
                                                         read this Prospectus carefully.
               ------------------------------------------------------------------------------------

                      Next, determine the amount         The minimum initial investment for the
                      of your investment                 Fund is $1,000 for all accounts
                                                         except that certain Merrill Lynch fee-
                                                         based programs have a $250 initial
                                                         minimum investment.

                                                         (The minimums for initial investments
                                                         may be waived under certain
                                                         circumstances.)
               ------------------------------------------------------------------------------------

                      Have your Merrill                  The price of your shares is based on the
                      Lynch Financial Advisor,           next calculation of net asset value after your
                      selected securities dealer or      order is placed. Any purchase
                      other financial intermediary       orders placed prior to the close of
                      submit your                        business on the New York Stock
                      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,
                                                         including Merrill Lynch, may charge a
                                                         processing fee to confirm a purchase.
                                                         Merrill Lynch currently charges a fee of
                                                         $5.35.
               ------------------------------------------------------------------------------------

                      Or contact the Transfer            To purchase shares directly, call the
                      Agent                              Transfer Agent at 1-800-MER-FUND
                                                         and request a purchase application. 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
Investment                                               purchases is generally $50 except that
                                                         certain programs, such as automatic
                                                         investment plans, may have higher
                                                         minimums.

                                                         (The minimum for additional purchases
                                                         may be waived under certain
                                                         circumstances.)
               ------------------------------------------------------------------------------------

                      Acquire additional shares          All dividends are automatically
                      through the automatic              reinvested without a sales charge.
                      dividend reinvestment plan
               ------------------------------------------------------------------------------------

                      Participate in the                 You may invest a specific amount on a
                      automatic investment plan          periodic basis through certain Merrill
                                                         Lynch investment or central
                                                         asset accounts.
- ---------------------------------------------------------------------------------------------------

Transfer Shares       Transfer to a participating        You may transfer your Fund shares
to Another            securities dealer or other         only to another securities dealer that has
Securities Dealer     financial intermediary             entered into an agreement with the
or Other                                                 Distributor. Certain shareholder services
Financial                                                may not be available for the transferred
Intermediary                                             shares. You may only purchase
                                                         additional shares of funds previously
                                                         owned before the transfer. All future
                                                         trading of these assets must be
                                                         coordinated by the receiving firm.
               ------------------------------------------------------------------------------------

                      Transfer to a non-                 You must either:
                      participating securities           . Transfer your shares to an account
                      dealer or other financial          with the Transfer Agent; or
                      intermediary                       . Sell your shares, paying any applicable
                                                         deferred sales charge.
- ---------------------------------------------------------------------------------------------------


                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  21


[ICON] Your Account



If You Want           Your Choices                       Information Important for You to Know
to
- -----------------------------------------------------------------------------------------------------------
                                                   
Sell Your             Have your Merrill                  The price of your shares is based on the next
Shares                Lynch Financial                    calculation of net asset value after your order
                      Advisor, selected                  is placed. For your redemption request to be
                      securities dealer or other         priced at the net asset value on the day of
                      financial intermediary             your request, you must submit your request
                      submit your sales                  to your dealer or other financial intermediary
                      order                              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, including Merrill Lynch, may
                                                         charge a fee to process a redemption of
                                                         shares. Merrill Lynch currently 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          You may sell shares held at the Transfer
                      Agent                              Agent by writing to the Transfer Agent at the
                                                         address on the inside back cover of this
                                                         prospectus. All shareholders on the account
                                                         must sign the letter. A signature guarantee
                                                         will generally be required but may be waived
                                                         in certain limited circumstances. You can
                                                         obtain a signature guarantee from a bank,
                                                         securities dealer, securities broker, credit
                                                         union, savings association, national
                                                         securities exchange or registered securities
                                                         association. A notary public seal will not be
                                                         acceptable. If you hold stock certificates,
                                                         return the certificates with the letter. The
                                                         Transfer Agent will normally mail
                                                         redemption proceeds within seven days
                                                         following receipt of a properly completed
                                                         request. If you make a redemption request
                                                         before the Fund has collected payment for
                                                         the purchase of shares, the Fund or the
                                                         Transfer Agent may delay mailing your
                                                         proceeds. This delay will usually not exceed
                                                         ten days.

                                                         You may also sell shares held at the Transfer
                                                         Agent by telephone request if the amount
                                                         being sold is less than $50,000 and if certain
                                                         other conditions are met. Contact the
                                                         Transfer Agent at 1-800-MER-FUND for
                                                         details.
- ------------------------------------------------------------------------------------------------------------
Sell Shares           Participate in the Fund's          You can choose to receive systematic
Systematically        Systematic Withdrawal              payments from your Fund account either by
                      Plan                               check or through direct deposit to your bank
                                                         account on a monthly or quarterly basis. If
                                                         you hold your Fund shares in a Merrill
                                                         Lynch CMA(R) or CBA(R) Account 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
                                                         Merrill Lynch Financial Advisor or other
                                                         financial intermediary for details.
- ------------------------------------------------------------------------------------------------------------


22               MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND




If You Want           Your Choices                       Information Important for You to Know
to
- ------------------------------------------------------------------------------------------------------------
                                                   
Exchange Your         Select the fund into               You can exchange your shares of the Fund
Shares                which you want to                  for shares of many other Merrill Lynch
                      exchange. Be sure to               mutual funds. You must have held the shares
                      read that fund's                   used in the exchange for at least 15 calendar
                      prospectus                         days before you can exchange to another
                                                         fund.

                                                         Each class of Fund shares is exchangeable
                                                         for shares of the same class of
                                                         another fund. If you own Class A shares and
                                                         wish to exchange into a fund in which you
                                                         have no Class A shares (and are not eligible
                                                         to purchase Class A shares), you will
                                                         exchange into Class D shares.

                                                         Some of the Merrill Lynch mutual funds
                                                         impose a different initial or deferred sales
                                                         charge schedule. If you exchange Class A or
                                                         Class D 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 generally apply. The time you
                                                         hold Class B or Class C shares in both funds
                                                         will count when determining your holding
                                                         period for calculating a deferred sales charge
                                                         at redemption. If you exchange Class A or
                                                         Class D 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. To
                                                         exercise the exchange privilege contact your
                                                         Merrill Lynch Financial Advisor or other
                                                         financial intermediary or call the Transfer
                                                         Agent at 1-800-MER-FUND.

                                                         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.
- ------------------------------------------------------------------------------------------------------------


Short-term or excessive trading into and out of the Fund may harm performance by
disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short-term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds, and
accounts under common ownership or control.

                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  23


[ICON] Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24               MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


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

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized long or
short term capital gains at least annually. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. If you would like to receive dividends in cash, contact your
Merrill Lynch Financial Advisor, selected securities dealer, other financial
intermediary or the Transfer Agent.

To the extent that the dividends distributed by the Fund are from tax-exempt
municipal bond interest income, they are exempt from Federal income tax but may
be subject to state or local income taxes. If 95% or more of the exempt-interest
dividends paid by the Fund are derived from interest on Minnesota municipal
bonds, that portion of the dividends is exempt from Minnesota personal income
tax, but not from Minnesota corporate taxes. However, certain investors may be
subject to Federal and Minnesota alternative minimum taxes on dividends received
from the Fund. If the exempt-interest dividends paid to all shareholders from
Minnesota municipal bonds represent less than 95% of the exempt-interest
dividends paid by the Fund, the exempt-interest dividends derived from Minnesota
municipal bonds will be included in the shareholder's Minnesota taxable net
income. Dividends derived from capital gains realized by the Fund will be
subject to Federal tax, and Minnesota personal and corporate franchise taxes.
Minnesota taxes capital gains at the same rates as ordinary income. Interest
income from other

                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  25


[ICON] Your Account

"BUYING A DIVIDEND"


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

investments may produce taxable dividends. If you are subject to income tax in a
state other than Minnesota, the dividends derived from Minnesota municipal bonds
generally will not be exempt from income tax in that state.

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

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

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. Capital gains are generally taxed at
different rates than ordinary income dividends for federal but not Minnesota
purposes.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and Minnesota tax laws. It is not a substitute for
personal tax advice. You should consult your personal tax adviser about the
potential tax consequences to you of an investment in the Fund under all
applicable tax laws.

26               MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


Management of the Fund [ICON]

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
2001, the Manager received a fee equal to 0.55% of the Fund's average daily net
assets.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates had approximately $506 billion in
investment company and other portfolio assets under management as of September
2001.

                 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                  27


[ICON] Management of the Fund

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

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



                                                   Class A                                          Class B
                              -------------------------------------------------  -------------------------------------------------
                                          For the Year Ended July 31,                      For the Year Ended July 31,
                              -------------------------------------------------  -------------------------------------------------
  Increase (Decrease) in
  Net Asset Value:               2001      2000      1999      1998      1997      2001      2000      1999      1998       1997
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                            
  Per Share Operating
  Performance:
- ----------------------------------------------------------------------------------------------------------------------------------
  Net asset value, beginning
  of year                       $10.32    $10.50    $10.79    $10.72    $10.28   $ 10.33   $ 10.50   $ 10.79   $ 10.72    $ 10.28
- ----------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net          .51       .52       .52       .54       .53       .45       .47       .46       .48        .48
- ----------------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized gain
  (loss) on investments-- net      .40      (.18)     (.29)      .07       .44       .39      (.17)     (.29)      .07        .44
- ----------------------------------------------------------------------------------------------------------------------------------
  Total from investment
  operations                       .91       .34       .23       .61       .97       .84       .30       .17       .55        .92
- ----------------------------------------------------------------------------------------------------------------------------------
  Less dividends and
  distributions:

   Investment income-- net        (.51)     (.52)     (.52)     (.54)     (.53)     (.45)     (.47)     (.46)     (.48)      (.48)
   In excess of realized gain on
   investments-- net                --        --        --        --+       --        --        --        --        --+        --
- ----------------------------------------------------------------------------------------------------------------------------------
  Total dividends and
  distributions                   (.51)     (.52)     (.52)     (.54)     (.53)     (.45)     (.47)     (.46)     (.48)      (.48)
- ----------------------------------------------------------------------------------------------------------------------------------

  Net asset value, end of year  $10.72    $10.32    $10.50    $10.79    $10.72   $ 10.72   $ 10.33   $ 10.50   $ 10.79    $ 10.72
- ----------------------------------------------------------------------------------------------------------------------------------
  Total Investment Return:*
- ----------------------------------------------------------------------------------------------------------------------------------
  Based on net asset value
  per share                       8.95%     3.45%     2.08%     5.85%     9.71%     8.30%     3.03%     1.56%     5.31%      9.15%
- ----------------------------------------------------------------------------------------------------------------------------------
  Ratios to Average Net
  Assets:
- ----------------------------------------------------------------------------------------------------------------------------------
  Expenses                        1.03%      .97%     1.02%      .91%      .92%     1.53%     1.47%     1.53%     1.42%      1.43%
- ----------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net         4.79%     5.12%     4.80%     4.98%     5.09%     4.28%     4.61%     4.29%     4.47%      4.58%
- ----------------------------------------------------------------------------------------------------------------------------------
  Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
  Net assets, end of year
  (in thousands)                $4,110    $4,141    $6,067    $6,993    $5,390   $32,135   $32,524   $37,507   $38,585    $41,274
- ----------------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover             45.63%    43.42%    26.09%    56.43%    28.42%    45.63%    43.42%    26.09%    56.43%     28.42%
- ----------------------------------------------------------------------------------------------------------------------------------


*    Total investment returns exclude the effects of sales charges.

+    Amount is less than $.01 per share.

28               MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------



                                    ------------------------------------------ --------------------------------------------
                                                     Class C                                     Class D
                                            For the Year Ended July 31,                 For the Year Ended July 31,
                                    ------------------------------------------ ---------------------------------------------
                                                                                      
  Increase (Decrease) in
  Net Asset Value:                   2001     2000     1999     1998     1997     2001     2000     1999     1998     1997
  --------------------------------------------------------------------------------------------------------------------------
  Per Share Operating Performance:
  --------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  beginning of year                $ 10.33  $ 10.50  $ 10.80  $ 10.72  $ 10.28  $ 10.33  $ 10.50  $ 10.80  $ 10.73  $ 10.28
  --------------------------------------------------------------------------------------------------------------------------
  Investment income-- net              .44      .46      .45      .47      .47      .50      .51      .51      .53      .52
  --------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized gain
  (loss) on investments-- net          .39     (.17)    (.30)     .08      .44      .40     (.17)    (.30)     .07      .45
  --------------------------------------------------------------------------------------------------------------------------
  Total from investment
  operations                           .83      .29      .15      .55      .91      .90      .34      .21      .60      .97
  -------------------------------------------------------------------------------------------------------------------------
  Less dividends and distributions:
  Investment income-- net             (.44)    (.46)    (.45)    (.47)    (.47)    (.50)    (.51)    (.51)    (.53)    (.52)
  --------------------------------------------------------------------------------------------------------------------------
  In excess of realized
  gain on investments-- net             --       --       --       --+      --       --       --       --       --+      --
  --------------------------------------------------------------------------------------------------------------------------
  Total dividends and
  distributions                       (.44)    (.46)    (.45)    (.47)    (.47)    (.50)    (.51)    (.51)    (.53)    (.52)
  --------------------------------------------------------------------------------------------------------------------------
  Net asset value, end of year     $ 10.72  $ 10.33  $ 10.50  $ 10.80  $ 10.72  $ 10.73  $ 10.33  $ 10.50  $ 10.80  $ 10.73
  --------------------------------------------------------------------------------------------------------------------------
  Total Investment Return:*
  --------------------------------------------------------------------------------------------------------------------------
  Based on net asset value
  per share                           8.19%    2.92%    1.37%    5.30%    9.04%    8.84%    3.45%    1.88%    5.74%    9.70%
  --------------------------------------------------------------------------------------------------------------------------
  Ratios to Average Net Assets:
  --------------------------------------------------------------------------------------------------------------------------
  Expenses                            1.64%    1.57%    1.63%    1.52%    1.53%    1.13%    1.07%    1.13%    1.01%    1.02%
  --------------------------------------------------------------------------------------------------------------------------
  Investment income-- net             4.17%    4.52%    4.19%    4.37%    4.48%    4.68%    5.02%    4.69%    4.88%    4.99%
  --------------------------------------------------------------------------------------------------------------------------
  Supplemental Data:
  --------------------------------------------------------------------------------------------------------------------------
  Net assets, end of year
  (in thousands)                   $ 2,410  $ 1,672  $ 1,721  $ 1,437  $ 1,201  $ 2,108  $ 1,598  $ 1,950  $ 1,141  $   924
  --------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover                 45.63%   43.42%    26.0%   56.43%    28.4%    45.6%   43.42%    26.0%   56.43%   28.42%
  --------------------------------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

+ Amount is less than $.01 per share.

                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND                 29



                                                       
                                      POTENTIAL
                                      INVESTORS
              [1]                                                        [2]
                                   Open an account (two
                                         options)
         MERRILL LYNCH                                             TRANSFER AGENT
       FINANCIAL ADVISOR                                    Financial Data Services, Inc.
     or SECURITIES DEALER

 Advises shareholders on their
       Fund investments.
                                                               ADMINISTRATIVE OFFICES
                                                              4800 Deer Lake Drive East
                                                             Jacksonville, Florida 32246-6484

                                                                      MAILING ADDRESS
                                                                      P.O. Box 45289
                                                                   Jacksonville, Florida
                                                                        32232-5289

                                                                  Performs 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                       THE FUND                        CUSTODIAN

     Sidley Austin Brown          The Board of Trustees              State Street Bank
          & Wood LLP                oversees the Fund.               and Trust Company
       875 Third Avenue                                                P.O. Box 351
   New York, New York 10022                                     Boston, Massachusetts 02101

 Provides legal advice to the                                   Holds the Fund's assets for
            Fund.                                                      safekeeping.

     INDEPENDENT AUDITORS               ACCOUNTING                        MANAGER
                                    SERVICES PROVIDER
    Deloitte & Touche LLP                                       Fund Asset Management, L.P.
  Two World Financial Center        State Street Bank
New York, New York 10281-1008       and Trust Company             ADMINISTRATIVE OFFICES
                                  500 College Road East           800 Scudders Mill Road
     Audits the financial         Princeton, New Jersey        Plainsboro, New Jersey 08536
      statements of the                   08540
      Fund on behalf of                                               MAILING ADDRESS
      the shareholders.              Provides certain                  P.O. Box 9011
                                       accounting             Princeton, New Jersey 08543-9011
                                  services to the Fund.
                                                                     TELEPHONE NUMBER
                                                                      1-800-MER-FUND

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



                  MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND


For More Information [ICON]

Shareholder Reports

Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or other financial
intermediary or call the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Advisor or other financial intermediary or
contact the Fund at the telephone number or address indicated above if you have
any questions.

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

publicinfo@sec.gov, or by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.

You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375
Code #16185-11-01
(C) Fund Asset Management, L.P.

                                  Prospectus

[LOGO] Merrill Lynch
Investment Managers

Merrill Lynch Minnesota
Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust

                                                              November 14, 2001

EX-99.17I

                                                                   EXHIBIT 17(i)

Prospectus

[LOGO] Merrill Lynch Investment Managers

Merrill Lynch North Carolina Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust

                                                               November 14, 2001


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
                                                                                 
[ICON]  KEY FACTS
        --------------------------------------------------------------------------------
        Merrill Lynch North Carolina Municipal Bond Fund at a Glance                   3
        ------------------------------------------------------------
        Risk/Return Bar Chart                                                          5
        ---------------------
        Fees and Expenses                                                              6
        -----------------

[ICON]  DETAILS ABOUT THE FUND
        --------------------------------------------------------------------------------
        How the Fund Invests                                                           8
        --------------------
        Investment Risks                                                               9
        ----------------

[ICON]  YOUR ACCOUNT
        --------------------------------------------------------------------------------
        Merrill Lynch Select Pricing(SM) System                                       14
        ---------------------------------------
        How to Buy, Sell, Transfer and Exchange Shares                                20
        ----------------------------------------------
        Participation in Fee-Based Programs                                           24
        -----------------------------------

[ICON]  MANAGEMENT OF THE FUND
        --------------------------------------------------------------------------------
        Fund Asset Management                                                         27
        ---------------------
        Financial Highlights                                                          28
        --------------------

[ICON]  FOR MORE INFORMATION
        --------------------------------------------------------------------------------
        Shareholder Reports                                                   Back Cover
        --------------------
        Statement of Additional Information                                   Back Cover
        -----------------------------------


               MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


Key Facts [ICON]

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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

North Carolina Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in North Carolina or other qualifying issuer that pays
interest exempt from North Carolina income taxes as well as from Federal income
tax.

MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal and North Carolina income taxes.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade North
Carolina municipal bonds. These may be obligations of a variety of issuers
including governmental entities in North Carolina and issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam. The Fund will invest at least 80% of its
net assets in North Carolina municipal bonds. The Fund may invest up to 20% of
its assets in high yield bonds (also known as "junk" bonds); however, the Fund
will not invest in bonds that are in default or that Fund management believes
will be in default. The Fund also may invest in certain types of derivative
securities. When choosing investments, Fund management considers various
factors, including the credit quality of issuers, yield analysis, maturity
analysis and the call features of the obligations. Under normal conditions, the
Fund's weighted average maturity will be more than ten years. The Fund cannot
guarantee that it will achieve its objective.

What are the main risks of investing in the Fund?

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

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. For
this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance.

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

            MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                   3


[ICON] Key Facts

Who should invest?

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

   .   Are looking for income that is exempt from Federal and North Carolina
       income taxes

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

   .   Are looking for liquidity

   .   Can tolerate the risk of loss caused by negative political or economic
       developments in North Carolina, changes in interest rates or adverse
       changes in the price of bonds in general

4              MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

[IMAGE]

During the period shown in the bar chart, the highest return for a quarter was
7.36% (quarter ended March 31, 1995) and the lowest return for a quarter was-
6.60% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 3.81%.



Average Annual Total Returns                                Past          Past           Since
(as of December 31, 2000)                                  One Year      Five Years     Inception
- -------------------------------------------------------------------------------------------------
                                                                               
Merrill Lynch North Carolina Municipal Bond Fund*     A      7.87%         3.99%         5.56%+
Lehman Brothers Municipal Bond Index**                      11.68%         5.84%         6.58%++
- -------------------------------------------------------------------------------------------------
Merrill Lynch North Carolina Municipal Bond Fund*     B      7.80%         4.31%         5.55%+
Lehman Brothers Municipal Bond Index**                      11.68%         5.84%         6.58%++
- -------------------------------------------------------------------------------------------------
Merrill Lynch North Carolina Municipal Bond Fund*     C     10.69%         4.21%         5.93%#
Lehman Brothers Municipal Bond Index**                      11.68%         5.84%         7.54%##
- -------------------------------------------------------------------------------------------------
Merrill Lynch North Carolina Municipal Bond Fund*     D      7.65%         3.89%         5.77%#
Lehman Brothers Municipal Bond Index**                      11.68%         5.84%         7.54%##
- -------------------------------------------------------------------------------------------------


 *   Includes all applicable fees and sales charges.

**   This unmanaged Index consists of long-term revenue bonds, prerefunded
     bonds, general obligation bonds and insured bonds. Past performance is not
     predictive of future performance.

 +   Inception date is September 25, 1992.

++   As of September 30, 1992.

 #   Inception date is October 21, 1994.

##   Since October 31, 1994.

         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                      5


[ICON] Key Facts

UNDERSTANDING
EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries for account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

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



Shareholder Fees (fees paid directly from
your investment)(a):                              Class A      Class B(b)    Class C    Class  D
- --------------------------------------------------------------------------------------------------
                                                                            
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price)      4.00%(c)      None         None       4.00%(c)
- --------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower)           None (d)      4.0%(c)      1.0%(c)    None(d)
- --------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed
on Dividend Reinvestments                          None          None         None       None
- --------------------------------------------------------------------------------------------------
Redemption Fee                                     None          None         None       None
- --------------------------------------------------------------------------------------------------
Exchange Fee                                       None          None         None       None
- --------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
- --------------------------------------------------------------------------------------------------
Management Fee(e)                                  0.55%         0.55%        0.55%      0.55%
- --------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1)
Fees(f)                                            None          0.50%        0.60%      0.10%
- --------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(g)                                           0.56%         0.58%        0.58%      0.59%
- --------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses               1.11%         1.63%        1.73%      1.24%
- --------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution fees
     and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such services.

6              MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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                      $509            $739            $ 987          $1,698
- -------------------------------------------------------------------------------------
Class B                      $566            $714            $ 887          $1,933
- -------------------------------------------------------------------------------------
Class C                      $276            $545            $ 939          $2,041
- -------------------------------------------------------------------------------------
Class D                      $521            $778            $1,054         $1,840
- -------------------------------------------------------------------------------------


EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:



                             1 Year          3 Years         5 Years        10 Years
- -------------------------------------------------------------------------------------
                                                               
Class A                      $509            $739            $ 987          $1,698
- -------------------------------------------------------------------------------------
Class B                      $166            $514            $ 887          $1,933
- -------------------------------------------------------------------------------------
Class C                      $176            $545            $ 939          $2,041
- -------------------------------------------------------------------------------------
Class D                      $521            $778            $1,054         $1,840
- -------------------------------------------------------------------------------------


         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                      7


Details About the Fund [ICON]

ABOUT THE
PORTFOLIO MANAGER

Michael Kalinoski is the Vice President and portfolio manager of the Fund. He
has been a Vice President of Merrill Lynch Investment Managers since 1999. He
was head Municipal Bond Trader with Strong Funds from 1996 to 1999 and was a
member of the municipal bond investment team of Strong Funds from 1993 to 1996.

ABOUT THE MANAGER


The Fund is managed by Fund Asset
Management.

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

The Fund's main goal is to seek income that is exempt from Federal and North
Carolina income taxes. The Fund invests primarily in long term, investment grade
North Carolina municipal bonds. These may be obligations of a variety of issuers
including governmental entities or other qualifying issuers. Issuers may be
located in North Carolina or in other qualifying jurisdictions such as Puerto
Rico, the U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.

The Fund will invest at least 80% of its net assets in North Carolina municipal
bonds. Under normal conditions, the Fund's weighted average maturity will be
more than ten years. For temporary periods, however, the Fund may invest up to
35% of its assets in short term tax exempt or taxable money market obligations,
although the Fund will not generally invest more than 20% of its net assets in
taxable money market obligations. As a temporary measure for defensive purposes,
the Fund may invest without limitation in short term tax-exempt or taxable money
market obligations. These short term investments may limit the potential for the
Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

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

North Carolina's economy is influenced by developments in the state's leading
areas of agricultural industries and service and goods production. In recent
years, the North Carolina economy has moved from an agricultural to a service
and goods producing economy. Additionally, North Carolina derives a significant
portion of its revenue from taxes, including individual and corporate income
taxes, sales and use taxes, franchise and insurance taxes, and alcoholic
beverage taxes. Fund management believes that current economic conditions in
North Carolina will enable the Fund to continue to invest in high quality North
Carolina municipal bonds.

8              MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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

     .    Credit Quality of Issuers -- based on bond ratings and other factors
          including economic and financial conditions.

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

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

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

INVESTMENT RISKS
- --------------------------------------------------------------------------------

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

Bond Market and Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

               MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                9


[ICON] Details About the Fund

State Specific Risk -- The Fund will invest primarily in North Carolina
municipal bonds. As a result, the Fund is more exposed to risks affecting
issuers of North Carolina municipal bonds than is a municipal bond fund that
invests more widely. North Carolina experienced a positive General Fund balance
for each of the last six fiscal years and the unemployment rate has consistently
been below the national average. Moody's, Standard & Poor's, and Fitch currently
rate the State of North Carolina's general obligation bonds Aaa, AAA, and AAA,
respectively.

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.

Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

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

10             MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or that Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.

When Issued Securities, Delayed Delivery Securities and Forward Commitments --
When issued and delayed delivery securities and forward commitments involve the
risk that the security the Fund buys

              MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                11


[ICON] Details About the Fund

will lose value prior to its delivery to the Fund. There also is the risk that
the security will not be issued or that the other party will not meet its
obligation, in which case the Fund loses the investment opportunity of the
assets it has set aside to pay for the security and any gain in the security's
price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at current value or that
have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures, and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

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

The Fund may use derivatives for hedging purposes including anticipatory hedges.
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

12             MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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. 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.

Indexed and Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

               MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND               13


Your Account [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.

14             MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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



                 Class A          Class B            Class C            Class D
- ------------------------------------------------------------------------------------------
                                                            
Availability     Limited to       Generally          Generally          Generally
                 certain          available          available          available
                 investors        through Merrill    through Merrill    through Merrill
                 including:       Lynch. Limited     Lynch. Limited     Lynch. Limited
                 . Current        availability       availability       availability
                 Class A          through selected   through selected   through
                 shareholders     securities         securities         selected
                 . Participants   dealers and        dealers and        securities
                 in certain       other financial    other financial    dealers and
                 Merrill          intermediaries.    intermediaries.    other financial
                 Lynch-sponsored                                        intermediaries.
                 programs
                 . Certain
                 affiliates of
                 Merrill Lynch,
                 selected
                 securities
                 dealers and
                 other
                 financial
                 intermediaries.
- -------------------------------------------------------------------------------------------
Initial Sales    Yes. Payable     No. Entire         No. Entire         Yes. Payable at
Charge?          at time of       purchase price     purchase price     time of
                 purchase.        is invested in     is invested in     purchase. Lower
                 Lower sales      shares of the      shares of the      sales charges
                 charges          Fund.              Fund.              available for
                 available for                                          larger
                 larger                                                 investments.
                 investments.
- ------------------------------------------------------------------------------------------
Deferred Sales   No. (May be      Yes. Payable if    Yes. Payable if    No. (May be
Charge?          charged for      you redeem         you redeem         charged for
                 purchases over   within four        within one year    purchases over
                 $1 million       years of           of purchase.       $1 million that
                 that are         purchase.                             are redeemed
                 redeemed                                               within one
                 within one                                             year.)
                 year.)
- ------------------------------------------------------------------------------------------
Account          No.              0.25% Account      0.25% Account      0.10% Account
Maintenance                       Maintenance Fee.   Maintenance Fee.   Maintenance
and                               0.25%              0.35%              Fee. No
Distribution                      Distribution Fee.  Distribution Fee.  Distribution
Fees?                                                                   Fee.
- ------------------------------------------------------------------------------------------
Conversion to    No.              Yes,               No.                N/A
Class D shares?                   automatically
                                  after
                                  approximately
                                  ten years.
- ------------------------------------------------------------------------------------------


               MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND               15


[ICON] Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing(SM) System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.

Class A and Class D Shares -- Initial Sales Charge Options

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

                                                                     Dealer
                            As a % of         As a % of            Compensation
Your Investment          Offering Price    Your Investment*         as a % of
                                                                  Offering Price

Less than $25,000            4.00%              4.17%                 3.75%

$25,000 but less             3.75%              3.90%                 3.50%
than $50,000

$50,000 but less             3.25%              3.36%                 3.00%
than $100,000

$100,000 but less            2.50%              2.56%                 2.25%
than $250,000

$250,000 but less            1.50%              1.52%                 1.25%
than $1,000,000

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

  *  Rounded to the nearest one-hundredth percent.

 **  If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

  .    Purchases under a Right of Accumulation or Letter of Intent

  .    TMA(SM) Managed Trusts

  .    Certain Merrill Lynch investment or central asset accounts

  .    Purchases using proceeds from the sale of certain Merrill Lynch closed-
       end funds under certain circumstances

  .    Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees

16                MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


   .   Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates.

   Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

   If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four years after purchase, or your Class C shares within one year after
purchase, you may be required to pay a deferred sales charge. You will also pay
distribution fees of 0.25% for Class B shares and 0.35% for Class C shares and
account maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND           17


[ICON] Your Account

Class B Shares

If you redeem Class B shares within four 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                                 3.00%


           2 - 3                                 2.00%


           3 - 4                                 1.00%


           4 and thereafter                      0.00%



*    The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

     .    Redemption in connection with participation in certain fee-based
          programs of Merrill Lynch 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

     .    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

     .    Withdrawal 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

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

 18                 MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


   Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                 19


[ICON] Your Account

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

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

20       MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND




If You Want to      Your Choices            Information Important for You to Know
- ------------------------------------------------------------------------------------------------
                                      
Buy Shares          First, select the class Refer to the Merrill Lynch Select Pricing share
                    appropriate for you     table on page 15. Be sure to read this
                                            prospectus carefully.

                    Next, determine the     The minimum initial investment for the Fund
                    amount of your          is $1,000 for all accounts except that
                    investment              certain Merrill Lynch fee-based programs
                                            have a $250 initial minimum investment.

                                            (The minimums for initial investments may
                                            be waived under certain circumstances.)

                    Have your Merrill       The price of your shares is based on the
                    Lynch Financial         next calculation of net asset value after
                    Advisor, selected       your order is placed. Any purchase orders
                    securities dealer or    placed prior to the close of business on the
                    other financial         New York Stock Exchange (generally 4:00 p.m.
                    intermediary submit     Eastern time) will be priced at the net
                    your purchase           asset value determined that day. Certain
                    order                   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,
                                            including Merrill Lynch, may charge
                                            a processing fee to confirm a
                                            purchase. Merrill Lynch currently
                                            charges a fee of $5.35.

                    Or contact the          To purchase shares directly, call the
                    Transfer Agent          Transfer Agent at 1-800-MER-FUND and request
                                            a purchase application. 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     The minimum investment for additional
Investment          shares                  purchases is generally $50 except that
                                            certain programs, such as automatic
                                            investment plans, may have higher minimums.

                                            (The minimum for additional purchases may be
                                            waived under certain circumstances.)

                    Acquire additional      All dividends are automatically reinvested
                    shares through the      without a sales charge.
                    automatic dividend
                    reinvestment plan


                    Participate in the      You may invest a specific amount on a
                    automatic investment    periodic basis through certain Merrill Lynch
                    plan                    investment or central asset accounts.

Transfer Shares     Transfer to a           You may transfer your Fund shares only to
to                  participating           another securities dealer that has entered
Another             securities dealer or    into an agreement with the Distributor.
Securities          other financial         Certain shareholder services may not be
Dealer or Other     intermediary            available for the transferred shares. You
Financial                                   may only purchase additional shares of funds
Intermediary                                previously owned before the transfer. All
                                            future trading of these assets must be
                                            coordinated by the receiving firm.


                    Transfer to a           You must either:
                    non-participating       .  Transfer your shares to an account with
                    securities dealer or       the Transfer Agent; or
                    other financial         .  Sell your shares, paying any applicable
                    intermediary               deferred sales charge.


         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                 21


[ICON] Your Account



If You Want to      Your Choices            Information Important for You to Know
- -----------------------------------------------------------------------------------------------
                                      
Sell Your Shares    Have your Merrill       The price of your shares is based on the
                    Lynch Financial         next calculation of net asset value after
                    Advisor, selected       your order is placed. For your redemption
                    securities dealer or    request to be priced at the net asset value
                    other financial         on the day of your request, you must submit
                    intermediary submit     your request to your dealer or other
                    your sales order        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, including
                                            Merrill Lynch, may charge a fee to
                                            process a redemption of shares.
                                            Merrill Lynch currently 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        You may sell shares held at the Transfer
                    Transfer Agent          Agent by writing to the Transfer Agent at
                                            the address on the inside back cover
                                            of this prospectus. All shareholders
                                            on the account must sign the letter.
                                            A signature guarantee will generally
                                            be required but may be waived in
                                            certain limited circumstances. You
                                            can obtain a signature guarantee
                                            from a bank, securities dealer,
                                            securities broker, credit union,
                                            savings association, national
                                            securities exchange or registered
                                            securities association. A notary
                                            public seal will not be acceptable.
                                            If you hold stock certificates,
                                            return the certificates with the
                                            letter. The Transfer Agent will
                                            normally mail redemption proceeds
                                            within seven days following receipt
                                            of a properly completed request. If
                                            you make a redemption request before
                                            the Fund has collected payment for
                                            the purchase of shares, the Fund or
                                            the Transfer Agent may delay mailing
                                            your proceeds. This delay will
                                            usually not exceed ten days.

                                            You may also sell shares held at the
                                            Transfer Agent by telephone request
                                            if the amount being sold is less
                                            than $50,000 and if certain other
                                            conditions are met. Contact the
                                            Transfer Agent at 1-800-MER-FUND for
                                            details.
- -----------------------------------------------------------------------------------------------
Sell Shares         Participate in the      You can choose to receive systematic
Systematically      Fund's Systematic       payments from your Fund account either by
                    Withdrawal Plan         check or through direct deposit to your
                                            bank account on a monthly or quarterly
                                            basis. If you hold your Fund shares in a
                                            Merrill Lynch CMA(R) or CBA(R) Account 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 Merrill Lynch
                                            Financial Advisor or other financial
                                            intermediary for details.
- -----------------------------------------------------------------------------------------------


22       MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND




If You Want to      Your Choices            Information Important for You to Know
- -----------------------------------------------------------------------------------------------
                                      
Exchange Your       Select the fund into    You can exchange your shares of the Fund
Shares              which you want to       for shares of many other Merrill Lynch
                    exchange. Be sure to    mutual funds. You must have held the shares
                    read that fund's        used in the exchange for at least 15
                    prospectus              calendar days before you can exchange to
                                            another fund.

                                            Each class of Fund shares is
                                            generally exchangeable for shares of
                                            the same class of another fund. If
                                            you own Class A shares and wish to
                                            exchange into a fund in which you
                                            have no Class A shares (and are not
                                            eligible to purchase Class A
                                            shares), you will exchange into
                                            Class D shares.

                                            Some of the Merrill Lynch mutual
                                            funds impose a different initial or
                                            deferred sales charge schedule. If
                                            you exchange Class A or Class D
                                            shares for shares of a fund with a
                                            higher initial sales charge than you
                                            originally paid, you will be charged
                                            the difference at the time of
                                            exchange. If you exchange Class B
                                            shares for shares of a fund with a
                                            different deferred sales charge
                                            schedule, the higher schedule will
                                            apply. The time you hold Class B or
                                            Class C shares in both funds will
                                            count when determining your holding
                                            period for calculating a deferred
                                            sales charge at redemption. If you
                                            exchange Class A or Class D 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.

                                            To exercise the exchange privilege
                                            contact your Merrill Lynch Financial
                                            Advisor or other financial
                                            intermediary or call the Transfer
                                            Agent at 1-800-MER-FUND.

                                            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.
- -----------------------------------------------------------------------------------------------


Short-term or excessive trading into and out of the Fund may harm performance
by disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short-term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds, and
accounts under common ownership or control.

         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                     23


[ICON] Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Funds may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24             MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


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

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer, other financial intermediary or the Transfer Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax. However, certain
investors may be subject to a Federal alternative minimum tax on dividends
received from the Fund. To the extent that the dividends distributed by the Fund
are derived from North Carolina municipal bond interest income or from gains
from certain North Carolina municipal bonds issued before July 1, 1995, they are
also exempt from North Carolina income taxes. Interest income from other
investments may produce taxable distributions. Dividends derived from capital
gains realized by the Fund will be subject to Federal income tax and generally
(except for gains attributable to certain North Carolina municipal bonds issued
before July 1, 1995) will be subject to North Carolina income tax as well. If
you are subject to income tax in a state other than North Carolina, the
dividends derived from North Carolina municipal bonds generally will not be
exempt from income tax in that state.

               MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND               25


[ICON] Your Account

"BUYING A DIVIDEND"


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

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

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

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. Capital gains are generally taxed at
different rates than ordinary income dividends.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and North Carolina tax laws. It is not a substitute for
personal tax advice. You should consult your personal tax adviser about the
potential tax consequences to you of an investment in the Fund under all
applicable tax laws.

26             MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


Management of the Fund [ICON]

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
2001, the Manager received a fee equal to 0.55% of the Fund's average daily net
assets.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates, including Merrill Lynch Investment
Managers, had approximately, $506 billion in investment company and other
portfolio assets under management as of September 2001. This amount includes
assets managed for Merrill Lynch affiliates.

         MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                     27


[ICON] Management of the Fund

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

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



                                                 Class A                                             Class B
                                 --------------------------------------------       ----------------------------------------------
                                        For the Year Ended July 31,                         For the Year Ended July 31
Increase (Decrease) in
Net Asset Value:                 2001      2000      1999      1998      1997       2001     2000       1999       1998     1997
                                                                                            
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning
of year                         $10.14    $10.35    $11.00    $10.87    $10.36    $10.14    $10.35    $11.01    $10.88    $10.36
- --------------------------------------------------------------------------------------------------------------------------------
Investment income-- net            .48       .49       .47       .50       .51       .42       .44       .42       .45       .46
- --------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on investments--
net                                .43      (.21)     (.35)      .13       .51       .43      (.21)     (.36)      .13       .52
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations                         .91       .28       .12       .63      1.02       .85       .23       .06       .58       .98
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
 Investment income-- net          (.48)     (.49)     (.47)     (.50)     (.51)     (.42)     (.44)     (.42)     (.45)     (.46)
 Realized gain on investments
 -- net                             --        --      (.20)       --+       --        --        --      (.20)       --+       --
- --------------------------------------------------------------------------------------------------------------------------------
 In excess of realized gain
 on investments--net                --        --      (.10)       --        --        --        --      (.10)       --        --
- --------------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions                     (.48)     (.49)     (.77)     (.50)     (.51)     (.42)     (.44)     (.72)     (.45)     (.46)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end
of year                         $10.57    $10.14    $10.35    $11.00    $10.87    $10.57    $10.14    $10.35    $11.01    $10.88
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share                         9.13%     2.90%     1.02%     5.99%    10.17%     8.58%     2.38%      .41      5.45%     9.71%
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement                     1.11%      .96%     1.03%      .90%      .80%     1.63%     1.46%     1.54      1.41%     1.31%
- --------------------------------------------------------------------------------------------------------------------------------
  Expenses                        1.11%      .96%     1.03%      .90%      .88%     1.63%     1.46%     1.54      1.41%     1.39%
- --------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net         4.61%     4.90%     4.39%     4.59%     4.89%     4.09%     4.39%     3.88      4.08%     4.39%
- --------------------------------------------------------------------------------------------------------------------------------
  Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------------------
  Net assets, end
  of year (in thousands)        $6,441    $7,177    $9,094    $8,753    $8,542   $23,157   $25,533   $32,886   $37,204   $41,137
- --------------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover             28.58%    58.02%    47.52%   125.23%    94.59%    28.58%    58.02%    47.52    125.23%    94.59%
- --------------------------------------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

+ Amount is less than $.01 per share.


28                 MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------




                                                         Class C                                        Class D
                                      ---------------------------------------------     --------------------------------------
                                               For the Year Ended July 31,                    For the Year Ended July 31,
                                      ---------------------------------------------     --------------------------------------
Increase (Decrease) in
  Net Asset Value:                    2001      2000      1999      1998       1997     2001    2000    1999     1998     1997
                                                                                          
- ------------------------------------------------------------------------------------------------------------------------------
  Per Share Operating
  Performance:
- ------------------------------------------------------------------------------------------------------------------------------
  Net asset value, beginning
  of year                           $10.13    $10.35    $11.00    $10.87    $10.36    $10.14   $10.36  $11.01   $10.88  $10.37
- ------------------------------------------------------------------------------------------------------------------------------
  Investment income-- net              .41       .43       .41       .44       .45       .47      .48     .46      .49     .50
- ------------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized gain
  (loss) on investments--net           .44      (.22)     (.35)      .13       .51       .43     (.22)   (.35)     .13     .51
- ------------------------------------------------------------------------------------------------------------------------------
  Total from investment
  operations                           .85       .21       .06       .57       .96       .90      .26     .11      .62    1.01
- ------------------------------------------------------------------------------------------------------------------------------
  Less dividends and
  distributions:

    Investment income--net            (.41)     (.43)     (.41)     (.44)     (.45)     (.47)    (.48)   (.46)    (.49)   (.50)

    Realized gain on investments
    -- net                              --        --      (.20)       --+       --        --       --    (.20)      --+      --
    In excess of realized gain on
    investments-- net                   --        --      (.10)       --        --        --       --    (.10)      --       --
- -------------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions                         (.41)     (.43)     (.71)     (.44)     (.45)     (.47)    (.48)   (.76)    (.49)    (.50)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year        $10.57    $10.13    $10.35    $11.00    $10.87    $10.57   $10.14  $10.36   $11.01   $10.88
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -------------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share                             8.58%     2.18%      .41%     5.35%     9.50%     9.02%    2.70%    .92%    5.88%   10.05%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement                         1.73%     1.56%     1.64%     1.51%     1.41%     1.24%    1.05%   1.14%    1.00%     .90%
- -------------------------------------------------------------------------------------------------------------------------------
Expenses                              1.73%     1.56%     1.64%     1.51%     1.49%     1.24%    1.05%   1.14%    1.00%     .98%
- -------------------------------------------------------------------------------------------------------------------------------
Investment income--net                4.00%     4.29%     3.78%     3.98%     4.28%     4.47%    4.81%   4.28%    4.49%    4.79%
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)                      $1,743    $1,868    $2,404    $2,527    $2,052    $4,040   $2,812  $3,057   $2,534   $2,132
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover                   28.58%    58.02%    47.52%   125.23%    94.59%    28.58%   58.02%  47.52%  125.23%   94.59%
- -------------------------------------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

+ Amount is less than $.01 per share.

             MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND                 29


                                   POTENTIAL
                                   INVESTORS

         [1]                                                        [2]
                            Open an account (two options)
    MERRILL LYNCH                                              TRANSFER AGENT

 FINANCIAL ADVISOR
OR SECURITIES DEALER
                                                   Financial Data Services, Inc.
Advises shareholders on their
      Fund investments.                               ADMINISTRATIVE OFFICES
                                                     4800 Deer Lake Drive East
                                                       Jacksonville, Florida
                                                            32246-6484

                                                          MAILING ADDRESS
                                                           P.O. Box 45289
                                                       Jacksonville, Florida
                                                             32232-5289

                                                      Performs 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                     THE FUND                 CUSTODIAN

   Sidley Austin Brown        The Board of Trustees       State Street Bank
        & Wood LLP              oversees the Fund.       and Trust Company
     875 Third Avenue                                       P.O. Box 351
 New York, New York 10022                            Boston, Massachusetts 02101

Provides legal advice to the                         Holds the Fund's assets for
            Fund.                                           safekeeping.

INDEPENDENT AUDITORS               ACCOUNTING                  MANAGER
                               SERVICES PROVIDER

   Deloitte & Touche LLP                             Fund Asset Management, L.P.
Two World Financial Center     State Street Bank
    New York, New York         and Trust Company       ADMINISTRATIVE OFFICES
        10281-1008           500 College Road East     800 Scudders Mill Road
                             Princeton, New Jersey  Plainsboro, New Jersey 08536
   Audits the financial              08540
    statements of the                                     MAILING ADDRESS
    Fund on behalf of           Provides certain           P.O. Box 9011
    the shareholders.             accounting           Princeton, New Jersey
                                services to the             08543-9011
                                    Fund.
                                                       TELEPHONE NUMBER
                                                        1-800-MER-FUND

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



               MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND


For More Information [ICON]


Shareholder Reports

Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or other financial
intermediary or call the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Advisor or other financial intermediary or
contact the Fund at the telephone number or address indicated on the inside back
cover of this Prospectus if you have any questions.


Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's 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. 20549-6009.

You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375
Code #16400-11-01
(C) Fund Asset Management, L.P.

                                  Prospectus

[LOGO] Merrill Lynch
Investment Managers

Merrill Lynch North Carolina
Municipal Bond Fund
of Merrill Lynch Multi-State
Municipal Series Trust

                                                               November 14, 2001

EX-99.17J

                                                                   EXHIBIT 17(j)

                                  Prospectus

[LOGO] Merrill Lynch Investment Managers

                    Merrill Lynch Ohio Municipal Bond Fund
              of Merrill Lynch Multi-State Municipal Series Trust

                                                               November 14, 2001


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
                                                                                  
   [ICON] KEY FACTS
          -------------------------------------------------------------------------------
          Merrill Lynch Ohio Municipal Bond Fund at a Glance                            3
          Risk/Return Bar Chart                                                         5
          Fees and Expenses                                                             6

   [ICON] DETAILS ABOUT THE FUND
          -------------------------------------------------------------------------------
          How the Fund Invests                                                          8
          Investment Risks                                                              9

   [ICON] YOUR ACCOUNT
          -------------------------------------------------------------------------------
          Merrill Lynch Select Pricing(SM) System                                      14
          How to Buy, Sell, Transfer and Exchange Shares                               20
          Participation in Fee-Based Programs                                          24

   [ICON] MANAGEMENT OF THE FUND
          -------------------------------------------------------------------------------
          Fund Asset Management                                                        27
          Financial Highlights                                                         28

   [ICON] FOR MORE INFORMATION
          -------------------------------------------------------------------------------
          Shareholder Reports                                                  Back Cover
          Statement of Additional Information                                  Back Cover


                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND


Key Facts [ICON]


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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Ohio Municipal Bond -- a debt obligation issued by or on behalf of a
governmental entity in Ohio or other qualifying issuer that pays interest exempt
from Ohio personal income taxes as well as from Federal income tax.

MERRILL LYNCH OHIO MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

What is the Fund's investment objective?

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

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade Ohio
municipal bonds. These may be obligations of a variety of issuers including
governmental entities in Ohio and issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam. The Fund will invest at least 80% of its net assets in
Ohio municipal bonds. The Fund may invest up to 20% of its assets in high yield
bonds (also known as "junk" bonds); however, the Fund will not invest in bonds
that are in default or that Fund management believes will be in default. The
Fund also may invest in certain types of derivative securities. When choosing
investments, Fund management considers various factors, including the credit
quality of issuers, yield analysis, maturity analysis and the call features of
the obligations. Under normal conditions, the Fund's weighted average maturity
will be more than ten years. The Fund cannot guarantee that it will achieve its
objective.

What are the main risks of investing in the Fund?

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

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. For
this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance. In addition, since the Fund invests at least
80% of its net assets in Ohio municipal bonds, it is more exposed to negative
political or economic factors in Ohio than a fund that invests more widely.
Derivatives and high yield bonds may be volatile and subject to liquidity,
leverage and credit risks.

                   MERRILL LYNCH OHIO MUNICIPAL BOND FUND                      3


[ICON] Key Facts

Who should invest?


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

   .   Are looking for income that is exempt from Federal income tax and Ohio
       personal income tax

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

   .   Are looking for liquidity

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

4                   MERRILL LYNCH OHIO MUNICIPAL BOND FUND


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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

During the period shown in the bar chart, the highest return for a quarter was
6.94% (quarter ended March 31, 1995) and the lowest return for a quarter was-
6.47% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 4.00%.



Average Annual Total Returns                           Past        Past       Since
(as of December 31, 2000)                            One Year   Five Years  Inception
- ---------------------------------------------------------------------------------------
                                                                   
Merrill Lynch Ohio Municipal Bond
Fund*                                     A            4.36%        3.54%      5.63%+
Lehman Brothers Municipal Bond Index**                11.68%        5.84%      6.90%++
- ---------------------------------------------------------------------------------------
Merrill Lynch Ohio Municipal Bond
Fund*                                     B            4.16%        3.86%      5.58%+
Lehman Brothers Municipal Bond Index**                11.68%        5.84%      6.90%++
- ---------------------------------------------------------------------------------------
Merrill Lynch Ohio Municipal Bond
Fund*                                     C            7.16%        3.75%      5.39%#
Lehman Brothers Municipal Bond Index**                11.68%        5.84%      7.54%##
- ---------------------------------------------------------------------------------------
Merrill Lynch Ohio Municipal Bond
Fund*                                     D            4.36%        3.44%      5.24%#
Lehman Brothers Municipal Bond Index**                11.68%        5.84%      7.54%##
- ---------------------------------------------------------------------------------------


  *  Includes all applicable fees and sales charges.

 **  This unmanaged Index consists of long term revenue bonds, prerefunded
     bonds, general obligation bonds and insured bonds. Past performance is not
     predictive of future performance.

  +  Inception date is February 28, 1992.

 ++  Since February 28, 1992.

  #  Inception date is October 21, 1994.

 ##  Since October 31, 1994.

            MERRILL LYNCH OHIO MUNICIPAL BOND FUND                            5


[ICON] Key Facts

UNDERSTANDING EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries, for account maintenance activities.

FEES AND EXPENSES

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.

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



Shareholder Fees (fees paid directly
from your investment)(a):                                Class A       Class B(b)    Class C    Class D
- --------------------------------------------------------------------------------------------------------------------
                                                                                    
  Maximum Sales Charge (Load) imposed on purchases
  (as a percentage of offering price)                      4.00%(c)        None         None      4.00%(c)
- --------------------------------------------------------------------------------------------------------------------
  Maximum Deferred Sales Charge (Load) (as a
  percentage of original purchase price or
  redemption proceeds, whichever is lower)                  None(d)        4.0%(c)      1.0%(c)    None(d)
- --------------------------------------------------------------------------------------------------------------------
  Maximum Sales Charge (Load) imposed on
  Dividend Reinvestments                                    None           None         None       None
- --------------------------------------------------------------------------------------------------------------------
  Redemption Fee                                            None           None         None       None
- --------------------------------------------------------------------------------------------------------------------
  Exchange Fee                                              None           None         None       None
- --------------------------------------------------------------------------------------------------------------------
  Annual Fund Operating Expenses (expenses that are
  deducted from Fund assets):
- --------------------------------------------------------------------------------------------------------------------
  Management Fee(e)                                         0.55%          0.55%        0.55%      0.55%
- --------------------------------------------------------------------------------------------------------------------
  Distribution and/or Service (12b-1) Fees(f)               None           0.50%        0.60%      0.10%
- --------------------------------------------------------------------------------------------------------------------
  Other Expenses (including transfer agency fees)(g)        0.48%          0.49%        0.50%      0.48%
- --------------------------------------------------------------------------------------------------------------------
  Total Annual Fund Operating Expenses                      1.03%          1.54%        1.65%      1.13%
- --------------------------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution fees
     and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     services. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such services.

6                   MERRILL LYNCH OHIO MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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         $501            $715               $946              $1,609
- -------------------------------------------------------------------------------
Class B         $557            $686               $839              $1,835
- -------------------------------------------------------------------------------
Class C         $268            $520               $897              $1,955
- -------------------------------------------------------------------------------
Class D         $511            $745               $997              $1,720
- -------------------------------------------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                1 Year          3 Years           5 Years           10 Years
- -------------------------------------------------------------------------------
Class A         $501            $715              $946              $1,609
- -------------------------------------------------------------------------------
Class B         $157            $486              $839              $1,835
- -------------------------------------------------------------------------------
Class C         $168            $520              $897              $1,955
- -------------------------------------------------------------------------------
Class D         $511            $745              $997              $1,720
- -------------------------------------------------------------------------------

                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND                      7


Details About the Fund [ICON]

ABOUT THE PORTFOLIO MANAGER

Theodore R. Jaeckel, Jr. is the Vice President and portfolio manager of the
Fund. He has been a Director (Tax-Exempt Fund Management) of Merrill Lynch
Investment Managers since 1997 and was a Vice President of Merrill Lynch
Investment Managers from 1991 to 1997.

ABOUT THE MANAGER


The Fund is managed by Fund Asset Management.

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

The Fund's main goal is to seek income that is exempt from Federal income tax
and Ohio personal income tax. The Fund invests primarily in long term,
investment grade Ohio municipal bonds. These may be obligations of a variety of
issuers including governmental entities or other qualifying issuers. Issuers may
be located in Ohio or in other qualifying jurisdictions such as Puerto Rico, the
U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.

The Fund will invest at least 80% of its net assets in Ohio municipal bonds.
Under normal conditions, the Fund's weighted average maturity will be more than
ten years. For temporary periods, however, the Fund may invest up to 35% of its
assets in short term tax exempt or taxable money market obligations, although
the Fund will not generally invest more than 20% of its net assets in taxable
money market obligations. As a temporary measure for defensive purposes, the
Fund may invest without limitation in short term tax-exempt or taxable money
market obligations. These short term investments may limit the potential for the
Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

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

Ohio's economy is influenced by numerous factors, including developments in the
manufacturing industries, agribusiness and its status as a major "headquarters"
state. Fund management believes that current economic conditions in Ohio will
enable the Fund to continue to invest in high quality Ohio municipal bonds.

8                   MERRILL LYNCH OHIO MUNICIPAL BOND FUND


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

   .   Credit Quality Of Issuers -- based on bond ratings and other factors
       including economic and financial conditions.

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

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

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

INVESTMENT RISKS
- --------------------------------------------------------------------------------

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

Bond Market And Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. 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 municipal
bonds 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.

                       MERRILL LYNCH MUNICIPAL BOND FUND                       9


[ICON] Details About the Fund

State Specific Risk -- The Fund will invest primarily in Ohio municipal bonds.
As a result, the Fund is more exposed to risks affecting issuers of Ohio
municipal bonds than is a municipal bond fund that invests more widely. While
Ohio's general economy is presently stable, economic and social conditions may
affect the financial condition of Ohio and its political subdivisions. Moody's,
Standard & Poor's and Fitch currently rate the State of Ohio's general
obligation bonds Aa1, AA+ and AA+, respectively.

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.

Borrowing And Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

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

10                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or which Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders.
Junk bonds may be subject to greater call and redemption risk than higher rated
debt securities.

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                    11


[ICON] Details About the Fund

When Issued Securities, Delayed Delivery Securities And Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity for the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily sell within seven days at current value or that
have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures, and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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

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

12                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


The Fund may use derivatives for hedging purposes including anticipatory hedges.
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. 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.

Indexed And Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax-exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

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

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                    13


Your Account [ICON]

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. 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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

If you select Class B or Class C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.25% on Class
B shares or 0.35% on Class C shares and an account maintenance fee of 0.25% on
both classes. Because these fees are paid out of the Fund's assets on an ongoing
basis, over time these fees increase the cost of your investment and may cost
you more than paying other types of sales charges. In addition, you may be
subject to a deferred sales charge when you sell Class B or Class C shares.
The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.

14                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


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



                  Class A            Class B          Class C           Class D
- ------------------------------------------------------------------------------------------
                                                            
Availability      Limited to         Generally        Generally         Generally
                  certain            available        available         available
                  investors          through Merrill  through Merrill   through Merrill
                  including:         Lynch. Limited   Lynch. Limited    Lynch. Limited
                  . Current Class A  availability     availability      availability
                  shareholders       through          through           through selected
                  . Participants     selected         selected          securities
                  in certain         securities       securities        dealers and
                  Merrill            dealers and      dealers and       other financial
                  Lynch-sponsored    other financial  other financial   intermediaries.
                  programs           intermediaries.  intermediaries.
                  . Certain
                  affiliates
                  of Merrill
                  Lynch, selected
                  securities
                  dealers and other
                  financial
                  intermediaries.
- ------------------------------------------------------------------------------------------
Initial Sales     Yes. Payable at    No. Entire       No. Entire        Yes. Payable at
Charge?           time of purchase.  purchase price   purchase price    time of purchase.
                  Lower sales        is invested in   is invested in    Lower sales
                  charges available  shares of the    Shares of the     charges available
                  for larger         Fund.            Fund.             for larger
                  investments.                                          investments.
- ------------------------------------------------------------------------------------------
Deferred Sales    No. (May be        Yes. Payable if  Yes. Payable if   No. (May be
Charge?           charged for        you redeem       you redeem        charged for
                  purchases over     within four      within one        purchases over
                  $1 million that    years of         year of           $1 million that
                  are redeemed       purchase.        purchase.         are redeemed
                  within one year.)                                     within one year.)
- ------------------------------------------------------------------------------------------
Account           No.                0.25% Account    0.25% Account     0.10% Account
Maintenance and                      Maintenance      Maintenance       Maintenance Fee.
Distribution                         Fee. 0.25%       Fee. 0.35%        No Distribution
Fees?                                Distribution     Distribution      Fee.
                                     Fee.             Fee.
- ------------------------------------------------------------------------------------------
Conversion to     No.                Yes,             No.               N/A
Class D shares?                      automatically
                                     after
                                     approximately
                                     ten years.
- ------------------------------------------------------------------------------------------


                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                    15


[ICON] Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares -- Initial Sales Charge Options

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

                                                                    Dealer
                                                                 Compensation
                          As a % of          As a % of             as a % of
Your Investment        Offering Price    Your Investment*       Offering Price
- -------------------------------------------------------------------------------
Less than $25,000           4.00%              4.17%                 3.75%
- -------------------------------------------------------------------------------
$25,000 but less
than $50,000                3.75%              3.90%                 3.50%
- -------------------------------------------------------------------------------
$50,000 but less
than $100,000               3.25%              3.36%                 3.00%
- -------------------------------------------------------------------------------
$100,000 but less
than $250,000               2.50%              2.56%                 2.25%
- -------------------------------------------------------------------------------
$250,000 but less
than $1,000,000             1.50%              1.52%                 1.25%
- -------------------------------------------------------------------------------
$1,000,000 and over**       0.00%              0.00%                 0.00%
- -------------------------------------------------------------------------------
  *  Rounded to the nearest one-hundredth percent.

 **  If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

   .   Purchases under a Right of Accumulation or Letter of Intent

   .   TMA(SM) Managed Trusts

   .   Certain Merrill Lynch investment or central asset accounts

   .   Purchases using proceeds from the sale of certain Merrill Lynch closed-
       end funds under certain circumstances

   .   Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees

16                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


   .   Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase, or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                    17


[ICON] Your Account

Class B Shares

If you redeem Class B shares within four 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                                     3.00%
            ---------------------------------------------------
            2 - 3                                     2.00%
            ---------------------------------------------------
            3 - 4                                     1.00%
            ---------------------------------------------------
            4 and thereafter                          0.00%
            ---------------------------------------------------

*    The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

     .    Redemption in connection with participation in certain fee-based
          programs of Merrill Lynch 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

     .    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

     .    Withdrawal 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

Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class D

18                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for Federal income tax
purposes.

Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                    19


[ICON] Your Account

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

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

20                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND




If You Want to      Your Choices                  Information Important for You to Know
- ------------------------------------------------------------------------------------------
                                            
Buy Shares          First, select the share       Refer to the Merrill Lynch Select
                    class appropriate for you     Pricing  table on page 15. Be sure to
                                                  read this Prospectus carefully.
                    ----------------------------------------------------------------------
                    Next, determine the amount    The minimum initial investment for the
                    of your investment            Fund is $1,000 for all accounts except
                                                  that certain Merrill Lynch fee-based
                                                  programs have a $250 initial minimum
                                                  investment.

                                                  (The minimums for initial investments
                                                  may be waived under certain
                                                  circumstances.)
                    ----------------------------------------------------------------------
                    Have your Merrill Lynch       The price of your shares is based on the
                    Financial Advisor,            next calculation of net asset value
                    selected securities dealer    after your order is placed. Any purchase
                    or other financial            orders placed prior to the close of
                    intermediary submit your      business on the New York Stock Exchange
                    purchase order                (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,
                                                  including Merrill Lynch, may charge a
                                                  processing fee to confirm a purchase.
                                                  Merrill Lynch currently charges a fee of
                                                  $5.35.
                    ----------------------------------------------------------------------
                    Or contact the Transfer       To purchase shares directly, call the
                    Agent                         Transfer Agent at 1-800-MER-FUND and
                                                  request a purchase application. 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
Investment                                        purchases is generally $50 except that
                                                  certain programs, such as automatic
                                                  investment plans, may have higher
                                                  minimums.

                                                  (The minimum for additional purchases
                                                  may be waived under certain
                                                  circumstances.)
                    ----------------------------------------------------------------------
                    Acquire additional shares     All dividends are automatically
                    through the automatic         reinvested without a sales charge.
                    dividend reinvestment plan
                    ----------------------------------------------------------------------
                    Participate in the            You may invest a specific amount on a
                    automatic investment plan     periodic basis through certain Merrill
                                                  Lynch investment or central asset
                                                  accounts.
- ------------------------------------------------------------------------------------------
Transfer Shares     Transfer to a                 You may transfer your Fund shares only
to Another          participating securities      to another securities dealer that has
Securities Dealer   dealer or other financial     entered into an agreement with the
or Other Financial  intermediary                  Distributor. Certain shareholder
Intermediary                                      services may not be available for the
                                                  transferred shares. You may only
                                                  purchase additional shares of funds
                                                  previously owned before the transfer.
                                                  All future trading of these assets must
                                                  be coordinated by the receiving firm.
                    ----------------------------------------------------------------------
                    Transfer to a                 You must either:
                    non-participating             .  Transfer your shares to an account
                    securities dealer or other       with the Transfer Agent; or
                    financial intermediary        .  Sell your shares, paying any
                                                     applicable deferred sales charge.
- ------------------------------------------------------------------------------------------


                         MERRILL LYNCH OHIO MUNICIPAL BOND FUND               21


[ICON]  Your Account



If You Want to      Your Choices                  Information Important for You to Know
- ------------------------------------------------------------------------------------------
                                            
Sell Your Shares    Have your Merrill Lynch       The price of your shares is based on the
                    Financial Advisor,            next calculation of net asset value
                    selected securities dealer    after your order is placed. For your
                    or other financial            redemption request to be priced at the
                    intermediary submit your      net asset value on the day of 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, including Merrill Lynch,
                                                  may charge a fee to process a redemption
                                                  of shares. Merrill Lynch currently
                                                  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     You may sell shares held at the Transfer
                    Agent                         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 at the Transfer
                                                  Agent by telephone request if the amount
                                                  being sold is less than $50,000 and if
                                                  certain other conditions are met.
                                                  Contact the Transfer Agent at
                                                  1-800-MER-FUND for details.
- ------------------------------------------------------------------------------------------
Sell Shares         Participate in the Fund's     You can choose to receive systematic
Systematically      Systematic Withdrawal Plan    payments from your Fund 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 Merrill Lynch CMA(R) or
                                                  CBA(R) Account 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 Merrill
                                                  Lynch Financial Advisor or other
                                                  financial intermediary for details.
- ------------------------------------------------------------------------------------------


22                        MERRILL LYNCH OHIO MUNICIPAL BOND FUND




If You Want to      Your Choices                  Information Important for You to Know
- ------------------------------------------------------------------------------------------
                                            
Exchange Your       Select the fund into which    You can exchange your shares of the Fund
Shares              you want to exchange. Be      for shares of many other Merrill Lynch
                    sure to read that fund's      mutual funds. You must have held the
                    prospectus                    shares used in the exchange for at least
                                                  15 calendar days before you can exchange
                                                  to another fund.

                                                  Each class of Fund shares is generally
                                                  exchangeable for shares of the same
                                                  class of another fund. If you own Class
                                                  A shares and wish to exchange into a
                                                  fund in which you have no Class A shares
                                                  (and are not eligible to purchase Class
                                                  A shares), you will exchange into Class
                                                  D shares.

                                                  Some of the Merrill Lynch mutual funds
                                                  impose a different initial or deferred
                                                  sales charge schedule. If you exchange
                                                  Class A or Class D shares for shares of
                                                  a fund with a higher initial sales
                                                  charge than you originally paid, you
                                                  will be charged the difference at the
                                                  time of exchange. If you exchange Class
                                                  B shares for shares of a fund with a
                                                  different deferred sales charge
                                                  schedule, the higher schedule will
                                                  apply. The time you hold Class B or
                                                  Class C shares in both funds will count
                                                  when determining your holding period for
                                                  calculating a deferred sales charge at
                                                  redemption. If you exchange Class A or
                                                  Class D 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.

                                                  To exercise the exchange privilege
                                                  contact your Merrill Lynch Financial
                                                  Advisor or other financial intermediary
                                                  or call the Transfer Agent at
                                                  1-800-MER-FUND.

                                                  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.

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


Short-term or excessive trading into and out of the Fund may harm performance by
disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short-term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds, and
accounts under common ownership or control.

                     MERRILL LYNCH OHIO MUNICIPAL BOND FUND                   23


[ICON] Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


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

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary or the Transfer
Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax. However, certain
investors may be subject to a Federal alternative minimum tax on dividends
received from the Fund. To the extent that the dividends distributed by the Fund
are derived from Ohio municipal bond interest income, they are also exempt from
Ohio personal income tax. Interest income from other investments may produce
taxable distributions. Dividends derived from capital gains realized by the Fund
will be subject to Federal tax and generally will be subject to Ohio tax as
well. If you are subject to income tax in a state other than Ohio, the dividends
derived from Ohio municipal bonds generally will not be exempt from income tax
in that state.

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                   25


[ICON] Your Account

"BUYING A DIVIDEND"


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

Generally, within 60 days after the end of the Fund's taxable year, you will be
informed of the amount of exempt-interest dividends, ordinary income dividends
and capital gain dividends you received that year. The tax treatment of
dividends from the Fund is the same whether you choose to receive dividends in
cash or to have them reinvested in shares of the Fund. Capital gain dividends
are taxable for Federal income tax purposes as long term capital gains to you,
regardless of how long you have held your shares. Capital gains are generally
taxed at different rates from ordinary income for Federal income tax purposes.
For Ohio tax purposes, capital gains are generally taxed as capital gains;
however, the Ohio capital gains tax rate is the same as the rate for ordinary
income for Ohio personal income tax purposes.

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

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 as capital gain for both Federal and Ohio
purposes.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and Ohio tax laws. It is not a substitute for personal tax
advice. You should consult your personal tax adviser about the potential tax
consequences to you of an investment in the Fund under all applicable tax laws.

26                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


Management of the Fund [ICON]

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of net
assets from $500 million to $1 billion; and 0.50% of net assets above $1
billion. For the fiscal year ended July 31, 2001, the Manager received a fee
equal to 0.55% of the Fund's average daily net assets.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates had approximately $506 billion in
investment company and other portfolio assets under management as of September
2001. This amount includes assets managed for Merrill Lynch affiliates.

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                    27


[ICON] Management of the Fund

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

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



                                                  Class A                                     Class B
                                ------------------------------------------  -----------------------------------------------
                                         For the Year Ended July 31,                  For the Year Ended July 31,
                                ------------------------------------------  -----------------------------------------------
Increase (Decrease) in
Net Asset Value:                  2001     2000    1999      1998    1997      2001     2000     1999      1998      1997
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                    
Per Share Operating
Performance:
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year               $10.13   $10.77  $11.21    $11.17  $10.70   $ 10.13  $ 10.77  $ 11.21   $ 11.17   $ 10.70
- ---------------------------------------------------------------------------------------------------------------------------
Investment income -- net           .49      .51     .52       .55     .55       .44      .46      .47       .50       .49
- ---------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments -- net                 .25     (.40)   (.34)      .04     .47       .25     (.40)    (.34)      .04       .47
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations                         .74      .11     .18       .59    1.02       .69      .06      .13       .54       .96
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income -- net          (.49)    (.51)   (.52)     (.55)   (.55)     (.44)    (.46)    (.47)     (.50)     (.49)
- ---------------------------------------------------------------------------------------------------------------------------
Realized gain on
investments -- net                  --       --    (.10)       --      --        --       --     (.10)       --        --
In excess of realized gain
on investments -- net               --     (.24)     --        --      --        --     (.24)      --        --        --
- ---------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions                     (.49)    (.75)   (.62)     (.55)   (.55)     (.44)    (.70)    (.57)     (.50)     (.49)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of year                     $10.38   $10.13  $10.77    $11.21  $11.17   $ 10.38  $ 10.13  $ 10.77   $ 11.21   $ 11.17
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment
Return:*
- ---------------------------------------------------------------------------------------------------------------------------
Based on net asset
value per share                   7.51%    1.28%   1.59%     5.43%   9.80%     6.96%     .77%    1.08%     4.90%     9.25%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
- ---------------------------------------------------------------------------------------------------------------------------
Expenses                          1.03%     .87%    .92%      .83%    .80%     1.54%    1.38%    1.43%     1.34%     1.31%
- ---------------------------------------------------------------------------------------------------------------------------
Investment income -- net          4.83%    5.00%   4.70%     4.92%   5.07%     4.31%    4.49%    4.19%     4.41%     4.56%
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of
year (in thousands)             $6,109   $6,060  $9,161    $9,252  $8,506   $32,138  $37,864  $50,892   $55,554   $60,072
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover               38.01%   57.46%  82.55%    35.46%  52.57%    38.01%   57.46%   82.55%    35.46%    52.57%
- ---------------------------------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

28                  MERRILL LYNCH OHIO MUNICIPAL BOND FUND


FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------



                                                        Class C                                            Class D
                                 -----------------------------------------------------   -------------------------------------------
                                              For the Year Ended July 31,                        For the Year Ended July 31,
                                 -----------------------------------------------------   -------------------------------------------
                                                                                               
  Increase (Decrease) in
  Net Asset Value:                 2001          2000       1999       1998       1997     2001     2000     1999     1998     1997
- ------------------------------------------------------------------------------------------------------------------------------------
  Per Share Operating
  Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  beginning of year              $10.13        $10.77     $11.21     $11.17     $10.70   $10.13   $10.77   $11.21   $11.16   $10.70
- ------------------------------------------------------------------------------------------------------------------------------------
  Investment income -- net          .43           .44        .46        .48        .48      .48      .50      .51      .54      .54
- ------------------------------------------------------------------------------------------------------------------------------------
  Realized and unrealized
  gain (loss) on
  investments -- net                .25          (.40)      (.34)       .04        .47      .25     (.40)    (.34)     .05      .46
- ------------------------------------------------------------------------------------------------------------------------------------
  Total from investment
  operations                        .68           .04        .12        .52        .95      .73      .10      .17      .59     1.00
- ------------------------------------------------------------------------------------------------------------------------------------
  Less dividends and
  distributions:
    Investment income -- net       (.43)         (.44)      (.46)      (.48)      (.48)    (.48)    (.50)    (.51)    (.54)    (.54)
    Realized gain on
    investments -- net               --            --       (.10)        --         --       --       --     (.10)      --       --
    In excess of realized gain
    on investments -- net            --          (.24)        --         --         --       --     (.24)      --       --       --
- ------------------------------------------------------------------------------------------------------------------------------------
  Total dividends and
  distributions                    (.43)         (.68)      (.56)      (.48)      (.48)    (.48)    (.74)    (.61)    (.54)    (.54)
- ------------------------------------------------------------------------------------------------------------------------------------
  Net asset value,
  end of year                    $10.38        $10.13     $10.77     $11.21     $11.17   $10.38   $10.13   $10.77   $11.21   $11.16
- ------------------------------------------------------------------------------------------------------------------------------------
  Total Investment
  Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
  Based on net asset
  value per share                  6.86%          .67%       .98%      4.79%      9.14%    7.40%    1.18%    1.49%    5.42%    9.60%
- ------------------------------------------------------------------------------------------------------------------------------------
  Ratios to Average
  Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
  Expenses                         1.65%         1.48%      1.53%      1.44%      1.41%    1.13%     .97%    1.02%     .93%     .90%
- ------------------------------------------------------------------------------------------------------------------------------------
  Investment income -- net         4.18%         4.39%      4.08%      4.31%      4.46%    4.72%    4.90%    4.59%    4.82%    4.97%
- ------------------------------------------------------------------------------------------------------------------------------------
  Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
  Net assets, end of
  year (in thousands)            $3,308        $2,057     $2,713     $2,526     $2,412   $4,162   $4,115   $5,867   $5,267   $4,310
- ------------------------------------------------------------------------------------------------------------------------------------
  Portfolio turnover              38.01%        57.46%     82.55%     35.46%     52.57%   38.01%   57.46%   82.55%   35.46%   52.57%
- ------------------------------------------------------------------------------------------------------------------------------------


* Total investment returns exclude the effects of sales charges.

                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND                   29


                                   POTENTIAL
                                   INVESTORS
         [1]                                                         [2]
                             Open an account (two
                                  options).
    MERRILL LYNCH
  FINANCIAL ADVISOR                                        TRANSFER AGENT
OR SECURITIES DEALER
                                                   Financial Data Services, Inc.
Advises shareholders on their
      Fund investments.                               ADMINISTRATIVE OFFICES
                                                    4800 Deer Lake Drive East
                                                  Jacksonville, Florida 32246-
                                                              6484

                                                         MAILING ADDRESS
                                                         P.O. Box 45289
                                                      Jacksonville, Florida
                                                            32232-5289

                                                    Performs 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                           THE FUND                           CUSTODIAN
                                                                       

          Sidley Austin Brown              The Board of Trustees                 State Street Bank
               & Wood LLP                    oversees the Fund.                  and Trust Company
            875 Third Avenue                                                        P.O. Box 351
        New York, New York 10022                                             Boston, Massachusetts 02101

   Provides legal advice to the Fund.                                  Holds the Fund's assets for safekeeping.



          INDEPENDENT AUDITORS
                                                 ACCOUNTING                            MANAGER
                                              SERVICES PROVIDER
                                                                    
          Deloitte & Touche LLP                                              Fund Asset Management, L.P.
       Two World Financial Center             State Street Bank
     New York, New York 10281-1008            and Trust Company                ADMINISTRATIVE OFFICES
                                            500 College Road East              800 Scudders Mill Road
                                            Princeton, New Jersey           Plainsboro, New Jersey 08536
                                                    08540
          Audits the financial                                                     MAILING ADDRESS
           statements of the             Provides certain accounting                P.O. Box 9011
           Fund on behalf of                services to the Fund.          Princeton, New Jersey 08543-9011
           the shareholders.
                                                                                   TELEPHONE NUMBER
                                                                                    1-800-MER-FUND

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



                    MERRILL LYNCH OHIO MUNICIPAL BOND FUND


For More Information [ICON]


Shareholder Reports

Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or other financial
intermediary, or call the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this Prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Advisor or other financial intermediary, or
contact the Fund at the telephone number or address indicated above if you have
any questions.

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

publicinfo@sec.gov or by writing the Public
Reference Section of the SEC, Washington,
D.C. 20549-0102.


You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375
Code #16154-11-01
(C) Fund Asset Management, L.P.

                                  Prospectus

                                             [LOGO] Merrill Lynch

                                             Investment Managers

                                             Merrill Lynch Ohio

                                             Municipal Bond Fund
                                             of Merrill Lynch
                                             Multi-State
                                             Municipal Series Trust

                                             November 14, 2001

EX-99.17K

                                                                   EXHIBIT 17(K)

                                  Prospectus

[LOGO] Merrill Lynch Investment Managers

            Merrill Lynch Texas Municipal Bond Fund
            of Merrill Lynch Multi-State Municipal Series Trust

                                                               November 14, 2001


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
                                                                         
[ICON] KEY FACTS
       -------------------------------------------------------------------------------
       Merrill Lynch Texas Municipal Bond Fund at a Glance                           3
       ---------------------------------------------------
       Risk/Return Bar Chart                                                         5
       ----------------------
       Fees and Expenses                                                             6
       -----------------

[ICON] DETAILS ABOUT THE FUND
       -------------------------------------------------------------------------------
       How the Fund Invests                                                          8
       --------------------
       Investment Risks                                                              9
       ----------------

[ICON] YOUR ACCOUNT
       -------------------------------------------------------------------------------
       Merrill Lynch Select Pricing(SM) System                                      14
       ---------------------------------------
       How to Buy, Sell, Transfer and Exchange Shares                               20
       -----------------------------------------------
       Participation in Fee-Based Programs                                          24
       -----------------------------------

[ICON] MANAGEMENT OF THE FUND
       -------------------------------------------------------------------------------
       Fund Asset Management                                                        27
       ---------------------
       Financial Highlights                                                         28
       --------------------

[ICON] FOR MORE INFORMATION
       -------------------------------------------------------------------------------
       Shareholder Reports                                                  Back Cover
       --------------------
       Statement of Additional Information                                  Back Cover
       -----------------------------------


                    MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


Key Facts [ICON]

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

Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch, Inc.

Texas Municipal Bond-- a debt obligation issued by or on behalf of a
governmental entity in Texas or other qualifying issuer that pays interest
exempt from Federal income tax.

MERRILL LYNCH TEXAS MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

What is the Fund's investment objective?

The investment objective of the Fund is to provide shareholders with income
exempt from Federal income tax.

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term investment grade Texas
municipal bonds. These may be obligations of a variety of issuers including
governmental entities in Texas and issuers located in Puerto Rico, the U. S.
Virgin Islands and Guam. The Fund will invest at least 80% of its net assets in
Texas municipal bonds. The Fund may invest up to 20% of its assets in high yield
bonds (also known as "junk" bonds); however, the Fund will not invest in bonds
that are in default or that Fund management believes will be in default. The
Fund also may invest in certain types of derivative securities. When choosing
investments, Fund management considers various factors, including the credit
quality of issuers, yield analysis, maturity analysis and the call features of
the obligations. Under normal conditions, the Fund's weighted average maturity
will be more than ten years. The Fund cannot guarantee that it will achieve its
objective.

What are the main risks of investing in the Fund?

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

The Fund is a non-diversified fund, which means that it may invest more of its
assets in obligations of a single issuer than if it were a diversified fund. For
this reason, developments affecting an individual issuer may have a greater
impact on the Fund's performance. In addition, since the Fund invests at least
80% of its net assets in Texas municipal bonds, it is more exposed to negative
political or economic factors in Texas than a fund that invests more widely.
Derivatives and high yield bonds may be volatile and subject to liquidity,
leverage and credit risks.

                    MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                    3


[ICON] Key Facts

Who should invest?

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

   .  Are looking for income that is exempt from Federal income tax

   .  want a professionally managed portfolio without the administrative burdens
      of direct investments in municipal bonds

   .  Are looking for liquidity

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

4                    MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


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 complete calendar year since the Fund's inception. 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 for the periods shown with
those of the Lehman Brothers Municipal Bond Index. How the Fund performed in the
past is not necessarily an indication of how the Fund will perform in the
future.

[CHART]

                   1992                      10.14%
                   1993                      13.24%
                   1994                      -5.76%
                   1995                      15.80%
                   1996                       1.83%
                   1997                       7.98%
                   1998                       4.39%
                   1999                      -6.72%
                   2000                      11.05%

During the period shown in the bar chart, the highest return for a quarter was
4.94% (quarter ended June 30, 1992) and the lowest return for a quarter was-
5.83% (quarter ended March 31, 1994). The Fund's year-to-date return as of
September 30, 2001 was 4.01%.



Average Annual Total Returns                          Past         Past          Since
(as of December 31, 2000)                           One Year    Five Years     Inception
- ----------------------------------------------------------------------------------------------
                                                                       
Merrill Lynch Texas Municipal Bond Fund*     A       7.14%         3.20%          5.89%+
Lehman Brothers Municipal Bond Index**              11.68%         5.84%          7.07%++
- ----------------------------------------------------------------------------------------------
Merrill Lynch Texas Municipal Bond Fund*     B       7.05%         3.52%          5.82%+
Lehman Brothers Municipal Bond Index**              11.68%         5.84%          7.07%++
- ----------------------------------------------------------------------------------------------
Merrill Lynch Texas Municipal Bond Fund*     C       9.92%         3.41%          5.06%#
Lehman Brothers Municipal Bond Index**              11.68%         5.84%          7.54%##
- ----------------------------------------------------------------------------------------------
Merrill Lynch Texas Municipal Bond Fund*     D       7.14%         3.10%          4.94%#
Lehman Brothers Municipal Bond Index**              11.68%         5.84%          7.54%##
- ----------------------------------------------------------------------------------------------


  *  Includes all applicable fees and sales charges.

 **  This unmanaged Index consists of long-term revenue bonds, prerefunded
     bonds, general obligation bonds and insured bonds. Past performance is not
     predictive of future performance.

  +  Inception date is August 30, 1991.

 ++  Since August 31, 1991.

  #  Inception date is October 21, 1994.

 ##  Since October 31, 1994.

                 MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                       5


[ICON] Key Facts

UNDERSTANDING
EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees -- these include sales charges which 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 advisors, advertising and promotion.

Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries for account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.

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



Shareholder Fees (fees paid directly from
your investment)(a):                              Class A      Class B(b)     Class C       Class D
- ---------------------------------------------------------------------------------------------------
                                                                                
 Maximum Sales Charge (Load) imposed on

 purchases (as a percentage of offering price)    4.00%(c)       None          None         4.00%(c)
- ---------------------------------------------------------------------------------------------------
 Maximum Deferred Sales Charge (Load) (as a
 percentage of original purchase price or          None(d)       4.0%(c)       1.0%(c)       None(d)
 redemption proceeds, whichever is lower)
- ---------------------------------------------------------------------------------------------------
 Maximum Sales Charge (Load) imposed on
 Dividend Reinvestments                            None          None          None          None
- ---------------------------------------------------------------------------------------------------
 Redemption Fee                                    None          None          None          None
- ---------------------------------------------------------------------------------------------------
 Exchange Fee                                      None          None          None          None
- ---------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses
that are deducted from Fund assets):
- ---------------------------------------------------------------------------------------------------
 Management Fee(e)                                0.55%         0.55%         0.55%         0.55%
- ---------------------------------------------------------------------------------------------------
 Distribution and/or Service (12b-1) Fees(f)       None         0.50%         0.60%         0.10%
- ---------------------------------------------------------------------------------------------------
 Other Expenses (including transfer
 agency fees)(g)                                  0.58%         0.59%         0.60%         0.60%
- ---------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses              1.13%         1.64%         1.75%         1.25%
- ---------------------------------------------------------------------------------------------------


(a)  In addition, Merrill Lynch may charge clients a processing fee (currently
     $5.35) 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 D shares approximately ten
     years after you buy them and will no longer be subject to distribution fees
     and will pay lower account maintenance fees.

(c)  Some investors may qualify for reductions in the sales charge (load).

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

(e)  The Fund pays the Manager a fee at the annual rate of 0.55% of the average
     daily net assets of the Fund for the first $500 million; 0.525% of the
     average daily net assets from $500 million to $1 billion; and 0.50% of the
     average daily net assets above $1 billion. For the fiscal year ended July
     31, 2001, the fee payable to the Manager from the Fund was equal to 0.55%.

(f)  The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
     Maintenance Fee is the term used elsewhere in this Prospectus and in all
     other Fund materials. If you hold Class B or Class C shares over time, it
     may cost you more in distribution (12b-1) fees than the maximum sales
     charge that you would have paid if you had bought one of the other classes.

(g)  Financial Data Services, Inc., an affiliate of the Manager, provides
     transfer agency services to the Fund. The Fund pays a fee for these
     sevices. The Manager or its affiliates also provide certain accounting
     services to the Fund and the Fund reimburses the Manager or its affiliates
     for such services.

6                   MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


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. This assumption is 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 this example. 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               $511           $745          $  997        $1,720

Class B               $567           $717          $  892        $1,944

Class C               $278           $551          $  949        $2,062

Class D               $522           $781          $1,059        $1,851


EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

                     1 Year        3 Years        5 Years       10 Years

Class A               $511           $745          $  997        $1,720

Class B               $167           $517          $  892        $1,944

Class C               $178           $551          $  949        $2,062

Class D               $522           $781          $1,059        $1,851


Details About the Fund [ICON]


ABOUT THE PORTFOLIO MANAGER

Theodore R. Jaeckel, Jr. is the portfolio
manager of the Fund. Mr. Jaeckel has been a
Director (Tax Exempt Fund Management) of
Merrill Lynch Investment Managers since
1997 and was a Vice President of Merrill
Lynch Investment Managers from 1991 to 1997.

ABOUT THE MANAGER

The Fund is managed by Fund Asset
Management.

HOW THE FUND INVESTS

The Fund's main goal is to seek income that is exempt from Federal income tax.
The Fund invests primarily in long term, investment grade Texas municipal bonds.
These may be obligations of a variety of issuers including governmental entities
or other qualifying issuers. Issuers may be located in Texas or in other
qualifying jurisdictions such as Puerto Rico, the U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's assets will be invested in investment grade securities. The
Fund may invest up to 20% of its assets in high yield ("junk") bonds. These
bonds are generally more speculative and involve greater price fluctuations than
investment grade securities.

The Fund generally will invest at least 80% of its net assets in Texas municipal
bonds. Under normal conditions, the Fund's weighted average maturity will be
more than ten years. For temporary periods, however, the Fund may invest up to
35% of its assets in short term tax exempt or taxable money market obligations,
although the Fund will generally not invest more than 20% of its net assets in
taxable money market obligations. As a temporary measure for defensive purposes,
the Fund may invest without limitation in such short term tax exempt or taxable
money market obligations. These short term investments may limit the potential
for the Fund to achieve its objective.

The Fund may use derivatives including futures, options, indexed securities,
inverse securities and swap agreements. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.

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

The State of Texas has sometimes encountered financial difficulties of a type
that could have an adverse effect on the performance of the Fund. Fund
management believes that current economic conditions in Texas will enable the
Fund to continue to invest in high quality Texas municipal bonds.

               8        MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


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

     .   Credit Quality of Issuers -- based on bond ratings and other factors
         including economic and financial conditions.

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

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

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

INVESTMENT RISKS

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

Bond Market and Selection Risk -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the securities
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

Credit Risk -- Credit risk is the risk that the issuer will be unable to pay the
interest or principal when due. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.

               MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                        9


[ICON] Details About the Fund

Interest Rate Risk -- Interest rate risk is the risk that prices of municipal
bonds 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.

State Specific Risk -- The Fund will invest primarily in Texas municipal bonds.
As a result, the Fund is more exposed to risks affecting issuers of Texas
municipal bonds than is a municipal bond fund that invests more widely.

The Texas economy is affected by developments in the oil and gas industry, the
construction and housing industry and agricultural production. In addition,
developments in the economy of Mexico, one of Texas' largest trading partners,
could adversely affect Texas' economy. Moody's, Standard & Poor's and Fitch
currently rate the State of Texas general obligation bonds Aa1, AA and AA+,
respectively.

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.

Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund's portfolio. Borrowing will
cost the Fund interest expense and other fees. The costs of borrowing may reduce
the Fund's return. Certain securities that the Fund buys may create leverage
including, for example, when issued securities, forward commitments and options.

Risks associated with certain types of obligations in which the Fund may invest
include:

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

Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

               10       MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


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

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

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

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

Insured Municipal Bonds -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal on
maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop. Insured bonds are subject to
market risk.

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. The Fund does not intend to
purchase debt securities that are in default or that Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment


             MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                          11


[ICON] Details About the Fund

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 fewer assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.

When Issued Securities, Delayed Delivery Securities and Forward Commitments --
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 to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

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

Illiquid Securities -- The Fund may invest up to 15% of its assets in
illiquid securities that it cannot easily sell within seven days at current
value or that have contractual or legal restrictions on resale. 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.

Derivatives -- The Fund may use derivative instruments including indexed and
inverse securities, options on portfolio positions, options on securities or
other financial indices, financial futures and options on such futures and swap
agreements. Derivatives allow the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

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

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


12                   MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


         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. 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. 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.

Indexed and Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Indexed securities and inverse floaters are derivative securities
and can be considered speculative.

STATEMENT OF ADDITIONAL INFORMATION

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


            MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                           13


Your Account [ICON]

MERRILL LYNCH SELECT PRICINGSM SYSTEM

The Fund offers four share classes, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
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 Merrill Lynch
Financial Advisor can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or Class D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. 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
may 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 or for shareholder servicing activities.

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

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch. The Fund is a series of the Merrill Lynch Multi-State Municipal
Series Trust.


14                    MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


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



                    Class A                   Class B                  Class C               Class D
- ------------------------------------------------------------------------------------------------------------
                                                                                 
Availability        Limited to certain        Generally                Generally             Generally
                    investors including:      available                available             available
                    . Current Class A         through                  through               through Merrill
                      shareholders            Merrill Lynch.           Merrill Lynch.        Lynch. Limited
                    . Participants in         Limited                  Limited               availability
                      certain Merrill         availability             availability          through
                      Lynch-sponsored         through                  through               selected
                      programs                selected                 selected              securities
                    . Certain affiliates of   securities               securities            dealers and
                      Merrill Lynch,          dealers and              dealers and           other financial
                      selected securities     other financial          other financial       intermediaries.
                      dealers and other       intermediaries           intermediaries
                      financial
                      intermediaries.
- --------------------------------------------------------------------------------------------------------------------------
Initial Sales         Yes. Payable at time      No. Entire purchase    No. Entire purchase   Yes. Payable at time
Charge?               of purchase. Lower        price is invested in   price is invested in  of purchase. Lower sales
                      sales charges available   shares of the Fund.    shares of the Fund.   charges available for
                      for larger investments.                                                larger investments.
- --------------------------------------------------------------------------------------------------------------------------
Deferred Sales        No. (May be charged for   Yes. Payable if you    Yes. Payable if       No. (May be charged for
Sales Charge?         purchases over $1 million redeem within four     you redeem within one purchases over $1 million
                      that are redeemed within  years of purchase.     year of purchase.     that are redeemed within one
                      one year.)                                                             year.)
- --------------------------------------------------------------------------------------------------------------------------
Account               No.                       0.25% Account          0.25% Account         0.10% Account
Maintenance                                     Maintenance Fee.0.25%  Maintenance Fee.      Maintenance Fee.
and Distribution                                Distribution Fee.      0.35% Distribution    No Distribution Fee.
Fees?                                                                  Fee.

- --------------------------------------------------------------------------------------------------------------------------
Conversion            No.                       Yes, automatically     No.                   N/A
to Class D Shares                               after approximately
                                                ten years.
- --------------------------------------------------------------------------------------------------------------------------


          MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                             15



[ICON] Your Account

Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares -- Initial Sales Charge Options

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



                                                                            Dealer
                                                                         Compensation
                               As a % of           As a % of              as a % of
Your Investment             Offering Price     Your Investment*         Offering Price
- ------------------------------------------------------------------------------------------
                                                               
Less than $25,000              4.00%               4.17%                     3.75%
- ------------------------------------------------------------------------------------------
$25,000 but less
than $50,000                   3.75%               3.90%                     3.50%
- ------------------------------------------------------------------------------------------
$50,000 but less
than $100,000                  3.25%               3.36%                     3.00%
- ------------------------------------------------------------------------------------------
$100,000 but less
than $250,000                  2.50%               2.56%                     2.25%
- ------------------------------------------------------------------------------------------
$250,000 but less
than $1,000,000                1.50%               1.52%                     1.25%
- ------------------------------------------------------------------------------------------
$1,000,000 and over**          0.00%               0.00%                     0.00%
- ------------------------------------------------------------------------------------------


  *  Rounded to the nearest one-hundredth percent.

 **  If you invest $1,000,000 or more in Class A or Class D 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.

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

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:


    .  Purchases under a Right of Accumulation or Letter of Intent


    .  TMA(SM) Managed Trusts


    .  Certain Merrill Lynch investment or central asset accounts


    .  Purchases using proceeds from the sale of certain Merrill Lynch
       closed-end funds under certain circumstances

    .  Certain investors, including directors or trustees of Merrill Lynch
       mutual funds and Merrill Lynch employees

    .  Certain fee-based programs of Merrill Lynch and other financial
       intermediaries that have agreements with the Distributor or its
       affiliates.

16                 MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class A
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 D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while Class
A shares are not.

If you redeem Class A or Class D 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 Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.

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 four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.25% for Class B shares and 0.35% for Class C shares and account
maintenance fees of 0.25% for Class B and Class C shares each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost you more than paying other
types of sales charges. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary who assists you in
purchasing Fund shares.

               MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                        17


[ICON] Your Account

Class B Shares

If you redeem Class B shares within four 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                                     3.00%
              ---------------------------------------------------
              2 - 3                                     2.00%
              ---------------------------------------------------
              3 - 4                                     1.00%
              ---------------------------------------------------
              4 and thereafter                          0.00%
              ---------------------------------------------------


  *  The percentage charge will apply to the lesser of the original cost of the
     shares being redeemed or the proceeds of your redemption. Shares acquired
     through reinvestment of dividends are not subject to a deferred sales
     charge. Not all Merrill Lynch 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:

    . Redemption in connection with participation in certain fee-based programs
      of Merrill Lynch 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

    . 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

    . Withdrawal 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

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

18                    MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year 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 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 and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

                  MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                     19


[ICON] Your Account

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

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

20              MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


                                          
If You Want to     Your Choices                 Information Important for You to Know
- ------------------------------------------------------------------------------------------
Buy Shares         First, select the share      Refer to the Merrill Lynch Select
                   class appropriate for you    Pricing(SM) table on page 15. Be sure to
                                                read this Prospectus carefully.
- ------------------------------------------------------------------------------------------
                   Next, determine the amount   The minimum initial investment for the
                   of your investment           Fund is $1,000 for all accounts except
                                                that certain Merrill Lynch fee-based
                                                programs have a $250 initial minimum
                                                investment.

                                                (The minimums for initial investments may
                                                be waived under certain circumstances.)
- ------------------------------------------------------------------------------------------
                   Have your Merrill Lynch      The price of your shares is based on the
                   Financial Advisor, selected  next calculation of net asset value after
                   securities dealer or other   your order is placed. Any purchase your
                   financial intermediary       orders placed prior to the close of
                   submit purchase order        business on the New York Stock 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, including Merrill
                                                Lynch, may charge a processing fee to
                                                confirm a purchase. Merrill Lynch currently
                                                charges a fee of $5.35.
- ------------------------------------------------------------------------------------------
                   Or contact the Transfer      To purchase shares directly, call the
                   Agent                        Transfer Agent at 1-800-MER-FUND and
                                                request a purchase application. 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
Investment                                      purchases is generally $50 except that
                                                certain programs, such as automatic
                                                investment plans, may have higher
                                                minimums.
- ------------------------------------------------------------------------------------------
                                                (The minimum for additional purchases may
                                                be waived under certain circumstances.)
- ------------------------------------------------------------------------------------------
                   Acquire additional shares    All dividends are automatically
                   through the automatic        reinvested without a sales charge.
                   dividend reinvestment plan
- ------------------------------------------------------------------------------------------

                   Participate in the           You may invest a specific amount on a
                   automatic investment plan    periodic basis through certain Merrill
                                                Lynch investment or central asset
                                                accounts.
- ------------------------------------------------------------------------------------------
Transfer Shares    Transfer to a                You may transfer your Fund shares only to
to Another         participating securities     another securities dealer that has entered
Securities         dealer or other financial    into an agreement with the Distributor.
Dealer or Other    intermediary                 Certain shareholder services may not be
Financial                                       available for the transferred shares. You
Intermediary                                    may only purchase additional shares of
                                                funds previously owned before the transfer.
                                                All future trading of these assets must be
                                                coordinated by the receiving firm.
- ------------------------------------------------------------------------------------------
                   Transfer to a                You must either:
                   non-participating            . Transfer your shares to an account with
                   securities dealer or other     the TransferAgent; or
                   financial intermediary       . Sell your shares, paying any applicable
                                                  deferred sales charge.
- ------------------------------------------------------------------------------------------



                 MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                      21


[ICON] Your Account

If You Want To    Your Choices           Information Important for You to Know
- --------------------------------------------------------------------------------

Sell Your         Have your Merrill      The price of your shares is based on
Shares            Lynch Financial        the next calculation of net asset
                  Advisor, selected      value after your order is placed. For
                  securities dealer      your redemption request to be priced at
                  or other financial     the net asset value on the day of your
                  intermediary submit    request, you must submit your request
                  your sales order       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, including Merrill
                                         Lynch, may charge a fee to process a
                                         redemption of shares. Merrill Lynch
                                         currently 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       You may sell shares held at the
                  Transfer Agent         Transfer Agent by writing to the
                                         Transfer Agent at the address on the
                                         inside back cover of this prospectus.
                                         All shareholders on the account must
                                         sign the letter. A signature guarantee
                                         will generally be required but may be
                                         waived in certain limited
                                         circumstances. You can obtain a
                                         signature guarantee from a bank,
                                         securities dealer, securities broker,
                                         credit union, savings association,
                                         national securities exchange or
                                         registered securities association. A
                                         notary public seal will not be
                                         acceptable. If you hold stock
                                         certificates, return the certificates
                                         with the letter. The Transfer Agent
                                         will normally mail redemption proceeds
                                         within seven days following receipt of
                                         a properly completed request. If you
                                         make a redemption request before the
                                         Fund has collected payment for the
                                         purchase of shares, the Fund or the
                                         Transfer Agent may delay mailing your
                                         proceeds. This delay will usually not
                                         exceed ten days.

                                         You may also sell shares held at the
                                         Transfer Agent by telephone request if
                                         the amount being sold is less than
                                         $50,000 and if certain other conditions
                                         are met. Contact the Transfer Agent at
                                         1-800-MER-FUND for details.
- --------------------------------------------------------------------------------
Sell Shares       Participate in the     You can choose to receive systematic
Systematically    Fund's Systematic      payments from your Fund account either
                  Withdrawal Plan        by check or through direct deposit to
                                         your bank account on a monthly or
                                         quarterly basis. If you hold your Fund
                                         shares in a Merrill Lynch CMA(R) or
                                         CBA(R) Account 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
                                         Merrill Lynch Financial Advisor or
                                         other financial intermediary for
                                         details.
- --------------------------------------------------------------------------------

22               MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


If You Want To    Your Choices            Information Important for You to Know
- --------------------------------------------------------------------------------
Exchange Your     Select the fund into    You can exchange your shares of the
Shares            which you want to       Fund for shares of many other Merrill
                  exchange. Be sure to    Lynch mutual funds. You must have
                  read that fund's        held the shares used in the exchange
                  prospectus              for at least 15 calendar days before
                                          you can exchange to another fund.

                                          Each class of Fund shares is generally
                                          exchangeable for shares of the same
                                          class of another fund. If you own
                                          Class A shares and wish to exchange
                                          into a fund in which you have no Class
                                          A shares (and are not eligible to
                                          purchase Class A shares), you will
                                          exchange into Class D shares.

                                          Some of the Merrill Lynch mutual funds
                                          impose a different initial or deferred
                                          sales charge schedule. If you exchange
                                          Class A or Class D shares for shares
                                          of a fund with a higher initial sales
                                          charge than you originally paid, you
                                          will be charged the difference at the
                                          time of exchange. If you exchange
                                          Class B shares for shares of a fund
                                          with a different deferred sales charge
                                          schedule, the higher schedule will
                                          apply. The time you hold Class B or
                                          Class C shares in both funds will
                                          count when determining your holding
                                          period for calculating a deferred
                                          sales charge at redemption. If you
                                          exchange Class A or Class D 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.

                                          To exercise the exchange privilege,
                                          contact your Merrill Lynch Financial
                                          Advisor or other financial
                                          intermediary or call the Transfer
                                          Agent and 1-800-MER-FUND.

                                          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.
- --------------------------------------------------------------------------------

Short-term or excessive trading into and out of the Fund may harm performance
by disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in that Fund or other Merrill Lynch funds and
accounts under common ownership or control.

             MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                         23


[ICON] Your Account

Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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 its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, as of the close of business on the Exchange based on prices at
the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time.
The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.

The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the financial 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.

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

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

If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A 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.

24              MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


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

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.

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

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

The Fund will distribute net investment income monthly and net realized capital
gains at least annually. The Fund may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If you would like
to receive dividends in cash, contact your Merrill Lynch Financial Advisor,
selected securities dealer or other financial intermediary or the Transfer
Agent.

To the extent that the dividends distributed by the Fund are from municipal bond
interest income, they are exempt from Federal income tax. However, certain
investors may be subject to Federal alternative minimum tax on dividends
received from the Fund. Interest income from other investments may produce
taxable distributions. Dividends paid by the Fund to individual Texas residents
are not subject to taxation by Texas because Texas does not impose a personal
income tax. Consequently, individual Texas residents enjoy no special state
income tax benefits by investing in the Fund. Dividends derived from capital
gains realized by the Fund will be subject to Federal tax. If you are subject to
income tax in a state other than Texas, the dividends derived from Texas
municipal bonds generally will not be exempt from income tax in that state.

               MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                        25


[ICON] Your Account

"BUYING A DIVIDEND"


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

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

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

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. Capital gains are generally taxed at
different rates than ordinary income dividends.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and Texas tax laws. It is not a substitute for personal
tax advice. You should consult your personal tax adviser about the potential tax
consequences to you of an investment in the Fund under all applicable tax laws.

26               MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


Management of the Fund [ICON]

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment decisions
for the Fund. The Fund pays the Manager a fee at the annual rate of 0.55% of the
average daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July 31,
2001 the Manager received a fee equal to 0.55% of the Fund's average daily net
assets.

Fund Asset Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment companies.
Fund Asset Management and its affiliates had approximately $506 billion in
investment company and other portfolio assets under management as of September
2001.

             MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                          27


[ICON] Management of the Fund

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

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



                                        Class A                                     Class B
                     -------------------------------------------  --------------------------------------------
                             For the Year Ended July 31,                  For the Year Ended July 31,
                     -------------------------------------------  --------------------------------------------
                                                                         
Increase
(Decrease) in
Net Asset Value:      2001     2000     1999     1998     1997      2001     2000     1999     1998     1997
- --------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
- --------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year    $ 9.74   $10.45   $10.90   $10.96   $10.57    $ 9.74   $10.45   $10.90   $10.96   $10.57
- --------------------------------------------------------------------------------------------------------------
Investment income--
net                     .48      .50      .51      .58      .57       .43      .45      .45      .52      .52
- --------------------------------------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments-- net       .47     (.41)    (.45)    (.06)     .39       .47     (.41)    (.45)    (.06)     .39
- --------------------------------------------------------------------------------------------------------------
Total from
investment
operations              .95      .09      .06      .52      .96       .90      .04       --      .46      .91
- --------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:

Investment income--
net                    (.48)    (.50)    (.51)    (.58)    (.57)     (.43)    (.45)    (.45)    (.52)    (.52)
- --------------------------------------------------------------------------------------------------------------
In excess of
realized gain on
investments-- net        --     (.30)      --       --       --        --     (.30)      --       --       --
- --------------------------------------------------------------------------------------------------------------
Total dividends and
distributions          (.48)    (.80)    (.51)    (.58)    (.57)     (.43)    (.75)    (.45)    (.52)    (.52)
- --------------------------------------------------------------------------------------------------------------
Net asset value,
end of year          $10.21   $ 9.74   $10.45   $10.90   $10.96    $10.21   $ 9.74   $10.45   $10.90   $10.96
- --------------------------------------------------------------------------------------------------------------
Total Investment
Return:*
- --------------------------------------------------------------------------------------------------------------
Based on net asset
value per
share                  9.98%    1.19%     .43%    4.83%    9.39%     9.43%     .68%    (.08)%   4.30%    8.84%
- --------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
- --------------------------------------------------------------------------------------------------------------
Expenses               1.13%     .96%     .98%     .87%     .83%     1.64%    1.47%    1.49%    1.38%    1.34%
- --------------------------------------------------------------------------------------------------------------
Investment income--
net                    4.83%    5.12%    4.67%    5.25%    5.37%     4.31%    4.61%    4.15%    4.74%    4.86%
- --------------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------------
Net assets, end of
year (in thousands)  $4,316   $5,924   $8,545   $9,842  $10,707   $26,642  $30,090  $44,502  $48,887  $56,115
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover    26.93%   97.91%  129.23%   24.61%   47.83%    26.93%   97.91%  129.23%   24.61%   47.83%
- --------------------------------------------------------------------------------------------------------------


  * Total investment returns exclude the effects of sales charges.

28               MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


FINANCIAL HIGHLIGHTS (concluded)



                                        Class C                                             Class D
                       ---------------------------------------------  -----------------------------------------------
                                For the Year Ended July 31,                     For the Year Ended July 31,
                       ---------------------------------------------  -----------------------------------------------
Increase (Decrease) in
Net Asset Value:        2001     2000      1999      1998      1997    2001     2000      1999     1998      1997
- ---------------------------------------------------------------------------------------------------------------------
                                                                               
Per Share Operating
Performance:
- ---------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year       $ 9.75   $10.46   $ 10.91   $ 10.97   $10.58   $9.75    $10.46   $ 10.92   $ 10.98   $ 10.58
- ---------------------------------------------------------------------------------------------------------------------
Investment income--
net                        .42      .44       .44       .51      .51     .47       .49       .50       .57       .56
- ---------------------------------------------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on investments
- --net                      .47     (.41)     (.45)     (.06)    .39      .48      (.41)     (.46)     (.06)      .40
- ---------------------------------------------------------------------------------------------------------------------
Total from investment
operations                 .89      .03      (.01)      .45     .90      .95       .08       .04       .51       .96
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income--
net                       (.42)    (.44)     (.44)     (.51)   (.51)    (.47)     (.49)     (.50)     (.57)     (.56)

In excess of realized
gain on
investments-- net           --     (.30)       --        --      --       --      (.30)       --        --        --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions             (.42)    (.74)     (.44)     (.51)    (.51)   (.47)     (.79)     (.50)     (.57)     (.56)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end
of year                 $10.22   $ 9.75   $ 10.46   $ 10.91   $10.97   $10.23   $ 9.75   $ 10.46  $  10.92   $ 10.98
- ---------------------------------------------------------------------------------------------------------------------
Total Investment
Return:*
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset
value per share           9.30%     .58%     (.18)%    4.18%    8.71%    9.97%    1.10%      .24%     4.72%     9.38%
- ---------------------------------------------------------------------------------------------------------------------
Ratios To Average Net
Assets:
- ---------------------------------------------------------------------------------------------------------------------
Expenses                  1.75%    1.58%     1.59%     1.48%    1.45%    1.25%    1.06%     1.11%      .97%      .93%
- ---------------------------------------------------------------------------------------------------------------------
Investment income--
net                       4.20%    4.51%     4.06%     4.63%    4.75%    4.71%    5.03%     4.49%     5.15%     5.27%
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of
year (in thousands)     $  705   $  733   $   836   $ 1,304   $  917  $ 1,396   $  944   $ 1,166   $   338   $   335
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover       26.93%   97.91%   129.23%    24.61%   47.83%   26.93%   97.91%   129.23%    24.61%    47.83%
- ---------------------------------------------------------------------------------------------------------------------



  * Total investment returns exclude the effects of sales charges.

MERRILL LYNCH TEXAS MUNICIPAL BOND FUND                                      29


                                   POTENTIAL
                                   INVESTORS

      [1]                                                     [2]
                             Open an account (two
                                   options)

   MERRILL LYNCH                                         TRANSFER AGENT
 FINANCIAL ADVISOR
OR SECURITIES DEALER                               Financial Data Services, Inc.

                                                       ADMINISTRATIVE OFFICES
                                                     4800 Deer Lake Drive East
                                                        Jacksonville, Florida
                                                              32246-6484

Advises shareholders on their                             MAILING ADDRESS
Fund investments.                                          P.O. Box 45289
                                                        Jacksonville, Florida
                                                             32232-5289

                                                       Performs 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                      THE FUND                  CUSTODIAN
Sidley Austin Brown         The Board of Trustees        State Street Bank
     & Wood LLP               oversees the Fund.         and Trust Company
  875 Third Avenue                                          P.O. Box 351
New York, New York 10022                             Boston, Massachusetts 02101

Provides legal advice to the                         Holds the Fund's assets for
          Fund.                                               safekeeping.

    INDEPENDENT                      ACCOUNTING                MANAGER
     AUDITORS                    SERVICES PROVIDER
                                                     Fund Asset Management, L.P.
  Deloitte & Touche LLP         State Street Bank
Two World Financial Center      and Trust Company       ADMINISTRATIVE OFFICES
New York, New York 10281-1008 500 College Road East     800 Scudders Mill Road
                              Princeton, New Jersey Plainsboro, New Jersey 08536
                                      08540

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

                                                         TELEPHONE NUMBER
                                                          1-800-MER-FUND

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


         MERRILL LYNCH TEXAS MUNICIPAL BOND FUND


For More Information [ICON]

Shareholder Reports

   Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. 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 by calling 1-800-MER-FUND.

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 Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor or other financial
intermediary or call the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.

   Contact your Merrill Lynch Financial Advisor or other financial intermediary
or contact the Fund at the telephone number or address indicated above if you
have any questions.

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

publicinfo@sec.gov, or by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.

You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-4375    Code #13968-11-01     (C) Fund Asset
Management, L.P.

                                  Prospectus

[LOGO] Merrill Lynch
Investment Managers

Merrill Lynch Texas
Municipal Bond Fund
of Merrill Lynch Multi-State
Municipal Series Trust

                                                               November 14, 2001

EX-99.17L

                                                                   EXHIBIT 17(L)

(BULL LOGO)
Merrill Lynch Investment Managers


Annual Report
June 30, 2001


Merrill Lynch
Municipal Bond
Fund, Inc.


www.mlim.ml.com


This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.


Merrill Lynch
Municipal Bond Fund, Inc.
Box 9011
Princeton, NJ
08543-9011

                                     Page 1


MERRILL LYNCH MUNICIPAL BOND FUND, INC.


Officers and Directors

Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Peter J. Hayes, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286

Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

                                     Page 2


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

DEAR SHAREHOLDER

The Municipal Market Environment
During the six-month period ended June 30, 2001, among considerable weekly
volatility, long-term fixed-income bond yields generally moved higher. So far in
2001, investors have generally focused on the actions taken by the Federal
Reserve Board to reverse the ongoing US economic slowdown. US economic growth
fell into the 1%-2% range in 2001 after expanding at more than 5% during the
first half of 2000. In mid-December 2000, the Federal Reserve Board announced
that economic conditions warranted the cessation of the series of short-term
interest rate increases initiated in February 2000. Citing declining consumer
confidence and weakening industrial production, the Federal Reserve Board at
each of the meetings in January, February and March of this year lowered short-
term interest rates in an effort to promote stronger US economic growth. Given
continued weak equity markets, investors focused on the declining supply of US
Treasury securities and forecasts of sizeable Federal budget surpluses. This
positive economic environment fostered a significant decline in US Treasury bond
yields. By late March 2001, US Treasury bond yields declined approximately 20
basis points (0.20%) to 5.25%.

Despite additional actions by the Federal Reserve Board in April, May and June,
fixed-income securities were unable to maintain their earlier market gains.
Recovering US stock markets, especially the NASDAQ, caused many investors to
reallocate assets out of US Treasury securities to equities. Additionally, many
investors believed that the 275 basis point decline in short-term interest rates
engineered by the Federal Reserve Board over the last six months would
eventually rekindle a strong US economy with concomitant inflationary pressures.
In recent months, recovering equity markets, renewed inflationary fears, and the
expectation that the US economy will resume strong growth in late 2001 put
consistent pressures on fixed-income issues. By the end of June 2001, long-term
US Treasury bond yields rose to 5.75%, an increase of approximately 30 basis
points over the last six months.

During the last six months, tax-exempt bond yields also reacted to the Federal
Reserve Board actions and equity market volatility. However, this reaction was
muted in both intensity and degree. In early 2001, municipal bond yields traded
in a narrow range supported by a strong US Treasury market and continued
investor demand. As it became apparent that any proposed changes in the Federal
tax system were unlikely to have any immediate, material impact on existing
Federal tax brackets, tax-exempt bond yields responded by moving higher in early
2001. By late March 2001, long-term uninsured revenue bond yields, as measured
by the Bond Buyer Revenue Bond Index, approached 5.40%, a decline of
approximately 10 basis points from the end of December 2000. Similar to the US
Treasury market, tax-exempt bond yields were pushed higher during the remainder
of the period by equity market improvement in April, as well as the possibility
that the Federal Reserve Board was close to the end of its current interest rate
easing cycle. At the end of June 2001, long-term municipal bond yields rose to
approximately 5.50%, although during the past six months, they rose
approximately five basis points.

The recent relative outperformance of the tax-exempt bond market was
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the June 2001 quarter. Historically, low municipal bond yields
have continued to allow municipalities to refund outstanding, high-couponed
debt. Also, as yields rose in early April, tax-exempt issuers rushed to issue
new financing, fearing higher yields in the coming months. During the past six
months, almost $135 billion in long-term tax-exempt bonds was issued, an
increase of more than 40% compared to the same period a year ago. During the
three-month period ended June 30, 2001, tax-exempt bond issuance was
particularly heavy, with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same three-month
period a year ago.

Historically, June has been a period of weak investor demand for tax-exempt
products as investors are often forced to liquidate bond positions to meet
Federal and state tax payments. In recent months, there was no appreciable
selling by retail accounts. It has been noted that, thus far in 2001, new net
cash inflows into municipal bond mutual funds have reached $4 billion compared
to new net cash outflows of more than $13 billion for the same period a year
ago. This suggests that the positive technical structure of the municipal market
has remained intact. Also, the months of June and July tend to be periods of
strong retail demand in response to the larger-coupon income payments and
proceeds from bond maturities these months generate. Additionally, short-term
tax-exempt interest rates are poised to move lower. Seasonal tax pressures have
kept short-term municipal rates artificially high, although not as high as in
recent years. As these pressures abate, short-term interest rates are likely to
decline below 3%. As short-term interest rates decline, investors have tended to
extend maturities to take advantage of the steep municipal yield curve. We
believe all of these factors should enhance the tax-exempt market's technical
position in the coming months.

Looking forward, the municipal market's direction appears uncertain. Should the
US economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary policy to a greater extent than investors currently
expect. The prospect of two or three additional interest rate easings may push
fixed-income bond yields, including municipal bond yields, lower. However,
should the cumulative 275 basis point reduction in short-term interest rates by
the Federal Reserve Board and the economic stimulus expected to be produced by
recent Federal tax reform combine to restore consumer confidence and economic
activity, tax-exempt bond yields may not decline further. Given the strong
technical position of the municipal bond market, we believe the tax-exempt
market is poised to continue to outperform its taxable counterpart in the coming
months.

Fiscal Year in Review
Insured Portfolio
For the year ended June 30, 2001, Insured Portfolio's Class A, Class B, Class C
and Class D Shares had total returns of +10.01%, +9.04%, +8.99% and +9.74%,
respectively. (Fund results do not reflect sales charges and would be lower if
sales charges were included.) In managing the Insured Portfolio, we seek to
provide a balanced performance, focusing on achieving a high current yield with
a competitive total return. While maintaining very low cash reserves for most of
the fiscal year ended June 30, 2001, we concentrated on purchasing premium
coupons in the 10-year - 20-year range. The 15-year portion of the municipal
yield curve provided above-average risk-adjusted returns, while capturing
greater than 90% of the yield further out on the curve. Our strategy enabled the
Portfolio to maintain a very competitive yield with a more neutral interest rate
position. In addition, we increased the Portfolio's exposure to insured inverse
floater securities. With the Federal Reserve Board lowering short-term interest
rates, investments in both inverse floaters and intermediate maturity bonds
enabled the Portfolio to achieve a high current yield with competitive total
returns.

The municipal market environment for the 12-month period ended June 30, 2001
required us to manage the portfolio in two distinct rate trends, each lasting
approximately six months. At mid-June 2000, 10-year Treasury securities yielded
6%. Our strategy at that time was to be more aggressive with the Portfolio, as
we owned longer duration, discounted securities that offered potential for
capital appreciation as interest rates later declined. While the Portfolio was
fully invested at this stage, performance resulted more from a generous accrual
and current yield than an overly aggressive market position. We stressed higher
credit quality in the middle of last year, and therefore avoided any negative
situations involving declining credit concerns. As 2000 ended, interest rates
declined (nearly 5% for 10-year US Treasury bonds) and the Portfolio assumed a
more defensive structure. Longer-maturity holdings were sold with proceeds
reinvested in serial maturities or prerefunded bonds, which can offer more price
protection should interest rates start to rise again.

Since the beginning of 2001, interest rates trended upward and our defensive
strategy helped cushion the decline in net asset valuation. Cash equivalent
reserves were kept low in order to maintain competitive returns, and our
exposure to inverse floater product was increased to take advantage of an
extremely favorable technical position in the short end of the tax-exempt
market, resulting from aggressive Federal Reserve Board easings. At mid-year
2001, interest rates were in the center of the recent fiscal year trading range.

                                     Page 3


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

We expect our strategy going forward to be to remain focused on achieving
performance results through a more defensive structure, with more attention to
the current yield portion of the total return equation. We also expect to
continue to maintain a higher degree of credit quality since we believe that
focusing on assets in the top rating categories should shield the Portfolio from
most credit deterioration associated with the current economic slowdown.

National Portfolio
During the fiscal year ended June 30, 2001, National Portfolio's Class A, Class
B, Class C and Class D Shares had total returns of +10.32%, +9.49%, +9.33% and
+10.04%, respectively, by emphasizing current yield and credit quality. (Fund
results do not reflect sales charges and would be lower if sales charges were
included.) The period was characterized by reduced price volatility that
provided few real trading opportunities, with a slight trend toward higher
municipal yields. We generally maintained moderate to minimal cash equivalent
reserves in the Portfolio in order to keep a competitive current yield. Credit
quality remained a priority, as it enabled the Portfolio to avoid any credit-
related underperformance during a period when a slowing economy led to some
credit quality deterioration and defaults. Supply and demand technicals have
been supportive of bond prices, during which time a relatively large calendar of
new issues was absorbed by strong retail and institutional interest.

The municipal market environment for the 12-month period ended June 30, 2001
required us to manage the Portfolio in two distinct rate trends, each lasting
approximately six months. At mid-June 2000, 10-year Treasury securities yielded
6%. Our strategy at that time was to be more aggressive with the Portfolio, as
we owned longer duration, discounted securities that offered potential for
capital appreciation as interest rates later declined. While the Portfolio was
fully invested at this stage, performance resulted more from a generous accrual
and current yield than an overly aggressive market position. We stressed higher
credit quality in the middle of last year, and therefore avoided any negative
situations involving declining credit concerns. As 2000 ended, interest rates
declined (nearly 5% for 10-year US Treasury bonds) and the Portfolio assumed a
more defensive structure. Longer-maturity holdings were sold with proceeds
reinvested in serial maturities or prerefunded bonds, which can offer more price
protection should interest rates start to rise again.

Since the beginning of 2001, interest rates trended upward and our defensive
strategy helped cushion the decline in net asset valuation. Cash equivalent
reserves were kept low in order to maintain competitive returns, and our
exposure to inverse floater product was increased to take advantage of an
extremely favorable technical position in the short end of the tax-exempt
market, resulting from aggressive Federal Reserve Board easings. At June 2001,
interest rates were in the center of the recent fiscal year trading range.

We expect our strategy going forward to be to remain focused on achieving
performance results through a more defensive structure, with more attention to
the current yield portion of the total return equation. We also expect to
continue to maintain a higher degree of credit quality since we believe that
focusing on assets in the top rating categories should shield the Portfolio from
most credit deterioration associated with the current economic slowdown.

Limited Maturity Portfolio
For the year ended June 30, 2001, the Limited Maturity Portfolio's Class A,
Class B, Class C and Class D Shares had total returns of +6.07%, +5.69%, +5.59%
and +5.96%, respectively. (Fund results shown do not reflect sales charges and
would be lower if sales charges were included.) Limited Maturity Portfolio kept
a fully invested stance for most of the fiscal year ended June 30, 2001, as we
expected that a weakening economy and falling equity markets would cause the
Federal Reserve Board to ease monetary policy. Low cash reserves and an average
portfolio maturity close to the maximum allowed by the prospectus benefited
performance, since the Fund's short-term nature is directly affected by Federal
Reserve Board policy. However, because of the continued shareholder redemptions,
we maintained a higher credit quality on average than our peer group in an
effort to maintain liquidity.

With continued evidence of a weak economic environment and additional easing by
the Federal Reserve Board, we maintained our relatively aggressive investment
position for the Limited Maturity Portfolio during the second half of the fiscal
year. The Portfolio's average maturity was kept between 1.6 years - 1.8 years
with minimal cash reserves. The average credit quality continued to be AA1 in
order to seek to provide insulation against any net asset value volatility and
for liquidity in meeting shareholder redemptions. This aggressive investment
position enhanced the Fund's performance, since the short-term portion of the
yield curve benefited most from the Federal Reserve Board's reduction of
interest rates.

In Conclusion
We appreciate your ongoing interest in Merrill Lynch Municipal Bond Fund, Inc.,
and we look forward to serving your investment needs in the months and years to
come.


Sincerely,


(Terry K. Glenn)
Terry K. Glenn
President and Director


(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President


(Robert DiMella)
Robert DiMella
Vice President and Portfolio Manager
Insured Portfolio


(Walter O'Connor)
Walter O'Connor
Vice President and Portfolio Manager
National Portfolio


(Peter Hayes)
Peter Hayes
Vice President and Portfolio Manager
Limited Maturity Portfolio


August 15, 2001

                                     Page 4


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:

* Class A Shares incur a maximum initial sales charge (front-end load) of 4% and
bear no ongoing distribution or account maintenance fees for Insured and
National Portfolios. Limited Maturity Portfolio incurs a maximum initial sales
charge (front-end load) of 1% and bears no ongoing distribution or account
maintenance fees.

* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year for Insured and National Portfolios. Limited Maturity
Portfolio is subject to a maximum contingent deferred sales charge of 1% if
redeemed within one year of purchase. In addition, Insured and National
Portfolios are subject to a distribution fee of 0.50% and an account maintenance
fee of 0.25%. Limited Maturity Portfolio is subject to a distribution fee of
0.20% and an account maintenance fee of 0.15%. All three classes of shares
automatically convert to Class D Shares after approximately 10 years. (There is
no initial sales charge for automatic share conversions.)

* Class C Shares are subject to a distribution fee of 0.55% and an account
maintenance fee of 0.25% for Insured and National Portfolios. Limited Maturity
Portfolio is subject to a distribution fee of 0.20% and an account maintenance
fee of 0.15%. In addition, Class C Shares for all three Portfolios are subject
to a 1% contingent deferred sales charge if redeemed within one year of
purchase.

* Class D Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.25% (but no distribution fee) for Insured and National
Portfolios. Limited Maturity Portfolio incurs a maximum initial sales charge of
1% and an account maintenance fee of 0.10% (but no distribution fee).

None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in the "Recent Performance Results" and "Average Annual Total
Return" tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.

Insured Portfolio's
Class A and Class B Shares

Total Return Based on a $10,000 Investment

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund Insured Portfolio Class A and Class B Shares* compared with a similar
investment in the Lehman Brothers Municipal Bond Index++++. Beginning and ending
values are:

                                               6/91       6/01
ML Municipal Bond Fund--
Insured Portfolio--Class A Shares*            10,000     18,048

ML Municipal Bond Fund--
Insured Portfolio--Class B Shares*            10,000     17,414

Lehman Brothers Municipal Bond Index++++      10,000     19,967

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
++The Insured Portfolio invests primarily in long-term, investment-grade
municipal bonds (bonds rated Baa or better) covered by portfolio insurance
guaranteeing the timely payment of principal at maturity and interest.
++++This unmanaged Index consists of revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds, all of which
mature within 30 years.

Insured Portfolio's
Class A and Class B Shares

Average Annual Total Return

                                    % Return Without  % Return With
Class A Shares*                       Sales Charge    Sales Charge**

One Year Ended 6/30/01                    +10.01%         +5.61%
Five Years Ended 6/30/01                  + 5.65          +4.79
Ten Years Ended 6/30/01                   + 6.52          +6.08

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

                                         % Return        % Return
Class B Shares*                        Without CDSC    With CDSC**

One Year Ended 6/30/01                     +9.04%         +5.04%
Five Years Ended 6/30/01                   +4.82          +4.82
Ten Years Ended 6/30/01                    +5.70          +5.70

*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.

Insured Portfolio's
Class C and Class D Shares

Total Return Based on a $10,000 Investment

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund Insured Portfolio Class C and Class D Shares* compared with a similar
investment in the Lehman Brothers Municipal Bond Index++++. Beginning and ending
values are :

                                            10/21/94**    6/01
ML Municipal Bond Fund--
Insured Portfolio--Class C Shares*            10,000     14,378

ML Municipal Bond Fund--
Insured Portfolio--Class D Shares*            10,000     14,349

Lehman Brothers Municipal Bond Index++++      10,000     16,107

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++The Insured Portfolio invests primarily in long-term, investment-grade
municipal bonds (bonds rated Baa or better) covered by portfolio insurance
guaranteeing the timely payment of principal at maturity and interest.
++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years.
The starting date for the Index is from 10/31/94.

Insured Portfolio's
Class C and Class D Shares

Average Annual Total Return

                                         % Return        % Return
Class C Shares*                        Without CDSC    With CDSC**

One Year Ended 6/30/01                     +8.99%         +7.99%
Five Years Ended 6/30/01                   +4.77          +4.77
Inception (10/21/94) through 6/30/01       +5.58          +5.58

*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.

                                    % Return Without  % Return With
Class D Shares*                       Sales Charge    Sales Charge**

One Year Ended 6/30/01                     +9.74%         +5.35%
Five Years Ended 6/30/01                   +5.39          +4.53
Inception (10/21/94) through 6/30/01       +6.19          +5.54

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

                                     Page 5


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

PERFORMANCE DATA (continued)

National Portfolio's
Class A and Class B Shares

Total Return Based on a $10,000 Investment

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund National Portfolio Class A and Class B Shares* compared with a similar
investment in the Lehman Brothers Municipal Bond Index++++. Beginning and ending
values are:

                                               6/91       6/01
ML Municipal Bond Fund--
National Portfolio--Class A Shares*           10,000     18,546

ML Municipal Bond Fund--
National Portfolio--Class B Shares*           10,000     17,931

Lehman Brothers Municipal Bond Index++++      10,000     19,967

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
++The National Portfolio invests primarily in long-term municipal bonds rated in
any rating category.
++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years.
Past performance is not predictive of future performance.

National Portfolio's
Class A and Class B Shares

Average Annual Total Return

                                    % Return Without  % Return With
Class A Shares*                       Sales Charge    Sales Charge**

One Year Ended 6/30/01                    +10.32%         +5.91%
Five Years Ended 6/30/01                  + 5.80          +4.94
Ten Years Ended 6/30/01                   + 6.81          +6.37

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

                                         % Return        % Return
Class B Shares*                        Without CDSC    With CDSC**

One Year Ended 6/30/01                     +9.49%         +5.49%
Five Years Ended 6/30/01                   +5.00          +5.00
Ten Years Ended 6/30/01                    +6.01          +6.01

*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payments of applicable contingent deferred sales charge.

National Portfolio's
Class C and Class D Shares

Total Return Based on a $10,000 Investment

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund National Portfolio Class C and Class D Shares* compared with a similar
investment in the Lehman Brothers Municipal Bond Index++++. Beginning and ending
values are:

                                             10/21/94     6/01
ML Municipal Bond Fund--
National Portfolio--Class C Shares*           10,000     14,573

ML Municipal Bond Fund--
National Portfolio--Class D Shares*           10,000     14,533

Lehman Brothers Municipal Bond Index++++      10,000     16,107

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++The National Portfolio invests primarily in long-term municipal bonds rated in
any rating category.
++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years. The
starting date for the Index is from 10/31/94.
Past performance is not predictive of future performance.

National Portfolio's
Class C and Class D Shares

Average Annual Total Return

                                         % Return        % Return
Class C Shares*                        Without CDSC    With CDSC**

One Year Ended 6/30/01                     +9.33%         +8.33%
Five Years Ended 6/30/01                   +4.95          +4.95
Inception (10/21/94) through 6/30/01       +5.79          +5.79

*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.

                                    % Return Without  % Return With
Class D Shares*                       Sales Charge    Sales Charge**

One Year Ended 6/30/01                    +10.04%         +5.64%
Five Years Ended 6/30/01                  + 5.53          +4.67
Inception (10/21/94) through 6/30/01      + 6.39          +5.75

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

Limited Maturity Portfolio's
Class A and Class B Shares

Total Return Based on a $10,000 Investment

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund Limited Maturity Portfolio Class A Shares* compared with a similar
investment in the Lehman Brothers Municipal Bond Index++++. and Lehman Brothers
3-Year General Obligation Bond Index++++++ Beginning and ending values are:

                                               6/91       6/01
ML Municipal Bond Fund--
Limited Maturity Portfolio--Class A Shares*   10,000     15,244

Lehman Brothers Municipal Bond Index++++      10,000     19,967

Lehman Brothers 3-Year General Obligation
Bond Index++++++                              10,000     17,129

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund Limited Maturity Portfolio Class B Shares* compared with a similar
investment in the Lehman Brothers Municipal Bond Index++++. and Lehman Brothers
3-Year General Obligation Bond Index++++++ Beginning and ending values are:

                                             11/02/92     6/01
ML Municipal Bond Fund--
Limited Maturity Portfolio--Class B Shares*   10,000     13,743

Lehman Brothers Municipal Bond Index++++      10,000     17,264

Lehman Brothers 3-Year General Obligation
Bond Index++++++                              10,000     15,380

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++The Limited Maturity Portfolio invests primarily in investment-grade municipal
bonds (bonds rated Baa or better) with a maximum maturity not to exceed 4 years.
++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years. The
starting date for the Index is from 11/30/92.
++++++This unmanaged Index consists of state and local government obligation
bonds that mature in 3 years--4 years, rated Baa or better. The starting date
for the Index in the Class B Shares' graph is from 11/30/92.
Past performance is not predictive of future performance.

Limited Maturity Portfolio's
Class A and Class B Shares

Average Annual Total Return

                                    % Return Without  % Return With
Class A Shares*                       Sales Charge    Sales Charge**

One Year Ended 6/30/01                     +6.07%         +5.01%
Five Years Ended 6/30/01                   +4.28          +4.07
Ten Years Ended 6/30/01                    +4.41          +4.31

*Maximum sales charge is 1%.
**Assuming maximum sales charge.

                                         % Return        % Return
Class B Shares*                        Without CDSC    With CDSC**

One Year Ended 6/30/01                     +5.69%         +4.69%
Five Years Ended 6/30/01                   +3.93          +3.93
Inception (11/2/92) through 6/30/01        +3.74          +3.74

*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.

                                     Page 6


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

PERFORMANCE DATA (concluded)

Limited Maturity Portfolio's
Class C and Class D Shares

Total Return Based on a $10,000 Investment

A Line graphic illustrating the growth of a $10,000 investment in ML Municipal
Bond Fund Limited Maturity Portfolio Class C and Class D Shares* compared with a
similar investment in the Lehman Brothers Municipal Bond Index++++. and Lehman
Brothers 3-Year General Obligation Bond Index++++++ Beginning and ending values
are:

                                             10/21/94     6/01
ML Municipal Bond Fund--
Limited Maturity Portfolio--Class C Shares*   10,000     12,891

ML Municipal Bond Fund--
Limited Maturity Portfolio--Class D Shares*   10,000     13,059

Lehman Brothers Municipal Bond Index++++      10,000     16,107

Lehman Brothers 3-Year General Obligation
Bond Index++++++                              10,000     14,210

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++The Limited Maturity Portfolio invests primarily in investment-grade municipal
bonds (bonds rated Baa or better) with a maximum maturity not to exceed 4 years.
++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years. The
starting date for the Index is from 10/31/94.
++++++This unmanaged Index consists of state and local government obligation
bonds that mature in 3 years--4 years, rated Baa or better. The starting date
for the Index is from 10/31/94. Past performance is not predictive of future
performance.

Limited Maturity Portfolio's
Class C and Class D Shares

Average Annual Total Return

                                         % Return        % Return
Class C Shares*                        Without CDSC    With CDSC**

One Year Ended 6/30/01                     +5.59%         +4.59%
Five Years Ended 6/30/01                   +3.88          +3.88
Inception (10/21/94) through 6/30/01       +3.87          +3.87

*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.

                                    % Return Without  % Return With
Class D Shares*                       Sales Charge    Sales Charge**

One Year Ended 6/30/01                     +5.96%         +4.90%
Five Years Ended 6/30/01                   +4.19          +3.98
Inception (10/21/94) through 6/30/01       +4.23          +4.07

*Maximum sales charge is 1%.
**Assuming maximum sales charge.

Recent Performance Results*



                                                                                                   Ten Years/
                                                                                                    Since
                                                                   6-Month         12-Month        Inception       Standardized
                                                                    Total           Total            Total            30-Day
As of June 30, 2001                                                Return           Return          Return             Yield
                                                                                                     
ML Municipal Bond Fund, Inc. Insured Portfolio Class A Shares**    +2.48%          +10.01%          +88.01%            4.56%
ML Municipal Bond Fund, Inc. Insured Portfolio Class B Shares**    +1.96           + 9.04           +74.13             3.99
ML Municipal Bond Fund, Inc. Insured Portfolio Class C Shares**    +1.94           + 8.99           +43.79             3.94
ML Municipal Bond Fund, Inc. Insured Portfolio Class D Shares**    +2.35           + 9.74           +49.45             4.32
ML Municipal Bond Fund, Inc. National Portfolio Class A Shares**   +2.87           +10.32           +93.19             4.62
aML Municipal Bond Fund, Inc. National Portfolio Class B Shares**   +2.59           + 9.49           +79.32             4.05
ML Municipal Bond Fund, Inc. National Portfolio Class C Shares**   +2.46           + 9.33           +45.72             4.00
ML Municipal Bond Fund, Inc. National Portfolio Class D Shares**   +2.84           +10.04           +51.38             4.38
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio
Class A Shares***                                                  +2.97           + 6.07           +53.98             3.05
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio
Class B Shares***                                                  +2.89           + 5.69           +37.44             2.72
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio
Class C Shares***                                                  +2.79           + 5.59           +28.91             2.72
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio
Class D Shares***                                                  +2.92           + 5.96           +31.90             2.95


*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the payable
date.
**The Fund's ten-year/since inception periods are ten years for Class A & Class
B Shares and from 10/21/94 for Class C & Class D Shares.
***The Fund's ten-year/since inception periods are ten years for Class A Shares;
from 11/2/92 for Class B Shares; and from 10/21/94 for Class C & Class D Shares.

                                     Page 7


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS                                                                                   (in Thousands)
                  Municipal Bonds                                                                         Insured Portfolio
                  S&P    Moody's    Face
STATE           Ratings  Ratings   Amount                           Issue                                          Value
                                                                                           
Alabama--1.5%      AAA       Aaa     $ 1,585   Alabama Water Pollution Control Authority Revenue Bonds,
                                               Revolving Fund Loan, Series A, 6.75% due 8/15/2017 (b)            $    1,730
                   AAA       Aaa      10,000   Lauderdale County and Florence, Alabama, Health Care
                                               Authority, Revenue Refunding Bonds (Coffee Health Group),
                                               Series A, 6% due 7/01/2029 (e)                                        10,630
                   AAA       Aaa       7,000   University of Alabama, University Revenue Bonds (Birmingham),
                                               6% due 10/01/2020 (h)                                                  7,507

Arizona--1.3%      AAA       Aaa       6,750   Arizona State Municipal Financing Program, COP,
                                               Series 34, 7.25% due 8/01/2009 (g)                                     8,092
                   AAA       Aaa       8,400   Arizona State Transportation Board, Highway Revenue
                                               Bonds, 5.25% due 7/01/2012 (e)                                         8,882

California--10.5%                              ABC, California, Unified School District, GO (h):
                   AAA       Aaa       2,785    5.513%** due 8/01/2033                                                  456
                   AAA       Aaa       2,925    5.523%** due 8/01/2034                                                  452
                   AAA       Aaa       4,275   Cabrillo, California, Unified School District, GO,
                                               Series A, 5.621%** due 8/01/2020 (b)                                   1,512
                   A1+       VMIG1++  24,200   California Infrastructure and Economic Development Bank,
                                               Revenue Refunding Bonds (Independent System Operation
                                               Corporation Project), VRDN, Series A, 3.15% due 4/01/2008 (e)(f)      24,200
                   AAA       Aaa      31,500   California Pollution Control Financing Authority, PCR,
                                               Refunding (Pacific Gas & Electric), AMT, Series A,
                                               5.35% due 12/01/2016 (e)                                              31,466
                   AAA       Aaa       3,000   Encinitas, California, Unified School District, GO,
                                               5.571%** due 8/01/2019 (e)                                             1,128
                   AAA       Aaa      26,085   Los Angeles, California, Community College District, GO,
                                               Series A, 5.50% due 8/01/2019 (e)                                     27,086
                   AAA       Aaa      20,000   Los Angeles, California, Water and Power Revenue Refunding
                                               Bonds (Power System), Series A-A-1, 5.25% due 7/01/2019 (i)           20,186
                   AAA       Aaa       5,800   Oakland, California, Redevelopment Agency, Tax Allocation
                                               Refunding Bonds, INFLOS, 8.823% due 9/01/2019 (d)(e)                   6,279
                                               Rialto, California, Unified School District, GO, Series A (h):
                   AAA       Aaa      13,985    6.12%** due 6/01/2019                                                 5,307
                   AAA       Aaa      11,685    6.24%** due 6/01/2025                                                 3,082
                   AAA       Aaa      15,000   San Jose, California, Redevelopment Agency, Tax Allocation
                                               Refunding Bonds, DRIVERS, Series 158, 8.086% due 8/01/2014 (d)(e)     15,818

Colorado--4.1%     AAA       Aaa      19,250   Aurora, Colorado, COP, 6% due 12/01/2025 (b)                          20,711
                   NR*       Aaa      31,160   Denver, Colorado, City and County Airport Revenue Refunding
                                               Bonds, RIB, Series 153, 8.34% due 11/15/2025 (d)(e)                   32,931

District of        AAA       Aaa       7,495   District Columbia, GO, Refunding, DRIVERS, Series 152,
Columbia--0.6%                                 7.965% due 6/01/2013 (d)(i)                                            8,282

Florida--3.8%      AAA       Aaa       6,500   Dade County, Florida, Water and Sewer System Revenue Bonds,
                                               5.25% due 10/01/2026 (h)                                               6,472
                   NR*       Aaa       7,500   Escambia County, Florida, Health Facilities Authority,
                                               Health Facility Revenue Bonds, DRIVERS, Series 159,
                                               8.876% due 7/01/2020 (b)(d)                                            8,764
                                               Florida State Board of Education, Lottery Revenue Bonds,
                                               Series B (h):
                   AAA       Aaa       8,900    6% due 7/01/2013                                                      9,911
                   AAA       Aaa       9,435    6% due 7/01/2014                                                     10,441
                   AAA       Aaa       9,645    6% due 7/01/2015                                                     10,606
                   AAA       Aaa       2,240   West Coast Regional Water Supply Authority, Florida, Capital
                                               Improvement Revenue Bonds, 10.40% due 10/01/2010 (a)(b)                3,107

Georgia--3.3%                                  Georgia Municipal Electric Authority, Power Revenue Bonds,
                                               Series Y (b):
                   AAA       Aaa         490    6.40% due 1/01/2013 (c)                                                 567
                   AAA       Aaa       8,510    6.40% due 1/01/2013                                                   9,824
                                               Georgia Municipal Electric Authority, Power Revenue
                                               Refunding Bonds:
                   AAA       Aaa      20,000    Series EE, 7% due 1/01/2025 (b)                                      24,915
                   AAA       Aaa       5,000    Series Z, 5.50% due 1/01/2020 (e)                                     5,307
                   AAA       Aaa       2,490   Georgia State Municipal Electric Authority, Revenue Refunding
                                               Bonds, Series C, 5.25% due 1/01/2025 (e)                               2,524

Hawaii--0.8%       AAA       Aaa      10,000   Hawaii State Airport System, Revenue Refunding Bonds,
                                               6.45% due 7/01/2013 (e)                                               10,729

Illinois--9.9%     AAA       Aaa       2,000   Chicago, Illinois, O'Hare International Airport Revenue Bonds
                                               (Passenger Facility Charge), Series A, 5.625% due 1/01/2015 (b)        2,079
                   AAA       Aaa       2,000   Chicago, Illinois, O'Hare International Airport Revenue
                                               Refunding Bonds, Senior Lien, Series A, 5% due 1/01/2013 (e)           2,010
                   AAA       Aaa       3,250   Illinois Health Facilities Authority Revenue Bonds (Elmhurst
                                               Memorial Hospital), 6.625% due 1/01/2022 (h)                           3,354
                                               Illinois Health Facilities Authority, Revenue Refunding Bonds:
                   AAA       Aaa       3,740    (Methodist Medical Center), 5.50% due 11/15/2011 (e)                  3,966
                   AAA       NR*      14,450    RIB, Series 166, 8.94% due 2/15/2024 (b)(d)(j)                       15,599
                   A1        VMIG1++   1,500    (Resurrection Health), VRDN, Series A, 3.35% due 5/15/2029 (f)(i)     1,500
                                               Illinois Regional Transportation Authority Revenue Bonds (e):
                   AAA       Aaa      15,615    6.50% due 7/01/2026                                                  18,585
                   AAA       Aaa      26,000    Series A, 6.25% due 6/01/2004 (a)(b)                                 28,515
                   AAA       Aaa       3,000   Illinois State, GO, 5.75% due 5/01/2021 (e)                            3,115
                                               Kane, McHenry, Cook and DeKalb Counties, Illinois, United School
                                               District Number 300, GO (e):
                   AAA       Aaa       5,000    5.50% due 12/01/2013                                                  5,318
                   AAA       Aaa       5,500    5.50% due 12/01/2014                                                  5,808
                   AAA       Aaa       6,000    5.50% due 12/01/2015                                                  6,296
                   AAA       Aaa       7,000    5.50% due 12/01/2016                                                  7,310
                   AAA       Aaa       4,000    5.50% due 12/01/2017                                                  4,151
                   AAA       Aaa       5,000   Metropolitan Pier and Exposition Authority, Illinois, Dedicated
                                               State Tax Revenue Refunding Bonds (McCormick Plant
                                               Expansion Project), 5.50% due 12/15/2024 (h)                           5,075
                   NR*       Aaa       9,000   Northern Illinois University, Auxiliary Facilities System
                                               Revenue Refunding Bonds, 5.75% due 4/01/2022 (h)                       9,261
                   AAA       Aaa       6,905   Will and Kendall Counties, Illinois, Community Consolidated
                                               School District Number 202, GO, 5.75% due 12/30/2011 (i)               7,530

Indiana--1.0%      AAA       Aaa       5,555   Indiana State Office Building Commission, Facilities Revenue
                                               Bonds (Miami Correctional Facility--Phase 1), Series A, 5.50%
                                               due 7/01/2015 (b)                                                      5,800
                   AAA       Aaa       4,040   Indianapolis, Indiana, Local Public Improvement Revenue Bonds,
                                               7.90% due 2/01/2002 (a)(g)                                             4,057
                   AAA       Aaa       2,500   Penn, Indiana, High School Building Corporation Revenue Bonds,
                                               First Mortgage, 6.125% due 7/15/2005 (a)(e)                            2,757

Kansas--1.3%       AAA       Aaa      11,000   Kansas City, Kansas, Utility System Revenue Refunding and
                                               Improvement Bonds, 6.25% due 9/01/2014 (h)                            11,955
                   AAA       Aaa       5,145   Manhattan, Kansas, Hospital Revenue Bonds (Mercy Health
                                               Center), 5.50% due 8/15/2020 (i)                                       5,241


Portfolio Abbreviations
To simplify the listings of Merrill Lynch Municipal Bond Fund,
Inc.'s portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.

ACES SM         Adjustable Convertible Extendable Securities
AMT             Alternative Minimum Tax (subject to)
BAN             Bond Anticipation Notes
COP             Certificates of Participation
DRIVERS         Derivative Inverse Tax-Exempt Receipts
EDA             Economic Development Authority
GO              General Obligation Bonds
HDA             Housing Development Authority
HFA             Housing Finance Agency
IDA             Industrial Development Authority
IDR             Industrial Development Revenue Bonds
INFLOS          Inverse Floating Rate Municipal Bonds
IRS             Inverse Rate Securities
LEVRRS          Leveraged Reverse Rate Securities
PCR             Pollution Control Revenue Bonds
RIB             Residual Interest Bonds
RITR            Residual Interest Trust Receipts
S/F             Single-Family
TAN             Tax Anticipation Notes
TRAN            Tax Revenue Anticipation Notes
VRDN            Variable Rate Demand Notes

                                     Page 8


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS (continued)                                                                           (in Thousands)
                     Municipal Bonds                                                                         Insured Portfolio
                     S&P    Moody's    Face
STATE              Ratings  Ratings   Amount      Issue                                                               Value
                                                                                              
Kentucky--0.1%        A1     VMIG1++    $ 1,600   Kentucky Economic Development Finance Authority, Hospital
                                                  Facilities Revenue Refunding Bonds (Baptist Healthcare),
                                                  VRDN, Series C, 3.30% due 8/15/2031 (e)(f)                        $    1,600

Maryland--0.4%        AAA    Aaa          4,400   Maryland State Health and Higher Educational Facilities
                                                  Authority Revenue Bonds (University of Maryland Medical
                                                  System), Series B, 7% due 7/01/2022 (h)                                5,444

Massachusetts--2.1%   AAA    Aaa          2,715   Massachusetts Educational Loan Authority, Education Loan
                                                  Revenue Bonds, AMT, Issue D, Series A, 7.25% due 1/01/2009 (e)         2,778
                      AAA    Aaa         10,000   Massachusetts State Health and Educational Facilities
                                                  Authority Revenue Bonds (Beth Israel Deaconess Medical
                                                  Center), INFLOS, Series G-4, 8.573% due 7/01/2025 (b)(d)              10,500
                      AAA    Aaa          3,100   Massachusetts State Health and Educational Facilities
                                                  Authority, Revenue Refunding Bonds (Saint Elizabeth's
                                                  Hospital), LEVRRS, Series E, 10.37% due 8/15/2021 (d)(i)               3,243
                      AAA    Aaa         10,000   Route 3 North Transit Improvement Association, Massachusetts,
                                                  Lease Revenue Bonds, 5.75% due 6/15/2025 (e)                          10,448

Michigan--1.5%        AAA    Aaa          6,915   Michigan State, HDA, Rental Housing Revenue Refunding
                                                  Bonds, Series B, 6.15% due 10/01/2015 (e)                              7,242
                      AAA    Aaa         10,000   Michigan State Strategic Fund, Limited Obligation Revenue
                                                  Refunding Bonds (Detroit Edison Company), Series AA,
                                                  6.40% due 9/01/2025 (e)                                               10,703
                      NR*    VMIG1++      1,700   Michigan State Strategic Fund, PCR, Refunding (Consumers
                                                  Power Project), VRDN, 3.30% due 4/15/2018 (b)(f)                       1,700

Minnesota--1.6%       NR*    Aaa          5,860   Delano, Minnesota, Independent School District
                                                  Number 879, GO, Series A, 5.875% due 2/01/2025 (i)(k)                  6,219
                      AAA    Aaa          5,910   Minneapolis and Saint Paul, Minnesota, Metropolitan
                                                  Airports Commission, Airport Revenue Bonds, AMT, Series B,
                                                  6.20% due 1/01/2017 (h)                                                6,417
                                                  Sauk Rapids, Minnesota, Independent School District
                                                  Number 047, GO, Series A (e):
                      NR*    Aaa          3,735    5.65% due 2/01/2020                                                   3,896
                      NR*    Aaa          4,440    5.70% due 2/01/2021                                                   4,651

Mississippi--1.0%     AAA    Aaa          1,320   Harrison County, Mississippi, Wastewater Management District,
                                                  Revenue Refunding Bonds (Wastewater Treatment Facilities),
                                                  Series A, 8.50% due 2/01/2013 (h)                                      1,760
                      NR*    Aaa         10,000   Mississippi Hospital Equipment and Facilities Authority
                                                  Revenue Bonds (Forrest County General Hospital Project),
                                                  6% due 1/01/2030 (i)                                                  10,591

Missouri--1.8%                                    Kansas City, Missouri, Airport Revenue Refunding and
                                                  Improvement Bonds, Series A (e):
                      AAA    Aaa         12,990    5.50% due 9/01/2013                                                  13,758
                      AAA    Aaa          9,000    5.50% due 9/01/2014                                                   9,488

Nevada--4.2%                                      Director for the State of Nevada, Department of Business and
                                                  Industry Revenue Bonds (Las Vegas Monorail Company) (b):
                      AAA    Aaa          7,595    5.94%** due 1/01/2024                                                 2,158
                      AAA    Aaa          5,425    5.95%** due 1/01/2025                                                 1,451
                      AAA    Aaa          5,445    5.96%** due 1/01/2026                                                 1,374
                      AAA    Aaa          3,000    5.97%** due 1/01/2027                                                   715
                      AAA    Aaa          5,000    5.97%** due 1/01/2028                                                 1,121
                      AAA    Aaa         45,000   Washoe County, Nevada, Water Facility Revenue Bonds (Sierra
                                                  Pacific Power Company), AMT, 6.65% due 6/01/2017 (e)                  47,650

New Jersey--4.7%      AAA    Aaa          6,810   Cape May County, New Jersey, Industrial Pollution Control
                                                  Financing Authority, Revenue Refunding Bonds (Atlantic City
                                                  Electric Company Project), Series A, 6.80% due 3/01/2021 (e)           8,290
                      NR*    Aaa         12,500   New Jersey EDA, Natural Gas Facilities Revenue Refunding Bonds
                                                  (NUI Corporation), RIB, Series 371, 9.79% due 10/01/2022 (b)(d)       14,340
                      AAA    Aaa         12,420   New Jersey State Housing and Mortgage Finance Agency, Home
                                                  Buyer Revenue Bonds, AMT, Series M, 7% due 10/01/2026 (e)             13,118
                                                  Salem County, New Jersey, Industrial Pollution Control
                                                  Financing Authority, Revenue Refunding Bonds (Public Service
                                                  Electric & Gas), RIB (d)(e):
                      AAA    Aaa         10,000    Series 380, 9.59% due 6/01/2031                                      11,316
                      AAA    Aaa         12,500    Series 381, 9.49% due 8/01/2030                                      14,170

New Mexico--0.5%      AAA    Aaa          5,585   Santa Fe County, New Mexico, Correctional System Revenue
                                                  Bonds, 6% due 2/01/2027 (i)                                            6,297

New York--8.2%        AAA    Aaa         13,000   Long Island Power Authority, New York, Electric System
                                                  Revenue Refunding Bonds, Series A, 5.50% due 12/01/2029 (e)           13,190
                      AAA    Aaa          5,000   Nassau Health Care Corporation, New York, Health System
                                                  Revenue Bonds (Nassau County), 6% due 8/01/2011 (i)                    5,628
                      NR*    Aaa         12,075   New York City, New York, City Municipal Water Finance
                                                  Authority, Water and Sewer System Revenue Bonds, RIB, Series
                                                  158, 8.68% due 6/15/2026 (d)(e)                                       13,227
                                                  New York City, New York, GO, Refunding, Series G:
                      AAA    Aaa          7,655    5.75% due 2/01/2014 (e)                                               8,108
                      AAA    NR*          5,155    5.75% due 2/01/2017 (i)                                               5,456
                      AAA    Aaa         21,000   New York City, New York, GO, Series I, 6% due 4/15/2012 (i)           23,215
                      AAA    Aaa         10,000   New York State Dormitory Authority, Revenue Refunding Bonds
                                                  (Mental Health Services), Series A, 5.75% due 8/15/2022 (e)           10,477
                      NR*    Aaa         20,000   New York State Local Government Assistance Corporation, Revenue
                                                  Refunding Bonds, RIB, Series 468X, 8.17% due 4/01/2021 (d)(h)         20,619
                      AAA    Aaa            160   New York State Medical Care Facilities Finance Agency Revenue
                                                  Bonds, Series E, 6.25% due 8/15/2019 (h)                                 172
                                                  Niagara Falls, New York, GO, Public Improvement (e):
                      AAA    Aaa          2,975    6.90% due 3/01/2023                                                   3,254
                      AAA    Aaa          3,190    6.90% due 3/01/2024                                                   3,490

North Carolina                                    Piedmont Triad Airport Authority, North Carolina, Airport
- --0.7%                                            Revenue Refunding Bonds, Series A (i):
                      AAA    Aaa          2,595    5.25% due 7/01/2014                                                   2,697
                      AAA    Aaa          1,320    5.25% due 7/01/2016                                                   1,353
                                                  Raleigh-Durham, North Carolina, Airport Authority,
                                                  Airport Revenue Bonds, Series A (h):
                      NR*    Aaa          2,530    5.25% due 11/01/2018                                                  2,567
                      NR*    Aaa          2,545    5.25% due 11/01/2019                                                  2,574

Ohio--1.3%                                        Ohio State Water Development Authority, Pollution Control
                                                  Facilities Revenue Bonds (Water Control Loan Fund--Water
                                                  Quality Series)(e):
                      AAA    Aaa          3,575    5.50% due 12/01/2010                                                  3,832
                      AAA    Aaa          3,175    5.50% due 6/01/2012                                                   3,369
                      AAA    Aaa          3,420    5.50% due 6/01/2013                                                   3,611
                      AAA    Aaa          6,000    5.50% due 6/01/2014                                                   6,301

Oklahoma--0.6%        AAA    Aaa          6,385   Oklahoma State IDR, Refunding (Health System), Series A,
                                                  6.25% due 8/15/2016 (e)                                                6,973
                      A1+    VMIG1++        300   Oklahoma State Industries Authority Revenue Refunding Bonds
                                                  (Integris Baptist), VRDN, Series B, 3.30% due 8/15/2029 (e)(f)           300

Oregon--1.1%          AAA    Aaa          8,700   Oregon State Department, Administrative Services, COP,
                                                  Series A, 6.25% due 5/01/2010 (a)(b)                                  10,044
                      AAA    Aaa          3,865   Port of Portland, Oregon, Airport Revenue Refunding Bonds
                                                  (Portland International Airport), AMT, Series 7-B, 7.10%
                                                  due 1/01/2012 (a)(e)                                                   4,644

Pennsylvania--2.3%                                Philadelphia, Pennsylvania, GO (i):
                      AAA    Aaa          3,000    5.25% due 9/15/2015                                                   3,080
                      AAA    Aaa          3,200    5.25% due 9/15/2016                                                   3,268
                      AAA    Aaa          4,155    5.25% due 9/15/2017                                                   4,221
                      AAA    Aaa          6,000   Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
                                                  12th Series B, 7% due 5/15/2020 (c)(e)                                 7,273
                      AAA    Aaa         11,700   Southeastern Pennsylvania Transportation Authority,
                                                  Special Revenue Bonds, 5.375% due 3/01/2022 (h)                       11,827


                                     Page 9


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS (concluded)                                                                             (in Thousands)
                       Municipal Bonds                                                                         Insured Portfolio
                       S&P    Moody's    Face
STATE                Ratings  Ratings   Amount      Issue                                                               Value
                                                                                                
Puerto Rico--0.5%       AAA       Aaa     $ 5,985   Puerto Rico Electric Power Authority, Power Revenue
                                                    Bonds, Trust Receipts, Class R, Series 16 HH,
                                                    8.824% due 7/01/2013 (d)(i)                                       $    7,050

Rhode Island--0.6%      AAA       Aaa       6,815   Rhode Island State Economic Development Corporation,
                                                    Airport Revenue Bonds, Series B, 6% due 7/01/2028 (h)                  7,294

South Carolina--1.7%                                South Carolina State Public Service Authority, Revenue
                                                    Refunding Bonds, Series A (b):
                        AAA       Aaa      17,090    6.375% due 7/01/2021                                                 17,852
                        AAA       Aaa       4,200    6.25% due 1/01/2022                                                   4,484

Tennessee --1.4%                                    Putnam County, Tennessee, School GO (h):
                        NR*       Aaa       4,450    5.375% due 4/01/2018                                                  4,570
                        NR*       Aaa       3,750    5.50% due 4/01/2019                                                   3,879
                        NR*       Aaa       4,000    5.50% due 4/01/2020                                                   4,129
                        NR*       VMIG1++   5,900   Sevier County, Tennessee, Public Building Authority,
                                                    Local Government Public Improvement Revenue Bonds,
                                                    VRDN, Series IV-B-5, 3.05% due 6/01/2022 (f)(i)                        5,900

Texas--6.8%             AAA       Aaa      11,190   Austin, Texas, Utility System Revenue Bonds, Combined,
                                                    9.25% due 11/15/2008 (a)(e)                                           12,948
                        AAA       Aaa       6,000   Brazos River Authority, Texas, PCR, Refunding (Texas
                                                    Utilities Electric Company Project), AMT, 6.50% due 12/01/2027 (b)     6,297
                        AAA       Aaa      12,000   Brazos River Authority, Texas, PCR (Texas Utilities Electric
                                                    Company Project), AMT, Series B, 6.625% due 6/01/2022 (h)             12,548
                        AAA       NR*      17,975   Dallas-Fort Worth, Texas, International Airport Revenue Bonds,
                                                    DRIVERS, AMT, Series 202, 8.95% due 11/01/2028 (d)(h)                 19,582
                        AAA       Aaa       2,750   Harris County, Texas, Toll Road Revenue Refunding Bonds,
                                                    Series A, 6.50% due 8/15/2017 (b)                                      2,891
                        AAA       Aaa       3,500   Houston, Texas, Water Conveyance System Contract, COP,
                                                    Series J, 6.25% due 12/15/2013 (b)                                     3,982
                        AAA       Aaa      11,800   Matagorda County, Texas, Navigation District Number 1,
                                                    Revenue Refunding Bonds (Houston Light and Power
                                                    Company), Series A, 6.70% due 3/01/2027 (b)                           12,275
                        A1+       NR*       1,000   North Central Texas, Health Facility Development Corporation
                                                    Revenue Bonds (Methodist Hospitals--Dallas), VRDN, Series B,
                                                    3.30% due 10/01/2015 (f)(g)                                            1,000
                        A1+       VMIG1++   3,000   Sabine River Authority, Texas, PCR, Refunding (Texas
                                                    Utilities Electric Company Project), VRDN, Series A,
                                                    3.30% due 3/01/2026 (b)(f)                                             3,000
                        AAA       Aaa       6,000   San Antonio, Texas, Electric and Gas Revenue Bonds,
                                                    5.375% due 2/01/2018 (e)                                               6,054
                        AAA       Aaa       7,430   Southwest Higher Education Authority Incorporated,
                                                    Revenue Refunding Bonds, Series B, 6.25% due 10/01/2022 (h)            7,780

Utah--1.9%              A1        VMIG1++     800   Emery County, Utah, PCR, Refunding (Pacificorp Projects),
                                                    VRDN, 3.30% due 11/01/2024 (b)(f)                                        800
                                                    Utah State Building Ownership Authority, Lease Revenue Refunding
                                                    Bonds (State Facilities Master Lease Program), Series C (i):
                        AAA       Aaa       3,995    5.50% due 5/15/2012                                                   4,307
                        AAA       Aaa       3,000    5.50% due 5/15/2013                                                   3,225
                        AAA       NR*       9,535   Utah Transit Authority, Sales Tax and Transportation Revenue
                                                    Bonds (Salt Lake County Light Rail Transit Project), 5.375%
                                                    due 12/15/2022 (i)                                                     9,602
                                                    Utah Water Finance Agency Revenue Bonds (Pooled Loan
                                                    Financing Program), Series A (b):
                        NR*       Aaa       2,515    5.75% due 10/01/2015                                                  2,692
                        NR*       Aaa       3,770    6% due 10/01/2020                                                     4,064

Virginia--2.5%          AAA       Aaa      19,755   Fairfax County, Virginia, EDA, Resource Recovery Revenue
                                                    Refunding Bonds, AMT, Series A, 6.10% due 2/01/2011 (b)               22,266
                                                    Virginia State, HDA, Commonwealth Mortgage Revenue Bonds,
                                                    AMT, Series A, Sub-Series A-4 (e):
                        AAA       Aa1       2,285    5.40% due 1/01/2011                                                   2,386
                        AAA       Aaa       2,270    5.50% due 1/01/2012                                                   2,370
                        AAA       Aaa       5,000    6.30% due 7/01/2014                                                   5,169

Washington--6.1%        AAA       Aaa      15,000   Energy Northwest, Washington, Electric Revenue Refunding
                                                    Bonds (Project Number 3), Series A, 5.50% due 7/01/2017 (i)           15,513
                        AAA       Aaa      33,535   Seattle, Washington, Municipal Light and Power Revenue
                                                    Bonds, 6.625% due 7/01/2004 (a)(h)                                    37,206
                        AAA       Aaa      18,000   Tacoma, Washington, Electric System Revenue Refunding
                                                    Bonds, Series A, 5.75% due 1/01/2019 (i)                              18,853
                        AAA       Aaa       9,000   Washington State, GO, Series A, 4.50% due 7/01/2023 (i)                7,976

West Virginia--1.9%     AAA       Aaa      11,465   Mason County, West Virginia, PCR, Refunding (Appalachian
                                                    Power Company), 6.85% due 6/01/2022 (e)                               12,021
                        AAA       Aaa      12,250   Pleasants County, West Virginia, PCR, Refunding
                                                    (Potomac-Pleasants), Series C, 6.15% due 5/01/2015 (b)                13,057

Wisconsin--4.4%                                     Milwaukee County, Wisconsin, Airport Revenue Bonds,
                                                    AMT, Series A (h):
                        NR*       Aaa       2,625    6% due 12/01/2012                                                     2,872
                        NR*       Aaa       3,675    6% due 12/01/2013                                                     3,991
                        NR*       Aaa       3,675    6% due 12/01/2014                                                     3,968
                        NR*       Aaa       3,675    6% due 12/01/2015                                                     3,948
                        AAA       Aaa       9,000   Superior, Wisconsin, Limited Obligation Revenue Refunding Bonds
                                                    (Midwest Energy Resources), Series E, 6.90% due 8/01/2021 (h)         10,941
                        AAA       Aaa       4,650   Wisconsin Public Power Inc., Power Supply System Revenue Bonds,
                                                    Series A, 5.75% due 7/01/2023 (e)                                      4,804
                                                    Wisconsin State, GO, AMT, Series B (e):
                        AAA       Aaa       7,920    6.50% due 5/01/2020                                                   8,458
                        AAA       Aaa      17,130    6.50% due 5/01/2025                                                  18,293

                        Total Investments (Cost--$1,211,868)--98.0%                                                    1,277,691
                        Variation Margin on Financial Futures Contracts***--0.0%                                             425
                        Other Assets Less Liabilities--2.0%                                                               26,271
                                                                                                                      ----------
                        Net Assets--100.0%                                                                            $1,304,387
                                                                                                                      ==========


(a) Prerefunded.
(b) AMBAC Insured.
(c) Escrowed to maturity.
(d) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at June
30, 2001.
(e) MBIA Insured.
(f) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30, 2001.
(g) BIG Insured.
(h) FGIC Insured.
(i) FSA Insured.
(j)FHA Insured.
(k) All or a portion of security held as collateral in connection with open
financial futures contracts.
*Not rated.
**Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
***Financial futures contracts sold as of June 30, 2001 were as
follows:

Number oF                            Expiration
Contracts        Issue                 Date                Value

850          US Treasury Note      September 2001       $ 87,563,281

Total Financial Futures Contracts Sold
(Total Contract Price--$88,028,125)                     $ 87,563,281
                                                        ============

++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of shares shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

                                    Page 10


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS                                                                                         (in Thousands)
                       Municipal Bonds                                                                        National Portfolio
                       S&P    Moody's    Face
STATE                Ratings  Ratings   Amount      Issue                                                               Value
                                                                                               
Alabama--0.4%           AAA       Aaa     $ 3,820   Alabama Incentives Financing Authority, Special Obligation
                                                    Revenue Refunding Bonds, Series A, 6% due 10/01/2029 (c)          $    4,098

Alaska--3.4%            AAA       Aaa       3,000   Alaska State Housing Financial Corporation, General
                                                    Mortgage Revenue Refunding, Series A, 6% due 6/01/2027 (f)             3,138
                                                    Anchorage, Alaska, School, GO, Series B (e):
                        AAA       Aaa       1,760    5.875% due 12/01/2016                                                 1,891
                        AAA       Aaa       2,100    5.875% due 12/01/2017                                                 2,246
                        AA+       NR*      27,150   Valdez, Alaska, Marine Terminal Revenue Refunding Bonds
                                                    (Sohio Pipeline--British Petroleum Oil), 7.125% due 12/01/2025        28,383

Arizona--1.5%           AAA       Aaa       1,620   Gilbert, Arizona, Water and Sewer Revenue Refunding
                                                    Bonds, 6.50% due 7/01/2022 (e)                                         1,754
                        AAA       Aaa       2,330   Phoenix, Arizona, Civic Improvement Corporation, Municipal
                                                    Facilities, Excise Tax Revenue Bonds, 5.75% due 7/01/2016 (e)          2,506
                                                    Phoenix, Arizona, Civic Improvement Corporation, Water System
                                                    Revenue Bonds, Junior Lien (i):
                        AA-       Aaa       2,000    5.625% due 7/01/2006                                                  2,170
                        AA-       Aaa       2,315    6% due 7/01/2006                                                      2,551
                        NR*       B3        5,000   Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds
                                                    (America West Airlines Inc. Project), AMT, 6.30% due 4/01/2023         4,086
                        NR*       Aaa         500   Phoenix, Arizona, IDA Revenue Bonds (Camelback Crossing),
                                                    6.20% due 9/20/2020 (d)                                                  534
                        AA        NR*       1,200   Tucson, Arizona, IDA, Senior Living Facilities Revenue Bonds
                                                    (Christian Care Tucson Inc. Project), Series A, 6.125% due
                                                    7/01/2024                                                              1,266
                        AAA       Aaa       1,000   University of Arizona, COP (University of Arizona Parking
                                                    and Student Housing), 5.75% due 6/01/2019 (c)                          1,053

California--6.5%        AAA       Aaa      11,740   Alameda County, California, COP (Financing Project),
                                                    6% due 9/01/2021 (f)                                                  12,502
                                                    California Pollution Control Financing Authority, PCR,
                                                    Refunding (Pacific Gas and Electric), VRDN (a):
                        A1+       NR*      12,200    AMT, Series B, 3.60% due 11/01/2026                                  12,200
                        A1+       NR*       8,900    Series C, 3.65% due 11/01/2026                                        8,900
                        NR*       NR*       4,000   Long Beach, California, Special Tax Bonds (Community
                                                    Facilities District No. 3--Pine Ave.), 6.375% due 9/01/2023            4,143
                        NR*       Aa3      20,000   Los Angeles, California, Department of Water and Power,
                                                    Electric Plant Revenue Refunding Bonds, RIB, Series 370,
                                                    9.12% due 2/15/2024 (g)                                               23,349
                        NR*       NR*       5,000   San Francisco California, City and County Redevelopment
                                                    Agency Revenue Bonds (Community Facilities District Number
                                                    6--Mission), 6% due 8/01/2021                                          4,959
                        NR*       Aaa       1,075   San Francisco, California, Uptown Parking Corporation,
                                                    Parking Revenue Bonds (Union Square), 6% due 7/01/2020 (f)             1,136

Colorado--4.5%          AAA       Aaa      25,000   Colorado Department of Transit, TRAN, 6% due 6/15/2014 (c)            27,629
                                                    Denver, Colorado, City and County Airport Revenue Bonds, AMT:
                        A         A2        2,575    Series A, 7.50% due 11/15/2023                                        2,870
                        A         A2        9,710    Series B, 7.25% due 11/15/2023                                       10,320
                        AAA       Aaa       3,685   Larimer County, Colorado, Poudre School District Number
                                                    R-1, GO, 6% due 12/15/2016 (e)                                         4,033
                        BB+       Ba1       1,615   Northwest Parkway, Colorado, Public Highway Authority
                                                    Revenue Bonds, First Tier, Sub-Series D, 7.125% due 6/15/2041          1,597
Connecticut--0.1%       A1+       VMIG1++   1,000   Connecticut State Health and Educational Facilities Authority
                                                    Revenue Bonds (Yale University), VRDN, Series T-1,
                                                    2.40% due 7/01/2029 (a)                                                1,000

Florida--5.9%           NR*       NR*       2,600   Brooks of Bonita Springs II, Florida, Community Development
                                                    District, Capital Improvement Revenue Bonds, Series B, 6.60%
                                                    due 5/01/2007                                                          2,627
                        NR*       Aaa       2,725   Duval County, Florida, School Board, COP, 5.75% due 7/01/2017 (h)      2,864
                        AAA       Aaa       6,330   Florida HFA, Revenue Bonds (Antigua Club Apartments), AMT,
                                                    Series A-1, 7% due 2/01/2035 (c)                                       6,735
                        AA+       Aaa      10,500   Florida State Board of Education, Capital Outlay, GO (Public
                                                    Education), Series B (i), 5.875% due 6/01/2005                        11,463
                        AAA       Aaa       5,200   Florida State, GO (Department of Transportation--Right of Way),
                                                    5.875% due 7/01/2005 (f)(i)                                            5,689
                        NR*       NR*       2,305   Heritage Isles, Florida, Community Development District, BAN,
                                                    6.30% due 8/01/2001                                                    2,305
                        AA-       Aa3       9,500   Jacksonville, Florida, Electric Authority, Water and Sewer
                                                    Revenue Bonds, Series A, 6% due 10/01/2024                            10,269
                        AAA       Aaa       4,500   Lee County, Florida, Transportation Facilities Revenue Bonds,
                                                    5.75% due 10/01/2022 (f)                                               4,669
                        NR*       NR*         565   Mediterra, Florida, South Community Development District,
                                                    Capital Improvement Revenue Bonds, Series B, 6.25% due 5/01/2004         568
                        AAA       NR*       1,690   Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT,
                                                    Series A, 8.375% due 3/01/2021 (b)(d)                                  1,697
                        AAA       Aaa       5,000   Orange County, Florida, Tourist Development, Tax Revenue Bonds,
                                                    5.50% due 10/01/2020 (c)                                               5,136
                        AAA       Aaa       2,000   Saint Lucie, Florida, West Services District, Utility Revenue
                                                    Refunding Bonds, Senior Lien, 6% due 10/01/2022 (f)                    2,179
                        NR*       NR*       4,810   Stoneybrook West, Florida, Community Development District, Special
                                                    Assessment Revenue Bonds, Series B, 6.45% due 5/01/2010                4,871

Georgia--1.8%           AAA       Aaa       9,000   Atlanta, Georgia, Water and Sewer Revenue Bonds,
                                                    5.25% due 1/01/2007 (e)(i)                                             9,669
                        AAA       Aaa       5,210   College Park, Georgia, Business and IDA, Revenue Bonds
                                                    (Civic Center Project), 5.75% due 9/01/2026 (c)                        5,527
                        AAA       Aaa       3,450   Fulton County, Georgia, Development Authority Revenue Bonds
                                                    (Morehouse College Project), 5.875% due 12/01/2030 (c)                 3,675

Illinois--7.6%          AAA       NR*      10,620   Chicago, Illinois, Board of Education, GO, DRIVERS,
                                                    Series 199, 8.20% due 12/01/2020 (c)(g)                               11,555
                                                    Chicago, Illinois, GO (Neighborhoods Alive 21 Program) (e):
                        AAA       Aaa       1,400    5.875% due 1/01/2019                                                  1,486
                        AAA       Aaa      10,000    Series A, 6.50% due 7/01/2010 (i)                                    11,705
                        AAA       Aaa       2,000   Chicago, Illinois, GO, Series A, 6.125% due 7/01/2010 (e)(i)           2,282
                        AAA       Aaa       8,000   Chicago, Illinois, O'Hare International Airport, General
                                                    Airport Revenue Refunding Bonds, Second Lien, Series A,
                                                    6.375% due 1/01/2012 (f)                                               8,708
                        AAA       Aaa       2,265   Chicago, Illinois, Park District, GO, Refunding, Series B,
                                                    5.75% due 1/01/2015 (e)                                                2,413
                        AAA       Aaa       1,500   Chicago, Illinois, Park District, GO, Series A, 5.75%
                                                    due 1/01/2016 (e)                                                      1,590
                        AAA       Aaa       3,210   Cicero, Illinois, GO, Refunding (Corporate Purpose), 6%
                                                    due 12/01/2028 (f)                                                     3,439
                        NR*       Aaa       7,000   Decatur, Illinois, GO, Refunding, 6% due 3/01/2025 (e)                 7,364
                        AA        Aa1          50   Illinois HDA, Residential Mortgage Revenue Bonds, RIB, AMT,
                                                    10.525% due 2/01/2018 (g)                                                 53
                                                    Illinois State, GO, 1st Series (f):
                        AAA       Aaa       8,890    5.75% due 12/01/2015                                                  9,517
                        AAA       Aaa       3,745    5.75% due 12/01/2016                                                  3,989
                        AAA       Aaa       4,000    5.75% due 12/01/2017                                                  4,238
                        AAA       Aa2       3,000   Illinois State, Sales Tax Revenue Bonds, 6% due 6/15/2020              3,226
                        AA+       Aa1       2,000   Lake County, Illinois, Forest Preservation District, GO
                                                    (Land Acquisition and Development), 5.75% due 12/15/2016               2,131
                        NR*       A2        4,400   Southwestern Illinois Development Authority, Sewer
                                                    Facilities Revenue Bonds (Monsanto Company Project),
                                                    AMT, 7.30% due 7/15/2015                                               4,803

Indiana--1.4%           AAA       NR*       2,000   Indiana Bond Bank Revenue Bonds (State Revolving Fund
                                                    Program), Series A, 5.875% due 8/01/2012                               2,206
                        NR*       NR*       2,595   Indiana State Educational Facilities Authority, Revenue Refunding
                                                    Bonds (Saint Joseph's College Project), 7% due 10/01/2029              2,714
                        AA        NR*       9,100   Indianapolis, Indiana, Local Public Improvement Bond Bank
                                                    Revenue Refunding Bonds, Series D, 6.75% due 2/01/2020                 9,694

Iowa--1.1%              AAA       Aaa       1,000   Iowa City, Iowa, Sewer Revenue Bonds, 5.75% due 7/01/2021 (f)          1,026
                        NR*       NR*       9,000   Iowa Finance Authority, Health Care Facilities Revenue
                                                    Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025       10,731

Kansas--2.3%                                        Wichita, Kansas, Hospital Revenue Refunding Bonds, RIB (f)(g):
                        AAA       Aaa      12,000    Series III-A, 9.705% due 10/20/2017                                  13,035
                        AAA       Aaa      10,000    Series III-B, 9.908% due 10/21/2022                                  10,875


                                    Page 11


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS (continued)                                                                               (in Thousands)
                         Municipal Bonds                                                                        National Portfolio
                         S&P    Moody's    Face
STATE                  Ratings  Ratings   Amount      Issue                                                               Value
                                                                                                 
Kentucky--0.8%            A-        A3      $ 8,000   Perry County, Kentucky, Solid Waste Disposal Revenue Bonds
                                                      (TJ International Project), AMT, 7% due 6/01/2024                 $    8,419

Louisiana--4.8%           NR*       A3       34,000   Lake Charles, Louisiana, Harbor and Terminal District,
                                                      Port Facilities Revenue Refunding Bonds (Trunkline
                                                      Long Company Project), 7.75% due 8/15/2022                            36,228
                          BB-       NR*      13,000   Port New Orleans, Louisiana, IDR, Refunding (Continental
                                                      Grain Company Project), 7.50% due 7/01/2013                           13,166

Maine--1.1%               BBB       Baa3      3,445   Maine Finance Authority, Solid Waste Recycling Facilities
                                                      Revenue Bonds (Great Northern Paper Project--
                                                      Bowater), AMT, 7.75% due 10/01/2022                                    3,591
                          AA        NR*       7,500   Maine State Housing Authority, Mortgage Purpose Revenue Bonds,
                                                      DRIVERS, AMT, Series 170, 8.91% due 11/15/2028 (g)                     7,839

Massachusetts--2.3%       AA-       Aa2      15,000   Massachusetts State, GO, Consolidated Loan, Series A,
                                                      6% due 2/01/2010 (i)                                                  16,930
                          NR*       Ca       10,488   Massachusetts State Health and Educational Facilities
                                                      Authority, Revenue Refunding Bonds (New England
                                                      Memorial Hospital), Series B, 6.25% due 7/01/2023 (j)                  1,468
                          AAA       Aaa       5,430   Route 3 North Transit Improvement Association, Massachusetts,
                                                      Lease Revenue Bonds, 5.75% due 6/15/2018 (f)                           5,749

Michigan--0.3%            AAA       Aaa       2,675   Michigan Municipal Bond Authority Revenue Bonds (Drinking
                                                      Water Revolving Fund), 5.875% due 10/01/2016                           2,909

Minnesota--0.3%           AA+       NR*       3,000   Rochester, Minnesota, Health Care Facilities Revenue Bonds,
                                                      IRS, Series H, 8.827% due 11/15/2015 (g)                               3,229

Mississippi--0.3%         NR*       Aaa       3,085   Mississippi Home Corporation, S/F Mortgage Revenue Bonds
                                                      (Access Program), AMT, Series A, 6.90% due 6/01/2024 (d)               3,292

Missouri--0.7%                                        Fenton, Missouri, Tax Increment Revenue Refunding and
                                                      Improvement Bonds (Gravois Bluffs):
                          NR*       NR*       2,670    6.75% due 10/01/2015                                                  2,705
                          NR*       NR*       4,000    7% due 10/01/2021                                                     4,077

Nevada--2.4%              AAA       Aaa       8,125   Clark County, Nevada, Airport Revenue Bonds, Sub-Lien,
                                                      Series A, 6% due 7/01/2029 (f)                                         8,706
                                                      Las Vegas, Nevada, Local Improvement Bonds, Special Assessment,
                                                      Special Improvement District Number 808, Summerlin:
                          NR*       NR*       1,775    5.875% due 6/01/2009                                                  1,783
                          NR*       NR*       2,050    6.125% due 6/01/2012                                                  2,046
                          NR*       NR*       2,285    6.25% due 6/01/2013                                                   2,285
                                                      Sparks, Nevada, Redevelopment Agency, Tax Allocation Revenue
                                                      Refunding Bonds, Series A, Asset Guaranty:
                          AA        NR*       3,110    6% due 1/15/2015                                                      3,301
                          AA        NR*       6,315    6% due 1/15/2023                                                      6,569

New Jersey--4.4%          BB        Ba2         735   New Jersey EDA, Special Facility Revenue Bonds (Continental
                                                      Airlines Inc. Project), AMT, 7% due 11/15/2030                           753
                          NR*       Aaa       5,000   New Jersey State Transit Corporation, COP, RIB, Series 245,
                                                      9.39% due 9/15/2014 (c)(g)                                             6,126
                          NR*       Aa2      14,690   New Jersey State Transportation Trust Fund Authority, Revenue
                                                      Refunding Bonds, RIB, Series 204, 9.39% due 6/15/2015 (g)             17,995
                          AA        Aa2       3,000   New Jersey State Transportation Trust Fund Authority,
                                                      Transportation System Revenue Bonds, Series A, 6% due 6/15/2019        3,264
                                                      New Jersey State Turnpike Authority, Turnpike Revenue
                                                      Refunding Bonds (f)(g):
                          NR*       Aaa      10,000    DRIVERS, Series 155, 8.725% due 1/01/2018                            11,300
                          NR*       Aaa       5,000    RIB, Series 315, 8.64% due 1/01/2018                                  5,650

New York--17.8%           AAA       Aaa      11,000   Metropolitan Transportation Authority, New York, Commuter
                                                      Facilities, Service Contract Revenue Refunding Bonds,
                                                      Series 8, 5.50% due 7/01/2021 (h)                                     11,410
                          AAA       Aaa      10,000   Metropolitan Transportation Authority, New York, Transit
                                                      Facilities Revenue Bonds, Series A, 5.625% due 7/01/2025 (f)          10,435
                          NR*       Aaa      10,000   New York City, New York, City Municipal Water Finance
                                                      Authority, Water and Sewer System Revenue Bonds, RIB,
                                                      Series 158, 8.68% due 6/15/2026 (f)(g)                                10,954
                          AAA       Aaa       3,000   New York City, New York, City Transit Authority,
                                                      Triborough Metropolitan Transportation Authority, COP,
                                                      5.75% due 1/01/2020 (c)                                                3,192
                                                      New York City, New York, City Transitional Finance
                                                      Authority Revenue Bonds, Future Tax Secured:
                          AA+       Aa2      10,915    Series A, 6% due 8/15/2029                                           11,747
                          AA+       Aa2      12,000    Series B, 6% due 11/15/2024                                          13,000
                          AA+       Aa2       5,000    Series B, 6% due 11/15/2029                                           5,406
                                                      New York City, New York, City Transitional Finance Authority,
                                                      Revenue Refunding Bonds, Future Tax Secured,
                                                      Series C:
                          AA+       Aa2       5,000    5.875% due 11/01/2014                                                 5,499
                          AA+       Aa2      13,630    5.875% due 11/01/2015                                                14,908
                          AA+       Aa2       8,000    5.875% due 11/01/2017                                                 8,678
                                                      New York City, New York, GO:
                          A         A2        4,000    Series B, 8.25% due 6/01/2006                                         4,759
                          AAA       Aaa      10,000    Series B, 5.875% due 8/01/2015 (f)                                   10,957
                          A         Aaa       5,495    Series F, 8.25% due 11/15/2001 (i)                                    5,690
                                                      New York City, New York, GO, Refunding:
                          A         A2        6,600    Series A, 6% due 5/15/2021                                            7,135
                          A         A2       10,000    Series A, 6.25% due 5/15/2026                                        10,944
                          A         Aaa      10,000    Series B, 7.75% due 2/01/2002 (i)                                    10,439
                          A         Aaa       4,500    Series B, 7.75% due 2/01/2002 (i)                                     4,698
                          AAA       Aaa       4,000    Series C, 5.875% due 2/01/2016 (e)                                    4,254
                          AAA       Aaa      15,000    Series G, 5.75% due 2/01/2014 (f)                                    15,888
                          A         A2        1,000    Series H, 6% due 8/01/2017                                            1,066
                          AA-       A3        5,000   New York State Dormitory Authority, Revenue Refunding
                                                      Bonds (State University Educational Facilities), Series A,
                                                       7.50% due 5/15/2013                                                   6,310
                          AAA       Aaa       3,400   New York State Environmental Facilities Corporation,
                                                      State Clean Water and Drinking, Revolving Funds Revenue
                                                      Bonds (Pooled Loan Program), Series B, 5.875% due 1/15/2019            3,658
                          NR*       Aa1       1,000   New York State Mortgage Agency, Homeowner Mortgage Revenue
                                                      Refunding Bonds, Series 95, 5.50% due
                                                      10/01/2017                                                             1,027
                          AAA       Aaa       2,700   New York State Thruway Authority, Highway and Bridge Trust
                                                      Fund Revenue Bonds, Series A, 5.875% due 4/01/2019 (h)                 2,907

North Carolina--0.7%      BBB       Baa3      4,000   North Carolina Eastern Municipal Power Agency, Power
                                                      System Revenue Bonds, Series D, 6.75% due 1/01/2026                    4,248
                          NR*       NR*       2,500   North Carolina Medical Care Commission, Health Care
                                                      Facilities, First Mortgage Revenue Bonds
                                                      (Presbyterian Homes Project), 6.875% due 10/01/2021                    2,600
                          A1        VMIG1++     100   North Carolina Medical Care Commission, Hospital
                                                      Revenue Bonds (Pooled Equipment Financing Project),
                                                      ACES, 2.75% due 12/01/2025 (a)(f)                                        100

Ohio--2.6%                NR*       Aaa       9,975   Ohio HFA, Residential Mortgage Revenue Bonds, Series A-1,
                                                      6.35% due 9/01/2031 (d)                                               10,507
                          AAA       Aaa       4,500   Ohio HFA, S/F Mortgage Revenue Bonds, AMT, RIB, Series B,
                                                      10.733% due 3/31/2031 (d)(g)                                           4,691
                          AAA       Aaa       8,000   Ohio State Air Quality Development Authority, Revenue
                                                      Refunding Bonds (Dayton Power & Light Company),
                                                      Series B, 6.40% due 8/15/2027 (f)                                      8,372
                          AAA       Aaa       3,005   Toledo-Lucas County, Ohio, Lodging Tax Revenue Refunding
                                                      Bonds (Convention Center Project), 5.70% due 10/01/2015 (f)            3,173

Oregon--1.7%              AAA       Aaa       2,485   Jackson County, Oregon, Central Point School District
                                                      Number 006, GO, 5.75% due 6/15/2017 (e)                                2,633
                          AAA       Aaa       9,175   Oregon State Department of Administrative Services, COP,
                                                      Series A, 6% due 5/01/2010 (c)(i)                                     10,425
                          NR*       Aaa       3,190   Portland, Oregon, Urban Renewal and Redevelopment Revenue
                                                      Bonds (South Park Blocks), Series A, 5.75% due 6/15/2018 (c)           3,389
                          NR*       Aaa       1,000   Portland, Oregon, Urban Renewal and Redevelopment Revenue
                                                      Refunding Bonds (Downtown Waterfront), Series A, 5.75%
                                                      due 6/15/2018 (c)                                                      1,061

Pennsylvania--3.6%        AAA       Aaa       7,000   Allegheny County, Pennsylvania, Port Authority, Special
                                                      Transportation Revenue Bonds, 6.125% due 3/01/2009 (f)(i)              7,931
                          AAA       Aaa       2,220   Allegheny County, Pennsylvania, Sanitation Authority,
                                                      Sewer Revenue Bonds, 5.75% due 12/01/2017 (f)                          2,372
                          AAA       Aaa      13,000   Erie, Pennsylvania, School District, GO, 5.80% due 9/01/2010 (c)(i)   14,517
                          AA+       Aa2       8,800   Pennsylvania HFA Revenue Refunding Bonds, RIB, AMT, 10.725%
                                                      due 10/03/2023 (g)                                                     9,207


                                    Page 12


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS (concluded)                                                                                 (in Thousands)
                         Municipal Bonds                                                                          National Portfolio
                         S&P    Moody's    Face
STATE                  Ratings  Ratings   Amount      Issue                                                               Value
                                                                                                   
Pennsylvania              AAA       NR*     $ 2,000   Pennsylvania State Higher Educational Facilities Authority,
(concluded)                                           College and University Revenue Bonds (Eastern College),
                                                      Series B, 8% due 10/15/2006 (i)                                   $    2,434
                          NR*       NR*       1,400   Philadelphia, Pennsylvania, Authority for Industrial
                                                      Developement, Health Care Facility Revenue Refunding
                                                      Bonds (Paul's Run), Series A, 5.75% due 5/15/2018                      1,212

Rhode Island--1.8%        AA+       Aa2       8,075   Rhode Island Housing and Mortgage Finance Corporation Revenue
                                                      Bonds, DRIVERS, AMT, Series 156, 8.824% due 4/01/2029 (g)              8,604
                          AAA       Aaa       6,815   Rhode Island State Economic Development Corporation, Airport
                                                      Revenue Bonds, Series B, 6% due 7/01/2028 (e)                          7,294
                          AA        NR*       1,000   Rhode Island State Economic Development Corporation Revenue
                                                      Bonds (Providence Place Mall), 6.125% due 7/01/2020                    1,055
                          AAA       Aaa       2,000   Rhode Island State, GO (Consolidated Capital Development Loan),
                                                      Series A, 5.75% due 7/15/2013 (e)                                      2,183

South Dakota--0.4%        NR*       Aaa       3,750   Pierre, South Dakota, School District Number 32-2,
                                                      GO, 5.75% due 8/01/2020 (h)                                            3,928

Tennessee--1.6%                                       Chattanooga, Tennessee, Industrial Development Board, Lease
                                                      Rent Revenue Bonds (Southside Redevelopment Corporation) (c):
                          AAA       Aaa       4,485    5.75% due 10/01/2017                                                  4,759
                          AAA       Aaa       3,740    5.75% due 10/01/2018                                                  3,954
                          AA        Aa2       5,000   Metropolitan Government of Nashville and Davidson County,
                                                      Tennessee, GO, 5.875% due 5/15/2026                                    5,202
                          NR*       Aaa       2,500   Robertson and Sumner Counties, Tennessee, White House
                                                      Utility District, Water Revenue Bonds, 6% due 1/01/2026 (h)            2,673

Texas--5.6%                                           Austin, Texas, Convention Center Revenue Bonds (Convention
                                                      Enterprises Inc.), First Tier, Series A:
                          BBB-      Baa3      4,300    6.60% due 1/01/2021                                                   4,349
                          BBB-      Baa3      1,000    6.70% due 1/01/2028                                                   1,015
                          AAA       Aaa       9,340   Austin, Texas, Independent School District, GO, Refunding,
                                                      5.75% due 8/01/2006 (i)                                               10,198
                          AAA       Aaa       5,300   Austin, Texas, Revenue Bonds (Town Lake Community Events
                                                      Center Venue), 6.20% due 11/15/2029 (e)                                5,693
                          AAA       Aaa       5,000   Bexar County, Texas, Revenue Bonds (Venue Project),
                                                      5.75% due 8/15/2012 (f)                                                5,405
                          AAA       NR*       9,125   Dallas-Fort Worth, Texas, International Airport Revenue Bonds,
                                                      DRIVERS, AMT, Series 201, 8.95% due 11/01/2024 (e)(g)                  9,976
                          BBB       Baa1      7,250   Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds
                                                      (Champion International Corporation), AMT, 7.45% due 5/01/2026         7,495
                          AAA       Aaa       2,860   Jefferson County, Texas, GO, Certificates of Obligation,
                                                      6% due 8/01/2019 (h)                                                   3,075
                          AAA       Aaa       2,000   Lower Colorado River Authority, Texas, Revenue Refunding
                                                      Bonds, Series A, 5.875% due 5/15/2015 (h)                              2,151
                                                      Texas State Public Finance Authority, Building
                                                      Revenue Bonds (h):
                          AAA       Aaa       2,100    (General Services Commission Project), Series A, 6% due 2/01/2020     2,247
                          AAA       Aaa       1,000    (State Preservation Project), Series B, 6% due 8/01/2015              1,082
                          AAA       Aaa       4,930   Upper Trinity Regional Water District, Texas, Water Revenue
                                                      Bonds (Regional Treated Water Supply System), Series A,
                                                      6% due 8/01/2020 (e)                                                   5,290

Utah--1.3%                NR*       NR*       2,000   Tooele County, Utah, PCR, Refunding (Laidlaw Environmental),
                                                      AMT, Series A, 7.55% due 7/01/2027 (j)                                    55
                          AAA       Aaa      12,000   Weber County, Utah, Municipal Building Authority, Lease
                                                      Revenue Bonds, 7.50% due 12/15/2004 (i)                               13,786

Virginia--0.3%            NR*       NR*       5,000   Peninsula Ports Authority, Virginia, Revenue Refunding Bonds
                                                      (Port Facility--Zeigler Coal), 6.90% due 5/02/2022 (j)                 3,250

Washington--0.9%          AAA       Aaa       2,065   Kitsap County, Washington, GO, 5.875% due 7/01/2020 (c)                2,186
                          AAA       Aaa       2,500   Port Seattle, Washington, Special Facilities Revenue
                                                      Bonds, Series A, 6% due 9/01/2029 (f)                                  2,668
                          AAA       Aaa       3,010   Seattle, Washington, Drain and Wastewater Utility
                                                      Revenue Bonds, 5.75% due 11/01/2022 (f)                                3,149
                          AAA       Aaa       1,625   University of Washington, University Revenue Bonds
                                                      (Student Facilities Fee), 5.875% due 6/01/2017 (h)                     1,735

West Virginia--0.8%       A-        A3        7,500   Upshur County, West Virginia, Solid Waste Disposal Revenue
                                                      Bonds (TJ International Project), AMT, 7% due 7/15/2025                7,907

Wisconsin--4.7%           NR*       Aaa       2,050   Waterford, Wisconsin, Graded Joint School District
                                                      Number 1, GO, Refunding, 5.75% due 4/01/2018 (e)                       2,158
                          AAA       NR*      11,080   Wisconsin Center District, Wisconsin Tax Revenue Bonds,
                                                      Series B, 5.75% due 12/15/2006 (i)                                    12,255
                                                      Wisconsin Housing and EDA, Home Ownership Revenue
                                                      Refunding Bonds:
                          NR*       Aa2      21,150    RITR, AMT, Series 18, 8.712% due 9/01/2028 (g)                       22,449
                          AA        Aaa       1,680    Series A, 7.10% due 3/01/2023                                         1,727
                          AAA       Aaa      10,000   Wisconsin State, GO, AMT, Series B, 6.20% due 11/01/2026 (f)          10,435

Wyoming--0.9%             AAA       Aaa       8,400   Sweetwater County, Wyoming, PCR, Refunding (Idaho Power
                                                      Company Project), Series A, 6.05% due 7/15/2026 (f)                    8,857

                          Total Investments (Cost--$987,831)--98.6%                                                      1,022,495
                          Other Assets Less Liabilities--1.4%                                                               14,744
                                                                                                                        ----------
                          Net Assets--100.0%                                                                            $1,037,239
                                                                                                                        ==========


(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30, 2001.
(b) FHA Insured.
(c) AMBAC Insured.
(d) GNMA Collateralized.
(e) FGIC Insured.
(f) MBIA Insured.
(g) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at June
30, 2001.
(h) FSA Insured.
(i) Prerefunded.
(j) Non-income producing security.
*Not Rated.
++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

                                    Page 13




SCHEDULE OF INVESTMENTS                                                                                           (in Thousands)
                      Municipal Bonds                                                                     Limited Maturity Portfolio
                      S&P    Moody's    Face
STATE               Ratings  Ratings   Amount      Issue                                                               Value
                                                                                                      
Alabama--3.0%          AA        Aa3     $ 7,675   Alabama State Public School and College Authority, Capital
                                                   Improvement Revenue Bonds, Series D, 5% due 8/01/2003             $    7,958

Arizona--3.6%          AAA       NR*       4,720   Phoenix, Arizona, Civic Improvement Corporation, Wastewater
                                                   System, Lease Revenue Bonds, 6.125% due 7/01/2003 (a)                  5,082
                       AAA       Aaa       4,285   Pima County, Arizona, Unified School District Number 6,
                                                   Marana, GO, Series A, 5.75% due 7/01/2003 (a)(f)                       4,544

California--9.9%       A1+       VMIG1++   4,800   California Infrastructure and Economic Development Bank, Revenue
                                                   Refunding Bonds (Independent System Operation Corporation
                                                   Project), VRDN, Series A, 3.15% due 4/01/2008 (b)(d)                   4,800
                       A1+       NR*       8,300   California Pollution Control Financing Authority, PCR,
                                                   Refunding (Pacific Gas and Electric), VRDN, AMT, Series B,
                                                   3.60% due 11/01/2026 (b)                                               8,300
                       A1+       A1        4,000   Chula Vista, California, IDR, Refunding (San Diego Gas &
                                                   Electric Co.), VRDN, AMT, Series A, 6.75% due 3/01/2023 (b)            4,108
                       SP1+      MIG1++    5,000   Sacramento County, California, TRAN, 5% due 10/04/2001                 5,030
                       SP1+      MIG1++    4,000   San Diego, California, Unified School District,
                                                   TRAN, Series A, 5.25% due 10/04/2001                                   4,026

Connecticut--2.5%                                  Connecticut State Resource Recovery Authority, Resource Recovery
                                                   Revenue Refunding Bonds (Bridgeport Resco Company LP Project):
                       A+        A2        2,500    5.25% due 1/01/2002                                                   2,527
                       A+        A2        4,000    5% due 1/01/2003                                                      4,082

Delaware--2.1%         AAA       Aaa       5,500   Delaware State, GO, Series A, 5% due 4/01/2002                         5,598


                                    Page 14


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001



SCHEDULE OF INVESTMENTS (concluded)                                                                                   (in Thousands)
                         Municipal Bonds                                                                  Limited Maturity Portfolio
                         S&P    Moody's    Face
STATE                  Ratings  Ratings   Amount      Issue                                                               Value
                                                                                                         
Georgia--1.3%             AA-       Aa2     $ 3,500   Cherokee County, Georgia, GO, 4.25% due 8/01/2003                 $    3,577

Hawaii--1.4%              AAA       Aaa       3,585   Hawaii State, GO, Series CT, 5.25% due 9/01/2003 (e)                   3,739

Illinois--16.9%                                       Chicago, Illinois, Public Building Commission, Building
                                                      Revenue Bonds, Series C (f):
                          AAA       Aaa       5,000    5.125% due 2/01/2003                                                  5,147
                          AAA       Aaa       5,000    5.125% due 2/01/2004                                                  5,196
                          AAA       NR*       5,000   Chicago, Illinois, Skyway Toll Bridge Revenue Refunding
                                                      Bonds, 6.75% due 1/01/2004 (a)                                         5,491
                          AAA       Aaa      12,000   Cook County, Illinois, GO, Series A, 6.6% due 11/15/2002 (a)(d)       12,822
                          AAA       Aaa       2,255   Du Page County, Illinois, Transportation Revenue Refunding
                                                      Bonds, 5.25% due 1/01/2005 (e)                                         2,367
                          AA        Aa2       3,500   Illinois State, GO, 4% due 3/01/2002                                   3,531
                          AAA       Aaa       5,000   Illinois State Toll Highway Authority, Toll Highway
                                                      Revenue Refunding Bonds, Series A, 5.50% due 1/01/2004 (f)             5,235
                          AAA       Aaa       5,000   Illinois Student Assistance Commission, Student Loan Revenue
                                                      Refunding Bonds, Senior Series WW, 4.50% due 9/01/2002                 5,089

Indiana--1.1%             AAA       Aaa       3,000   Indianapolis, Indiana, Airport Authority Revenue Refunding
                                                      Bonds, AMT, Series A, 4.50% due 7/01/2001 (f)                          3,000

Kansas--4.1%              A2        A2        3,500   Burlington, Kansas, Environmental Improvement Revenue
                                                      Refunding Bonds (Kansas City Power and Light Company
                                                      Project), Series D, 4.35% due 9/01/2001 (b)                            3,503
                                                      Kansas State Development Finance Authority Revenue Bonds,
                                                      Board of Regents (Rehabilitation Center), Series G-2 (c):
                          AAA       Aaa       4,000    5% due 10/01/2001                                                     4,024
                          AAA       Aaa       3,250    5.50% due 10/01/2002                                                  3,358

Kentucky--1.9%            AAA       Aaa       5,000   Carrollton and Henderson, Kentucky, Public Energy Authority,
                                                      Gas Revenue Bonds (Kentucky Trust), Series A, 4.50%
                                                      due 1/01/2002 (e)                                                      5,008

Maryland--1.6%            AAA       Aaa       4,050   Washington Suburban Sanitation District, Maryland, Water
                                                      Supply, GO, Refunding, 4.125% due 6/01/2004                            4,146

Massachusetts--3.1%       AAA       Aaa         160   Massachusetts Education Loan Authority, Education Loan
                                                      Revenue Refunding Bonds, AMT, Issue E, Series B, 5.50%
                                                      due 7/01/2001 (c)                                                        160
                          AA-       Aa2         750   Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001        752
                          BBB       NR*       2,925   Massachusetts State Industrial Finance Agency, Resource
                                                      Recovery Revenue Refunding Bonds (Ogden Haverhill Associates),
                                                      Series A, 4.50% due 12/01/2001                                         2,930
                          NR*       Aaa       4,385   New England Education Loan Marketing Corporation, Massachusetts,
                                                      Student Loan Revenue Refunding Bonds, Issue A, 5.80%
                                                      due 3/01/2002                                                          4,474

Michigan--1.1%            AAA       Aaa         105   Chelsea, Michigan, School District, GO, 6.75% due 5/01/2002 (f)          109
                          AAA       Aaa         250   Dearborn, Michigan, Economic Development Corporation,
                                                      Hospital Revenue Bonds (Oakwood Obligated Group), Series A,
                                                      6.95% due 8/15/2001 (a)(d)                                               256
                          AAA       Aaa       2,250   Michigan State, GO, Refunding, 5% due 12/01/2004                       2,365
                          NR*       Aaa         100   Michigan State Hospital Finance Authority Revenue Bonds
                                                      (McLaren Obligated Group), Series A, 7.50% due 9/15/2001 (a)             103

Minnesota--0.8%           AAA       Aaa       2,025   Metropolitan Council, Minnesota, Minneapolis-Saint Paul
                                                      Metropolitan Area Transit, GO, Series A, 5% due 2/01/2003              2,084

Nebraska--4.4%            AAA       Aaa       2,575   American Public Energy Agency, Nebraska, Gas Supply
                                                      Revenue Bonds (Nebraska Public Gas Agency Project),
                                                      Series A, 4.50% due 6/01/2002 (c)                                      2,582
                          AAA       Aaa       8,750   Nebraska Public Power District Revenue Refunding Bonds,
                                                      Series A, 5.25% due 1/01/2004 (d)                                      9,125

New Hampshire--2.8%       NR*       NR*       7,500   New Hampshire State Business Finance Authority, PCR,
                                                      Refunding,(UTD Illuminating), VRDN, AMT, Series A,
                                                      4.35% due 2/01/2002 (b)                                                7,511

New Jersey--2.0%          AA+       Aa1       4,900   New Jersey State, GO, Refunding, Series D, 5.40% due 2/15/2003         5,082
                          AAA       Aaa         125   Somerset County, New Jersey, GO, 5.875% due 12/01/2001                   127

New Mexico--0.8%          AA        Aa3       2,000   Albuquerque, New Mexico, Joint Water and Sewer System--0.8%
                                                      Revenue Refunding Bonds, Series A, 4.40% due 7/01/2003                 2,047

New York--4.9%            A-        Baa1      4,000   Long Island Power Authority, New York, Electric System
                                                      Revenue Refunding Bonds, Series A, 5.25% due 12/01/2002                4,122
                          A         A2        3,200   New York City, New York, GO, Refunding, Series G,
                                                      4.30% due 8/01/2002                                                    3,252
                          A         Aaa       4,615   New York City, New York, GO, Series C, Sub-Series C-1,
                                                      7.5% due 8/01/2002 (a)                                                 4,917
                          AAA       Aaa         600   New York State Local Government Assistance Corporation
                                                      Revenue Bonds, Series D, 7% due 4/01/2002 (a)                            631

North Carolina--1.7%      AAA       Aaa       4,500   North Carolina State, Public School Building,
                                                      GO, 4.60% due 4/01/2004                                                4,644

Ohio--6.4%                AAA       Aaa       2,500   Cincinnati, Ohio, City School District, GO, TAN,
                                                      5.50% due 12/01/2003 (c)                                               2,622
                          AAA       Aaa       6,990   Columbus, Ohio, GO, Series 2, 5% due 6/15/2002                         7,146
                                                      Ohio State, GO, Highway Capital Improvement:
                          AAA       Aa1       2,000    Series C, 4.75% due 5/01/2005                                         2,081
                          AAA       Aa1       5,000    Series F, 5% due 5/01/2005                                            5,247

Oklahoma--0.9%            NR*       Aaa       2,365   Midwest City, Oklahoma, Municipal Authority, Capital
                                                      Improvement Revenue Bonds, 4.55% due 6/01/2005 (e)                     2,437

Oregon--1.8%              AA+       Aa2       4,815   Tri-County, Oregon, Metropolitan Transportation District,
                                                      GO, Refunding (Light Rail Extension), Series A, 4% due 7/01/2003       4,894

Pennsylvania--1.5%        NR*       MIG1++    4,000   North Wales, Pennsylvania, Water Authority Revenue
                                                      Bonds (Rural Water Projects), 5.125% due 9/01/2001                     4,016

South Carolina--0.4%      AAA       Aaa       1,000   South Carolina State Highway, GO, Series B, 5.25% due 4/01/2005        1,058

Tennessee--2.2%           AA+       Aa1       5,605   Tennessee State, GO, Refunding, Series B, 5.50% due 5/01/2004          5,918


Texas--7.0%               AA        Aa2       6,075   Fort Worth, Texas, Water and Sewer Revenue Refunding and
                                                      Improvement Bonds, 5.50% due 2/15/2004                                 6,376
                          AAA       Aaa       2,445   Garland, Texas, Independent School District, GO, Series A,
                                                      6% due 2/15/2002 (a)                                                   2,495
                          AA        Aa1       5,750   Texas State, Texas Public Finance Authority, GO, Refunding,
                                                      Series B, 6% due 10/01/2004                                            6,187
                          AA        Aa1       3,600   Texas State University System Revenue Bonds (Constitutional
                                                      Appropriation), 4.75% due 8/15/2001                                    3,610

Virginia--1.3%            AA        A1        3,330   Richmond, Virginia, GO, Equipment Notes, 4.25% due 5/15/2002           3,368

Washington--3.6%          AA+       Aa1       1,900   Seattle, Washington, GO, Refunding, 4.50% due 7/01/2001                1,900
                          AAA       Aaa       2,000   Snohomish County, Washington, Public Utility District Number
                                                      001, Electric Revenue Refunding Bonds, 5% due 12/01/2003 (e)           2,082
                          AAA       Aaa       3,195   Washington State, GO, Refunding, Series R-A, 5.25%
                                                      due 9/01/2004 (e)                                                      3,361
                          AA-       Aa1       2,275   Washington State Public Power Supply System Revenue
                                                      Refunding Bonds (Nuclear Project Number 3), Series A,
                                                      5% due 7/01/2003                                                       2,349

                          Total Investments (Cost--$251,815)--96.1%                                                        255,708
                          Other Assets Less Liabilities--3.9%                                                               10,474
                                                                                                                        ----------
                          Net Assets--100.0%                                                                            $  266,182
                                                                                                                        ==========


(a) Prerefunded.
(b) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at June 30, 2001.
(c) AMBAC Insured.
(d) MBIA Insured.
(e) FSA Insured.
(f) FGIC Insured.
*Not Rated.
++Highest short-term rating issued by Moody's Investors Service,Inc.
Ratings of issues shown have not been audited by Deloitte & ToucheLLP.

See Notes to Financial Statements.

                                    Page 15


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

STATEMENTS OF ASSETS AND LIABILITIES



                                                                                                             Limited
                                                                       Insured            National           Maturity
                       As of June 30, 2001                            Portfolio          Portfolio          Portfolio
                                                                                              
Assets:             Investments, at value*                          $1,277,691,198     $1,022,495,169     $  255,708,077
                    Cash                                                 1,879,474             82,200             62,938
                    Receivables:
                      Interest                                          20,553,561         16,503,633          4,523,719
                      Securities sold                                    3,763,261          4,841,244          7,073,700
                      Capital shares sold                                2,732,874          1,763,332             49,995
                      Variation margin                                     425,000                 --                 --
                    Prepaid registration fees and other assets             807,446            152,205             63,396
                                                                    --------------     --------------     --------------
                    Total assets                                     1,307,852,814      1,045,837,783        267,481,825
                                                                    --------------     --------------     --------------

Liabilities:        Payables:
                      Securities purchased                                      --          5,000,000                 --
                      Capital shares redeemed                            1,653,034          1,964,699          1,008,398
                      Dividends to shareholders                          1,094,619            875,259            165,134
                      Investment adviser                                   368,771            381,027             68,936
                      Distributor                                          182,796            193,744             13,169
                    Accrued expenses and other liabilities                 166,395            184,274             44,566
                                                                    --------------     --------------     --------------
                    Total liabilities                                    3,465,615          8,599,003          1,300,203
                                                                    --------------     --------------     --------------

Net Assets:         Net assets                                      $1,304,387,199     $1,037,238,780     $  266,181,622
                                                                    ==============     ==============     ==============

Net Assets          Class A Common Stock, $.10 par value++          $   11,974,990     $    6,444,612     $    1,904,692
Consist of:         Class B Common Stock, $.10 par value++++             2,911,983          2,244,602            313,077
                    Class C Common Stock, $.10 par value++++++             187,295            314,246              6,012
                    Class D Common Stock, $.10 par value++++++++         1,895,412          1,222,862            423,695
                    Paid-in capital in excess of par                 1,269,936,596      1,039,881,233        261,989,271
                    Accumulated realized capital losses on
                    investments--net                                   (26,786,083)       (46,937,416)        (2,043,192)
                    Accumulated distributions in excess of
                    realized capital gains on investments--net         (22,021,059)          (596,027)          (304,677)
                    Unrealized appreciation on investments--net         66,288,065         34,664,668          3,892,744
                                                                    --------------     --------------     --------------
                    Net assets                                      $1,304,387,199     $1,037,238,780     $  266,181,622
                                                                    ==============     ==============     ==============

Net Asset           Class A:
Value:                Net assets                                    $  920,597,114     $  653,685,063     $  191,480,421
                                                                    ==============     ==============     ==============
                      Shares outstanding                               119,749,898         64,446,120         19,046,921
                                                                    ==============     ==============     ==============
                      Net asset value and redemption price
                      per share                                     $         7.69     $        10.14     $       10.05
                                                                    ==============     ==============     ==============
                    Class B:
                      Net assets                                    $  223,710,594     $  227,592,229     $   31,480,018
                                                                    ==============     ==============     ==============
                      Shares outstanding                                29,119,830         22,446,024          3,130,768
                                                                    ==============     ==============     ==============
                      Net asset value and redemption price
                      per share                                     $         7.68     $        10.14     $        10.06
                                                                    ==============     ==============     ==============
                    Class C:
                      Net assets                                    $   14,391,766     $   31,879,825     $      602,062
                                                                    ==============     ==============     ==============
                      Shares outstanding                                 1,872,946          3,142,464             60,117
                                                                    ==============     ==============     ==============
                      Net asset value and redemption price
                      per share                                     $         7.68     $        10.14     $        10.01
                                                                    ==============     ==============     ==============
                    Class D:
                      Net assets                                    $  145,687,725     $  124,081,663     $   42,619,121
                                                                    ==============     ==============     ==============
                      Shares outstanding                                18,954,121         12,228,620          4,236,955
                                                                    ==============     ==============     ==============
                      Net asset value and redemption price
                      per share                                     $         7.69      $       10.15     $        10.06
                                                                    ==============     ==============     ==============

                    *Identified cost                                $1,211,867,977     $  987,830,501     $  251,815,333
                                                                    ==============     ==============     ==============
                    ++Authorized shares--Class A                       500,000,000        375,000,000        150,000,000
                                                                    ==============     ==============     ==============
                    ++++Authorized shares--Class B                     375,000,000        375,000,000        150,000,000
                                                                    ==============     ==============     ==============
                    ++++++Authorized shares--Class C                   375,000,000        375,000,000        150,000,000
                                                                    ==============     ==============     ==============
                    ++++++++Authorized shares--Class D                 500,000,000        375,000,000        150,000,000
                                                                    ==============     ==============     ==============


See Notes to Financial Statements.

                                    Page 16


STATEMENTS OF OPERATIONS



                                                                                                             Limited
                                                                       Insured            National           Maturity
                    For the Year Ended June 30, 2001                  Portfolio          Portfolio          Portfolio
                                                                                              
Investment          Interest and amortization of premium
Income:             and discount earned                             $   74,817,055     $   62,986,491     $   11,918,977
                                                                    --------------     --------------     --------------

Expenses:           Investment advisory fees                             4,865,278          5,011,968            922,155
                    Account maintenance and distribution fees
                    --Class B                                            1,858,159          1,800,970            108,007
                    Accounting services                                    309,832            246,199             71,695
                    Transfer agent fees--Class A                           295,542            270,993             43,655
                    Account maintenance fees--Class D                      297,399            261,323             40,287
                    Account maintenance and distribution fees
                    --Class C                                              102,801            238,409              1,540
                    Custodian fees                                         112,957             97,245             27,479
                    Transfer agent fees--Class B                            97,663            117,894              9,040
                    Printing and shareholder reports                        87,608             74,299             40,850
                    Professional fees                                       64,347             80,787             19,915
                    Registration fees                                       36,442             47,480             40,949
                    Transfer agent fees--Class D                            37,876             42,582              8,731
                    Pricing services                                        41,335             27,057             13,723
                    Directors' fees and expenses                            14,457              8,674              2,840
                    Transfer agent fees--Class C                             5,089             14,391                152
                    Other                                                   44,402             41,243             12,362
                                                                    --------------     --------------     --------------
                    Total expenses                                       8,271,187          8,381,514          1,363,380
                                                                    --------------     --------------     --------------
                    Investment income--net                              66,545,868         54,604,977         10,555,597
                                                                    --------------     --------------     --------------

Realized &          Realized gain (loss) on investments--net            30,002,263         25,290,223            (94,770)
Unrealized          Change in unrealized appreciation/
Gain( Loss) on      depreciation on investments--net                    28,039,608         21,630,793          5,527,210
Investments                                                         --------------     --------------     --------------
- --Net:              Net Increase in Net Assets Resulting
                    from Operations                                 $  124,587,739     $  101,525,993     $   15,988,037
                                                                    ==============     ==============     ==============

See Notes to Financial Statements.

                                    Page 17


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

STATEMENTS OF CHANGES IN NET ASSETS



                                                             Insured Portfolio                  National Portfolio
                                                                For the Year                       For the Year
                                                               Ended June 30,                     Ended June 30,
              Increase (Decrease) in Net Assets:             2001            2000             2001             2000
                                                                                           
Operations:   Investment income--net                   $   66,545,868   $   77,843,650   $   54,604,977   $   65,780,760
              Realized gain (loss) on investments
              --net                                        30,002,263      (78,541,901)      25,290,223      (62,192,724)
              Change in unrealized appreciation/
              depreciation on investments--net             28,039,608        7,805,843       21,630,793       (8,162,695)
                                                       --------------   --------------   --------------   --------------
              Net increase (decrease) in net
              assets resulting from operations            124,587,739        7,107,592      101,525,993       (4,574,659)
                                                       --------------   --------------   --------------   --------------

Dividends &   Investment income--net:
Distribu-      Class A                                    (49,144,606)     (57,133,564)     (36,633,484)     (43,599,153)
tions to       Class B                                    (10,966,780)     (15,325,442)     (11,203,855)     (15,259,347)
Share-         Class C                                       (562,694)        (646,631)      (1,374,445)      (1,906,874)
holders:       Class D                                     (5,871,788)      (4,738,013)      (5,393,193)      (5,015,386)
              In excess of realized gain on
              investments--net:
               Class A                                             --      (15,607,942)              --               --
               Class B                                             --       (4,878,687)              --               --
               Class C                                             --         (207,962)              --               --
               Class D                                             --       (1,326,468)              --               --
                                                       --------------   --------------   --------------   --------------
              Net decrease in net assets resulting
              from dividends and distributions to
              shareholders                                (66,545,868)     (99,864,709)     (54,604,977)     (65,780,760)
                                                       ==============   ==============   ==============   ==============

Capital       Net decrease in net assets derived
Share         from capital share transactions            (114,411,068)    (275,055,198)     (64,099,665)    (268,812,275)
Transac-                                               ==============   ==============   ==============   ==============
tions:

Net Assets:   Total decrease in net assets                (56,369,197)    (367,812,315)     (17,178,649)    (339,167,694)
              Beginning of year                         1,360,756,396    1,728,568,711    1,054,417,429    1,393,585,123
                                                       --------------   --------------   --------------   --------------
              End of year                              $1,304,387,199   $1,360,756,396   $1,037,238,780   $1,054,417,429
                                                       ==============   ==============   ==============   ==============




                                                                                           Limited Maturity Portfolio
                                                                                                   For the Year
                                                                                                  Ended June 30,
              Increase (Decrease) in Net Assets:                                              2001             2000
                                                                                                    
Operations:   Investment income--net                                                     $  10,555,597    $  12,919,927
              Realized gain (loss) on investments--net                                         (94,770)        (385,160)
              Change in unrealized appreciation/
              depreciation on investments--net                                               5,527,210       (1,879,787)
                                                                                         -------------    -------------
              Net increase (decrease) in net assets
              resulting from operations                                                     15,988,037       10,654,980
                                                                                         -------------    -------------
Dividends &   Investment income--net:
Distribu-      Class A                                                                      (7,913,125)      (9,083,280)
tions to       Class B                                                                      (1,094,398)      (1,394,083)
holders:       Class C                                                                         (15,552)         (17,620)
               Class D                                                                      (1,532,522)      (2,424,944)
              In excess of realized gain on investments--net:
               Class A                                                                              --               --
               Class B                                                                              --               --
               Class C                                                                              --               --
               Class D                                                                              --               --
                                                                                         -------------    -------------
              Net decrease in net assets resulting from dividends and
              distributions to shareholders                                                (10,555,597)     (12,919,927)
                                                                                         =============    =============

Capital       Net decrease in net assets derived from capital share
Share         transactions                                                                 (26,812,001)     (98,688,194)
Transac-                                                                                 =============    =============
tions:

Net Assets:   Total decrease in net assets                                                 (21,379,561)    (100,953,141)
              Beginning of year                                                            287,561,183      388,514,324
                                                                                         -------------    -------------
              End of year                                                                $ 266,181,622    $ 287,561,183
                                                                                         =============    =============


See Notes to Financial Statements.

                                    Page 18


FINANCIAL HIGHLIGHTS

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



                                                                                      Insured Portfolio
                                                                                           Class A
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     7.36   $     7.79  $     8.25  $     8.06    $     7.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .39          .40         .41         .43           .45
                Realized and unrealized gain (loss)
                on investments--net                               .33         (.32)       (.27)        .20           .15
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .72          .08         .14         .63           .60
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.39)        (.40)       (.41)       (.43)         (.45)
                  Realized gain on investments--net                --           --        (.19)       (.01)           --
                  In excess of realized gain in
                  investments--net                                 --         (.11)         --          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.39)        (.51)       (.60)       (.44)         (.45)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $     7.69   $     7.36  $     7.79  $     8.25    $     8.06
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share              10.01%        1.21%       1.56%       8.05%         7.72%
                                                           ==========   ==========  ==========  ==========    ==========

Ratios to       Expenses                                          .45%         .43%        .42%        .42%          .44%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           5.19%        5.33%       5.02%       5.29%         5.58%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $  920,597   $  972,420  $1,216,346  $1,377,025    $1,441,785
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              64.39%       94.08%      86.35%     102.89%        74.40%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                      Insured Portfolio
                                                                                           Class B
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     7.36   $     7.78  $     8.24  $     8.05    $     7.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .34          .34         .35         .37           .39
                Realized and unrealized gain (loss)
                on investments--net                               .32         (.31)       (.27)        .20           .14
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .66          .03         .08         .57           .53
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.34)        (.34)       (.35)       (.37)         (.39)
                  Realized gain on investments--net                --           --        (.19)       (.01)           --
                  In excess of realized gain in
                investments--net                                   --        (.11)          --          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.34)        (.45)       (.54)       (.38)         (.39)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year              $      7.68  $      7.36  $     7.78  $     8.24    $     8.05
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share               9.04%         .57%        .79%       7.24%         6.78%
                                                           ==========   ==========  ==========  ==========    ==========

Ratios to       Expenses                                         1.21%        1.19%       1.18%       1.18%         1.19%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           4.43%        4.56%       4.26%       4.53%         4.82%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $  223,710   $  276,154  $  414,135  $  498,624    $  560,105
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              64.39%       94.08%      86.35%     102.89%        74.40%
                                                           ==========   ==========  ==========  ==========    ==========


Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

                                    Page 19


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

FINANCIAL HIGHLIGHTS (continued)

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



                                                                                      Insured Portfolio
                                                                                           Class C
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                           
Per Share       Net asset value, beginning of year         $     7.36   $     7.78  $     8.24  $     8.06    $     7.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .33          .34         .34         .37           .38
                Realized and unrealized gain (loss)
                on investments--net                               .32         (.31)       (.27)        .19           .15
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .65          .03         .07         .56           .53
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.33)        (.34)       (.34)       (.37)         (.38)
                  Realized gain on investments--net                --           --        (.19)       (.01)           --
                  In excess of realized gain in
                  investments--net                                 --         (.11)         --          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.33)        (.45)       (.53)       (.38)         (.38)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $     7.68   $     7.36  $     7.78  $     8.24    $     8.06
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share               8.99%         .52%        .74%       7.05%         6.86%
                                                           ==========   ==========  ==========  ==========    ==========

Ratios to       Expenses                                         1.26%        1.24%       1.23%       1.23%         1.25%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           4.38%        4.52%       4.21%       4.48%         4.77%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $   14,392   $   12,856  $   16,850  $   14,623    $   11,922
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              64.39%       94.08%      86.35%     102.89%        74.40%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                      Insured Portfolio
                                                                                           Class D
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     7.36   $     7.79  $     8.24  $     8.06    $     7.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .37          .38         .39         .41           .43
                Realized and unrealized gain (loss)
                on investments--net                               .33         (.32)       (.26)        .19           .15
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .70          .06         .13         .60           .58
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.37)        (.38)       (.39)       (.41)         (.43)
                  Realized gain on investments--net                --           --        (.19)       (.01)           --
                  In excess of realized gain in
                  investments--net                                 --         (.11)         --          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.37)        (.49)       (.58)       (.42)         (.43)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $     7.69  $      7.36  $     7.79  $     8.24    $     8.06
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share               9.74%         .96%       1.43%       7.65%         7.46%
                                                           ==========   ==========  ==========  ==========    ==========


Ratios to       Expenses                                          .70%         .68%        .67%        .67%          .69%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           4.94%        5.10%       4.77%       5.03%         5.33%
                                                           ==========   ==========  ==========  ==========    ==========


Supplemental    Net assets, end of year (in thousands)     $  145,688   $   99,326  $   81,238  $   48,706    $   38,422
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              64.39%       94.08%      86.35%     102.89%        74.40%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                      National Portfolio
                                                                                           Class A
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     9.70   $    10.22  $    10.64  $    10.38    $    10.11
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .54          .56         .56         .59           .60
                Realized and unrealized gain (loss)
                on investments--net                               .44         (.52)       (.42)        .26           .27
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .98          .04         .14         .85           .87
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.54)        (.56)       (.56)       (.59)         (.60)
                  In excess of realized gain on
                  investments--net                                 --           --        --++          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.54)        (.56)       (.56)       (.59)         (.60)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.14   $     9.70  $    10.22  $    10.64    $    10.38
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share              10.32%         .58%       1.28%       8.36%         8.84%
                                                           ==========   ==========  ==========  ==========    ==========

Ratios to       Expenses                                          .58%         .56%        .55%        .55%          .55%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           5.42%        5.74%       5.26%       5.58%         5.86%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $  653,685   $  682,553  $  877,841  $  964,940    $  983,650
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              80.88%      108.43%     125.75%     142.02%        99.52%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                      National Portfolio
                                                                                           Class B
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     9.70   $    10.21  $    10.63  $    10.37    $    10.11
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .46          .49         .48         .51           .52
                Realized and unrealized gain (loss)
                on investments--net                               .44         (.51)       (.42)        .26           .26
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .90         (.02)        .06         .77           .78
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.46)        (.49)       (.48)       (.51)         (.52)
                  In excess of realized gain on
                  investments--net                                 --           --        --++          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.46)        (.49)       (.48)       (.51)         (.52)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.14   $     9.70  $    10.21  $    10.63    $    10.37
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share               9.49%        (.09%)       .51%       7.55%         7.92%
                                                           ==========   ==========  ==========  ==========    ==========

Ratios to       Expenses                                         1.34%        1.32%       1.31%       1.31%         1.31%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           4.67%        4.98%       4.50%       4.82%         5.10%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $  227,592   $  254,860  $  374,642  $  406,798    $  415,103
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              80.88%      108.43%     125.75%     142.02%        99.52%
                                                           ==========   ==========  ==========  ==========    ==========


*Total investment returns exclude the effects of sales charges.
++Amount is less than $.01 per share.

See Notes to Financial Statements.

                                    Page 20


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

FINANCIAL HIGHLIGHTS (continued)

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



                                                                                      National Portfolio
                                                                                           Class C
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     9.71   $    10.22  $    10.64  $    10.38    $    10.11
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .46          .48         .47         .50           .52
                Realized and unrealized gain (loss)
                on investments--net                               .43         (.51)       (.42)        .26           .27
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .89         (.03)        .05         .76           .79
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.46)        (.48)       (.47)       (.50)         (.52)
                  In excess of realized gain on
                  Investments--net                                 --           --        --++          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.46)        (.48)       (.47)       (.50)         (.52)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.14   $     9.71  $    10.22  $    10.64    $    10.38
                                                           ==========   ==========  ==========  ==========    ==========
Total Investment
Return:*        Based on net asset value per share               9.33%       (.13%)        .47%       7.49%         7.97%
                                                           ==========   ==========  ==========  ==========    ==========

Ratios to       Expenses                                         1.39%        1.37%       1.36%       1.36%         1.36%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           4.61%        4.92%       4.45%       4.76%         5.04%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $   31,880   $   30,303  $   47,901  $   41,087    $   28,096
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              80.88%      108.43%     125.75%     142.02%        99.52%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                      National Portfolio
                                                                                           Class D
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     9.71   $    10.22  $    10.64  $    10.39    $    10.12
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .52          .54         .53         .56           .58
                Realized and unrealized gain (loss)
                on investments--net                               .44         (.51)       (.42)        .25           .27
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .96          .03         .11         .81           .85
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.52)        (.54)       (.53)       (.56)         (.58)
                  In excess of realized gain on
                  investments--net                                 --           --        --++          --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.52)        (.54)       (.53)       (.56)         (.58)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.15   $     9.71  $    10.22  $    10.64    $    10.39
                                                           ==========   ==========  ==========  ==========    ==========

Total           Based on net asset value per share              10.04%         .43%       1.03%       7.99%         8.57%
Investment                                                 ==========   ==========  ==========  ==========    ==========
Return:*

Ratios to       Expenses                                          .83%         .81%        .81%        .80%          .80%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           5.16%        5.50%       5.01%       5.32%         5.60%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $  124,082   $   86,701  $   93,201  $   68,162    $   51,038
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              80.88%      108.43%     125.75%     142.02%        99.52%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                  Limited Maturity Portfolio
                                                                                           Class A
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                            
Per Share       Net asset value, beginning of year         $     9.85   $     9.91  $     9.96  $     9.93    $     9.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .39          .38         .37         .39           .39
                Realized and unrealized gain (loss)
                on investments--net                               .20         (.06)       (.04)        .03           .04
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .59          .32         .33         .42           .43
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.39)        (.38)       (.37)       (.39)         (.39)
                  Realized gain on investments--net                --           --          --          --          (.02)
                  In excess of realized gain on
                  investments--net                                 --           --        (.01)         --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.39)        (.38)       (.38)       (.39)         (.41)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.05   $     9.85  $     9.91  $     9.96    $     9.93
                                                           ==========   ==========  ==========  ==========    ==========

Total           Based on net asset value per share               6.07%        3.31%       3.37%       4.26%         4.40%
Investment                                                 ==========   ==========  ==========  ==========    ==========
Return:*

Ratios to       Expenses                                          .44%         .40%        .43%        .43%          .39%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           3.91%        3.83%       3.75%       3.88%         3.93%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $  191,481   $  215,421  $  261,970  $  295,641    $  343,641
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              51.94%       51.42%      40.28%      72.69%        61.90%
                                                           ==========   ==========  ==========  ==========    ==========


*Total investment returns exclude the effects of sales charges.
++Amount is less than $.01 per share.

See Notes to Financial Statements.

                                    Page 21


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

FINANCIAL HIGHLIGHTS (concluded)

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



                                                                                  Limited Maturity Portfolio
                                                                                           Class B
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                               
Per Share       Net asset value, beginning of year         $     9.86   $     9.92  $     9.97  $     9.94    $     9.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .35          .35         .34         .35           .36
                Realized and unrealized gain (loss)
                on investments--net                               .20         (.06)       (.04)        .03           .05
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .55          .29         .30         .38           .41
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.35)        (.35)       (.34)       (.35)         (.36)
                  Realized gain on investments--net                --           --          --          --          (.02)
                  In excess of realized gain on
                  investments--net                                 --           --        (.01)         --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.35)        (.35)       (.35)       (.35)         (.38)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.06   $     9.86  $     9.92  $     9.97    $     9.94
                                                           ==========   ==========  ==========  ==========    ==========

Total           Based on net asset value per share               5.69%        2.94%       3.01%       3.89%         4.13%
Investment                                                 ==========   ==========  ==========  ==========    ==========
Return:*

Ratios to       Expenses                                          .80%         .76%        .78%        .78%          .75%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           3.55%        3.47%       3.39%       3.43%         3.58%
                                                           ==========   ==========  ==========  ==========    ==========


Supplemental    Net assets, end of year (in thousands)     $   31,480   $   32,742  $   42,930  $   44,714    $   54,275
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              51.94%       51.42%      40.28%      72.69%        61.90%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                  Limited Maturity Portfolio
                                                                                           Class C
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                               
Per Share       Net asset value, beginning of year         $     9.82   $     9.88  $     9.94  $     9.91    $     9.88
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .35          .34         .34         .35           .35
                Realized and unrealized gain (loss)
                on investments--net                               .19        (.06)       (.05)         .03           .05
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .54          .28         .29         .38           .40
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.35)        (.34)       (.34)       (.35)         (.35)
                  Realized gain on investments--net                --           --          --          --          (.02)
                  In excess of realized gain on
                  investments--net                                 --           --        (.01)         --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.35)        (.34)       (.35)       (.35)         (.37)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.01   $     9.82  $     9.88  $     9.94    $     9.91
                                                           ==========   ==========  ==========  ==========    ==========

Total           Based on net asset value per share               5.59%        2.93%       2.89%       3.88%         4.11%
Investment                                                 ==========   ==========  ==========  ==========    ==========
Return:*

Ratios to       Expenses                                          .81%         .76%        .79%        .79%          .75%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           3.53%        3.46%       3.37%       4.27%         3.57%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $      602   $      308  $      437  $       86    $      108
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              51.94%       51.42%      40.28%      72.69%        61.90%
                                                           ==========   ==========  ==========  ==========    ==========


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



                                                                                  Limited Maturity Portfolio
                                                                                           Class D
                                                                                 For the Year Ended June 30,
                Increase (Decrease) in Net Asset Value:         2001         2000        1999         1998        1997
                                                                                               
Per Share       Net asset value, beginning of year         $     9.86   $     9.92  $     9.97  $     9.94    $     9.91
Operating                                                  ----------   ----------  ----------  ----------    ----------
Performance:    Investment income--net                            .38          .37         .37         .38           .38
                Realized and unrealized gain (loss)
                on investments--net                               .20        (.06)       (.04)         .03           .05
                                                           ----------   ----------  ----------  ----------    ----------
                Total from investment operations                  .58          .31         .33         .41           .43
                                                           ----------   ----------  ----------  ----------    ----------
                Less dividends and distributions:
                  Investment income--net                         (.38)        (.37)       (.37)       (.38)         (.38)
                  Realized gain on investments--net                --           --          --          --          (.02)
                  In excess of realized gain on
                  investments--net                                 --           --        (.01)         --            --
                                                           ----------   ----------  ----------  ----------    ----------
                Total dividends and distributions                (.38)        (.37)       (.38)       (.38)         (.40)
                                                           ----------   ----------  ----------  ----------    ----------
                Net asset value, end of year               $    10.06   $     9.86  $     9.92  $     9.97    $     9.94
                                                           ==========   ==========  ==========  ==========    ==========

Total           Based on net asset value per share               5.96%        3.20%       3.27%       4.16%         4.40%
Investment                                                 ==========   ==========  ==========  ==========    ==========
Return:*

Ratios to       Expenses                                          .54%         .50%        .53%        .54%          .48%
Average                                                    ==========   ==========  ==========  ==========    ==========
Net Assets:     Investment income--net                           3.80%        3.72%       3.65%       3.89%         3.84%
                                                           ==========   ==========  ==========  ==========    ==========

Supplemental    Net assets, end of year (in thousands)     $   42,619   $   39,090  $   83,177  $   68,562    $   20,383
Data:                                                      ==========   ==========  ==========  ==========    ==========
                Portfolio turnover                              51.94%       51.42%      40.28%      72.69%        61.90%
                                                           ==========   ==========  ==========  ==========    ==========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

                                    Page 22


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

NOTES TO FINANCIAL STATEMENTS



1. Significant Accounting Policies:
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. The Fund's Portfolios
offer four classes of shares under the Merrill Lynch Select Pricing(SM) System.
Shares of Class A and Class D are sold with a front-end sales charge. Shares of
Class B and Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.

(a) Valuation of investments--Insured Portfolio: Where bonds in the Portfolio
have not been insured pursuant to policies obtained by the issuer, the Fund has
obtained insurance with respect to the payment of interest and principal of each
bond. Such insurance is valid as long as the bonds are held by the Fund.

All Portfolios: Municipal bonds and money market securities are traded primarily
in the over-the-counter markets and are valued at the most recent bid price or
yield equivalent as obtained from dealers that make markets in such securities.
Positions in futures contracts and options thereon, which are traded on
exchanges, are valued at closing prices as of the close of such exchanges.
Assets for which market quotations are not readily available are valued at fair
value on a consistent basis using methods determined in good faith by the Fund's
Board of Directors, including valuations furnished by a pricing service retained
by the Fund, which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers of the Fund
under the general supervision of the Board of Directors.

(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis.
Discounts and market premiums are amortized into interest income. The Fund will
adopt the provisions to amortize all premiums and discounts on debt securities
effective July 1, 2001, as now required under the new AICPA Audit and Accounting
Guide for Investment Companies. The cumulative effect of this accounting change
will have no impact on the total net assets of the Fund, but will result in a
$1,299,562 and a $35,232 decrease and a $27,922 increase to the cost of
securities in the Insured, Limited Maturity and National Portfolios,
respectively, and a corresponding $1,299,562 and a $35,232 increase and a
$27,922 decrease to net unrealized appreciation in the Insured, Limited Maturity
and National Portfolios, respectively.

(e) Prepaid registration fees--Prepaid registration fees are charged to expenses
as the related shares are issued.

(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.

(g) Expenses--Certain expenses have been allocated to the individual Portfolios
in the Fund on a pro rata basis based upon the respective aggregate net asset
value of each Portfolio included in the Fund.

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

FAM is responsible for the management of the Fund's portfolios and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operation of the Fund. For such services, FAM receives at the end of each
month a fee with respect to each Portfolio at the annual rates set forth below
which are based upon the average daily value of the Fund's net assets.

                                            Rate of Advisory Fee
Aggregate of Average Daily                                       Limited
Net Assets of the Three                Insured      National     Maturity
Combined Portfolios                   Portfolio    Portfolio    Portfolio

Not exceeding $250 million               .40%        .50%         .40%
In excess of $250 million
but not exceeding $400 million           .375        .475         .375
In excess of $400 million
but not exceeding $550 million           .375        .475         .35
In excess of $550 million
but not exceeding $1.5 billion           .375        .475         .325
In excess of $1.5 billion                .35         .475         .325

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

              Account Maintenance Fees                Distribution Fees
                                    Limited                           Limited
         Insured      National     Maturity     Insured    National   Maturity
        Portfolio    Portfolio    Portfolio    Portfolio  Portfolio  Portfolio

Class B     .25%        .25%         .15%         .50%      .50%         .20%
Class C     .25         .25          .15          .55       .55          .20
Class D     .25         .25          .10           --        --           --

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

For the year ended June 30, 2001, FAMD earned underwriting discounts and direct
commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares follows:

                                                    Limited
                        Insured        National     Maturity
                       Portfolio      Portfolio    Portfolio
Class A Shares:
FAMD                    $10,264        $11,629        $  416
MLPF&S                   69,136         63,952         3,631
Class D Shares:
FAMD                    $ 5,719        $ 6,922        $  962
MLPF&S                   40,840         68,966         8,692

For the year ended June 30, 2001, MLPF&S received contingent deferred sales
charges of $481,802 relating to transactions in Class B Shares, amounting to
$206,769, $258,500 and $16,533 in the Insured, National and Limited Maturity
Portfolios, respectively, and $7,947 relating to transactions in Class C Shares,
amounting to $525 and $7,422 in the Insured and National Portfolios,
respectively. Furthermore, MLPF&S received contingent deferred sales charges of
$851 relating to transactions subject to front-end sales charge waivers in Class
D Shares, amounting to $451 and $400 in the Insured and Limited Maturity
Portfolios, respectively.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended June 30, 2001, the Fund reimbursed FAM an
aggregate of $127,406, $103,166 and $34,448 in the Insured, National and Limited
Maturity Portfolios, respectively, for the above-described services. The Fund
entered into an agreement with State Street Bank and Trust Company ("State
Street"), effective January 1, 2001, pursuant to which State Street provides
certain accounting services to the Fund. The Fund pays a fee for these services.

Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, FAMD, FDS, and/or ML & Co.

                                    Page 23


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

3. Investments:

Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2001 were as follows:

                                 Purchases           Sales

Insured Portfolio              $  814,056,319    $  930,524,756
National Portfolio                811,063,484       875,288,743
Limited Maturity Portfolio        122,581,933       143,523,291

Net realized gains (losses) for the year ended June 30, 2001 and net unrealized
gains as of June 30, 2001 were as follows:

                                  Realized           Unrealized
Insured Portfolio                  Gains               Gains

Long-term investments          $   30,002,263    $   65,823,221
Financial futures contracts                --           464,844
                               --------------    --------------
Total                          $   30,002,263    $   66,288,065
                               ==============    ==============

                                  Realized           Unrealized
National Portfolio                  Gains               Gains

Long-term investments          $   25,290,223    $   34,664,668
                               --------------    --------------
Total                          $   25,290,223    $   34,664,668
                               ==============     =============

                                  Realized           Unrealized
Limited Maturity Portfolio         Losses              Gains

Long-term investments          $      (87,533)   $    3,892,744
Short-term investments                 (7,237)               --
                               --------------    --------------
Total                          $      (94,770)   $    3,892,744
                               ==============    ==============

As of June 30, 2001 net unrealized appreciation for Federal income tax purposes
were as follows:

                        Gross            Gross            Net
                      Unrealized       Unrealized      Unrealized
                     Appreciation     Depreciation    Appreciation

Insured Portfolio     $68,729,166     $  2,905,945    $65,823,221
National Portfolio     48,585,396       13,920,728     34,664,668
Limited Maturity
Portfolio               3,910,849           18,105      3,892,744

The aggregate cost of investments at June 30, 2001 for Federal income tax
purposes was $1,211,867,977 for the Insured Portfolio, $987,830,501 for the
National Portfolio, and $251,815,333 for the Limited Maturity Portfolio.

4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions for the years
ended June 30, 2001 and June 30, 2000 were $(114,411,068) and $(275,055,198),
respectively, for the Insured Portfolio; $(64,099,665) and $(268,812,275),
respectively, for the National Portfolio, and $(26,812,001) and $(98,688,194),
respectively, for the Limited Maturity Portfolio.

Transactions in capital shares for each class were as follows:

Insured Portfolio
Class A Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          1,427,734   $   10,879,765
Shares issued to shareholders
in reinvestment of dividends         2,625,131       19,947,178
                                  ------------   --------------
Total issued                         4,052,865       30,826,943
Shares redeemed                    (16,366,210)    (123,992,361)
                                  ------------   --------------
Net decrease                       (12,313,345)  $  (93,165,418)
                                  ============   ==============

Insured Portfolio
Class A Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          2,189,238   $   16,064,750
Shares issued to shareholders in
reinvestment of dividends and
distributions                        4,168,354       30,616,793
                                  ------------   --------------
Total issued                         6,357,592       46,681,543
Shares redeemed                    (30,464,525)    (225,027,241)
                                  ------------   --------------
Net decrease                       (24,106,933)  $ (178,345,698)
                                  ============   ==============

Insured Portfolio

Class B Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          2,812,803   $   21,451,283
Shares issued to shareholders
in reinvestment of dividends           667,922        5,069,294
                                  ------------   --------------
Total issued                         3,480,725       26,520,577
Automatic conversion of shares      (4,267,970)     (32,457,905)
Shares redeemed                     (7,622,598)     (57,690,475)
                                  ------------   --------------
Net decrease                        (8,409,843)  $  (63,627,803)
                                  ============   ==============

Insured Portfolio

Class B Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          3,270,666   $   24,137,115
Shares issued to shareholders in
reinvestment of dividends and
distributions                        1,345,927        9,877,799
                                  ------------   --------------
Total issued                         4,616,593       34,014,914
Automatic conversion of shares      (5,976,596)     (44,419,700)
Shares redeemed                    (14,317,769)    (105,647,752)
                                  ------------   --------------
Net decrease                       (15,677,772)  $ (116,052,538)
                                  ============   ==============

Insured Portfolio

Class C Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                            499,727   $    3,826,445
Shares issued to shareholders
in reinvestment of dividends            35,920          272,860
                                  ------------   --------------
Total issued                           535,647        4,099,305
Shares redeemed                       (409,419)      (3,101,300)
                                  ------------   --------------
Net increase                           126,228   $      998,005
                                  ============   ==============

Insured Portfolio

Class C Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                            460,085   $    3,400,275
Shares issued to shareholders in
reinvestment of dividends and
distributions                           58,936          432,490
                                  ------------   --------------
Total issued                           519,021        3,832,765
Shares redeemed                       (936,770)      (6,943,556)
                                  ------------   --------------
Net decrease                          (417,749)  $   (3,110,791)
                                  ============   ==============

Insured Portfolio

Class D Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                         13,510,419   $  102,970,054
Automatic conversion of shares       4,266,565       32,457,905
Shares issued to shareholders
in reinvestment of dividends           388,222        2,953,112
                                  ------------   --------------
Total issued                        18,165,206      138,381,071
Shares redeemed                    (12,703,356)     (96,996,923)
                                  ------------   --------------
Net increase                         5,461,850   $   41,384,148
                                  ============   ==============

Insured Portfolio

Class D Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          5,635,273   $   41,646,584
Automatic conversion of shares       5,974,043       44,419,700
Shares issued to shareholders in
reinvestment of dividends and
distributions                          401,383        2,941,244
                                  ------------   --------------
Total issued                        12,010,699       89,007,528
Shares redeemed                     (8,952,192)     (66,553,699)
                                  ------------   --------------
Net increase                         3,058,507   $   22,453,829
                                  ============   ==============

National Portfolio

Class A Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          3,205,962   $   31,960,303
Shares issued to shareholders
in reinvestment of dividends         1,804,242       18,050,261
                                  ------------   --------------
Total issued                         5,010,204       50,010,564
Shares redeemed                    (10,899,821)    (109,075,525)
                                  ------------   --------------
Net decrease                        (5,889,617)  $  (59,064,961)
                                  ============   ==============

National Portfolio

Class A Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          2,501,422   $   24,056,825
Shares issued to shareholders
in reinvestment of dividends         2,217,109       21,483,144
                                  ------------   --------------
Total issued                         4,718,531       45,539,969
Shares redeemed                    (20,297,630)    (196,458,002)
                                  ------------   --------------
Net decrease                       (15,579,099)  $ (150,918,033)
                                  ============   ==============

National Portfolio

Class B Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          3,513,254   $   35,164,873
Shares issued to shareholders
in reinvestment of dividends           479,599        4,794,417
                                  ------------   --------------
Total issued                         3,992,853       39,959,290
Automatic conversion of shares      (1,524,031)     (15,253,380)
Shares redeemed                     (6,294,843)     (62,763,426)
                                  ------------   --------------
Net decrease                        (3,826,021)  $  (38,057,516)
                                  ============   ==============

National Portfolio

Class B Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          3,230,018   $   31,342,736
Shares issued to shareholders
in reinvestment of dividends           723,846        7,016,462
                                  ------------   --------------
Total issued                         3,953,864       38,359,198
Automatic conversion of shares      (1,771,855)     (17,264,191)
Shares redeemed                    (12,589,149)    (121,755,396)
                                  ------------   --------------
Net decrease                       (10,407,140)  $ (100,660,389)
                                  ============   ==============

National Portfolio

Class C Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                            794,329   $    8,018,241
Shares issued to shareholders
in reinvestment of dividends            74,364          744,084
                                  ------------   --------------
Total issued                           868,693        8,762,325
Shares redeemed                       (848,298)      (8,455,809)
                                  ------------   --------------
Net increase                            20,395   $      306,516
                                  ============   ==============

                                    Page 24


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

National Portfolio

Class C Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                            592,010   $    5,777,103
Shares issued to shareholders
in reinvestment of dividends           110,217        1,068,763
                                  ------------   --------------
Total issued                           702,227        6,845,866
Shares redeemed                     (2,267,391)     (21,908,932)
                                  ------------   --------------
Net decrease                        (1,565,164)  $  (15,063,066)
                                  ============   ==============

National Portfolio

Class D Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          9,806,380   $   98,249,860
Automatic conversion of shares       1,522,876       15,253,380
Shares issued to shareholders
in reinvestment of dividends           238,130        2,387,772
                                  ------------   --------------
Total issued                        11,567,386      115,891,012
Shares redeemed                     (8,269,580)     (83,174,716)
                                  ------------   --------------
Net increase                         3,297,806   $   32,716,296
                                  ============   ==============

National Portfolio

Class D Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          4,890,948   $   47,366,022
Automatic conversion of shares       1,770,615       17,264,191
Shares issued to shareholders
in reinvestment of dividends           236,352        2,290,783
                                  ------------   --------------
Total issued                         6,897,915       66,920,996
Shares redeemed                     (7,085,726)     (69,091,783)
                                  ------------   --------------
Net decrease                          (187,811)   $  (2,170,787)
                                  ============   ==============

Limited Maturity Portfolio

Class A Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          1,462,647   $   14,632,026
Shares issued to shareholders
in reinvestment of dividends           452,741        4,510,226
                                  ------------   --------------
Total issued                         1,915,388       19,142,252
Shares redeemed                     (4,727,779)     (47,108,289)
                                  ------------   --------------
Net decrease                        (2,812,391)  $  (27,966,037)
                                  ============   ==============

Limited Maturity Portfolio

Class A Shares for the Year                            Dollar
Ended June 30, 2000                    Shares          Amount

Shares sold                         1,536,138    $   15,117,350
Shares issued to shareholders
in reinvestment of dividends          512,562         5,053,751
                                 ------------    --------------
Total issued                        2,048,700        20,171,101
Shares redeemed                    (6,612,955)      (65,210,325)
                                 ------------    --------------
Net decrease                       (4,564,255)   $  (45,039,224)
                                 ============    ==============

Limited Maturity Portfolio

Class B Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                            624,476   $    6,238,998
Shares issued to shareholders
in resinvestment of dividends           69,458          692,233
                                  ------------   --------------
Total issued                           693,934        6,931,231
Automatic conversion of shares         (79,376)        (792,225)
Shares redeemed                       (805,597)      (8,013,075)
                                  ------------   --------------
Net decrease                          (191,039)  $   (1,874,069)
                                  ============   ==============

Limited Maturity Portfolio

Class B Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                            890,806   $    8,796,176
Shares issued to shareholders
in reinvestment of dividends            90,275          890,200
                                  ------------   --------------
Total issued                           981,081        9,686,376
Automatic conversion of shares         (20,095)        (198,201)
Shares redeemed                     (1,968,527)     (19,397,167)
                                  ------------   --------------
Net decrease                        (1,007,541)  $   (9,908,992)
                                  ============   ==============

Limited Maturity Portfolio

Class C Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                             40,701   $      404,478
Shares issued to shareholders
in reinvestment of dividends             1,162           11,555
                                  ------------   --------------
Total issued                            41,863          416,033
Shares redeemed                        (13,145)        (130,860)
                                  ------------   --------------
Net increase                            28,718   $      285,173
                                  ============   ==============

Limited Maturity Portfolio

Class C Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                             71,755   $      707,095
Shares issued to shareholders
in reinvestment of dividends             1,301           12,780
                                  ------------   --------------
Total issued                            73,056          719,875
Shares redeemed                        (85,885)        (844,221)
                                  ------------   --------------
Net decrease                           (12,829)   $    (124,346)
                                  ============   ==============

Limited Maturity Portfolio

Class D Shares for the Year                            Dollar
Ended June 30, 2001                     Shares         Amount

Shares sold                          1,740,306   $   17,346,660
Automatic conversion of shares          79,340          792,225
Shares issued to shareholders
in reinvestment of dividends            80,824          806,042
                                  ------------   --------------
Total issued                         1,900,470       18,944,927
Shares redeemed                     (1,628,053)     (16,201,995)
                                  ------------   --------------
Net increase                           272,417   $    2,742,932
                                  ============   ==============

Limited Maturity Portfolio

Class D Shares for the Year                            Dollar
Ended June 30, 2000                     Shares         Amount

Shares sold                          1,521,072   $   15,017,187
Automatic conversion of shares          20,088          198,201
Shares issued to shareholders
in reinvestment of dividends           131,400        1,296,203
                                  ------------   --------------
Total issued                         1,672,560       16,511,591
Shares redeemed                     (6,094,726)     (60,127,223)
                                  ------------   --------------
Net decrease                        (4,422,166)  $  (43,615,632)
                                  ============   ==============

5. Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds managed by MLIM
and its affiliates, renewed and amended a $1,000,000,000 credit agreement with
Bank One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended June 30, 2001.

6. Capital Loss Carryforward:
At June 30, 2001, the Insured Portfolio had a net capital loss carryforward of
approximately $50,189,000, of which $17,630,000 expires in 2008 and $32,559,000
expires in 2009; the National Portfolio had a net capital loss carryforward of
approximately $44,931,000, of which $25,616,000 expires in 2008 and $19,315,000
expires in 2009; and the Limited Maturity Portfolio had a net capital loss
carry-forward of approximately $2,474,000, of which $1,928,000 expires in 2003,
$120,000 expires in 2008 and $426,000 expires in 2009. These amounts will be
available to offset like amounts of any future taxable gains.

7. Reorganization Plan:
On March 13, 2001, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby the National Portfolio would acquire substantially all of the assets and
liabilities of Merrill Lynch Arkansas Municipal Bond Fund, Merrill Lynch
Colorado Municipal Bond Fund and Merrill Lynch New Mexico Municipal Bond Fund in
exchange for newly issued shares of the Fund. These Funds are registered, non-
diversified, open-end management investment companies. All four entities have a
similar investment objective and are managed by FAM.

                                    Page 25


Merrill Lynch Municipal Bond Fund, Inc., June 30, 2001

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders, Merrill Lynch Municipal Bond Fund,
Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Merrill Lynch Municipal Bond Fund, Inc.
(comprising, respectively, the Insured, National and Limited Maturity
Portfolios) as of June 30, 2001, the related statements of operations for the
year then ended and changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at June 30, 2001 by correspondence with the custodian and
brokers. Where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting the Merrill Lynch Municipal Bond Fund, Inc.
as of June 30, 2001, the results of their operations, the changes in their net
assets, and their financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.


Deloitte & Touche LLP
New York, New York
August 17, 2001

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions declared daily by
Merrill Lynch Municipal Bond Fund, Inc. during its taxable year
ended June 30, 2001 qualify as tax-exempt interest dividends for
Federal income tax purposes.

                                    Page 26

EX-99.17M

                                                                   Exhibit 17(M)

[LOGO] Merrill Lynch Investment Managers

Annual Report
July 31, 2001

Merrill Lynch
Arizona Municipal
Bond Fund

www.mlim.ml.com


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

TO OUR SHAREHOLDERS

The Municipal Market Environment

In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and

1


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

July 2001, both institutional and retail investor demand for tax-exempt
securities significantly increased. For the remainder of the period, the
municipal bond market was able to respond positively to this increased demand
and long-term tax-exempt bond yields declined to 5.40% by July 31, 2001, a five
basis point decline in long-term municipal bond yields from January 2001 levels.

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June 2001 and July 2001.
Given continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates artificially high, although not as high as in recent years. As
these pressures abated, short-term municipal interest rates declined to
approximately 2.5%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.

Portfolio Strategy

Merrill Lynch Arizona Municipal Bond Fund is maintained as a low-duration,
low-turnover portfolio. The relative inactivity of both the Arizona primary and
secondary markets affords us little opportunity for major portfolio
restructuring or reallocation of the Fund assets between different sectors of
the municipal market. Our goal is to deliver a high level of tax-exempt current
income to shareholders, while seeking to temper the Fund's net asset value vol -
atility. The Fund is structured with an above-industry

2


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

average of couponing, and we have enhanced the Fund's allowable percentage of
assets devoted to inverse floater product. As a result, the Fund was able to
deliver a high current return without compromising credit standards. Going
forward, our strategy will be to continue to maintain a fully invested position,
although the securities in the Fund may not always offer the structure that
provides the greatest price appreciation potential. Our focus remains on seeking
to provide price stability and yield with above-average credit quality.

Fiscal Year in Review

During the 12 months ended July 31, 2001, 10-year US Treasury bonds traded in a
range between 4.75%-5.50%. However, the market fluctuation for Arizona municipal
bonds was much tighter. We made very minor adjustments to the Fund's portfolio
mix over the past year, mainly because of the lack of available securities and
our viewpoint that a continuous accrual of higher-couponed securities would be a
more profitable strategy should interest rates either rise or trend sideways.
Earlier this year, as interest rates rose from a low of 4.75%, the Fund
benefited from its defensive market stance. Our attention to higher-coupon and
shorter-average maturities early in the fiscal year limited the Fund's decline
in net asset values as interest rates rose. After cresting at 5.50% in mid-May,
the market improved as a result of weak domestic and foreign economic
conditions. As we maintained the Fund's defensive stance, the portfolio
underperformed as interest rates traded back toward 5.15%.

Despite our overall defensive position, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +8.93%, +8.38%, +8.28% and +8.82%,
respectively, for the 12 months ended July 31, 2001. The Fund underperformed
relative to the +10.08% return of the unmanaged benchmark Lehman Brothers
Municipal Bond Index, while the Fund's performance results were similar to the
Lipper, Inc. average of other Arizona municipal bond funds for the same 12-month
period. (Fund results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be found on
pages 4 and 5 of this report to shareholders.)

Going forward, the Fund's performance may again benefit from a scenario where
economic conditions improve and equity markets rise. We believe that actions
taken by the Federal Reserve Board thus far this year, combined with Federal tax
reform, should foster increased economic activity by year end.

In Conclusion

We appreciate your ongoing interest in Merrill Lynch Arizona Municipal Bond
Fund, and we look forward to serving your investment needs in the months and
years to come.

Sincerely,

/s/ Terry K. Glenn

Terry K. Glenn
President and Trustee

/s/ Vincent R. Giordano

Vincent R. Giordano
Senior Vice President

/s/ Walter C. O'Connor

Walter C. O'Connor
Vice President and Portfolio Manager

September 7, 2001

3


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select PricingSM System, which offers four pricing alternatives:

 .     Class A Shares incur a maximum initial sales charge (front-end load) of 4%
      and bear no ongoing distribution or account maintenance fees. Class A
      Shares are available only to eligible investors.

 .     Class B Shares are subject to a maximum contingent deferred sales charge
      of 4% if redeemed during the first year, decreasing 1% each year
      thereafter to 0% after the fourth year. In addition, Class B Shares are
      subject to a distribution fee of 0.25% and an account maintenance fee of
      0.25%. These shares automatically convert to Class D Shares after
      approximately 10 years. (There is no initial sales charge for automatic
      share conversions.)

 .     Class C Shares are subject to a distribution fee of 0.35% and an account
      maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
      contingent deferred sales charge if redeemed within one year of purchase.

 .     Class D Shares incur a maximum initial sales charge of 4% and an account
      maintenance fee of 0.10% (but no distribution fee).

None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in the "Recent Performance Results" and "Average Annual Total
Return" tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.

Average Annual Total Return

                                               % Return Without   % Return With
                                                 Sales Charge     Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/01                              +9.17%            +4.81%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                            +5.52             +4.66
- --------------------------------------------------------------------------------
Inception (11/29/91)
through 6/30/01                                     +6.51             +6.05
- --------------------------------------------------------------------------------
 * Maximum sales charge is 4%.
** Assuming maximum sales charge.

                                                   % Return         % Return
                                                 Without CDSC      With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/01                              +8.62%            +4.62%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                            +4.99             +4.99
- --------------------------------------------------------------------------------
Inception (11/29/91)
through 6/30/01                                     +5.97             +5.97
- --------------------------------------------------------------------------------
 * Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
   years.
** Assuming payment of applicable contingent deferred sales charge.

                                                   % Return         % Return
                                                 Without CDSC      With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/01                              +8.52%            +7.52%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                            +4.88             +4.88
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                     +5.59             +5.59
- --------------------------------------------------------------------------------
 * Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
   year.
**Assuming payment of applicable contingent deferred sales charge.

                                               % Return Without   % Return With
                                                 Sales Charge     Sales Charge**
================================================================================
Class D Shares*
================================================================================
One Year Ended 6/30/01                              +9.07%            +4.71%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                            +5.42             +4.56
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                     +6.14             +5.49
- --------------------------------------------------------------------------------
 * Maximum sales charge is 4%.
** Assuming maximum sales charge.

4


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

PERFORMANCE DATA (concluded)

Total Return Based on a $10,000 Investment

A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from November 29, 1991 to July 2001:



                          11/29/91**   7/92     7/93    7/94      7/95    7/96
                                                       
ML Arizona
Municipal Bond Fund+--
Class A Shares*            $  9,600  $10,734  $11,767  $11,958  $12,766  $13,537
ML Arizona
Municipal Bond Fund+--
Class B Shares*            $ 10,000  $11,145  $12,156  $12,291  $13,056  $13,773
Lehman Brothers Municipal
Bond Index++               $ 10,000  $10,952  $11,920  $12,143  $13,099  $13,963


                              7/97     7/98    7/99      7/00     7/01    7/99
                                                        
ML Arizona
Municipal Bond Fund+--
Class A Shares*            $ 14,705  $15,477  $15,867  $16,314  $17,771 $13,152

ML Arizona
Municipal Bond Fund+--
Class B Shares*            $ 14,886  $15,587  $15,900  $16,266  $17,629 $12,944
Lehman Brothers Municipal
Bond Index++               $ 15,395  $16,318  $16,787  $17,511  $19,276 $14,234


A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from October 21, 1994 to July 2001:



                         10/21/94**   7/95      7/96      7/97      7/98   7/99
                                                        
ML Arizona
Municipal Bond Fund+--
Class C Shares*             $10,000  $10,853  $11,437  $12,349  $12,918   $13,152
ML Arizona
Municipal Bond Fund+--
Class D Shares*             $ 9,600  $10,456  $11,076  $12,020  $12,638   $12,944
Lehman Brothers Municipal
Bond Index++                $10,000  $11,107  $11,840  $13,054  $13,836   $14,234


                            7/00      7/01
                                
ML Arizona
Municipal Bond Fund+--
Class C Shares*             $13,441  $14,554
ML Arizona
Municipal Bond Fund+--
Class D Shares*             $13,296  $14,469
Lehman Brothers Municipal
Bond Index++                $14,848  $16,344


*     Assuming maximum sales charge, transaction costs and other operating
      expenses, including advisory fees.
**    Commencement of operations.
+     ML Arizona Municipal Bond Fund invests primarily in long-term
      investment-grade obligations issued by or on behalf of the state of
      Arizona, its political subdivisions, agencies and instrumentalities and
      obligations of other qualifying issuers.
++    This unmanaged Index consists of long-term revenue bonds, prerefunded
      bonds, general obligation bonds and insured bonds. The starting date for
      the Index in the Class C & Class D Shares' graph is from 10/31/94. Past
      performance is not predictive of future performance.

Recent Performance Results*



                                                     6-Month        12-Month     Since Inception   Standardized
As of July 31, 2001                                Total Return   Total Return    Total Return     30-Day Yield
===============================================================================================================
                                                                                       
ML Arizona Municipal Bond Fund Class A Shares         +3.26%         +8.93%          +85.11%          3.98%
- ---------------------------------------------------------------------------------------------------------------
ML Arizona Municipal Bond Fund Class B Shares         +3.00          +8.38           +76.29           3.64
- ---------------------------------------------------------------------------------------------------------------
ML Arizona Municipal Bond Fund Class C Shares         +2.95          +8.28           +45.54           3.54
- ---------------------------------------------------------------------------------------------------------------
ML Arizona Municipal Bond Fund Class D Shares         +3.21          +8.82           +50.72           3.88
===============================================================================================================


*     Investment results shown do not reflect sales charges; results would be
      lower if a sales charge was included. Total investment returns are based
      on changes in net asset values for the periods shown, and assume
      reinvestment of all dividends and capital gains distributions at net asset
      value on the payable date. The Fund's since inception periods are from
      11/29/91 for Class A & Class B Shares and from 10/21/94 for Class C &
      Class D Shares.

5


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

SCHEDULE OF INVESTMENTS                                           (in Thousands)



S&P       Moody's    Face
Ratings   Ratings   Amount                                       Issue                                                 Value
- -----------------------------------------------------------------------------------------------------------------------------
Arizona--89.3%
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                          
NR*       AAA       $  960   Arizona Health Facilities Authority, Hospital System Revenue Refunding Bonds
                             (Saint Luke's Health Systems), 7.25% due 11/01/2003 (g)                                  $ 1,057
- -----------------------------------------------------------------------------------------------------------------------------------
BBB       Baa2       2,000   Arizona Health Facilities Authority Revenue Bonds (Catholic Healthcare West),
                             Series A, 6.625% due 7/01/2020                                                             2,032
- -----------------------------------------------------------------------------------------------------------------------------------
NR*       Aa1        2,860   Arizona State Transportation Board, Highway Revenue Refunding Bonds,
                             RIB, Series 367, 8.49% due 7/01/2019 (h)                                                   3,235
- -----------------------------------------------------------------------------------------------------------------------------------
NR*       Aa         2,000   Arizona Student Loan Acquisition Authority, Student Loan Revenue Refunding Bonds,
                             AMT, Senior Series B, 6.60% due 5/01/2010                                                  2,113
- -----------------------------------------------------------------------------------------------------------------------------------
A1+       P1           810   Coconino County, Arizona, Pollution Control Corporation Revenue Bonds
                             (Arizona Public Service Co. Project), VRDN, AMT, Series A, 2.70% due 12/01/2031 (i)          810
- -----------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        2,000   Gilbert, Arizona, Water and Sewer Revenue Refunding Bonds, 6.50% due 7/01/2022 (c)         2,174
- -----------------------------------------------------------------------------------------------------------------------------------
AAA       NR*        1,000   Glendale, Arizona, Development Authority, Educational Facilities Revenue Refunding
                             Bonds (American Graduate School International), 7.125% due 7/01/2005 (b)(g)                1,143
- -----------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Glendale, Arizona, Union High School District Number 205, GO (Projects of 1993),
                             Series B, 5.70% due 7/01/2005 (c)(g)                                                       1,092
- -----------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        2,000   Maricopa County, Arizona, Elementary School District No. 68 (Alhambra), GO, Refunding,
                             Series A, 6.75% due 7/01/2014 (a)                                                          2,215
- -----------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Maricopa County, Arizona, Gilbert Unified School District Number 41, GO,
                             6.25% due 7/01/2015 (d)                                                                    1,117
- -----------------------------------------------------------------------------------------------------------------------------------
BBB       Baa1       1,000   Maricopa County, Arizona, Hospital Revenue Refunding Bonds (Sun Health Corporation),
                             6.125% due 4/01/2018                                                                         988
- -----------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Maricopa County, Arizona, IDA, M/F Housing Revenue Bonds (Metro Gardens--Mesa Ridge
                             Project), Series A, 5.65% due 7/01/2019 (f)                                                1,040
- -----------------------------------------------------------------------------------------------------------------------------------
                             Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding:
A1+       P1         1,200     (Arizona Public Service Company), VRDN, Series B, 2.70% due 5/01/2029 (i)                1,200
BB+       Ba1        1,000     (El Paso Electric), Series E, 6.15% due 8/01/2002                                        1,010
BBB-      Baa3       1,000     (Public Service Company of New Mexico Project), Series A, 6.30% due 12/01/2026           1,014
- -----------------------------------------------------------------------------------------------------------------------------------
NR*       NR*        2,000   Mohave County, Arizona, IDA, IDR (North Star Steel Company Project), AMT,
                             6.70% due 3/01/2020                                                                        2,091
- -----------------------------------------------------------------------------------------------------------------------------------


PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Arizona Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list below and at right.

AMT    Alternative Minimum Tax (subject to)
GO     General Obligation Bonds
IDA    Industrial Development Authority
IDR    Industrial Development Revenue Bonds
M/F    Multi-Family
PCR    Pollution Control Revenue Bonds
RIB    Residual Interest Bonds
RITR   Residual Interest Trust Receipts
VRDN   Variable Rate Demand Notes
YCN    Yield Curve Notes

6


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

SCHEDULE OF INVESTMENTS (concluded)                               (in Thousands)



S&P       Moody's    Face
Ratings   Ratings   Amount                                       Issue                                                 Value
- -----------------------------------------------------------------------------------------------------------------------------
Arizona (concluded)
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                            
                             Peoria, Arizona, Improvement District No. 8401, Special Assessment Bonds No. 8802:
BBB+      NR*       $  430     7.20% due 1/01/2010                                                                      $   455
BBB+      NR*          510     7.20% due 1/01/2013                                                                          540
- -------------------------------------------------------------------------------------------------------------------------------
                             Peoria, Arizona, Improvement District, Special Assessment Bonds No. 8801:
BBB+      NR*          200     7.30% due 1/01/2009                                                                          212
BBB+      NR*          395     7.30% due 1/01/2011                                                                          419
- -------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,275   Phoenix, Arizona, Civic Improvement, Corporate Wastewater System Revenue
                             Refunding Bonds, Junior Lien, 5.375% due 7/01/2016 (c)                                       1,342
- -------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        2,000   Phoenix, Arizona, Civic Improvement Corporation, Municipal Facilities Excise
                             Tax Revenue Bonds, 6.90% due 7/01/2004 (f)(g)                                                2,242
- -------------------------------------------------------------------------------------------------------------------------------
AA+       Aa1        2,665   Phoenix, Arizona, GO, 5.875% due 7/01/2017                                                   2,897
- -------------------------------------------------------------------------------------------------------------------------------
NR*       Aaa        2,220   Phoenix, Arizona, IDA Revenue Bonds (Camelback Crossing), 6.20% due 9/20/2020 (e)            2,394
- -------------------------------------------------------------------------------------------------------------------------------
B+        Ba3        1,000   Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds (Tucson Electric Power
                             Company Project), Series B, 6% due 9/01/2029                                                   949
- -------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        2,050   Pinal County, Arizona, Unified School District Number 43, Apache Junction, GO,
                             Refunding, 5.75% due 7/01/2015 (c)                                                           2,297
- -------------------------------------------------------------------------------------------------------------------------------
BBB-      NR*          750   Prescott Valley, Arizona, Improvement District, Special Assessment Bonds
                             (Sewer Collection System Roadway Repair), 7.90% due 1/01/2012                                  801
- -------------------------------------------------------------------------------------------------------------------------------
A-        NR*        1,600   Sedona, Arizona, Sewer Revenue Refunding Bonds, 7% due 7/01/2012                             1,741
- -------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        2,000   Tucson, Arizona, Airport Authority Incorporated, Revenue Refunding Bonds,
                             5.70% due 6/01/2013 (f)                                                                      2,091
- -------------------------------------------------------------------------------------------------------------------------------
AA        NR*        2,315   Tucson, Arizona, IDA, Senior Living Facilities Revenue Bonds
                             (Christian Care Tucson Inc. Project), Series A, 6.125% due 7/01/2024                         2,482
- -------------------------------------------------------------------------------------------------------------------------------
AA        A1         2,000   University of Arizona, University Revenue Refunding Bonds, Series A, 6.20% due 6/01/2016     2,305
- -------------------------------------------------------------------------------------------------------------------------------
                             Puerto Rico--12.6%
- -------------------------------------------------------------------------------------------------------------------------------
                             Puerto Rico Commonwealth, GO, Refunding (h):
AAA       Aaa        3,000     RITR, Class R, Series 3, 8.616% due 7/01/2016 (f)                                          3,487
AAA       Aaa        2,000     YCN, 8.432% due 7/01/2020 (d)(j)                                                           2,160
- -------------------------------------------------------------------------------------------------------------------------------
A         Baa1       1,000   Puerto Rico Commonwealth Highway and Transportation Authority, Transportation
                             Revenue Bonds, Series B, 6% due 7/01/2026                                                    1,052
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$51,095)--101.9%                                                                                54,197
Liabilities in Excess of Other Assets--(1.9%)                                                                            (1,003)
                                                                                                                        -------
Net Assets--100.0%                                                                                                      $53,194
- -------------------------------------------------------------------------------------------------------------------------------


(a)   AMBAC Insured.
(b)   Connie Lee Insured.
(c)   FGIC Insured.
(d)   FSA Insured.
(e)   GNMA Collateralized.
(f)   MBIA Insured.
(g)   Prerefunded.
(h)   The interest rate is subject to change periodically and inversely based
      upon prevailing market rates. The interest rate shown is the rate in
      effect at July 31, 2001.
(i)   The interest rate is subject to change periodically based upon prevailing
      market rates. The interest rate shown is the rate in effect at July 31,
      2001.
(j)   Escrowed to maturity.
*     Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

7


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001



                                                                                                            
Assets:              Investments, at value (identified cost--$51,095,350) ..........................                 $ 54,197,308
                     Cash ..........................................................................                       17,362
                     Receivables:
                       Interest ....................................................................   $   457,409
                       Beneficial interest sold ....................................................         5,793        463,202
                                                                                                       -----------
                     Prepaid expenses and other assets .............................................                        8,813
                                                                                                                     ------------
                     Total assets ..................................................................                   54,686,685
                                                                                                                     ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities:         Payables:
                       Securities purchased ........................................................     1,345,327
                       Dividends to shareholders ...................................................        63,012
                       Investment adviser ..........................................................        24,040
                       Distributor .................................................................        15,298
                       Beneficial interest redeemed ................................................        12,368      1,460,045
                                                                                                       -----------
                     Accrued expenses and other liabilities ........................................                       32,222
                                                                                                                     ------------
                     Total liabilities .............................................................                    1,492,267
                                                                                                                     ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets:          Net assets ....................................................................                 $ 53,194,418
                                                                                                                     ============
- ---------------------------------------------------------------------------------------------------------------------------------

Net Assets           Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of:          shares authorized .............................................................                 $    107,356
                     Class B Shares of beneficial interest, $.10 par value, unlimited number of
                     shares authorized .......................................................                            319,531
                     Class C Shares of beneficial interest, $.10 par value, unlimited number of
                     shares authorized .............................................................                       16,218
                     Class D Shares of beneficial interest, $.10 par value, unlimited number of
                     shares authorized .............................................................                       57,293
                     Paid-in capital in excess of par................................                                  50,136,523
                     Accumulated distributions in excess of realized capital gains--net                                  (544,461)
                     Unrealized appreciation on investments--net ...................................                    3,101,958
                                                                                                                     ------------
                     Net assets ....................................................................                 $ 53,194,418
                                                                                                                     ============
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value:      Class A--Based on net assets of $11,413,531 and 1,073,557 shares
                      of beneficial interest outstanding ...........................................                 $      10.63
                                                                                                                     ============
                      Class B--Based on net assets of $33,972,049 and 3,195,310 shares
                      of beneficial interest outstanding ...........................................                 $      10.63
                                                                                                                     ============
                      Class C--Based on net assets of $1,722,997 and 162,185 shares
                      of beneficial interest outstanding ...........................................                 $      10.62
                                                                                                                     ============
                      Class D--Based on net assets of $6,085,841 and 572,935 shares
                      of beneficial interest outstanding ...........................................                 $      10.62
                                                                                                                     ============
- ---------------------------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

8


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION (continued)

Statement of Operations



                                                                                                 For the Year Ended
                                                                                                      July 31, 2001
- -------------------------------------------------------------------------------------------------------------------
                                                                                              
Investment Income:   Interest and amortization of premium and discount earned ........                 $  3,137,365
- -------------------------------------------------------------------------------------------------------------------
Expenses:            Investment advisory fees.........................................   $   287,397
                     Account maintenance and distribution fees--Class B...............       170,436
                     Accounting services..............................................        69,141
                     Professional fees................................................        68,868
                     Printing and shareholder reports.................................        37,947
                     Transfer agent fees--Class B.....................................        14,085
                     Registration fees................................................        12,143
                     Trustees' fees and expenses......................................         8,501
                     Account maintenance and distribution fees--Class C...............         7,944
                     Transfer agent fees--Class A.....................................         7,177
                     Pricing fees.....................................................         6,478
                     Account maintenance fees--Class D................................         5,399
                     Custodian fees..................................................          3,648
                     Transfer agent fees--Class D.....................................         2,229
                     Transfer agent fees--Class C.....................................           545
                     Other............................................................         6,783
                                                                                         -----------
                     Total expenses...................................................                      708,721
                                                                                                       ------------
                     Investment income--net ..........................................                    2,428,644
                                                                                                       ------------
- -------------------------------------------------------------------------------------------------------------------
Realized &           Realized gain on investments--net ...............................                      461,989
Unrealized Gain on   Change in unrealized appreciation on investments--net............                    1,409,146
Investments--Net:                                                                                      ------------
                     Net Increase in Net Assets Resulting from Operations ............                 $  4,299,779
                                                                                                       ============
- -------------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

9


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets



                                                                                                        For the Year Ended
                                                                                                             July 31,
                                                                                                    ---------------------------
Increase (Decrease) in Net Assets:                                                                      2001           2000
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                                          
Operations:           Investment income--net ....................................................   $  2,428,644   $  2,694,007
                      Realized gain (loss) on investments--net ..................................        461,989       (246,381)
                      Change in unrealized appreciation on investments--net .....................      1,409,146     (1,342,914)
                                                                                                    ------------   ------------
                      Net increase in net assets resulting from operations ......................      4,299,779      1,104,712
                                                                                                    ------------   ------------
- -------------------------------------------------------------------------------------------------------------------------------
Dividends &           Investment income--net:
Distributions to        Class A .................................................................       (572,827)      (639,418)
Shareholders:           Class B .................................................................     (1,532,885)    (1,803,547)
                        Class C .................................................................        (58,282)       (50,135)
                        Class D .................................................................       (264,650)      (200,907)
                      In excess of realized gain on investments--net:
                        Class A .................................................................         (2,510)        (7,114)
                        Class B .................................................................         (7,329)       (23,230)
                        Class C .................................................................           (249)          (534)
                        Class D .................................................................         (1,174)        (2,189)
                                                                                                    ------------   ------------
                      Net decrease in net assets resulting from dividends and distributions
                      to shareholders ...........................................................     (2,439,906)    (2,727,074)
                                                                                                    ------------   ------------
- -------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest   Net decrease in net assets derived from beneficial interest transactions...       (405,164)    (7,420,185)
Transactions:                                                                                       ------------   ------------
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets:           Total increase (decrease) in net assets ...................................      1,454,709     (9,042,547)
                      Beginning of year .........................................................     51,739,709     60,782,256
                                                                                                    ------------   ------------
                      End of year................................................................   $ 53,194,418   $ 51,739,709
                                                                                                    ============   ============
- -------------------------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

10


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights



                                                                                      Class A
The following per share data and ratios have been derived       ----------------------------------------------------
from information provided in the financial statements.                      For the Year Ended July 31,
                                                                ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001       2000       1999       1998      1997
- --------------------------------------------------------------------------------------------------------------------
                                                                                             
Per Share          Net asset value, beginning of year .......   $  10.26   $  10.53   $  10.88   $  10.87   $  10.54
Operating
                                                                --------   --------   --------   --------   --------
Performance:       Investment income--net ...................        .52        .54        .52        .55        .55
                   Realized and unrealized gain (loss) on
                   investments--net .........................        .37       (.26)      (.24)       .01        .33
                                                                --------   --------   --------   --------   --------
                   Total from investment operations .........        .89        .28        .28        .56        .88
                                                                --------   --------   --------   --------   --------
                   Less dividends and distributions:
                     Investment income--net .................       (.52)      (.54)      (.52)      (.55)      (.55)
                     In excess of realized gain on
                     investments--net .......................         --+      (.01)      (.11)        --         --
                                                                --------   --------   --------   --------   --------
                   Total dividends and distributions ........       (.52)      (.55)      (.63)      (.55)      (.55)
                                                                --------   --------   --------   --------   --------
                   Net asset value, end of year .............   $  10.63   $  10.26   $  10.53   $  10.88   $  10.87
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Total Investment   Based on net asset value per share .......       8.93%      2.82%      2.52%      5.25%      8.63%
Return:*
                                                                ========   ========    =======    =======    =======
- --------------------------------------------------------------------------------------------------------------------
Ratios to          Expenses .................................       1.00%       .86%       .94%       .82%       .79%
Average
                                                                ========   ========    =======    =======    =======
Net Assets:        Investment income--net ...................       5.00%      5.31%      4.77%      5.01%      5.21%
                                                                ========   ========    =======    =======    =======
- --------------------------------------------------------------------------------------------------------------------
Supplemental       Net assets, end of year (in thousands) ...   $ 11,413   $ 11,525   $ 12,975   $ 13,875   $ 14,012
                                                                ========   ========   ========   ========   ========
Data:              Portfolio turnover .......................      41.00%     41.15%     25.16%     53.75%     29.68%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------


                  * Total investment returns exclude the effects of sales
                    charges.
                  + Amount is less than $.01 per share.

                    See Notes to Financial Statements.

11


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



                                                                                      Class B
The following per share data and ratios have been derived       ----------------------------------------------------
from information provided in the financial statements.                      For the Year Ended July 31,
                                                                ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001       2000       1999       1998       1997
- --------------------------------------------------------------------------------------------------------------------
                                                                                             
Per Share          Net asset value, beginning of year .......   $  10.26   $  10.53   $  10.88   $  10.87   $  10.54
Operating
                                                                --------   --------   --------   --------   --------
Performance:       Investment income--net ...................        .47        .49        .46        .49        .50
                   Realized and unrealized gain (loss) on
                   investments--net .........................        .37       (.26)      (.24)       .01        .33
                                                                --------   --------   --------   --------   --------
                   Total from investment operations.........         .84        .23        .22        .50        .83
                                                                --------   --------   --------   --------   --------
                   Less dividends and distributions:
                     Investment income--net..................       (.47)      (.49)      (.46)      (.49)      (.50)
                     In excess of realized gain on
                     investments--net .......................         --+      (.01)      (.11)        --         --
                                                                --------   --------   --------   --------   --------
                   Total dividends and distributions ........       (.47)      (.50)      (.57)      (.49)      (.50)
                                                                --------   --------   --------   --------   --------
                   Net asset value, end of year .............   $  10.63   $  10.26   $  10.53   $  10.88   $  10.87
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Total Investment   Based on net asset value per share .......       8.38%      2.30%      2.01%      4.71%      8.08%
Return:*
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Ratios to          Expenses .................................       1.51%      1.37%      1.44%      1.32%      1.30%
Average
                                                                ========   ========   ========   ========   ========
Net Assets:        Investment income--net ...................       4.50%      4.80%      4.26%      4.50%      4.70%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Supplemental       Net assets, end of year (in thousands) ...   $ 33,972   $ 34,565   $ 42,758   $ 51,503   $ 58,282
Data:
                                                                ========   ========   ========   ========   ========
                   Portfolio turnover .......................      41.00%     41.15%     25.16%     53.75%     29.68%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------


                  * Total investment returns exclude the effects of sales
                    charges.
                  + Amount is less than $.01 per share.

                    See Notes to Financial Statements.

12


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



                                                                                      Class C
The following per share data and ratios have been derived       ----------------------------------------------------
from information provided in the financial statements.                      For the Year Ended July 31,
                                                                ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001       2000       1999       1998       1997
- --------------------------------------------------------------------------------------------------------------------
                                                                                             
Per Share          Net asset value, beginning of year .......   $  10.25   $  10.52   $  10.88   $  10.87   $  10.54
Operating
                                                                --------   --------   --------   --------   --------
Performance:       Investment income--net ...................        .46        .48        .45        .48        .49
                   Realized and unrealized gain (loss) on
                   investments--net .........................        .37       (.26)      (.25)       .01        .33
                                                                --------   --------   --------   --------   --------
                   Total from investment operations .........        .83        .22        .20        .49        .82
                                                                --------   --------   --------   --------   --------
                   Less dividends and distributions:
                     Investment income--net .................       (.46)      (.48)      (.45)      (.48)      (.49)
                     In excess of realized gain on
                     investments--net .......................         --+      (.01)      (.11)        --         --
                                                                --------   --------   --------   --------   --------
                   Total dividends and distributions ........       (.46)      (.49)      (.56)      (.48)      (.49)
                                                                --------   --------   --------   --------   --------
                   Net asset value, end of year .............   $  10.62   $  10.25   $  10.52   $  10.88   $  10.87
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Total Investment   Based on net asset value per share .......       8.28%      2.20%      1.81%      4.61%      7.97%
Return:*
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Ratios to          Expenses .................................       1.61%      1.47%      1.54%      1.42%      1.40%
Average
                                                                ========   ========   ========   ========   ========
Net Assets:        Investment income--net ...................       4.40%      4.71%      4.16%      4.39%      4.59%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Supplemental       Net assets, end of year (in thousands) ...   $  1,723   $  1,244   $    996   $  1,233   $    957
Data:
                                                                ========   ========   ========   ========   ========
                   Portfolio turnover .......................      41.00%     41.15%     25.16%     53.75%     29.68%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------


                  * Total investment returns exclude the effects of sales
                    charges.
                  + Amount is less than $.01 per share.

                    See Notes to Financial Statements.

13


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)



                                                                                      Class D
The following per share data and ratios have been derived       ----------------------------------------------------
from information provided in the financial statements.                      For the Year Ended July 31,
                                                                ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001       2000       1999       1998       1997
- --------------------------------------------------------------------------------------------------------------------
                                                                                             
Per Share          Net asset value, beginning of year .......   $  10.25   $  10.52   $  10.87   $  10.86   $  10.53
Operating
                                                                --------   --------   --------   --------   --------

Performance:       Investment income--net ...................        .51        .53        .51        .54        .54
                   Realized and unrealized gain (loss) on
                   investments--net .........................        .37       (.26)      (.24)       .01        .33
                                                                --------   --------   --------   --------   --------
                   Total from investment operations .........        .88        .27        .27        .55        .87
                                                                --------   --------   --------   --------   --------
                   Less dividends and distributions:
                     Investment income--net..................       (.51)      (.53)      (.51)      (.54)      (.54)
                     In excess of realized gain on
                     investments--net .......................         --+      (.01)      (.11)        --         --
                                                                --------   --------   --------   --------   --------
                   Total dividends and distributions ........       (.51)      (.54)      (.62)      (.54)      (.54)
                                                                --------   --------   --------   --------   --------
                   Net asset value, end of year .............   $  10.62   $  10.25   $  10.52   $  10.87   $  10.86
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Total Investment   Based on net asset value per share .......       8.82%      2.72%      2.42%      5.14%      8.52%
Return:*
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Ratios to          Expenses .................................       1.10%       .96%      1.05%       .92%       .89%
Average
                                                                ========   ========   ========   ========   ========
Net Assets:        Investment income--net ...................       4.90%      5.20%      4.67%      4.90%      5.11%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------
Supplemental       Net assets, end of year (in thousands) ...   $  6,086   $  4,406   $  4,053   $  2,740   $  2,188
Data:
                                                                ========   ========   ========   ========   ========
                   Portfolio turnover .......................      41.00%     41.15%     25.16%     53.75%     29.68%
                                                                ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------


                  * Total investment returns exclude the effects of sales
                    charges.
                  + Amount is less than $.01 per share.

                    See Notes to Financial Statements.

14


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:

Merrill Lynch Arizona Municipal Bond Fund (the "Fund") is part of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. The Fund offers
four classes of shares under the Merrill Lynch Select PricingSM System. Shares
of Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The following
is a summary of significant accounting policies followed by the Fund.

(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis.
Discounts and market premiums are amortized into interest income. The Fund will
adopt the provisions to amortize premiums and discounts on debt securities
effective August 1, 2001, as now required under the new

15


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

AICPA Audit and Accounting Guide for Investment Companies. The cumulative effect
of this accounting change will have no impact on the total net assets of the
Fund, but will result in a $320 increase to the cost of securities and a
corresponding $320 decrease to net unrealized appreciation, based on debt
securities held as of July 31, 2001.

(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.

(f) Expenses -- Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.

2. Investment Advisory Agreement and Transactions with Affiliates:

The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

- --------------------------------------------------------------------------------
                                                    Account         Distribution
                                                Maintenance Fee         Fee
- --------------------------------------------------------------------------------
Class B ....................................         .25%              .25%
Class C ....................................         .25%              .35%
Class D ....................................         .10%               --
- --------------------------------------------------------------------------------

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

- --------------------------------------------------------------------------------
                                                       FAMD               MLPF&S
- --------------------------------------------------------------------------------
Class A ................................               $433               $2,963
Class D ................................               $672               $7,048
- --------------------------------------------------------------------------------

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $10,554 and $4,500 relating to transactions in Class B and Class C
Shares respectively.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimbursed FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed

16


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

FAM an aggregate of $28,351 for the above-described services. The Fund entered
into an agreement with State Street Bank and Trust Company ("State Street"),
effective January 1, 2001, pursuant to which State Street provides certain
accounting services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:

Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $26,698,523 and $20,246,598, respectively.

Net realized gains for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:

- --------------------------------------------------------------------------------
                                                     Realized         Unrealized
                                                      Gains             Gains
- --------------------------------------------------------------------------------
Long-term investments ......................         $366,089         $3,101,958
Financial futures contracts ................           95,900                 --
                                                     --------         ----------
Total ......................................         $461,989         $3,101,958
                                                     ========         ==========
- --------------------------------------------------------------------------------

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $3,101,958, of which $3,121,541 related to appreciated securities and
$19,583 related to depreciated securities. The aggregate cost of investments at
July 31, 2000 for Federal income tax purposes was $51,095,350.

4. Beneficial Interest Transactions:

Net decrease in net assets derived from beneficial interest transactions was
$405,164 and $7,420,185 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:

- --------------------------------------------------------------------------------
Class A Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................          43,958         $   462,703
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          25,085             262,786
                                                   --------         -----------
Total issued ..............................          69,043             725,489
Shares redeemed ...........................        (119,240)         (1,249,931)
                                                   --------         -----------
Net decrease ..............................         (50,197)        $  (524,442)
                                                   ========         ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class A Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................         121,596         $ 1,219,526
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          32,916             333,211
                                                   --------         -----------
Total issued ..............................         154,512           1,552,737
Shares redeemed ...........................        (263,317)         (2,665,813)
                                                   --------         -----------
Net decrease ..............................        (108,805)        $(1,113,076)
                                                   ========         ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class B Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................         386,365         $ 4,069,369
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          53,676             562,245
                                                   --------         -----------
Total issued ..............................         440,041           4,631,614
Automatic conversion
of shares .................................         (96,394)         (1,007,254)
Shares redeemed ...........................        (518,580)         (5,423,418)
                                                   --------         -----------
Net decrease ..............................        (174,933)        $(1,799,058)
                                                   ========         ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class B Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................         215,656         $ 2,179,133
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          70,640             715,305
                                                   --------         -----------
Total issued ..............................         286,296           2,894,438
Automatic conversion of
shares ....................................         (13,688)           (139,007)
Shares redeemed ...........................        (964,126)         (9,765,327)
                                                   --------         -----------
Net decrease ..............................        (691,518)        $(7,009,896)
                                                   ========         ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class C Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................          90,959         $   954,483
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................           2,560              26,800
                                                   --------         -----------
Total issued ..............................          93,519             981,283
Shares redeemed ...........................         (52,721)           (551,642)
                                                   --------         -----------
Net increase ..............................          40,798         $   429,641
                                                   ========         ===========
- --------------------------------------------------------------------------------

17


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

- --------------------------------------------------------------------------------
Class C Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................          46,999         $   471,284
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................           2,751              27,825
                                                   --------         -----------
Total issued ..............................          49,750             499,109
Shares redeemed ...........................         (23,061)           (235,876)
                                                   --------         -----------
Net increase ..............................          26,689         $   263,233
                                                   ========         ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class D Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................          83,599         $   873,615
Automatic conversion
of shares .................................          96,486           1,007,254
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................           8,071              84,499
                                                   --------         -----------
Total issued ..............................         188,156           1,965,368
Shares redeemed ...........................         (45,241)           (476,673)
                                                   --------         -----------
Net increase ..............................         142,915         $ 1,488,695
                                                   ========         ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class D Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- --------------------------------------------------------------------------------
Shares sold ...............................         123,728         $ 1,238,932
Automatic conversion
of shares .................................          13,702             139,007
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................           7,861              79,557
                                                   --------         -----------
Total issued ..............................         145,291           1,457,496
Shares redeemed ...........................        (100,624)         (1,017,942)
                                                   --------         -----------
Net increase ..............................          44,667         $   439,554
                                                   ========         ===========
- --------------------------------------------------------------------------------

5. Short-Term Borrowings:

On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Arizona Municipal Bond Fund during its taxable year ended July 31, 2001 qualify
as tax-exempt interest dividends for Federal income tax purposes.

Additionally, the Fund paid a long-term capital gains distribution in the amount
of $.002304 per share to shareholders as of December 21, 2000. The entire
distribution is subject to a maximum 20% tax rate.

Please retain this information for your records.

18


Merrill Lynch Arizona Municipal Bond Fund                          July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Arizona Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
broker; where a reply was not received from the broker, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Arizona Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
New York, New York
September 13, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

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

Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

19


[LOGO] Merrill Lynch Investment Managers
- --------------------------------------------------------------------------------
                                                               [GRAPHIC OMITTED]

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Arizona
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

[RECYCLED LOGO] Printed on post-consumer recycled paper           #16238 -- 7/01

EX-99.17N

                                                                   EXHIBIT 17(n)

[LOGO] Merrill Lynch Investment Managers

Annual Report
July 31, 2001

Merrill Lynch
Connecticut
Municipal
Bond Fund

www.mlim.ml.com

1


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

DEAR SHAREHOLDER

The Municipal Market Environment

In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations.

Additionally, a strong Producer Price Index released in early May ignited
smoldering inflationary fears among many investors. These investors believed
that the 250 basis point decline in short-term interest rates by the Federal
Reserve Board through May would eventually rekindle a strong US economy with
concomitant inflationary pressures. As a result of these factors, US Treasury
bond prices declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to this increased demand and long-term tax-exempt bond
yields declined to 5.40% by July 31, 2001, a five

2


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

basis point decline in long-term municipal bond yields from January 2001 levels.

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June and July 2001. Given
continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates artificially high, although not as high as in recent years. As
these pressures abated, short-term municipal interest rates declined to
approximately 2.5%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.

Portfolio Strategy

During the six-month period ended July 31, 2001, our investment strategy was to
enhance the level of tax-exempt income and moderate price volatility. Therefore,
we focused on the acquisition of higher-coupon securities in the 13-year --
20-year maturity range and the sale of long-duration bonds. Because of the
municipal bond market's steep yield curve, these issues represent 88% -- 98% of
the yield available on the long end of the yield curve. This maturity segment is
also less subject to interest rate sensitivity, as are bonds maturing in 21
years -- 31 years. The Fund also continued to have high profile, credit-quality
holdings.

Looking forward, we expect to keep the Fund's present position, since we
believe that long-term interest rates currently have seen the majority of their
decline, but bond prices may further improve in the coming months. We intend to
keep the Fund fully invested to further enhance shareholder income. If either
the US economy or equity markets display major weakness, we are prepared to
adopt a more aggressive investment stance.

3


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

Fiscal Year in Review

For the 12 months ended July 31, 2001, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +9.32%, +8.77%, +8.56% and +9.21%,
respectively. This compares to the +10.08% return of the Fund's unmanaged
benchmark Lehman Brothers Municipal Bond Index for the same period. (Fund
results do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 4 and 5 of this
report to shareholders.)

For the 12 months ended July 31, 2001, we restructured the Fund's portfolio with
the primary focus of seeking to enhance shareholder income and lowering price
volatility. To achieve this goal, we concentrated on the acquisition of
higher-coupon securities in the 13-year -- 20-year maturity range. We based our
strategy on the anticipation that the Federal Reserve Board would raise
short-term interest rates further in the second half of 2000, which, in turn,
would put upward pressure on long-term interest rates. Our view on short-term
interest rates was correct and interest rates on long-term US Treasury
securities rose to nearly 6% at the end of September 2000. However, interest
rates declined late in the fourth quarter of 2000. Because of this market
appreciation, the Fund's duration was reduced below what we considered neutral.
As a result, we moved to restore the Fund's duration to its earlier higher level
because of reduced new bond issuance and the increased incremental yield.

In Conclusion

We appreciate your ongoing interest in Merrill Lynch Connecticut Municipal Bond
Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.

Sincerely,


/s/ Terry K. Glenn

Terry K. Glenn
President and Trustee


/s/ Vincent R. Giordano

Vincent R. Giordano
Senior Vice President


/s/ William R. Bock

William R. Bock
Vice President and Portfolio Manager

September 4, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
William R. Bock, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

Custodian

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

Transfer Agent

Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

4


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:

 .     Class A Shares incur a maximum initial sales charge (front-end load) of 4%
      and bear no ongoing distribution or account maintenance fees. Class A
      Shares are available only to eligible investors.

 .     Class B Shares are subject to a maximum contingent deferred sales charge
      of 4% if redeemed during the first year, decreasing 1% each year
      thereafter to 0% after the fourth year. In addition, Class B Shares are
      subject to a distribution fee of 0.25% and an account maintenance fee of
      0.25%. These shares automatically convert to Class D Shares after
      approximately 10 years. (There is no initial sales charge for automatic
      share conversions.)

 .     Class C Shares are subject to a distribution fee of 0.35% and an account
      maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
      contingent deferred sales charge if redeemed within one year of purchase.

 .     Class D Shares incur a maximum initial sales charge of 4% and an account
      maintenance fee of 0.10% (but no distribution fee).

      None of the past results shown should be considered a representation of
      future performance. Performance results do not reflect the deduction of
      taxes that a shareholder would pay on fund distributions or the redemption
      of fund shares. Figures shown in the "Recent Performance Results" and
      "Average Annual Total Return" tables assume reinvestment of all dividends
      and capital gains distributions at net asset value on the payable date.
      Investment return and principal value of shares will fluctuate so that
      shares, when redeemed, may be worth more or less than their original cost.
      Dividends paid to each class of shares will vary because of the different
      levels of account maintenance, distribution and transfer agency fees
      applicable to each class, which are deducted from the income available to
      be paid to share holders. The Fund's Investment Adviser voluntarily waived
      a portion of its management fee. Without such waiver, the Fund's
      performance would have been lower.

Average Annual Total Return

                                           % Return Without       % Return With
                                             Sales Charge         Sales Charge**
- --------------------------------------------------------------------------------
Class A Shares*
- --------------------------------------------------------------------------------
One Year Ended 6/30/01                          +9.18%                +4.81%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                        +5.71                 +4.85
- --------------------------------------------------------------------------------
Inception (7/01/94)
through 6/30/01                                 +6.13                 +5.52
- --------------------------------------------------------------------------------
*     Maximum sales charge is 4%.
**    Assuming maximum sales charge.

                                              % Return                % Return
                                             Without CDSC            With CDSC**
- --------------------------------------------------------------------------------
Class B Shares*
- --------------------------------------------------------------------------------
One Year Ended 6/30/01                          +8.63%                 +4.63%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                        +5.18                  +5.18
- --------------------------------------------------------------------------------
Inception (7/01/94)
through 6/30/01                                 +5.60                  +5.60
- --------------------------------------------------------------------------------
*     Maximum contingent deferred sales charge is 4% and is reduced to 0% after
      4 years.
**    Assuming payment of applicable contingent deferred sales charge.

- --------------------------------------------------------------------------------
                                              % Return                % Return
                                             Without CDSC            With CDSC**
- --------------------------------------------------------------------------------
Class C Shares*
- --------------------------------------------------------------------------------
One Year Ended 6/30/01                          +8.63%                 +7.63%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                        +5.08                  +5.08
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                 +5.80                  +5.80
- --------------------------------------------------------------------------------
*     Maximum contingent deferred sales charge is 1% and is reduced to 0% after
      1 year.
**    Assuming payment of applicable contingent deferred sales charge.

- ---------------------------------------=========================================
                                          % Return Without        % Return With
                                            Sales Charge          Sales Charge**
================================================================================
Class D Shares*
- --------------------------------------------------------------------------------
One Year Ended 6/30/01                          +9.07%                 +4.71%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                        +5.61                  +4.75
- --------------------------------------------------------------------------------
Inception (10/21/94)
   through 6/30/01                              +6.32                  +5.68
- --------------------------------------------------------------------------------
*     Maximum sales charge is 4%.
**    Assuming maximum sales charge.

5


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

PERFORMANCE DATA (concluded)

Total Return Based on a $10,000 Investment

ML Connecticut Municipal Bond Fund's Class A and Class B Shares--Total Return
Based on a $10,000 Investment

A line graph depicting the growth of an investment in the Portfolio's Class A
Shares and Class B Shares compared to growth of an investment in the Lehman
Brothers Municipal Bond Index. Values are from July 1, 1994 to July 2001:



                               7/01/94**    7/94         7/95         7/96         7/97         7/98
                                                                              
ML Connecticut
Municipal Bond Fund+--
Class A Shares*                $ 9,600      $ 9,857      $10,478      $11,145      $12,205      $12,937
ML Connecticut
Municipal Bond Fund+--
Class B Shares*                $10,000      $10,264      $10,856      $11,488      $12,517      $13,202


                               7/29/94**
                                                                              
Lehman Brothers Municipal
Bond Index++                   $10,000      $10,000      $10,787      $11,499      $12,678      $13,438


                               7/99         7/00         7/01
                                                
ML Connecticut
Municipal Bond Fund+--
Class A Shares*                $13,260      $13,520      $14,780
ML Connecticut
Municipal Bond Fund+--
Class B Shares*                $13,465      $13,660      $14,858
Lehman Brothers Municipal
Bond Index++                   $13,825      $14,421      $15,874


ML Connecticut Municipal Bond Fund's Class C and Class D Shares--Total Return
Based on a $10,000 Investment

A line graph depicting the growth of an investment in the Portfolio's Class C
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from October 21, 1994 to July 2001:



                               10/21/94**   7/95         7/96         7/97         7/98         7/99
                                                                              
ML Connecticut
Municipal Bond Fund+--
Class C Shares*                $10,000      $10,879      $11,501      $12,518      $13,189      $13,425
ML Connecticut
Municipal Bond Fund+--
Class D Shares*                $ 9,600      $10,474      $11,130      $12,176      $12,894      $13,203


                               10/31/94**
                                                                              
Lehman Brothers Municipal
Bond Index++                   $10,000      $11,107      $11,840      $13,054      $13,836      $14,234


                               7/00         7/01
                                      
ML Connecticut
Municipal Bond Fund+--
Class C Shares*                $13,620      $14,786
ML Connecticut
Municipal Bond Fund+--
Class D Shares*                $13,449      $14,688
Lehman Brothers Municipal
Bond Index++                   $14,848      $16,344


*     Assuming maximum sales charge, transaction costs and other operating
      expenses, including advisory fees.

**    Commencement of operations.

+     ML Connecticut Municipal Bond Fund invests primarily in long-term
      investment-grade obligations issued by or on behalf of the state of
      Connecticut, its political subdivisions, agencies and instrumentalities
      and obligations of other qualifying issuers.

++    This unmanaged Index consists of long-term revenue bonds, prerefunded
      bonds, general obligation bonds and insured bonds. The starting date for
      the Index in the Class A & Class B Shares' graph is from 6/30/94 and in
      the Class C & Class D Shares' graph is from 10/31/94.

      Past performance is not predictive of future performance.

Recent Performance Results*



                                                                6-Month       12-Month    Since Inception   Standardized
As of July 31, 2001                                           Total Return  Total Return    Total Return    30-Day Yield
========================================================================================================================
                                                                                                    
ML Connecticut Municipal Bond Fund Class A Shares                 +3.13%        +9.32%        +53.98%           4.01%
- ------------------------------------------------------------------------------------------------------------------------
ML Connecticut Municipal Bond Fund Class B Shares                 +2.77         +8.77         +48.58            3.68
- ------------------------------------------------------------------------------------------------------------------------
ML Connecticut Municipal Bond Fund Class C Shares                 +2.72         +8.56         +47.85            3.58
- ------------------------------------------------------------------------------------------------------------------------
ML Connecticut Municipal Bond Fund Class D Shares                 +2.98         +9.21         +52.99            3.92
========================================================================================================================


*     Investment results shown do not reflect sales charges; results would be
      lower if a sales charge was included. Total investment returns are based
      on changes in net asset values for the periods shown, and assume
      reinvestment of all dividends and capital gains distributions at net asset
      value on the payable date. The Fund's since inception dates are from
      7/01/94 for Class A & Class B Shares and from 10/21/94 for Class C & Class
      D Shares.

6


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

SCHEDULE OF INVESTMENTS                                           (in Thousands)



S&P      Moody's   Face
Ratings  Ratings  Amount                                      Issue                                                          Value
- ------------------------------------------------------------------------------------------------------------------------------------
Connecticut--90.7%
                                                                                                                
                           Bridgeport, Connecticut, GO, Refunding (c):
AAA      Aaa      $2,000     Series A, 5.875% due 7/15/2019                                                                 $  2,163
AAA      Aaa       2,000     Series C, 5.375% due 8/15/2019                                                                    2,092
- ------------------------------------------------------------------------------------------------------------------------------------
                           Colchester, Connecticut, GO, Refunding (c):
NR*      Aaa         395     5.50% due 6/15/2014                                                                                 432
NR*      Aaa         390     5.50% due 6/15/2015                                                                                 423
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,000   Connecticut State Development Authority, Governmental Lease Revenue Bonds,
                           6.60% due 6/15/2014 (b)                                                                             1,104
- ------------------------------------------------------------------------------------------------------------------------------------
AA       A1        2,000   Connecticut State Development Authority Revenue Bonds (General Fund), Series A,
                           6.375% due 10/15/2024                                                                               2,177
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,500   Connecticut State Development Authority, Solid Waste Disposal Facilities Revenue Bonds
                           (Pfizer Inc. Project), AMT, 7% due 7/01/2025                                                        1,690
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      NR*       1,250   Connecticut State Development Authority, Water Facility Revenue Bonds (Bridgeport
                           Hydraulic Company), AMT, 6.15% due 4/01/2035 (d)                                                    1,343
- ------------------------------------------------------------------------------------------------------------------------------------
AA       NR*       1,500   Connecticut State, GO, DRIVERS, Series 174, 8.286% due 12/15/2009 (e)                               1,820
- ------------------------------------------------------------------------------------------------------------------------------------
AA       Aa2       1,000   Connecticut State, GO, RIB, Series 373, 8.89% due 6/15/2013 (e)                                     1,202
- ------------------------------------------------------------------------------------------------------------------------------------
NR*      Aa2       1,250   Connecticut State, GO, Refunding, RIB, Series 513X, 8.28% due 12/15/2014 (e)                        1,509
- ------------------------------------------------------------------------------------------------------------------------------------
AA       Aa2       1,000   Connecticut State, GO, Series B, 5.50% due 11/01/2018                                               1,059
- ------------------------------------------------------------------------------------------------------------------------------------
                           Connecticut State, HFA, Revenue Bonds (Housing Mortgage Finance Program):
AA       Aa2         820     AMT, Series A, Sub-Series A-2, 6.20% due 11/15/2022                                                 859
AAA      Aaa       4,110     Series B, 6.75% due 11/15/2023 (b)                                                                4,317
- ------------------------------------------------------------------------------------------------------------------------------------
                           Connecticut State, HFA, Revenue Refunding Bonds (Housing Mortgage Finance Program):
AA       Aa2       1,000     AMT, Series B, Sub-Series B-2, 5.70% due 5/15/2017                                                1,033
AA       Aa2       2,000     Series A-1, 6% due 11/15/2028                                                                     2,101
AA       Aa2       1,200     Series C-1, 6.30% due 11/15/2017                                                                  1,264
- ------------------------------------------------------------------------------------------------------------------------------------
                           Connecticut State Health and Educational Facilities Authority Revenue Bonds:
AAA      Aaa       1,000     (Bridgeport Hospital), Series A, 6.625% due 7/01/2018 (b)                                         1,051
AAA      Aaa         980     (Child Care Facilities Program), Series C, 5.50% due 7/01/2019 (d)                                1,024
AAA      Aaa       1,400     (Newington Children's Hospital), Series A, 6.30% due 7/01/2021 (b)                                1,500
AA       NR*       1,500     (Waterbury Hospital Issue), Series C, 5.75% due 7/01/2020                                         1,564
AA       NR*       1,000     (Westover School), Series A, 5.70% due 7/01/2030                                                  1,040
AAA      Aaa       1,000     (Yale--New Haven Hospital Issue), Series G, 6.50% due 7/01/2012 (b)                               1,050
A1+      VMIG1@      100     (Yale University), VRDN, Series T-2, 2.50% due 7/01/2029 (a)                                        100
A1+      VMIG1@      200     (Yale University), VRDN, Series U, 2.45% due 7/01/2033 (a)                                          200
A1+      VMIG1@      700     (Yale University), VRDN, Series U-2, 2.45% due 7/01/2033 (a)                                        700
A1+      VMIG1@    1,900     (Yale University), VRDN, Series V-2, 2.70% due 7/01/2036 (a)                                      1,900
- ------------------------------------------------------------------------------------------------------------------------------------


PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Connecticut Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.

AMT      Alternative Minimum Tax (subject to)
DRIVERS  Derivative Inverse Tax-Exempt Receipts
GO       General Obligation Bonds
HFA      Housing Finance Agency
RIB      Residual Interest Bonds
S/F      Single-Family
VRDN     Variable Rate Demand Notes

7


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

SCHEDULE OF INVESTMENTS (concluded)                               (in Thousands)



S&P      Moody's   Face
Ratings  Ratings  Amount                                       Issue                                                         Value
- ------------------------------------------------------------------------------------------------------------------------------------
Connecticut (concluded)
                                                                                                                
                           Connecticut State Health and Educational Facilities Authority, Revenue Refunding Bonds:
AA       NR*      $2,000     (Eastern Connecticut Health Network), Series A, 6.50% due 7/01/2030                            $  2,208
AA       NR*         640     (Sacred Heart University), 6.625% due 7/01/2026                                                     699
AAA      Aaa       1,000     (Yale--New Haven Hospital Issue), Series H, 5.70% due 7/01/2025 (b)                               1,042
AAA      Aaa       1,500     (Yale University), RIB, 8.887% due 6/10/2030 (e)                                                  1,596
- ------------------------------------------------------------------------------------------------------------------------------------
                           Connecticut State Higher Education, Supplemental Loan Authority Revenue Bonds
                           (Family Education Loan Program), AMT, Series A:
NR*      A1          555     6.40% due 11/15/2014                                                                                583
NR*      Aaa       1,400     5.50% due 11/15/2020                                                                              1,435
- ------------------------------------------------------------------------------------------------------------------------------------
NR*      NR*       1,000   Connecticut State Regional Learning Educational Service Center Revenue Bonds
                           (Office/Education Center Facility), 7.75% due 2/01/2015                                             1,058
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      NR*       1,500   Connecticut State Special Tax Obligation Revenue Refunding
                           Bonds, DRIVERS, Series 168, 9.285% due 10/01/2009 (b)(e)                                            1,914
- ------------------------------------------------------------------------------------------------------------------------------------
NR*      Aaa       1,015   East Lyme, Connecticut, GO, Refunding, 5% due 7/15/2016 (c)                                         1,043
- ------------------------------------------------------------------------------------------------------------------------------------
NR*      NR*       1,520   Eastern Connecticut State Regional Educational Service Center Revenue Bonds,
                           6.50% due 5/15/2009                                                                                 1,560
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      Aaa         625   Ridgefield, Connecticut, GO, Lot A, 5.50% due 7/01/2020                                               662
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      Aaa         930   Southington, Connecticut, GO, 5% due 5/15/2019 (c)                                                    943
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       2,000   University of Connecticut, GO, Series A, 5.625% due 3/01/2020 (c)                                   2,146
- ------------------------------------------------------------------------------------------------------------------------------------
AA       Baa3        860   Waterbury, Connecticut, GO, 6% due 2/01/2017                                                          913
- ------------------------------------------------------------------------------------------------------------------------------------
Guam--1.8%
AAA      NR*       1,000   Guam Housing Corporation, S/F Mortgage Revenue Bonds, AMT, Series A,
                           5.75% due 9/01/2031 (f)                                                                             1,052
- ------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--6.5%
AAA      Aaa       2,000   Puerto Rico Commonwealth Highway and Transportation Authority, Transportation Revenue
                           Bonds, Series B, 5.875% due 7/01/2021 (b)                                                           2,200
- ------------------------------------------------------------------------------------------------------------------------------------
AAA      Aaa         500   Puerto Rico Electric Power Authority, Power Revenue Bonds, Trust Receipts, Class R,
                           Series 16 HH, 8.632% due 7/01/2013 (e)(g)                                                             600
- ------------------------------------------------------------------------------------------------------------------------------------
AA       Aa2       1,000   Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities
                           Revenue Bonds (Hospital de la Concepcion), Series A, 6.375% due 11/15/2015                          1,134
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$56,448)--99.0%                                                                                      59,505

Other Assets Less Liabilities--1.0%                                                                                              583
                                                                                                                             -------
Net Assets--100.0%                                                                                                           $60,088
                                                                                                                             =======
- ------------------------------------------------------------------------------------------------------------------------------------


(a)   The interest rate is subject to change periodically based upon prevailing
      market rates. The interest rate shown is the rate in effect at July 31,
      2001.
(b)   MBIA Insured.
(c)   FGIC Insured.
(d)   AMBAC Insured.
(e)   The interest rate is subject to change periodically and inversely based
      upon prevailing market rates. The interest rate shown is the rate in
      effect at July 31, 2001.
(f)   FHLMC Collateralized.
(g)   FSA Insured.
  *   Not Rated.
  @   Highest short-term rating by Moody's Investors Service, Inc.

Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

8


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001

                                                                                                              
Assets:              Investments, at value (identified cost -- $56,448,268).........................                   $ 59,504,868
                     Cash...........................................................................                        117,023
                     Receivables:
                       Interest.....................................................................     $   609,343
                       Beneficial interest sold.....................................................          68,151        677,494
                                                                                                         -----------
                     Prepaid expenses and other assets..............................................                         14,438
                                                                                                                       ------------
                     Total assets...................................................................                     60,313,823
                                                                                                                       ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:         Payables:
                       Beneficial interest redeemed.................................................          84,282
                       Dividends to shareholders....................................................          54,464
                       Investment adviser...........................................................          21,790
                       Distributor..................................................................          19,950        180,486
                                                                                                         -----------
                     Accrued expenses and other liabilities.........................................                         45,537
                                                                                                                       ------------
                     Total liabilities..............................................................                        226,023
                                                                                                                       ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:          Net assets.....................................................................                   $ 60,087,800
                                                                                                                       ============
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets           Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of:          shares authorized..............................................................                    $    65,352
                     Class B Shares of beneficial interest, $.10 par value, unlimited number of
                     shares authorized..............................................................                        391,729
                     Class C Shares of beneficial interest, $.10 par value, unlimited number of
                     shares authorized..............................................................                         53,454
                     Class D Shares of beneficial interest, $.10 par value, unlimited number of
                     shares authorized..............................................................                         54,308
                     Paid-in capital in excess of par...............................................                     57,662,187
                     Accumulated realized capital losses on investments -- net......................                       (846,081)
                     Accumulated distributions in excess of realized capital gains
                     on investments -- net..........................................................                       (349,749)
                     Unrealized appreciation on investments -- net..................................                      3,056,600
                                                                                                                       ------------
                     Net assets.....................................................................                   $ 60,087,800
                                                                                                                       ============
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value:     Class A -- Based on net assets of $6,950,749 and 653,517 shares
                     of beneficial interest outstanding.............................................                   $      10.64
                                                                                                                       ============
                     Class B -- Based on net assets of $41,669,408 and 3,917,293 shares
                     of beneficial interest outstanding.............................................                   $      10.64
                                                                                                                       ============
                     Class C -- Based on net assets of $5,689,760 and 534,537 shares
                     of beneficial interest outstanding.............................................                   $      10.64
                                                                                                                       ============
                     Class D -- Based on net assets of $5,777,883 and 543,082 shares
                     of beneficial interest outstanding.............................................                   $      10.64
                                                                                                                       ============
- -----------------------------------------------------------------------------------------------------------------------------------



                      See Notes to Financial Statements.

9


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION (continued)

Statement of Operations



                                                                                              For the Year Ended
                                                                                                   July 31, 2001
- ----------------------------------------------------------------------------------------------------------------
                                                                                        
Investment Income:   Interest and amortization of premium and discount earned.........               $ 3,161,228
- ----------------------------------------------------------------------------------------------------------------
Expenses:            Investment advisory fees.........................................               $   306,589
                     Account maintenance and distribution fees -- Class B.............                   187,068
                     Professional fees................................................                    73,635
                     Accounting services..............................................                    61,315
                     Printing and shareholder reports.................................                    50,144
                     Account maintenance and distribution fees -- Class C.............                    34,048
                     Transfer agent fees -- Class B...................................                    14,371
                     Trustees' fees and expenses......................................                     8,631
                     Pricing fees.....................................................                     6,736
                     Account maintenance fees -- Class D..............................                     5,681
                     Registration fees................................................                     4,825
                     Custodian fees...................................................                     3,445
                     Transfer agent fees -- Class A...................................                     2,291
                     Transfer agent fees -- Class C...................................                     2,084
                     Transfer agent fees -- Class D...................................                     1,866
                     Other............................................................                     6,783
                                                                                                     -----------
                     Total expenses before reimbursement..............................                   769,512
                     Reimbursement of expenses........................................                   (55,743)
                                                                                                     -----------
                     Total expenses after reimbursement...............................                   713,769
                                                                                                     -----------
                     Investment income -- net ........................................                 2,447,459
                                                                                                     -----------
- ----------------------------------------------------------------------------------------------------------------
Realized &           Realized gain on investments -- net .............................                   516,059
Unrealized Gain on   Change in unrealized appreciation on investments -- net..........                 1,735,752
Investments -- Net:                                                                                  -----------
                     Net Increase in Net Assets Resulting from Operations.............               $ 4,699,270
                                                                                                     ===========
- ----------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

10


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets



                                                                                                           For the Year Ended
                                                                                                                 July 31,
                                                                                                    -------------------------------
Increase (Decrease) in Net Assets:                                                                      2001                2000
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
Operations:          Investment income -- net ........................................              $  2,447,459       $  2,531,760
                     Realized gain (loss) on investments -- net ......................                   516,059         (1,503,396)
                     Change in unrealized appreciation on investments -- net..........                 1,735,752           (503,493)
                                                                                                    ------------       ------------
                     Net increase in net assets resulting from operations.............                 4,699,270            524,871
                                                                                                    ------------       ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends &          Investment income -- net:
Distributions to       Class A.......................................................                   (335,111)          (352,599)
Shareholders:          Class B.......................................................                 (1,606,771)        (1,663,422)
                       Class C.......................................................                   (238,247)          (231,023)
                       Class D.......................................................                   (267,330)          (284,716)
                     In excess of realized gain on investments -- net:
                       Class A.......................................................                         --             (2,382)
                       Class B.......................................................                         --            (12,672)
                       Class C.......................................................                         --             (1,685)
                       Class D.......................................................                         --             (1,865)
                                                                                                    ------------       ------------
                     Net decrease in net assets resulting from dividends and distributions
                     to shareholders                                                                  (2,447,459)        (2,550,364)
                                                                                                    ------------       ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest  Net increase (decrease) in net assets derived from beneficial
Transactions:        interest transactions ..........................................                  5,133,648        (10,139,562)
                                                                                                    ------------       ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:          Total increase (decrease) in net assets.........................                  7,385,459        (12,165,055)
                     Beginning of year...............................................                 52,702,341         64,867,396
                                                                                                    ------------       ------------
                     End of year.....................................................               $ 60,087,800       $ 52,702,341
                                                                                                    ============       ============
- -----------------------------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

11


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights

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



                                                                                       Class A
                                                                -------------------------------------------------------
                                                                              For the Year Ended July 31,
                                                                -------------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001        2000       1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------
                                                                                              
Per Share              Net asset value, beginning of year ...   $ 10.21     $ 10.53     $ 10.79     $ 10.68     $ 10.29
Operating                                                       -------     -------     -------     -------     -------
Performance:           Investment income -- net .............       .50         .50         .48         .52         .56

                       Realized and unrealized gain (loss) on
                       investments -- net ...................       .43        (.32)       (.21)        .11         .39
                                                                -------     -------     -------     -------     -------
                       Total from investment operations .....       .93         .18         .27         .63         .95
                                                                -------     -------     -------     -------     -------
                       Less dividends and distributions:
                         Investment income -- net ...........      (.50)       (.50)       (.48)       (.52)       (.56)
                         In excess of realized gain on
                         investments -- net .................        --         --+        (.05)         --          --
                                                                -------     -------     -------     -------     -------
                       Total dividends and distributions ....      (.50)       (.50)       (.53)       (.52)       (.56)
                                                                -------     -------     -------     -------     -------
                       Net asset value, end of year .........   $ 10.64     $ 10.21     $ 10.53     $ 10.79     $ 10.68
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Total Investment       Based on net asset value per share ...     9.32%       1.96%       2.50%       6.00%       9.51%
Return:*                                                        =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average      Expenses, net of reimbursement .......      .87%        .77%        .84%        .77%        .52%
Net Assets:                                                     =======     =======     =======     =======     =======
                       Expenses .............................      .97%        .87%        .94%        .89%        .92%
                                                                =======     =======     =======     =======     =======
                       Investment income -- net .............     4.80%       4.98%       4.43%       4.79%       5.38%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Supplemental           Net assets, end of year (in thousands)   $ 6,951     $ 6,905     $ 9,013     $ 8,855     $ 8,380
Data:                                                           =======     =======     =======     =======     =======
                       Portfolio turnover ...................    57.42%      85.68%      47.62%      53.99%      32.46%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------

                 *     Total investment returns exclude the effects of sales
                       charges.
                 +     Amount is less than $.01 per share.

                      See Notes to Financial Statements.

12


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                       Class B
                                                                -------------------------------------------------------
                                                                              For the Year Ended July 31,
                                                                -------------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001        2000       1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------
                                                                                              
Per Share              Net asset value, beginning of year ...   $ 10.21     $ 10.53     $ 10.79     $ 10.68     $ 10.29
Operating                                                       -------     -------     -------     -------     -------
Performance:           Investment income -- net .............       .45         .45         .43         .46         .51
                       Realized and unrealized gain (loss) on
                       investments -- net ...................       .43        (.32)       (.21)        .11         .39
                                                                -------     -------     -------     -------     -------
                       Total from investment operations .....       .88         .13         .22         .57         .90
                                                                -------     -------     -------     -------     -------
                       Less dividends and distributions:
                         Investment income -- net ...........      (.45)       (.45)       (.43)       (.46)       (.51)
                         In excess of realized gain on
                         investments -- net .................        --         --+        (.05)         --          --
                                                                -------     -------     -------     -------     -------
                       Total dividends and distributions ....      (.45)       (.45)       (.48)       (.46)       (.51)
                                                                -------     -------     -------     -------     -------
                       Net asset value, end of year .........   $ 10.64     $ 10.21     $ 10.53     $ 10.79     $ 10.68
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Total Investment       Based on net asset value per share ...     8.77%       1.45%       1.99%       5.47%       8.96%
Return:*                                                        =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average      Expenses, net of reimbursement .......     1.38%       1.27%       1.35%       1.27%       1.02%
Net Assets:                                                     =======     =======     =======     =======     =======
                       Expenses .............................     1.48%       1.37%       1.45%       1.40%       1.43%
                                                                =======     =======     =======     =======     =======
                       Investment income -- net .............     4.29%       4.48%       3.93%       4.28%       4.87%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Supplemental           Net assets, end of year (in thousands)   $41,669     $34,989     $41,835     $41,964     $35,563
Data:                                                           =======     =======     =======     =======     =======
                       Portfolio turnover ...................    57.42%      85.68%      47.62%      53.99%      32.46%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------


                 *     Total investment returns exclude the effects of sales
                       charges.
                 +     Amount is less than $.01 per share.

                      See Notes to Financial Statements.

13


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                       Class C
                                                                -------------------------------------------------------
                                                                              For the Year Ended July 31,
                                                                -------------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001        2000       1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------
                                                                                              
Per Share              Net asset value, beginning of year ...   $ 10.22     $ 10.53     $ 10.80     $ 10.69     $ 10.30
Operating                                                       -------     -------     -------     -------     -------
Performance:           Investment income -- net .............       .44         .44         .41         .45         .50

                       Realized and unrealized gain (loss) on
                       investments -- net                           .42        (.31)       (.22)        .11         .39
                                                                -------     -------     -------     -------     -------
                       Total from investment operations .....       .86         .13         .19         .56         .89
                                                                -------     -------     -------     -------     -------
                       Less dividends and distributions:
                         Investment income -- net ...........      (.44)       (.44)       (.41)       (.45)       (.50)
                         In excess of realized gain on
                          investments -- net ................        --         --+        (.05)         --          --
                                                                -------     -------     -------     -------     -------
                       Total dividends and distributions ....      (.44)       (.44)       (.46)       (.45)       (.50)
                                                                -------     -------     -------     -------     -------
                       Net asset value, end of year .........   $ 10.64     $ 10.22     $ 10.53     $ 10.80     $ 10.69
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Total Investment       Based on net asset value per share ...     8.56%       1.45%       1.79%       5.36%       8.84%
Return:*                                                        =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average      Expenses, net of reimbursement .......     1.47%       1.37%       1.45%       1.37%       1.12%
Net Assets:                                                     =======     =======     =======     =======     =======
                       Expenses .............................     1.57%       1.47%       1.55%       1.50%       1.53%
                                                                =======     =======     =======     =======     =======
                       Investment income -- net .............     4.20%       4.38%       3.82%       4.17%       4.77%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Supplemental           Net assets, end of year (in thousands)   $ 5,690     $ 5,085     $ 6,837     $ 4,399     $ 2,016
Data:                                                           =======     =======     =======     =======     =======
                       Portfolio turnover ...................    57.42%      85.68%      47.62%      53.99%      32.46%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------


                 *     Total investment returns exclude the effects of sales
                       charges.
                 +     Amount is less than $.01 per share.

                      See Notes to Financial Statements.

14


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)

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



                                                                                       Class D
                                                                -------------------------------------------------------
                                                                              For the Year Ended July 31,
                                                                -------------------------------------------------------
Increase (Decrease) in Net Asset Value:                           2001        2000       1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------
                                                                                              
Per Share              Net asset value, beginning of year ...   $ 10.21     $ 10.53     $ 10.79     $ 10.68     $ 10.29
Operating                                                       -------     -------     -------     -------     -------
Performance:           Investment income -- net .............       .49         .49         .47         .51         .55

                       Realized and unrealized gain (loss) on
                         investments -- net .................       .43        (.32)       (.21)        .11         .39
                                                                -------     -------     -------     -------     -------
                       Total from investment operations .....       .92         .17         .26         .62         .94
                                                                -------     -------     -------     -------     -------
                       Less dividends and distributions:
                         Investment income -- net ...........      (.49)       (.49)       (.47)       (.51)       (.55)
                         In excess of realized gain on
                         investments -- net .................        --         --+        (.05)         --          --
                                                                -------     -------     -------     -------     -------
                       Total dividends and distributions ....      (.49)       (.49)       (.52)       (.51)       (.55)
                                                                -------     -------     -------     -------     -------
                       Net asset value, end of year .........   $ 10.64     $ 10.21     $ 10.53     $ 10.79     $ 10.68
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Total Investment       Based on net asset value per share ...     9.21%       1.86%       2.40%       5.90%       9.40%
Return:*                                                        =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average      Expenses, net of reimbursement .......      .97%        .87%        .95%        .87%        .62%
Net Assets:                                                     =======     =======     =======     =======     =======
                       Expenses .............................     1.07%        .97%       1.05%        .99%       1.03%
                                                                =======     =======     =======     =======     =======
                       Investment income -- net .............     4.71%       4.88%       4.32%       4.67%       5.27%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------
Supplemental           Net assets, end of year (in thousands)   $ 5,778     $ 5,723     $ 7,182     $ 4,634     $ 3,440
Data:                                                           =======     =======     =======     =======     =======
                       Portfolio turnover ...................    57.42%      85.68%      47.62%      53.99%      32.46%
                                                                =======     =======     =======     =======     =======
- -----------------------------------------------------------------------------------------------------------------------


                 *     Total investment returns exclude the effects of sales
                       charges.
                 +     Amount is less than $.01 per share.

                      See Notes to Financial Statements.

15


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:

Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is part of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. The
Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM)
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.

(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

16


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effective August 1, 2001, as now required under the new AICPA Audit
and Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund, but
will result in a $1,603 increase to the cost of securities and a corresponding
$1,603 decrease to net unrealized appreciation, based on debt securities held as
of July 31, 2001.

(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses.

(f) Expenses -- Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.

2. Investment Advisory Agreement and Transactions with Affiliates:

The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion. For the year ended July 31, 2001, FAM earned fees of $306,589, of which
$55,743 was waived.

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

- --------------------------------------------------------------------------------
                                                     Account        Distribution
                                                 Maintenance Fee         Fee
- --------------------------------------------------------------------------------
   Class B ...........................               .25%               .25%
   Class C ...........................               .25%               .35%
   Class D ...........................               .10%                --
- --------------------------------------------------------------------------------

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

- --------------------------------------------------------------------------------
                                                       FAMD               MLPF&S
- --------------------------------------------------------------------------------
   Class A....................                        $   12             $   112
   Class D....................                        $1,137             $11,721
- --------------------------------------------------------------------------------

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $20,679 and $2,045 relating to transactions in Class B and Class C
Shares, respectively.

17


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $22,891 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:

Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $33,308,103 and $30,472,888, respectively.

Net realized gains for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:

- --------------------------------------------------------------------------------
                                                   Realized           Unrealized
                                                    Gains                Gains
- --------------------------------------------------------------------------------
Long-term investments ..................           $516,059           $3,056,600
                                                   --------           ----------
Total ..................................           $516,059           $3,056,600
                                                   ========           ==========
- --------------------------------------------------------------------------------

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $3,056,600, all of which related to appreciated securities. The
aggregate cost of investments at July 31, 2001 for Federal income tax purposes
was $56,448,268.

4. Beneficial Interest Transactions:

Net increase (decrease) in net assets derived from beneficial interest
transactions was $5,133,648 and $(10,139,562) for the years ended July 31, 2001
and July 31, 2000, respectively.

Transactions in shares of beneficial interest for each class were as follows:

- -------------------------------------------------------------------------------
Class A Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ...............................          79,988         $   841,373
Shares issued to shareholders
in reinvestment of dividends ..............          17,087             178,697
                                                   --------         -----------
Total issued ..............................          97,075           1,020,070
Shares redeemed ...........................        (119,790)         (1,253,694)
                                                   --------         -----------
Net decrease ..............................         (22,715)        $  (233,624)
                                                   ========         ===========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Class A Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ...............................         357,483         $ 3,550,217
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          17,160             172,742
                                                   --------         -----------
Total issued ..............................         374,643           3,722,959
Shares redeemed ...........................        (554,681)         (5,569,792)
                                                   --------         -----------
Net decrease ..............................        (180,038)        $(1,846,833)
                                                   ========         ===========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Class B Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ..............................         906,482         $  9,497,430
Shares issued to shareholders
in reinvestment of dividends .............          62,130              649,933
                                                  --------         ------------
Total issued .............................         968,612           10,147,363
Automatic conversion
of shares ................................         (20,147)            (210,874)
Shares redeemed ..........................        (457,429)          (4,773,831)
                                                  --------         ------------
Net increase .............................         491,036         $  5,162,658
                                                  =========        ============
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Class B Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ............................           482,146         $  4,862,485
Shares issued to shareholders
in reinvestment of dividends
and distributions ......................            69,552              700,564
                                                ----------         ------------
Total issued ...........................           551,698            5,563,049
Automatic conversion
of shares ..............................            (3,927)             (39,270)
Shares redeemed ........................        (1,096,134)         (11,034,355)
                                                ----------         ------------
Net decrease ...........................          (548,363)        $ (5,510,576)
                                                ==========         ============
- -------------------------------------------------------------------------------

18


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

- -------------------------------------------------------------------------------
Class C Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ...............................         111,352         $ 1,162,959
Shares issued to shareholders
in reinvestment of dividends ..............          16,381             171,515
                                                    -------         -----------
Total issued ..............................         127,733           1,334,474
Shares redeemed ...........................         (90,819)           (950,510)
                                                    -------         -----------
Net increase ..............................          36,914         $   383,964
                                                    =======         ===========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Class C Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ...............................          64,189         $   655,144
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          16,553             166,836
                                                   --------         -----------
Total issued ..............................          80,742             821,980
Shares redeemed ...........................        (232,226)         (2,376,794)
                                                   --------         -----------
Net decrease ..............................        (151,484)        $(1,554,814)
                                                   ========         ===========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Class D Shares for the Year                                            Dollar
Ended July 31, 2001                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ...............................          50,783         $   533,553
Automatic conversion
of shares .................................          20,144             210,874
Shares issued to shareholders
in reinvestment of dividends ..............          13,444             140,686
                                                   --------         -----------
Total issued ..............................          84,371             885,113
Shares redeemed ...........................        (101,574)         (1,064,463)
                                                   --------         -----------
Net decrease ..............................         (17,203)        $  (179,350)
                                                   ========         ===========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Class D Shares for the Year                                            Dollar
Ended July 31, 2000                                 Shares             Amount
- -------------------------------------------------------------------------------
Shares sold ...............................          77,052         $   776,250
Automatic conversion
of shares .................................           3,927              39,270
Shares issued to shareholders
in reinvestment of dividends
and distributions .........................          14,641             147,528
                                                   --------         -----------
Total issued ..............................          95,620             963,048
Shares redeemed ...........................        (217,531)         (2,190,387)
                                                   --------         -----------
Net decrease ..............................        (121,911)        $(1,227,339)
                                                   ========         ===========
- -------------------------------------------------------------------------------

5. Short-Term Borrowings:

On December 1, 2000, the Fund, along with certain other funds managed by MLIM
and its affiliates, renewed and amended a $1,000,000,000 credit agreement with
Bank One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

6. Capital Loss Carryforward:

At July 31, 2001, the Fund had a net capital loss carryforward of approximately
$1,060,000, of which $723,000 expires in 2008 and $337,000 expires in 2009. This
amount will be available to offset like amounts of any future taxable gains.

19


Merrill Lynch Connecticut Municipal Bond Fund                      July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Connecticut Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial high lights for each of the years presented. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
New York, New York
September 10, 2001

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Connecticut Municipal Bond Fund during its taxable year ended July 31, 2001
qualify as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

20


[LOGO] Merrill Lynch Investment Managers
                                                               [GRAPHIC OMITTED]

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Connecticut
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

EX-99.17O

                                                                   EXHIBIT 17(o)

(BULL LOGO)
Merrill Lynch Investment Managers

Annual Report
July 31, 2001

Merrill Lynch
Maryland Municipal
Bond Fund

www.mlim.ml.com

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Maryland
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

Printed on post-consumer recycled paper


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

DEAR SHAREHOLDER

The Municipal Market Environment
In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels.

However, during June and July 2001, both institutional and retail investor
demand for tax-exempt securities significantly increased. For the remainder of
the period, the municipal bond market was able to respond positively to this
increased demand and long-term tax-exempt bond yields declined to 5.40% by July
31, 2001, a five basis point decline in long-term municipal bond yields from
January 2001 levels.

                                     Page 2


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term tax-
exempt bonds was issued, an increase of more than 40% compared to the same 12-
month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June 2001 and July 2001.
Given continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally, short-
term municipal interest rates moved lower in response to the easier Federal
Reserve Board monetary policy. Seasonal tax pressures kept short-term interest
rates artificially high, although not as high as in recent years. As these
pressures abated, short-term municipal interest rates declined to approximately
2.5%. As interest rates declined, investors extended maturities to take
advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. Given the strong technical position of the
municipal bond market, however, the tax-exempt market is likely to continue to
outperform its taxable counterpart in the near future.

Fiscal Year in Review
For the 12 months ended July 31, 2001, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +9.43%, +8.88%, +8.87% and +9.44%,
respectively. This compares to the +10.08% return of the unmanaged benchmark
Lehman Brothers Municipal Bond Index for the same period. However, the total
return performance for the Fund was above the Lipper, Inc. average of other
Maryland tax-exempt mutual funds. (Fund results shown do not reflect sales
charges and would be lower if sales charges were included. Complete performance
information can be found on pages 4 - 5 of this report to shareholders.)

                                     Page 3


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

For the first six months of the fiscal year ended July 31, 2001, we continued
our strategy of seeking to reduce the Fund's volatility. With signs of a decline
in US economic growth and consumer confidence, a significant decline in Maryland
municipal bond interest rates began in November 2000 and continued through March
2001. As interest rates declined, we maintained our strategy of selling interest
rate-sensitive issues. With the proceeds, we purchased bonds with a maturity
range of 15 years - 20 years.

By mid-April 2001, yields began to rise in reaction to both higher energy and
equity prices. In anticipation of weaker economic news and strong retail demand,
as well as large June and July interest payments, we began to extend the Fund's
duration by purchasing interest rate-sensitive bonds. In June and July 2001,
interest rates declined slowly because of weak economic conditions and strong
retail demand. Recently, we shifted the Fund back into a neutral position. Going
forward, we intend to remain fully invested in an effort to enhance shareholder
income.

In Conclusion
We appreciate your ongoing interest in Merrill Lynch Maryland Municipal Bond
Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.


Sincerely,

(Terry K. Glenn)
Terry K. Glenn
President and Trustee

(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President

(Robert D. Sneeden)
Robert D. Sneeden
Vice President and Portfolio Manager

September 5, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Robert D. Sneeden, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary


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


Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

                                     Page 4


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:

* Class A Shares incur a maximum initial sales charge (front-end load) of 4% and
bear no ongoing distribution or account maintenance fees. Class A Shares are
available only to eligible investors.

* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are subject to a distribution
fee of 0.25% and an account maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)

* Class C Shares are subject to a distribution fee of 0.35% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.

* Class D Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.10% (but no distribution fee).

None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in the "Recent Performance Results" and "Average Annual Total
Return" tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders. The Fund's
Investment Adviser voluntarily waived a portion of its management fee. Without
such waiver, the Fund's performance would have been lower.

Average Annual Total Return

                                    % Return Without   % Return With
                                      Sales Charge     Sales Charge**
Class A Shares*

One Year Ended 6/30/01                    +9.75%          +5.36%
Five Years Ended 6/30/01                  +6.19%          +5.32%
Inception (10/29/93) through 6/30/01      +4.73%          +4.18%

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

                                       % Return          % Return
                                      Without CDSC       With CDSC
Class B Shares*

One Year Ended 6/30/01                    +9.20%          +5.20%
Five Years Ended 6/30/01                  +5.65%          +5.65%
Inception (10/29/93) through 6/30/01      +4.20%          +4.20%

*  Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
** Assuming payment of applicable contingent deferred sales charge.

                                       % Return          % Return
                                      Without CDSC       With CDSC
Class C Shares*
One Year Ended 6/30/01                    +8.97%          +7.97%
Five Years Ended 6/30/01                  +5.52%          +5.52%
Inception (10/21/94) through 6/30/01      +6.01%          +6.01%

*  Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
** Assuming payment of applicable contingent deferred sales charge.

                                    % Return Without   % Return With
                                      Sales Charge     Sales Charge**
Class D Shares*
One Year Ended 6/30/01                    +9.64%          +5.25%
Five Years Ended 6/30/01                  +6.08%          +5.22%
Inception (10/21/94) through 6/30/01      +6.56%          +5.91%

*  Maximum sales charge is 4%.
** Assuming maximum sales charge.

                                     Page 5


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

PERFORMANCE DATA (concluded)

Total Return Based on a $10,000 Investment

A line graphic illustrating the growth of a $10,000 investment in Merrill Lynch
Maryland Municipal Bond Fund++ Class A and Class B Shares* compared to a similar
investment in Lehman Brothers Municipal Bond Index++++. Values illustrated are
as follows:

Merrill Lynch Maryland Municipal Bond Fund++
Class A Shares*

DATE                        VALUE

10/29/1993**              $ 9,600.00
July 1994                 $ 9,186.00
July 1995                 $ 9,681.00
July 1996                 $10,247.00
July 1997                 $11,308.00
July 1998                 $12,038.00
July 1999                 $12,263.00
July 2000                 $12,654.00
July 2001                 $13,847.00

Merrill Lynch Maryland Municipal Bond Fund++
Class B Shares*

DATE                        VALUE

10/29/1993**              $10,000.00
July 1994                 $ 9,532.00
July 1995                 $10,005.00
July 1996                 $10,524.00
July 1997                 $11,554.00
July 1998                 $12,238.00
July 1999                 $12,404.00
July 2000                 $12,735.00
July 2001                 $13,866.00

Lehman Brothers Municipal Bond Index++++

DATE                        VALUE

10/29/1993**              $10,000.00
July 1994                 $ 9,848.00
July 1995                 $10,623.00
July 1996                 $11,324.00
July 1997                 $12,485.00
July 1998                 $13,233.00
July 1999                 $13,614.00
July 2000                 $14,201.00
July 2001                 $15,632.00

A line graphic illustrating the growth of a $10,000 investment in Merrill Lynch
Maryland Municipal Bond Fund++ Class C and Class D Shares* compared to a similar
investment in Lehman Brothers Municipal Bond Index++++. Values illustrated are
as follows:

Merrill Lynch Maryland Municipal Bond Fund++
Class C Shares*

DATE                        VALUE

10/21/1994**              $10,000.00
July 1995                 $10,851.00
July 1996                 $11,413.00
July 1997                 $12,517.00
July 1998                 $13,230.00
July 1999                 $13,397.00
July 2000                 $13,741.00
July 2001                 $14,960.00

Merrill Lynch Maryland Municipal Bond Fund++
Class D Shares*

DATE                        VALUE

10/21/1994**              $ 9,600.00
July 1995                 $10,458.00
July 1996                 $11,047.00
July 1997                 $12,178.00
July 1998                 $12,951.00
July 1999                 $13,167.00
July 2000                 $13,574.00
July 2001                 $14,855.00

Lehman Brothers Municipal Bond Index++++

DATE                        VALUE

10/21/1994**              $10,000.00
July 1995                 $11,107.00
July 1996                 $11,840.00
July 1997                 $13,054.00
July 1998                 $13,836.00
July 1999                 $14,234.00
July 2000                 $14,848.00
July 2001                 $16,344.00

*   Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**  Commencement of operations.
++  ML Maryland Municipal Bond Fund invests primarily in long-term investment-
grade obligations issued by or on behalf of the state of Maryland, its political
subdivisions, agencies and instrumentalities and obligations of other qualifying
issuers.
++++ This unmanaged Index consists of long-term revenue bonds, prerefunded
bonds, general obligation bonds and insured bonds. The starting date for the
Index in the Class C &Class D Shares' graph is from 10/31/94.
Past performance is not predictive of future performance.

Recent Performance Results*



                                                    6-Month         12-Month    Since Inception    Standardized
As of July 31, 2001                               Total Return    Total Return    Total Return     30-Day Yield
                                                                                       
ML Maryland Municipal Bond Fund Class A Shares        +3.34%          +9.43%         +44.25%            3.71%
ML Maryland Municipal Bond Fund Class B Shares        +2.98           +8.88          +38.66             3.36
ML Maryland Municipal Bond Fund Class C Shares        +3.03           +8.87          +49.59             3.25
ML Maryland Municipal Bond Fund Class D Shares        +3.29           +9.44          +54.73             3.61


* Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the ex-
dividend date. The Fund's inception dates are from 10/29/93 for Class A & Class
B Shares and from 10/21/94 for Class C & Class D Shares.

                                     Page 6


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001



SCHEDULE OF INVESTMENTS                                                                                      (in Thousands)
S&P      Moody's    Face
Ratings  Ratings   Amount                             Issue                                                      Value
                                                                                                 
Maryland--87.0%
NR*      NR*      $  500    Anne Arundel County, Maryland, Special Obligation Revenue Bonds
                            (Arundel Mills Project), 7.10% due 7/01/2029                                         $   537

AA       Aa2         600    Carroll County, Maryland, GO (County Commissioners--Consolidated
                            Public Improvement), 6.50% due 10/01/2024                                                654

AAA      Aaa       1,000    Maryland State and Local Facilities Loan, GO, First Series,
                            5.50% due 3/01/2010                                                                    1,103

NR*      Aa2       1,000    Maryland State Community Development Administration, Department of
                            Housing and Community Development, Housing Revenue Bonds, AMT,
                            Series B, 6.15% due 1/01/2021                                                          1,046

NR*      Aa2       1,250    Maryland State Community Development Administration, Department of
                            Housing and Community Development, Residential Revenue Refunding Bonds,
                            Series A, 5.60% due 3/01/2017 (c)                                                      1,300

NR*      Aaa       1,000    Maryland State Community Development Administration, Department of
                            Housing and Community Development Revenue Bonds (Waters Landing II
                            Apartments), AMT, Series A, 5.875% due 8/01/2033                                       1,043

                            Maryland State Community Development Administration, Department of
                            Housing and Community Development Revenue Refunding Bonds, S/F Program:
NR*      Aa2         500      4th Series, 6.45% due 4/01/2014                                                        516
NR*      Aa2         250      6th Series, 7.05% due 4/01/2017                                                        259

NR*      NR*         445    Maryland State Economic Development Corporation Revenue Bonds
                            (Health and Mental Hygiene Program), Series A, 7.125% due 3/01/2006                      454

AAA      Aaa       1,000    Maryland State Economic Development Corporation, Utility Infrastructure
                            Revenue Bonds (University of Maryland-College Park Project), 5.375%
                            due 7/01/2015 (a)                                                                      1,059

                            Maryland State Energy Financing Administration, Solid Waste Disposal
                            Revenue Bonds, AMT:
A1+      VMIG1++   1,100      (Cimenteries Project), VRDN, 2.85% due 5/01/2035 (j)                                 1,100
A-       NR*       1,000      Limited Obligation (Wheelabrator Water Projects), 6.45% due 12/01/2016               1,056

                            Maryland State Health and Higher Educational Facilities Authority
                            Revenue Bonds:
AA       Aa2         850      (John's Hopkins University Issue), 6% due 7/01/2039                                    930
AAA      Aaa         625      (University of Maryland Medical System), Series B, 7% due 7/01/2022 (b)                789

                            Maryland State Health and Higher Educational Facilities Authority,
                            Revenue Refunding Bonds:
AAA      Aaa       1,470      (Maryland General Hospital), 6.125% due 7/01/2019 (g)                                1,580
NR*      NR*         900      (Memorial Hospital of Cumberland), 6.50% due 7/01/2004 (h)                             982

NR*      Aa3       1,000    Maryland State Industrial Development Financing Authority, Revenue
                            Refunding Bonds (American Center for Physics Facility), 5.25% due 12/15/2014           1,056


PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Maryland Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.

AMT        Alternative Minimum Tax (subject to)
GO         General Obligation Bonds
PCR        Pollution Control Revenue Bonds
RITR       Residual Interest Trust Receipts
S/F        Single-Family
STRIPES    Short-Term Rate Inverse Payment Exempt Securities
VRDN       Variable Rate Demand Notes

                                     Page 7


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001



SCHEDULE OF INVESTMENTS (concluded)                                                                       (in Thousands)
S&P      Moody's    Face
Ratings  Ratings   Amount                             Issue                                                      Value
                                                                                              
Maryland (concluded)
                            Maryland Water Quality Financing Administration, Revolving Loan Fund
                            Revenue Bonds, Series A:
AA       Aa2      $  300      6.375% due 9/01/2010                                                               $   326
AA       Aa2         500      6.55% due 9/01/2014                                                                    524

NR*      Aa2         430    Montgomery County, Maryland, Housing Opportunities Commission, S/F
                            Mortgage Revenue Refunding Bonds, Series A, 5.75% due 7/01/2013                          459

AAA      Aaa         500    Montgomery County, Maryland, Parking Authority Revenue Refunding Bonds
                            (Silver Spring Parking Lot), Series A, 6.25% due 6/01/2009 (b)                           524

NR*      Baa3      1,000    Montgomery County, Maryland, Revenue Authority, Golf Course System
                            Revenue Bonds, Series A, 6.125% due 10/01/2022                                         1,005

NR*      A2        1,500    Northeast Maryland, Waste Disposal Authority, Solid Waste Revenue Bonds
                            (Montgomery County Resource Recovery Project), AMT, Series A, 6.30%
                            due 7/01/2016                                                                          1,564

AAA      NR*         500    Prince Georges County, Maryland, Housing Authority, Mortgage Revenue
                            Refunding Bonds (Parker Apartments Project), Series A, 7.25%
                            due 11/20/2016 (f)                                                                       521

AAA      NR*         645    Prince Georges County, Maryland, Housing Authority, S/F Mortgage Revenue
                            Bonds, AMT, Series A, 6.60% due 12/01/2025 (d)                                           666

A        A1        1,500    Prince Georges County, Maryland, PCR, Refunding (Potomac Electric Project),
                            5.75% due 3/15/2010                                                                    1,669

AA+      Aa3       1,000    University of Maryland, System Auxiliary Facility and Tuition Revenue Bonds,
                            Series A, 5.75% due 10/01/2019                                                         1,080

Puerto Rico--15.4%
AAAr     Aaa         500    Puerto Rico Commonwealth, GO, Refunding, RITR, Class R, Series 3,
                            8.616% due 7/01/2016 (g)(i)                                                              581

A1+      VMIG1++   1,100    Puerto Rico Commonwealth, Highway and Transportation Authority,
                            Transportation Revenue Refunding Bonds, VRDN, Series A, 2.50%
                            due 7/01/2028 (a)(j)                                                                   1,100

AAA      Aaa         400    Puerto Rico Electric Power Authority, Power Revenue Bonds, STRIPES,
                            Series T, 8.524% due 7/01/2005 (e)(i)                                                    456

AAA      Aaa       1,000    Puerto Rico Public Financing Corporation Revenue Bonds (Commonwealth
                            Appropriation), Series A, 5.50% due 8/01/2019 (g)                                      1,063

AAA      Aaa       1,000    University of Puerto Rico, University Revenue Refunding Bonds,
                            Series O, 5.375% due 6/01/2030 (g)                                                     1,015

Total Investments (Cost--$26,734)--102.4%                                                                         28,017
Liabilities in Excess of Other Assets--(2.4)%                                                                       (644)
                                                                                                                 -------
Net Assets--100.0%                                                                                               $27,373
                                                                                                                 =======


(a) AMBAC Insured.
(b) FGIC Insured.
(c) FHA Insured.
(d) FNMA/GNMA Collateralized.
(e) FSA Insured.
(f) GNMA Collateralized.
(g) MBIA Insured.
(h) Prerefunded.
(i) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at July
31, 2001.
(j) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31, 2001.
*  Not Rated.
++ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.

See Notes to Financial Statements.

                                     Page 8


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001

                                                                                                  
Assets:           Investments, at value (identified cost--$26,734,414)                                     $  28,017,354
                  Cash                                                                                            79,683
                  Receivables:
                    Interest                                                             $    337,306
                    Beneficial interest sold                                                   93,615            430,921
                                                                                         ------------
                  Prepaid expenses and other assets                                                               10,174
                                                                                                           -------------
                  Total assets                                                                                28,538,132
                                                                                                           -------------

Liabilities:      Payables:
                    Securities purchased                                                    1,046,170
                    Dividends to shareholders                                                  22,793
                    Beneficial interest redeemed                                               15,641
                    Distributor                                                                10,008
                    Investment adviser                                                          5,557          1,100,169
                                                                                         ------------
                  Accrued expenses and other liabilities                                                          65,275
                                                                                                           -------------
                  Total liabilities                                                                            1,165,444
                                                                                                           -------------
Net Assets:       Net assets                                                                               $  27,372,688
                                                                                                           =============

Net Assets        Class A Shares of beneficial interest, $.10 par value,
Consist of:       unlimited number of shares authorized                                                    $      18,183
                  Class B Shares of beneficial interest, $.10 par value,
                  unlimited number of shares authorized                                                          220,193
                  Class C Shares of beneficial interest, $.10 par value,
                  unlimited number of shares authorized                                                           22,407
                  Class D Shares of beneficial interest, $.10 par value,
                  unlimited number of shares authorized                                                           17,561
                  Paid-in capital in excess of par                                                            26,992,517
                  Accumulated realized capital losses on investments--net                                     (1,181,113)
                  Unrealized appreciation on investments--net                                                  1,282,940
                                                                                                           -------------
                  Net assets                                                                               $  27,372,688
                                                                                                           =============

Net Asset         Class A--Based on net assets of $1,787,697 and 181,828 shares
Value:            of beneficial interest outstanding                                                       $        9.83
                                                                                                           =============
                  Class B--Based on net assets of $21,654,595 and 2,201,932 shares
                  of beneficial interest outstanding                                                       $        9.83
                                                                                                           =============
                  Class C--Based on net assets of $2,204,220 and 224,069 shares of
                  beneficial interest outstanding                                                          $        9.84
                                                                                                           =============
                  Class D--Based on net assets of $1,726,176 and 175,609 shares of
                  beneficial interest outstanding                                                          $        9.83
                                                                                                           =============



See Notes to Financial Statements.

                                     Page 9


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION (continued)

Statement of Operations



                                                                                                      For the Year Ended
                                                                                                           July 31, 2001
                                                                                             
Investment        Interest and amortization of premium and discount earned                                 $   1,402,350
Income:

Expenses:         Investment advisory fees                                               $    137,485
                  Account maintenance and distribution fees--Class B                          100,298
                  Professional fees                                                            71,074
                  Printing and shareholder reports                                             50,557
                  Accounting services                                                          37,336
                  Transfer agent fees--Class B                                                 14,471
                  Account maintenance and distribution fees--Class C                           12,001
                  Trustees' fees and expenses                                                   7,519
                  Registration fees                                                             6,745
                  Pricing fees                                                                  5,475
                  Custodian fees                                                                2,248
                  Transfer agent fees--Class C                                                  1,521
                  Account maintenance fees--Class D                                             1,246
                  Transfer agent fees--Class A                                                  1,063
                  Transfer agent fees--Class D                                                    798
                  Other                                                                         6,526
                                                                                         ------------
                  Total expenses before reimbursement                                         456,363
                  Reimbursement of expenses                                                   (74,992)
                                                                                         ------------
                  Total expenses after reimbursement                                                             381,371
                                                                                                           -------------
                  Investment income--net                                                                       1,020,979
                                                                                                           -------------

Realized &        Realized loss on investments--net                                                              (4,036)
Unrealized        Change in unrealized appreciation on investments--net                                        1,130,641
Gain (Loss) on                                                                                             -------------
Investments       Net Increase in Net Assets Resulting from Operations--Net:                               $   2,147,584
                                                                                                           =============


See Notes to Financial Statements.

                                    Page 10


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets



                                                                                            For the Year Ended July 31,
Increase (Decrease) in Net Assets:                                                           2001               2000
                                                                                                  
Operations:       Investment income--net                                                 $  1,020,979      $   1,140,036
                  Realized gain (loss) on investments--net                                     (4,036)           142,647
                  Change in unrealized appreciation on investments--net                     1,130,641           (769,630)
                                                                                         ------------      -------------
                  Net increase in net assets resulting from operations                      2,147,584            513,053
                                                                                         ------------      -------------

Dividends to      Investment income--net:
Shareholders:       Class A                                                                   (77,095)           (94,113)
                    Class B                                                                  (810,020)          (900,913)
                    Class C                                                                   (78,780)           (96,299)
                    Class D                                                                   (55,084)           (48,711)
                                                                                         ------------       ------------
                  Net decrease in net assets resulting from dividends to shareholders      (1,020,979)        (1,140,036)
                                                                                         ------------       ------------

Beneficial        Net increase (decrease) in net assets derived from beneficial
Interest          interest transactions                                                     2,237,962         (6,301,598)
Transactions:                                                                            ------------       ------------

Net Assets:       Total increase (decrease) in net assets                                   3,364,567         (6,928,581)
                  Beginning of year                                                        24,008,121         30,936,702
                                                                                         ------------       ------------
                  End of year                                                            $ 27,372,688       $ 24,008,121
                                                                                         ============       ============


See Notes to Financial Statements.

                                    Page 11


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights

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



                                                                                          Class A
                                                                                For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                               2001      2000       1999        1998       1997
                                                                                              
Per Share           Net asset value, beginning of year             $   9.40   $   9.56   $   9.80    $   9.66   $   9.21
Operating                                                          --------   --------   --------    --------   --------
Performance:        Investment income--net                              .44        .45        .43         .47        .48
                    Realized and unrealized gain (loss)
                    on investments--net                                 .43       (.16)      (.24)        .14        .45
                                                                   --------   --------   --------    --------   --------
                    Total from investment operations                    .87        .29        .19         .61        .93
                                                                   --------   --------   --------    --------   --------
                    Less dividends from investment income--net         (.44)      (.45)      (.43)       (.47)      (.48)
                                                                   --------   --------   --------    --------   --------
                    Net asset value, end of year                   $   9.83   $   9.40   $   9.56    $   9.80   $   9.66
                                                                   ========   ========   ========    ========   ========

Total Investment    Based on net asset value per share                 9.43%      3.19%      1.87%       6.46%     10.35%
Return:*                                                           ========   ========   ========    ========   ========

Ratios to Average   Expenses, net of reimbursement                     1.06%       .91%       .94%        .73%       .47%
Net Assets:                                                        ========   ========   ========    ========   ========
                    Expenses                                           1.36%      1.21%      1.26%       1.21%      1.32%
                                                                   ========   ========   ========    ========   ========
                    Investment income--net                             4.56%      4.82%      4.35%       4.80%      5.11%
                                                                   ========   ========   ========    ========   ========

Supplemental        Net assets, end of year (in thousands)         $  1,788   $  1,771   $  2,309    $  2,303   $  1,928
Data:                                                              ========   ========   ========    ========   ========
                    Portfolio turnover                                37.69%     35.57%     30.98%      88.89%     94.90%
                                                                   ========   ========   ========    ========   ========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

                                    Page 12


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                               Class B
                                                                                     For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                               2001      2000       1999        1998       1997
                                                                                              
Per Share           Net asset value, beginning of year             $   9.40   $   9.56   $   9.80    $   9.66   $   9.21
Operating                                                          --------   --------   --------    --------   --------
Performance:        Investment income--net                              .39        .40        .38         .42        .43
                    Realized and unrealized gain (loss)
                    on investments--net                                 .43        (.16)      (.24)       .14        .45
                                                                   --------   --------   --------    --------   --------
                    Total from investment operations                    .82        .24        .14         .56        .88
                                                                   --------   --------   --------    --------   --------
                    Less dividends from investment income--net         (.39)      (.40)      (.38)       (.42)      (.43)
                                                                   --------   --------   --------    --------   --------
                    Net asset value, end of year                   $   9.83   $   9.40   $   9.56    $   9.80   $   9.66
                                                                   ========   ========   ========    ========   ========

Total Investment    Based on net asset value per share                 8.88%      2.67%      1.36%       5.92%      9.79%
Return:*                                                           ========   ========   ========    ========   ========

Ratios to Average   Expenses, net of reimbursement                    1.57%      1.42%      1.45%       1.23%       .97%
Net Assets:                                                        ========   ========   ========    ========   ========
                    Expenses                                           1.87%      1.72%      1.77%       1.72%      1.82%
                                                                   ========   ========   ========    ========   ========
                    Investment income--net                             4.04%      4.31%      3.84%       4.29%      4.59%
                                                                   ========   ========   ========    ========   ========

Supplemental        Net assets, end of year (in thousands)         $ 21,655   $ 19,257   $ 24,775    $ 23,306   $ 21,851
Data:                                                              ========   ========   ========    ========   ========
                    Portfolio turnover                                37.69%     35.57%     30.98%      88.89%     94.90%
                                                                   ========   ========   ========    ========   ========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

                                    Page 13


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



The following per share data and ratios
have been derived from information
provided in the financial statements.                                                          Class C
                                                                                     For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                               2001      2000       1999        1998       1997
                                                                                              
Per Share           Net asset value, beginning of year             $   9.40   $   9.56   $   9.80    $   9.67   $   9.22
Operating                                                          --------   --------   --------    --------   --------
Performance:        Investment income--net                              .38        .39        .37         .41        .42
                    Realized and unrealized gain (loss)
                    on investments--net                                 .44       (.16)      (.24)        .13        .45
                                                                   --------   --------   --------    --------   --------
                    Total from investment operations                    .82        .23        .13         .54        .87
                                                                   --------   --------   --------    --------   --------
                    Less dividends from investment income--net         (.38)      (.39)      (.37)       (.41)      (.42)
                                                                   --------   --------   --------    --------   --------
                    Net asset value, end of year                   $   9.84   $   9.40   $   9.56    $   9.80   $   9.67
                                                                   ========   ========   ========    ========   ========

Total Investment    Based on net asset value per share                 8.87%      2.57%      1.26%       5.70%      9.67%
Return:*                                                           ========   ========   ========    ========   ========

Ratios to Average   Expenses, net of reimbursement                     1.67%      1.52%      1.56%       1.34%      1.07%
Net Assets:                                                        ========   ========   ========    ========   ========
                    Expenses                                           1.97%      1.82%      1.88%       1.82%      1.92%
                                                                   ========   ========   ========    ========   ========
                    Investment income--net                             3.94%      4.19%      3.73%       4.19%      4.47%
                                                                   ========   ========   ========    ========   ========

Supplemental        Net assets, end of year (in thousands)         $  2,204   $  2,002   $  2,762    $  2,307   $  2,038
Data:                                                              ========   ========   ========    ========   ========
                    Portfolio turnover                                37.69%     35.57%     30.98%      88.89%     94.90%
                                                                   ========   ========   ========    ========   ========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

                                    Page 14


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)



The following per share data and ratios
have been derived from information
provided in the financial statements.                                                          Class D
                                                                                     For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                               2001      2000       1999        1998       1997
                                                                                              
Per Share           Net asset value, beginning of year             $   9.39   $   9.55   $   9.80    $   9.66   $   9.21
Operating                                                          --------   --------   --------    --------   --------
Performance:        Investment income--net                              .43        .44        .42         .46        .47
                    Realized and unrealized gain (loss)
                    on investments--net                                 .44       (.16)      (.25)        .14        .45
                                                                   --------   --------   --------    --------   --------
                    Total from investment operations                    .87        .28        .17         .60        .92
                                                                   --------   --------   --------    --------   --------
                    Less dividends from investment income--net         (.43)      (.44)      (.42)       (.46)      (.47)
                                                                   --------   --------   --------    --------   --------
                    Net asset value, end of year                   $   9.83   $   9.39   $   9.55    $   9.80   $   9.66
                                                                   ========   ========   ========    ========   ========

Total Investment    Based on net asset value per share                 9.44%      3.09%      1.67%       6.35%     10.24%
Return:*                                                           ========   ========   ========    ========   ========

Ratios to Average   Expenses, net of reimbursement                     1.17%      1.01%      1.04%        .83%       .56%
Net Assets:                                                        ========   ========   ========    ========   ========
                    Expenses                                           1.47%      1.31%      1.36%       1.31%      1.41%
                                                                   ========   ========   ========    ========   ========
                    Investment income--net                             4.42%      4.73%      4.25%       4.70%      5.00%
                                                                   ========   ========   ========    ========   ========

Supplemental        Net assets, end of year (in thousands)         $  1,726   $    978   $  1,091    $  1,107   $    883
Data:                                                              ========   ========   ========    ========   ========
                    Portfolio turnover                                37.69%     35.57%     30.98%      88.89%     94.90%
                                                                   ========   ========   ========    ========   ========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

                                    Page 15


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:
Merrill Lynch Maryland Municipal Bond Fund (the "Fund") is part of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM System. Shares
of Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The following
is a summary of significant accounting policies followed by the Fund.

(a)  Valuation of investments--Municipal bonds and other portfolio securities in
which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b)  Derivative financial instruments--The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

(d)  Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effective August 1, 2001, as now required under the new AICPA Audit
and Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund and no
cumulative adjustment will be necessary.

                                    Page 16


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

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

(f)  Expenses--Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.

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

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

For the year ended July 31, 2001, FAM earned fees of $137,485, of which $74,992
was waived.

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

                          Account
                        Maintenance      Distribution
                            Fee               Fee

Class B                     .25%             .25%
Class C                     .25%             .35%
Class D                     .10%              --

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

                            FAMD            MLPF&S

Class A                    $  6            $    94
Class D                    $787            $13,857

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $26,495 and $130 relating to transactions in Class B and Class C
Shares, respectively.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimbursed FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $6,025 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $10,558,626 and $8,914,608, respectively.

                                    Page 17


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

Net realized losses for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:

                                 Realized       Unrealized
                                  Losses           Gains

Long-term investments           $ (4,036)       $1,282,940
                                ---------       ----------
Total                           $ (4,036)       $1,282,940
                                =========       ==========

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $1,282,940, all of which related to appreciated securities. The
aggregate cost of investments at July 31, 2001 for Federal income tax purposes
was $26,734,414.

4.   Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $2,237,962 and $(6,301,598) for the years ended July 31, 2001
and July 31, 2000, respectively.

Transactions in shares of beneficial interest for each class were as follows:

Class A Shares for the Year                              Dollar
Ended July 31, 2001                       Shares         Amount

Shares sold                               31,145    $   301,715
Shares issued to shareholders
in reinvestment of dividends               6,063         58,465
                                       ---------    -----------
Total issued                              37,208        360,180
Shares redeemed                          (43,818)      (421,887)
                                       ---------    -----------
Net decrease                              (6,610)   $  (61,707)
                                       =========    ===========


Class A Shares for the Year                              Dollar
Ended July 31, 2000                       Shares         Amount

Shares sold                               22,974    $   212,144
Shares issued to shareholders
in reinvestment of dividends               7,384         68,253
                                       ---------    -----------
Total issued                              30,358        280,397
Shares redeemed                          (83,491)      (770,096)
                                       ---------    -----------
Net decrease                             (53,133)   $  (489,699)
                                       =========    ===========


Class B Shares for the Year                              Dollar
Ended July 31, 2001                       Shares         Amount

Shares sold                              494,598    $ 4,781,191
Shares issued to shareholders
in reinvestment of dividends              40,061        386,720
                                       ---------    -----------
Total issued                             534,659      5,167,911
Automatic conversion of shares            (6,035)       (57,570)
Shares redeemed                         (375,715)    (3,611,334)
                                       ---------    -----------
Net increase                             152,909    $ 1,499,007
                                       =========    ===========


Class B Shares for the Year                              Dollar
Ended July 31, 2000                       Shares         Amount

Shares sold                              188,466    $ 1,748,293
Shares issued to shareholders
in reinvestment of dividends              44,854        414,719
                                       ---------    -----------
Total issued                             233,320      2,163,012
Automatic conversion of shares            (8,236)       (77,454)
Shares redeemed                         (767,846)    (7,111,106)
                                       ---------    -----------
Net decrease                            (542,762)   $(5,025,548)
                                       =========    ===========


Class C Shares for the Year                              Dollar
Ended July 31, 2001                       Shares         Amount

Shares sold                               97,313    $   947,995
Shares issued to shareholders
in reinvestment of dividends               5,055         48,835
                                       ---------    -----------
Total issued                             102,368        996,830
Shares redeemed                          (91,301)      (887,476)
                                       ---------    -----------
Net increase                              11,067    $   109,354
                                       =========    ===========


Class C Shares for the Year                              Dollar
Ended July 31, 2000                       Shares         Amount

Shares sold                               43,483    $   404,543
Shares issued to shareholders
in reinvestment of dividends               5,911         54,716
                                       ---------    -----------
Total issued                              49,394        459,259
Shares redeemed                         (125,193)    (1,153,731)
                                       ---------    -----------
Net decrease                             (75,799)   $  (694,472)
                                       =========    ===========

                                    Page 18


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)


Class D Shares for the Year                              Dollar
Ended July 31, 2001                       Shares         Amount

Shares sold                               76,312    $   737,447
Automatic conversion of shares             6,041         57,570
Shares issued to shareholders
in reinvestment of dividends               2,801         27,069
                                       ---------    -----------
Total issued                              85,154        822,086
Shares redeemed                          (13,614)      (130,778)
                                       ---------    -----------
Net increase                              71,540    $   691,308
                                       =========    ===========


Class D Shares for the Year                              Dollar
Ended July 31, 2000                       Shares         Amount

Shares sold                                5,707    $    52,823
Automatic conversion of shares             8,237         77,454
Shares issued to shareholders
in reinvestment of dividends               2,785         25,730
                                       ---------    -----------
Total issued                              16,729        156,007
Shares redeemed                         ( 26,831)      (247,886)
                                       ---------    -----------
Net decrease                             (10,102)   $   (91,879)
                                       =========    ===========

5. Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

6. Capital Loss Carryforward:
At July 31, 2001, the Fund had a net capital loss carryforward of approximately
$1,111,000, of which $333,000 expires in 2003 and $778,000 expires in 2004. This
amount will be available to offset like amounts of any future taxable gains.

                                    Page 19


Merrill Lynch Maryland Municipal Bond Fund, July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Maryland Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.


Deloitte & Touche LLP
New York, New York
September 10, 2001


IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Maryland Municipal Bond Fund during its taxable year ended July 31, 2001 qualify
as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

                                    Page 20

EX-99.17P

                                                                   EXHIBIT 17(p)


[LOGO] Merrill Lynch Investment Managers

Annual Report
July 31, 2001

Merrill Lynch
Massachusetts
Municipal Bond Fund

www.mlim.ml.com


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

DEAR SHAREHOLDER

The Municipal Market Environment

In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to this increased demand and long-term tax-exempt bond
yields declined to 5.40% by July 31, 2001, a five

1


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

basis point decline in long-term municipal bond yields from January 2001 levels.

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appre ciable selling by retail
accounts. However, it was recently noted that thus far in 2001, net new cash
inflows into municipal bond mutual funds reached $4 billion. The same 12-month
period a year ago saw net new cash outflows of more than $13 billion. This
suggests that the positive technical structure of the municipal market remains
intact. Also, the months of June and July have tended to be periods of strong
retail demand in response to the large coupon income payments and proceeds from
bond maturities and early redemptions these months generated. Analysts estimated
that investors received more than $60 billion in such proceeds in June and July
2001. Given continued weak equity markets, much of these monies were reinvested
in tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates artificially high, although not as high as in recent years. As
these pressures abated, short-term municipal interest rates declined to
approximately 2.5%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. Given the strong technical position of the
municipal bond market, however, the tax-exempt market is likely to continue to
outperform its taxable counterpart in the near future.

Fiscal Year in Review

For the 12 months ended July 31, 2001, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +9.99%, +9.44%, +9.34% and +9.88%,
respectively. This compares to the +10.08% return of the unmanaged benchmark
Lehman Brothers Municipal Bond Index for the same period. The Fund's results
also fell slightly short of the Lipper, Inc. average of other Massachusetts
tax-exempt mutual funds. (Fund results shown do not reflect sales charges and
would be lower if sales charges were included. Complete performance information
can be found on pages 4 and 5 of this report to shareholders.)

Renewed demand for tax-exempt bonds by both retail and institutional investors
in recent months has more than offset the 28% increase in debt issuance by the
commonwealth and its many political subdivisions through the year just ended.
Amidst a generally favorable environment, we sought to enhance the Fund's return
to shareholders by maintaining a fully invested position for much of the Fund's
fiscal year. More specifically, our strategy was to capitalize on recent

2


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

trends in the tax-exempt market that included a significant shift in the term
structure of interest rates as well as a resurgent appetite for credit risk.

The Federal Reserve Board's aggressive campaign to revive a moribund economy has
prompted short-term interest rates to fall more sharply than long-term interest
rates, causing the term structure of interest rates to become more positively
sloped. Under these circumstances, the opportunity exists to leverage income
through the use of derivative securities designed to capitalize on historically
low borrowing costs as reflected in low short-term interest rates. While we have
utilized this strategy for some time, we felt that the present opportunity was
compelling enough to warrant increasing exposure further as a means to enhance
the Fund's distribution yield. In recognition of the greater volatility
associated with these products, great care was taken in selecting appropriate
underlying characteristics in order to limit the heightened degree of risk.
Furthermore, some of the Fund's more interest rate-sensitive holdings were sold
in recent months partly in order to realize gains from market appreciation, but
also to reduce the Fund's overall risk profile.

Another development arising from the Federal Reserve Board's aggressive shift in
monetary policy in January 2001 was the change in investor sentiment regarding
credit risk after more than a year of deteriorating valuations for
speculative-grade securities. Encouraged by prospects of steadily declining
short-term interest rates, fixed-income investors have demonstrated a renewed
appetite for both low investment-grade and speculative-grade credits in
anticipation of the stimulative effect of an easier monetary policy. Implicit in
the decision to reallocate asset weightings in this manner was the belief that
credit spreads already reflect current weak economic conditions. The
anticipatory nature of markets suggests that investors are looking beyond
present circumstances and are presently beginning to discount an eventual
economic rebound. As part of an effort to generate a competitive rate of return,
we maintained a modest degree of exposure to low investment-grade credits. Given
the improved climate for these types of investments, this exposure has provided
an incremental benefit to shareholders in the form of enhanced relative
performance.

Looking forward, our strategy will reflect the belief that much of the decline
in long-term interest rates has already occurred. However, it also appears
likely that a sustained period of muted economic growth accompanied by low
inflation and continued accommodation by monetary policymakers will provide a
favorable backdrop for fixed-income markets. In view of this outlook, we expect
to continue our present strategy, which seeks to provide income enhancement
within the context of reduced volatility.

In Conclusion

We appreciate your ongoing interest in Merrill Lynch Massachusetts Municipal
Bond Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.

Sincerely,


/s/ Terry K. Glenn

Terry K. Glenn
President and Trustee


/s/ Vincent R. Giordano

Vincent R. Giordano
Senior Vice President


/s/ Theodore R. Jaeckel Jr.

Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager

September 6, 2001

3


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

PERFORMANCE DATA

About Fund Performance

      Investors are able to purchase shares of the Fund through the Merrill
      Lynch Select PricingSM System, which offers four pricing alternatives:

 .     Class A Shares incur a maximum initial sales charge (front-end load) of 4%
      and bear no ongoing distribution or account maintenance fees. Class A
      Shares are available only to eligible investors.

 .     Class B Shares are subject to a maximum contingent deferred sales charge
      of 4% if redeemed during the first year, decreasing 1% each year
      thereafter to 0% after the fourth year. In addition, Class B Shares are
      subject to a distribution fee of 0.25% and an account maintenance fee of
      0.25%. These shares automatically convert to Class D Shares after
      approximately ten years. (There is no initial sales charge for automatic
      share conversions.)

 .     Class C Shares are subject to a distribution fee of 0.35% and an account
      maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
      contingent deferred sales charge if redeemed within one year of purchase.

 .     Class D Shares incur a maximum initial sales charge of 4% and an account
      maintenance fee of 0.10% (but no distribution fee).

      None of the past results shown should be considered a representation of
      future performance. Performance results do not reflect the deduction of
      taxes that a shareholder would pay on fund distributions or the redemption
      of fund shares. Figures shown in the "Recent Performance Results" and
      "Average Annual Total Return" tables assume reinvestment of all dividends
      and capital gains distributions at net asset value on the payable date.
      Investment return and principal value of shares will fluctuate so that
      shares, when redeemed, may be worth more or less than their original cost.
      Dividends paid to each class of shares will vary because of the different
      levels of account maintenance, distribution and transfer agency fees
      applicable to each class, which are deducted from the income available to
      be paid to share holders.

Average Annual Total Return

                                              % Return Without    % Return With
                                                Sales Charge      Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/01                             +10.09%              +5.69%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                           + 5.27               +4.41
- --------------------------------------------------------------------------------
Inception (2/28/92)
through 6/30/01                                    + 6.20               +5.73
- --------------------------------------------------------------------------------
 *    Maximum sales charge is 4%.
**    Assuming maximum sales charge.

                                                  % Return           % Return
                                                Without CDSC         With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/01                             +9.54%               +5.54%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                           +4.74                +4.74
- --------------------------------------------------------------------------------
Inception (2/28/92)
through 6/30/01                                    +5.66                +5.66
- --------------------------------------------------------------------------------
 *    Maximum contingent deferred sales charge is 4% and is reduced to 0% after
      4 years.
**    Assuming payment of applicable contingent deferred sales charge.

================================================================================
                                                  % Return           % Return
                                                Without CDSC         With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/01                             +9.43%               +8.43%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                           +4.63                +4.63
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                    +5.40                +5.40
- --------------------------------------------------------------------------------
 *    Maximum contingent deferred sales charge is 1% and is reduced to 0% after
      1 year.
**    Assuming payment of applicable contingent deferred sales charge.

================================================================================
                                              % Return Without    % Return With
                                                Sales Charge      Sales Charge**
================================================================================
Class D Shares*
================================================================================
One Year Ended 6/30/01                             +9.98%               +5.58%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                           +5.16                +4.31
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                    +5.95                +5.31
- --------------------------------------------------------------------------------
 *    Maximum sales charge is 4%.
**    Assuming maximum sales charge.

4


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

PERFORMANCE DATA (concluded)

ML Massachusetts Municipal Bond Fund's Class A and Class B Shares--Total Return
Based on a $10,000 Investment

A line graph depicting the growth of an investment in the Portfolio's Class A
Shares and Class B Shares compared to growth of an investment in the Lehman
Brothers Municipal Bond Index. Values are from February 28, 1992 to July 2001:



                                    2/28/92**   7/92       7/93      7/94      7/95      7/96
                                                                       
ML Massachusetts
Municipal Bond Fund+--
Class A Shares*                     $9,600      $10,506    $11,565   $11,711   $12,338   $13,175
ML Massachusetts
Municipal Bond Fund+--
Class B Shares*                     $10,000     $10,922    $11,963   $12,053   $12,634   $13,421
Lehman Brothers Municipal
Bond Index++                        $10,000     $10,694    $11,640   $11,858   $12,791   $13,635


                                    7/97        7/98       7/99      7/00      7/01
                                                                
ML Massachusetts
Municipal Bond Fund+--
Class A Shares*                     $14,495     $15,353    $15,321   $15,532   $17,084
ML Massachusetts
Municipal Bond Fund+--
Class B Shares*                     $14,691     $15,481    $15,371   $15,503   $16,966
Lehman Brothers Municipal
Bond Index++                        $15,033     $15,934    $16,393   $17,100   $18,824


ML Massachusetts Municipal Bond Fund's Class C and Class D Shares--Total Return
Based on a $10,000 Investment

A line graph depicting the growth of an investment in the Portfolio's Class C
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from October 21, 1994 to July 2001:



                                    10/21/94**   7/95      7/96      7/97      7/98      7/99      7/00      7/01
                                                                                     
ML Massachusetts
Municipal Bond Fund+--
Class C Shares*                     $10,000      $10,813   $11,475   $12,536   $13,198   $13,091   $13,190   $14,422
ML Massachusetts
Municipal Bond Fund+--
Class D Shares*                     $9,600       $10,436   $11,132   $12,223   $12,934   $12,895   $13,060   $14,350
Lehman Brothers Municipal
Bond Index++                        $10,000      $11,107   $11,840   $13,054   $13,836   $14,234   $14,848   $16,344


 *    Assuming maximum sales charge, transaction costs and other operating
      expenses, including advisory fees.
**    Commencement of operations.
 +    ML Massachusetts Municipal Bond Fund invests primarily in long-term
      investment-grade obligations issued by or on behalf of the Commonwealth of
      Massachusetts, its political subdivisions, agencies and instrumentalities
      and obligations of other qualifying issuers.
++    This unmanaged Index consists of long-term revenue bonds, prerefunded
      bonds, general obligation bonds and insured bonds. The starting date for
      the Index in the Class C & Class D Shares' graph is from 10/31/94. Past
      performance is not predictive of future performance.

Recent Performance Results*



                                                           6-Month        12-Month     Since Inception   Standardized
As of July 31, 2001                                      Total Return   Total Return    Total Return     30-Day Yield
======================================================================================================================
                                                                                                 
ML Massachusetts Municipal Bond Fund Class A Shares         +3.11%         +9.99%          +77.96%           3.89%
- ----------------------------------------------------------------------------------------------------------------------
ML Massachusetts Municipal Bond Fund Class B Shares         +2.85          +9.44           +69.66            3.55
- ----------------------------------------------------------------------------------------------------------------------
ML Massachusetts Municipal Bond Fund Class C Shares         +2.80          +9.34           +44.22            3.45
- ----------------------------------------------------------------------------------------------------------------------
ML Massachusetts Municipal Bond Fund Class D Shares         +2.96          +9.88           +49.48            3.80
======================================================================================================================


*     Investment results shown do not reflect sales charges; results would be
      lower if a sales charge was included. Total investment returns are based
      on changes in net asset values for the periods shown, and assume
      reinvestment of all dividends and capital gains distributions at net asset
      value on the payable date. The Fund's since inception dates are from
      2/28/92 for Class A & Class B Shares and from 10/21/94 for Class C & Class
      D Shares.

5


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

SCHEDULE OF INVESTMENTS                                           (in Thousands)



S&P       Moody's   Face
Ratings   Ratings   Amount                                       Issue                                                  Value
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--96.7%
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
NR*       Aaa       $1,500   Marlborough, Massachusetts, GO, 5.125% due 6/15/2019 (b)                                  $ 1,525
- ------------------------------------------------------------------------------------------------------------------------------
AA        Aa2        1,000   Massachusetts Bay Transportation Authority Revenue Bonds (General Transportation
                             System), Series A, 7% due 3/01/2021                                                         1,235
- ------------------------------------------------------------------------------------------------------------------------------
AA        Aa2        1,750   Massachusetts Bay Transportation Authority, Revenue Refunding Bonds (General
                             Transportation System), Series A, 7% due 3/01/2011                                          2,119
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa          660   Massachusetts Education Loan Authority, Education Loan Revenue Bonds, AMT, Issue E,
                             Series A, 7.375% due 1/01/2012 (a)                                                            696
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa          865   Massachusetts Educational Financing Authority, Education Loan Revenue Refunding Bonds,
                             AMT, Issue E, 5.85% due 7/01/2014 (a)                                                         918
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Massachusetts State Development Finance Agency Revenue Bonds (Western New England
                             College), 5.25% due 7/01/2020 (a)                                                           1,022
- ------------------------------------------------------------------------------------------------------------------------------
                             Massachusetts State Development Finance Agency, Revenue Refunding Bonds:
BBB+      A3         1,750     (Boston University), Series P, 5.45% due 5/15/2059                                        1,745
AA-       Aa3        1,000     (Mount Holyoke College), 5.50% due 7/01/2016                                              1,062
- ------------------------------------------------------------------------------------------------------------------------------
A1+       NR*        1,100   Massachusetts State, GO (Central Artery), VRDN, Series A, 2.80% due 12/01/2030 (d)          1,100
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,510   Massachusetts State, HFA, S/F Housing Revenue Bonds, AMT, Series 48,
                             6.35% due 6/01/2026 (e)                                                                     1,580
- ------------------------------------------------------------------------------------------------------------------------------
AA        Aa3        1,895   Massachusetts State, HFA, S/F Housing Revenue Refunding Bonds, AMT, Series 40,
                             6.65% due 12/01/2027                                                                        1,997
- ------------------------------------------------------------------------------------------------------------------------------
                             Massachusetts State Health and Educational Facilities Authority Revenue Bonds:
NR*       VMIG1+       600     (Capital Asset Program), VRDN, Series E, 2.75% due 1/01/2035 (d)                            600
AAA       Aaa        5,150     (Medical Center of Central Massachusetts), CARS, Series B, 10.02% due 6/23/2022 (a)(c)    6,186
A1+       VMIG1+       200     (Wellesley College), VRDN, Series G, 2.55% due 7/01/2039 (d)                                200
- ------------------------------------------------------------------------------------------------------------------------------
                             Massachusetts State Health and Educational Facilities Authority, Revenue Refunding Bonds:
NR*       Ba2          510     (Bay Cove Human Services Issue), Series A, 5.85% due 4/01/2004                              509
AAA       Aaa           85     (Boston College), Series J, 6.625% due 7/01/2021 (b)                                         87
AAA       Aaa        2,000     (Massachusetts General Hospital), Series F, 6.25% due 7/01/2012 (a)                       2,285
NR*       Ca           849     (New England Memorial Hospital), Series B, 6.125% due 7/01/2013 (f)                         119
AAA       Aaa        1,000     (Northeastern University), Series E, 6.55% due 10/01/2022 (e)                             1,058
AAA       Aaa          450     (Stonehill College), Series E, 6.60% due 7/01/2002 (e)(g)                                   475
AAA       Aaa          550     (Stonehill College), Series E, 6.60% due 7/01/2020 (e)                                      578
NR*       A2         1,000     (Wheaton College), Series C, 5.25% due 7/01/2019                                          1,011
- ------------------------------------------------------------------------------------------------------------------------------
BBB       NR*        1,500   Massachusetts State Industrial Financial Agency, Resource Recovery Revenue Refunding
                             Bonds (Ogden Haven Hill Project), AMT, Series A, 5.60% due 12/01/2019                       1,413
- ------------------------------------------------------------------------------------------------------------------------------


PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Massachusetts Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.

AMT     Alternative Minimum Tax (subject to)
CARS    Complementary Auction Rate Securities
GO      General Obligation Bonds
HFA     Housing Finance Agency
RIB     Residual Interest Bonds
S/F     Single-Family
VRDN    Variable Rate Demand Notes

6


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

SCHEDULE OF INVESTMENTS (concluded)                               (in Thousands)



S&P       Moody's    Face
Ratings   Ratings   Amount                                      Issue                                                   Value
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts (concluded)
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
AA+       Aaa       $1,680   Massachusetts State Water Pollution Abatement Trust, Water Pollution Abatement Revenue
                             Bonds (Secured Loan Program), Series A, 6.375% due 2/01/2015                              $ 1,817
- ------------------------------------------------------------------------------------------------------------------------------
AA        Aa3        6,000   Massachusetts State Water Resource Authority Revenue Bonds, Series A, 6.50% due 7/15/2019   7,259
- ------------------------------------------------------------------------------------------------------------------------------
NR*       Aaa        1,600   Montachusett, Massachusetts, Regional Vocational Technical School District, GO,
                             5.95% due 1/15/2020 (e)                                                                     1,754
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Plymouth, Massachusetts, GO, 5.25% due 10/15/2020 (e)                                       1,032
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,210   Southern Berkshire, Massachusetts, Regional School District, GO, 7% due 4/15/2011 (e)       1,276
- ------------------------------------------------------------------------------------------------------------------------------
NR*       Baa3       1,500   Springfield, Massachusetts, GO (School Project Loan), Series B, 7.10% due 9/01/2002 (g)     1,599
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--5.5%
- ------------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Puerto Rico Electric Power Authority, Power Revenue Bonds, Series DD,
                             5.25% due 7/01/2014 (h)                                                                     1,059
- ------------------------------------------------------------------------------------------------------------------------------
NR*       Aaa        1,300   Puerto Rico Public Finance Corporation Revenue Bonds, RIB, Series 519X,
                             5.50% due 8/01/2018 (c)(e)                                                                  1,466
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$44,119)--102.2%                                                                               46,782
Liabilities in Excess of Other Assets--(2.2%)                                                                           (1,011)
                                                                                                                       -------
Net Assets--100.0%                                                                                                     $45,771
                                                                                                                       =======
- ------------------------------------------------------------------------------------------------------------------------------


(a)   AMBAC Insured.
(b)   FGIC Insured.
(c)   The interest rate is subject to change periodically and inversely based
      upon prevailing market rates. The interest rate shown is the rate in
      effect at July 31, 2001.
(d)   The interest rate is subject to change periodically based upon prevailing
      market rates. The interest rate shown is the rate in effect at July 31,
      2001.
(e)   MBIA Insured.
(f)   Non-income producing security.
(g)   Prerefunded.
(h)   FSA Insured.
  +   Highest short-term rating by Moody's Investors Service, Inc.
  *   Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.

      See Notes to Financial Statements.

7


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION



Statement of Assets and Liabilities as of July 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
Assets:            Investments, at value (identified cost--$44,119,360) .........................                    $ 46,782,486
                   Cash .........................................................................                          16,872
                   Receivables:
                     Securities sold ............................................................   $ 3,791,201
                     Interest ...................................................................       449,372
                     Beneficial interest sold ...................................................        75,389         4,315,962
                                                                                                    -----------
                   Prepaid registration fees and other assets ...................................                          26,542
                                                                                                                     ------------
                   Total assets .................................................................                      51,141,862
                                                                                                                     ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities:       Payables:
                     Securities purchased .......................................................     5,212,256
                     Beneficial interest redeemed ...............................................        49,191
                     Dividends to shareholders ..................................................        41,368
                     Investment adviser .........................................................        20,515
                     Distributor ................................................................        16,183         5,339,513
                                                                                                    -----------
                   Accrued expenses and other liabilities .......................................                          31,324
                                                                                                                     ------------
                   Total liabilities ............................................................                       5,370,837
                                                                                                                     ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets:        Net assets ...................................................................                    $ 45,771,025
                                                                                                                     ============
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets         Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of:        shares authorized ............................................................                    $     36,817
                   Class B Shares of beneficial interest, $.10 par value, unlimited number of
                   shares authorized ............................................................                         336,970
                   Class C Shares of beneficial interest, $.10 par value, unlimited number of
                   shares authorized ............................................................                          24,065
                   Class D Shares of beneficial interest, $.10 par value, unlimited number of
                   shares authorized ............................................................                          31,161
                   Paid-in capital in excess of par .............................................                      44,854,004
                   Accumulated realized capital losses on investments--net ......................                      (1,818,826)
                   Accumulated distributions in excess of realized capital gains--net ...........                        (356,292)
                   Unrealized appreciation on investments--net ..................................                       2,663,126
                                                                                                                     ------------
                   Net assets ...................................................................                    $ 45,771,025
                                                                                                                     ============
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value:   Class A--Based on net assets of $3,928,323 and 368,174 shares
                   of beneficial interest outstanding ...........................................                    $      10.67
                                                                                                                     ============
                   Class B--Based on net assets of $35,952,141 and 3,369,698 shares
                   of beneficial interest outstanding ...........................................                    $      10.67
                                                                                                                     ============
                   Class C--Based on net assets of $2,565,179 and 240,645 shares
                   of beneficial interest outstanding ...........................................                    $      10.66
                                                                                                                     ============
                   Class D--Based on net assets of $3,325,382 and 311,612 shares
                   of beneficial interest outstanding ...........................................                    $      10.67
                                                                                                                     ============
- ---------------------------------------------------------------------------------------------------------------------------------

                   See Notes to Financial Statements.

8


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION (continued)


Statement of Operations



                                                                                                               For the Year Ended
                                                                                                                    July 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                             
Investment Income:   Interest and amortization of premium and discount earned ...............                         $ 2,663,076
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:            Investment advisory fees ...............................................       $   253,917
                     Account maintenance and distribution fees--Class B .....................           181,569
                     Professional fees ......................................................            72,701
                     Accounting services ....................................................            44,576
                     Printing and shareholder reports .......................................            43,575
                     Transfer agent fees--Class B ...........................................            20,460
                     Account maintenance and distribution fees--Class C .....................            16,656
                     Registration fees ......................................................            11,625
                     Trustees' fees and expenses ............................................             8,247
                     Pricing fees ...........................................................             4,764
                     Account maintenance fees--Class D ......................................             3,152
                     Custodian fees .........................................................             2,592
                     Transfer agent fees--Class A ...........................................             1,874
                     Transfer agent fees--Class D ...........................................             1,510
                     Transfer agent fees--Class C ...........................................             1,504
                     Other ..................................................................             8,377
                                                                                                    -----------
                     Total expenses .........................................................                             677,099
                                                                                                                      -----------
                     Investment income--net .................................................                           1,985,977
                                                                                                                      -----------
- ---------------------------------------------------------------------------------------------------------------------------------
Realized &           Realized gain on investments--net ......................................                             282,384
Unrealized Gain on   Change in unrealized appreciation on investments--net ..................                           1,931,293
Investments--Net:                                                                                                     -----------
                     Net Increase in Net Assets Resulting from Operations ...................                         $ 4,199,654
                                                                                                                      ===========
- ---------------------------------------------------------------------------------------------------------------------------------


                     See Notes to Financial Statements.

9


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets



                                                                                                         For the Year Ended
                                                                                                               July 31,
                                                                                                   ------------------------------
Increase (Decrease) in Net Assets:                                                                      2001             2000
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
Operations:          Investment income--net ...................................................    $  1,985,977      $  2,306,897
                     Realized gain (loss) on investments--net .................................         282,384        (1,728,839)
                     Change in unrealized appreciation on investments--net ....................       1,931,293          (558,007)
                                                                                                   ------------      ------------
                     Net increase in net assets resulting from operations .....................       4,199,654            20,051
                                                                                                   ------------      ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends &          Investment income--net:
Distributions to       Class A ................................................................        (186,269)         (218,251)
Shareholders:          Class B ................................................................      (1,538,462)       (1,808,290)
                       Class C ................................................................        (114,662)         (126,177)
                       Class D ................................................................        (146,584)         (154,179)
                     In excess of realized gain on investments--net:
                       Class A ................................................................              --           (30,447)
                       Class B ................................................................              --          (283,915)
                       Class C ................................................................              --           (18,997)
                       Class D ................................................................              --           (22,933)
                                                                                                   ------------      ------------
                     Net decrease in net assets resulting from dividends and distributions
                     to shareholders ..........................................................      (1,985,977)       (2,663,189)
                                                                                                   ------------      ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Beneficial Interest  Net decrease in net assets derived from beneficial
Transactions:        interest transactions ....................................................      (3,002,385)       (9,325,797)
                                                                                                   ------------      ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets:          Total decrease in net assets .............................................        (788,708)      (11,968,935)
                     Beginning of year ........................................................      46,559,733        58,528,668
                                                                                                   ------------      ------------
                     End of year ..............................................................    $ 45,771,025      $ 46,559,733
                                                                                                   ============      ============
- ---------------------------------------------------------------------------------------------------------------------------------


                        See Notes to Financial Statements.

10


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights

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


                                                                                                  Class A
                                                                          -------------------------------------------------------
                                                                                        For the Year Ended July 31,
                                                                          -------------------------------------------------------
Increase (Decrease) in Net Asset Value:                                     2001        2000        1999        1998       1997
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Per Share            Net asset value, beginning of year ...............   $ 10.17     $ 10.63     $ 11.15     $ 11.07     $ 10.60
Operating                                                                 -------     -------     -------     -------     -------
Performance:         Investment income--net ...........................       .50         .51         .51         .56         .56
                     Realized and unrealized gain (loss) on
                     investments--net .................................       .50        (.39)       (.52)        .08         .47
                                                                          -------     -------     -------     -------     -------
                     Total from investment operations .................      1.00         .12        (.01)        .64        1.03
                                                                          -------     -------     -------     -------     -------
                     Less dividends and distributions:
                      Investment income--net ..........................      (.50)       (.51)       (.51)       (.56)       (.56)
                      In excess of realized gain on investments--net ..        --        (.07)         --          --          --
                                                                          -------     -------     -------     -------     -------
                     Total dividends and distributions ................      (.50)       (.58)       (.51)       (.56)       (.56)
                                                                          -------     -------     -------     -------     -------
                     Net asset value, end of year .....................   $ 10.67     $ 10.17     $ 10.63     $ 11.15     $ 11.07
                                                                          =======     =======     =======     =======     =======
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share ...............     9.99%       1.38%       (.21%)      5.92%      10.02%
Return:*                                                                  =======     =======     =======     =======     =======
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average    Expenses .........................................     1.02%       1.00%        .95%        .86%        .83%
Net Assets:                                                               =======     =======     =======     =======     =======
                     Investment income--net ...........................     4.75%       5.07%       4.58%       5.02%       5.22%
                                                                          =======     =======     =======     =======     =======
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands) ...........   $ 3,928     $ 3,930     $ 5,080     $ 5,705     $ 5,757
Data:                                                                     =======     =======     =======     =======     =======
                     Portfolio turnover ...............................    32.60%      25.66%      89.30%      23.32%      24.64%
                                                                          =======     =======     =======     =======     =======
- ---------------------------------------------------------------------------------------------------------------------------------


                    *Total investment returns exclude the effects of sales
                     charges.

                     See Notes to Financial Statements.

11


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                                    Class B
                                                                          ----------------------------------------------------------
                                                                                         For the Year Ended July 31,
                                                                          ----------------------------------------------------------
Increase (Decrease) in Net Asset Value:                                       2001       2000         1999       1998        1997
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         
Per Share           Net asset value, beginning of year ................    $  10.17    $  10.63    $  11.15    $  11.07    $  10.60
Operating                                                                  --------    --------    --------    --------    --------
Performance:        Investment income--net ............................         .44         .46         .45         .50         .51
                    Realized and unrealized gain (loss) on
                    investments--net ..................................         .50        (.39)       (.52)        .08         .47
                                                                           --------    --------    --------    --------    --------
                    Total from investment operations ..................         .94         .07        (.07)        .58         .98
                                                                           --------    --------    --------    --------    --------
                    Less dividends and distributions:
                     Investment income--net ...........................        (.44)       (.46)       (.45)       (.50)       (.51)
                     In excess of realized gain on investments--net ...          --        (.07)         --          --          --
                                                                           --------    --------    --------    --------    --------
                    Total dividends and distributions .................        (.44)       (.53)       (.45)       (.50)       (.51)
                                                                           --------    --------    --------    --------    --------
                    Net asset value, end of year ......................    $  10.67    $  10.17    $  10.63    $  11.15    $  11.07
                                                                           ========    ========    ========    ========    ========
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment    Based on net asset value per share ................       9.44%        .86%       (.71%)      5.38%       9.46%
Return:*                                                                   ========    ========    ========    ========    ========
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average   Expenses ..........................................       1.53%       1.50%       1.46%       1.37%       1.34%
Net Assets:                                                                ========    ========    ========    ========    ========
                    Investment income--net ............................       4.24%       4.56%       4.07%       4.51%       4.71%
                                                                           ========    ========    ========    ========    ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental        Net assets, end of year (in thousands) ............    $ 35,952    $ 37,035    $ 45,988    $ 51,255    $ 53,336
Data:                                                                      ========    ========    ========    ========    ========
                    Portfolio turnover ................................      32.60%      25.66%      89.30%      23.32%      24.64%
                                                                           ========    ========    ========    ========    ========
- ------------------------------------------------------------------------------------------------------------------------------------


                   *Total investment returns exclude the effects of sales
                    charges.

                    See Notes to Financial Statements.

12


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                                     Class C
                                                                             ---------------------------------------------------
                                                                                            For the Year Ended July 31,
                                                                             ---------------------------------------------------
Increase (Decrease) in Net Asset Value:                                        2001       2000      1999         1998      1997
- --------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Per Share            Net asset value, beginning of year ...............      $ 10.16    $ 10.62    $ 11.14     $ 11.06   $ 10.60
Operating                                                                    -------    -------    -------     -------   -------
Performance:         Investment income--net ...........................          .43        .45        .44         .49       .49
                     Realized and unrealized gain (loss) on
                     investments--net .................................          .50       (.39)      (.52)        .08       .46
                                                                             -------    -------    -------     -------   -------
                     Total from investment operations .................          .93        .06       (.08)        .57       .95
                                                                             -------    -------    -------     -------   -------
                     Less dividends and distributions:
                      Investment income--net ..........................         (.43)      (.45)      (.44)       (.49)     (.49)
                      In excess of realized gain on investments--net ..           --       (.07)        --          --        --
                                                                             -------    -------    -------     -------   -------
                     Total dividends and distributions ................         (.43)      (.52)      (.44)       (.49)     (.49)
                                                                             -------    -------    -------     -------   -------
                     Net asset value, end of year .....................      $ 10.66    $ 10.16    $ 10.62     $ 11.14   $ 11.06
                                                                             =======    =======    =======     =======   =======
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share ...............        9.34%       .76%      (.81%)      5.28%     9.25%
Return:*                                                                     =======    =======    =======     =======   =======
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average    Expenses .........................................        1.63%      1.60%      1.57%       1.47%     1.43%
Net Assets:                                                                  =======    =======    =======     =======   =======
                     Investment income--net ...........................        4.13%      4.46%      3.96%       4.40%     4.63%
                                                                             =======    =======    =======     =======   =======
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands) ...........      $ 2,565    $ 2,664    $ 3,814     $ 1,835   $ 1,495
Data:                                                                        =======    =======    =======     =======   =======
                     Portfolio turnover ...............................       32.60%     25.66%     89.30%      23.32%    24.64%
                                                                             =======    =======    =======     =======   =======
- --------------------------------------------------------------------------------------------------------------------------------


                    *Total investment returns exclude the effects of sales
                     charges.

                     See Notes to Financial Statements.

13


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)

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



                                                                                                Class D
                                                                            -----------------------------------------------
                                                                                       For the Year Ended July 31,
                                                                            -----------------------------------------------
Increase (Decrease) in Net Asset Value:                                       2001      2000      1999       1998    1997
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                                  
Per Share            Net asset value, beginning of year ...............     $ 10.17   $ 10.63   $ 11.15    $ 11.07  $ 10.61
Operating                                                                   -------   -------   -------    -------  -------
Performance:         Investment income--net ...........................         .49       .50       .50        .55      .55
                     Realized and unrealized gain (loss) on
                     investments--net .................................         .50      (.39)     (.52)       .08      .46
                                                                            -------   -------   -------    -------  -------
                     Total from investment operations .................         .99       .11      (.02)       .63     1.01
                                                                            -------   -------   -------    -------  -------
                     Less dividends and distributions:
                      Investment income--net ..........................        (.49)     (.50)     (.50)      (.55)    (.55)
                      In excess of realized gain on investments--net ..          --      (.07)       --         --       --
                                                                            -------   -------   -------    -------  -------
                     Total dividends and distributions ................        (.49)     (.57)     (.50)      (.55)    (.55)
                                                                            -------   -------   -------    -------  -------
                     Net asset value, end of year .....................     $ 10.67   $ 10.17   $ 10.63    $ 11.15  $ 11.07
                                                                            =======   =======   =======    =======  =======
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share ...............       9.88%     1.28%     (.30%)     5.82%    9.80%
Return:*                                                                    =======   =======   =======    =======  =======
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average    Expenses .........................................       1.13%     1.09%     1.06%       .96%     .93%
Net Assets:                                                                 =======   =======   =======    =======  =======
                     Investment income--net ...........................       4.65%     4.97%     4.47%      4.91%    5.13%
                                                                            =======   =======   =======    =======  =======
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands) ...........     $ 3,326   $ 2,931   $ 3,647    $ 2,837  $ 1,602
Data:                                                                       =======   =======   =======    =======  =======
                     Portfolio turnover ...............................      32.60%    25.66%    89.30%     23.32%   24.64%
                                                                            =======   =======   =======    =======  =======
- ---------------------------------------------------------------------------------------------------------------------------


                    *Total investment returns exclude the effects of sales
                     charges.

                     See Notes to Financial Statements.

14


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:

Merrill Lynch Massachusetts Municipal Bond Fund (the "Fund") is part of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. The
Fund offers four classes of shares under the Merrill Lynch Select PricingSM
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.

(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effec-

15


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

tive August 1, 2001, as now required under the new AICPA Audit and Accounting
Guide for Investment Companies. The cumulative effect of this accounting change
will have no impact on the total net assets of the Fund, but will result in a
$28,059 increase to the cost of securities and a corresponding $28,059 decrease
to net unrealized appreciation, based on securities held as of July 31, 2001.

(e) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.

(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.

(g) Expenses--Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis upon the respective aggregate net asset value of
each Fund included in the Trust.

2. Investment Advisory Agreement and Transactions with Affiliates:

The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

- -----------------------------------------------------------------------
                                             Account       Distribution
                                         Maintenance Fee       Fee
- -----------------------------------------------------------------------
Class B.................                      .25%             .25%
Class C.................                      .25%             .35%
Class D.................                      .10%              --
- -----------------------------------------------------------------------

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class D Shares as follows:

- --------------------------------------------------------
                                        FAMD      MLPF&S
- --------------------------------------------------------
Class D....................             $325      $3,894
- --------------------------------------------------------

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $35,623 and $145 relating to transactions in Class B and Class C
Shares, respectively.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimbursed FAM at its cost for
such services. For the year ended July 31, 2001, the Fund

16


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

reimbursed FAM an aggregate of $15,916 for the above-described services. The
Fund entered into an agreement with State Street Bank and Trust Company ("State
Street"), effective January 1, 2001, pursuant to which State Street provides
certain accounting services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:

Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $14,235,970 and $14,524,941, respectively.

Net realized gains for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:

- ------------------------------------------------------------------------
                                                Realized      Unrealized
                                                 Gains          Gains
- ------------------------------------------------------------------------
Long-term investments ...............          $  282,384    $ 2,663,126
                                               ----------    -----------
Total ...............................          $  282,384    $ 2,663,126
                                               ==========    ===========
- ------------------------------------------------------------------------

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $2,663,126, of which $3,465,726 related to appreciated securities and
$802,600 related to depreciated securities. The aggregate cost of investments at
July 31, 2001 for Federal income tax purposes was $44,119,360.

4. Beneficial Interest Transactions:

Net decrease in net assets derived from beneficial interest transactions was
$3,002,385 and $9,325,797 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:

- -------------------------------------------------------------------------
Class A Shares for the Year                                     Dollar
Ended July 31, 2001                               Shares        Amount
- -------------------------------------------------------------------------
Shares sold .........................              20,348    $    213,007
Shares issued to shareholders
in reinvestment of dividends ........               7,407          77,465
                                             ------------    ------------
Total issued ........................              27,755         290,472
Shares redeemed .....................             (46,021)       (482,062)
                                             ------------    ------------
Net decrease ........................             (18,266)   $   (191,590)
                                             ============    ============
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------
Class A Shares for the Year                                     Dollar
Ended July 31, 2000                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................              20,599    $    206,043
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................              10,663         106,659
                                             ------------    ------------
Total issued ........................              31,262         312,702
Shares redeemed .....................            (122,611)     (1,230,778)
                                             ------------    ------------
Net decrease ........................             (91,349)   $   (918,076)
                                             ============    ============
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------
Class B Shares for the Year                                     Dollar
Ended July 31, 2001                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................             335,082    $  3,503,678
Shares issued to shareholders
in reinvestment of dividends ........              73,550         769,285
                                             ------------    ------------
Total issued ........................             408,632       4,272,963
Automatic conversion
of shares ...........................             (40,157)       (417,499)
Shares redeemed .....................            (640,320)     (6,677,394)
                                             ------------    ------------
Net decrease ........................            (271,845)   $ (2,821,930)
                                             ============    ============
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------
Class B Shares for the Year                                     Dollar
Ended July 31, 2000                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................             283,023    $  2,846,709
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................             107,915       1,078,734
                                             ------------    ------------
Total issued ........................             390,938       3,925,443
Automatic conversion
of shares ...........................             (18,267)       (185,116)
Shares redeemed .....................          (1,056,706)    (10,623,099)
                                             ------------    ------------
Net decrease ........................            (684,035)   $ (6,882,772)
                                             ============    ============
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------
Class C Shares for the Year                                     Dollar
Ended July 31, 2001                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................             109,124    $  1,146,801
Shares issued to shareholders
in reinvestment of dividends ........               8,816          92,174
                                             ------------    ------------
Total issued ........................             117,940       1,238,975
Shares redeemed .....................            (139,436)     (1,470,123)
                                             ------------    ------------
Net decrease ........................             (21,496)   $   (231,148)
                                             ============    ============
- -------------------------------------------------------------------------

17


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

- -------------------------------------------------------------------------
Class C Shares for the Year                                     Dollar
Ended July 31, 2000                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................              86,247    $    860,601
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................              11,955         119,548
                                             ------------    ------------
Total issued ........................              98,202         980,149
Shares redeemed .....................            (195,078)     (1,956,183)
                                             ------------    ------------
Net decrease ........................             (96,876)   $   (976,034)
                                             ============    ============
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------
Class D Shares for the Year                                     Dollar
Ended July 31, 2001                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................              23,970    $    248,932
Automatic conversion
of shares ...........................              40,157         417,499
Shares issued to shareholders
in reinvestment of dividends ........               4,581          47,948
                                             ------------    ------------
Total issued ........................              68,708         714,379
Shares redeemed .....................             (45,208)       (472,096)
                                             ------------    ------------
Net increase ........................              23,500    $    242,283
                                             ============    ============
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------
Class D Shares for the Year                                     Dollar
Ended July 31, 2000                                Shares       Amount
- -------------------------------------------------------------------------
Shares sold .........................              51,622    $    518,180
Automatic conversion
of shares ...........................              18,268         185,116
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................               5,491          54,903
                                             ------------    ------------
Total issued ........................              75,381         758,199
Shares redeemed .....................            (130,149)     (1,307,114)
                                             ------------    ------------
Net decrease ........................             (54,768)   $   (548,915)
                                             ============    ============
- -------------------------------------------------------------------------

5. Short-Term Borrowings:

On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

6. Capital Loss Carryforward:

At July 31, 2001, the Fund had a net capital loss carryforward of approximately
$1,782,000, of which $474,000 expires in 2008 and $1,308,000 expires in 2009.
This amount will be available to offset like amounts of any future taxable
gains.

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Massachusetts Municipal Bond Fund during its taxable year ended July 31, 2001
qualify as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

18


Merrill Lynch Massachusetts Municipal Bond Fund                    July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Massachusetts Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Massachusetts Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
New York, New York
September 10, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Theodore R. Jaeckel Jr., Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

Custodian

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

Transfer Agent

Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

19


[LOGO] Merrill Lynch Investment Managers
- --------------------------------------------------------------------------------
                                                                       [GRAPHIC]

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Massachusetts
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

[LOGO] Printed on post-consumer recycled paper                      #16150--7/01

EX-99.17Q

                                                                   EXHIBIT 17(Q)

[LOGO] Merrill Lynch Investment Managers

Annual Report
July 31, 2001

Merrill Lynch
Michigan Municipal
Bond Fund


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

DEAR SHAREHOLDER

The Municipal Market Environment

In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to


1

Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

this increased demand and long-term tax-exempt bond yields declined to 5.40% by
July 31, 2001, a five basis point decline in long-term municipal bond yields
from January 2001 levels.

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June and July 2001. Given
continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates artificially high, although not as high as in recent years. As
these pressures abated, short-term municipal interest rates declined to
approximately 2.5%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of
the municipal bond market, the tax-exempt market is likely to continue to
outperform its taxable counterpart in the near future.

Fiscal Year in Review

For the 12 months ended July 31, 2001, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +9.61%, +9.06%, +8.95% and +9.51%,
respectively. These results were slightly below the +10.08% return of the
unmanaged benchmark Lehman Brothers Municipal Bond Index and were similar to the
Lipper, Inc. average return of other Michigan tax-exempt mutual funds for the
same period. (Fund results shown do not reflect sales charges and would be lower
if sales charges were included. Complete performance information can be found on
pages 4 and 5 of this report to shareholders.)

During late 2000, we slowly adopted a more constructive approach to the
tax-exempt bond market. Based upon a continued positive inflation outlook and
the expectation that the Federal Reserve Board was near an end to its current
interest rate tightening cycle, we modestly increased the Fund's holdings of
more interest rate-sensitive issues in late September/early

2


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

October. This strategy proved beneficial to the Fund as bond yields declined in
November and December 2000 in response to weaker economic indicator releases
such as industrial production and consumer confidence. The announcement by the
Federal Reserve Board in December emphasizing its concern about declining
economic activity in 2001 resulted in a significant bond market rally into
year-end 2000.

We maintained our constructive approach through early March 2001, as the Federal
Reserve Board continued to lower short-term interest rates. We expected that
weak economic growth and declining equity markets would allow the Federal
Reserve Board to maintain its bias toward lowering short-term interest rates.
Our strategy was appropriate as interest rates continued to decline through
March. The sudden rise in fixed-income bond yields in April and May 2001
generated a period of underperformance for the Fund until we were able to return
the Fund to a market neutral position. We maintained this position through the
end of the July period.

Going forward, we expect to keep the Fund fully invested with above-average
credit quality issues exempt from both Federal and Michigan income tax. The
Fund's neutral market positioning and overall high-credit quality should help
insulate the Fund's net asset values from much of the anticipated market
volatility in the coming months.

In Conclusion

We appreciate your ongoing interest in Merrill Lynch Michigan Municipal Bond
Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.

Sincerely,


/s/ Terry K. Glenn

Terry K. Glenn
President and Trustee


/s/ Vincent R. Giordano

Vincent R. Giordano
Senior Vice President


/s/ Fred K. Stuebe

Fred K. Stuebe
Vice President and Portfolio Manager

September 4, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Fred K. Stuebe, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

Custodian

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

Transfer Agent

Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

3


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

PERFORMANCE DATA

About Fund Performance

      Investors are able to purchase shares of the Fund through the Merrill
      Lynch Select Pricing(SM) System, which offers four pricing alternatives:

 .     Class A Shares incur a maximum initial sales charge (front-end load) of 4%
      and bear no ongoing distribution or account maintenance fees. Class A
      Shares are available only to eligible investors.

 .     Class B Shares are subject to a maximum contingent deferred sales charge
      of 4% if redeemed during the first year, decreasing 1% each year
      thereafter to 0% after the fourth year. In addition, Class B Shares are
      subject to a distribution fee of 0.25% and an account maintenance fee of
      0.25%. These shares automatically convert to Class D Shares after
      approximately ten years. (There is no initial sales charge for automatic
      share conversions.)

 .     Class C Shares are subject to a distribution fee of 0.35% and an account
      maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
      contingent deferred sales charge if redeemed within one year of purchase.

 .     Class D Shares incur a maximum initial sales charge of 4% and an account
      maintenance fee of 0.10% (but no distribution fee).

      None of the past results shown should be considered a representation of
      future performance. Performance results do not reflect the deduction of
      taxes that a shareholder would pay on fund distributions or the redemption
      of fund shares. Figures shown in the "Recent Performance Results" and
      "Average Annual Total Return" tables assume reinvestment of all dividends
      and capital gains distributions at net asset value on the payable date.
      Investment return and principal value of shares will fluctuate so that
      shares, when redeemed, may be worth more or less than their original cost.
      Dividends paid to each class of shares will vary because of the different
      levels of account maintenance, distribution and transfer agency fees
      applicable to each class, which are deducted from the income available to
      be paid to shareholders. The Fund's Investment Adviser voluntarily waived
      a portion of its management fee. Without such waiver, the Fund's
      performance would have been lower.

Average Annual Total Return

                                   % Return Without         % Return With
                                     Sales Charge           Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/01                   +9.68%                +5.29%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                 +5.03                 +4.18
- --------------------------------------------------------------------------------
Inception (1/29/93)
through 6/30/01                          +5.10                 +4.59
- --------------------------------------------------------------------------------
*     Maximum sales charge is 4%.
**    Assuming maximum sales charge.

                                       % Return              % Return
                                     Without CDSC           With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/01                   +9.13%                +5.13%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                 +4.50                 +4.50
- --------------------------------------------------------------------------------
Inception (1/29/93)
through 6/30/01                          +4.57                 +4.57
- --------------------------------------------------------------------------------
*     Maximum contingent deferred sales charge is 4% and is reduced to 0% after
      4 years.
**    Assuming payment of applicable contingent deferred sales charge.

                                       % Return              % Return
                                      Without CDSC          With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/01                   +9.02%                +8.02%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                 +4.39                 +4.39
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                          +5.21                 +5.21
- --------------------------------------------------------------------------------
*     Maximum contingent deferred sales charge is 1% and is reduced to 0% after
      1 year.
**    Assuming payment of applicable contingent deferred sales charge.


                                   % Return Without         % Return With
                                      Sales Charge          Sales Charge**
================================================================================
Class D Shares*
================================================================================
One Year Ended 6/30/01                   +9.58%                +5.19%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                 +4.93                 +4.07
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                          +5.74                 +5.10
- --------------------------------------------------------------------------------
*     Maximum sales charge is 4%.
**    Assuming maximum sales charge.

4


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

PERFORMANCE DATA (concluded)

Total Return Based on a $10,000 Investment

ML Michigan Municipal Bond Fund's Class A and Class B Shares--Total Return Based
on a $10,000 Investment

A line graph depicting the growth of an investment in the Portfolio's Class A
Shares and Class B Shares compared to growth of an investment in the Lehman
Brothers Municipal Bond Index. Values are from January 29, 1993 to July 2001:



                                1/29/93**   7/93      7/94      7/95      7/96       7/97
                                                                   
ML Michigan
Municipal Bond Fund+--
Class A Shares*                 $9,600      $10,138   $10,262   $10,856   $11,535    $12,664
ML Michigan
Municipal Bond Fund+--
Class B Shares*                 $10,000     $10,535   $10,610   $11,167   $11,804    $12,894
Lehman Brothers Municipal
Bond Index++                    $10,000     $10,601   $10,800   $11,650   $12,419    $13,692


                                7/98        7/99      7/00      7/01
                                                    
ML Michigan
Municipal Bond Fund+--
Class A Shares*                 $13,277     $13,322   $13,483   $14,779
ML Michigan
Municipal Bond Fund+--
Class B Shares*                 $13,450     $13,427   $13,521   $14,746
Lehman Brothers Municipal
Bond Index++                    $14,513     $14,931   $15,575   $17,145


ML Michigan Municipal Bond Fund's Class C and Class D Shares--Total Return Based
on a $10,000 Investment

A line graph depicting the growth of an investment in the Portfolio's Class C
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from October 21, 1994 to July 2001:



                                10/21/94**   7/95      7/96      7/97      7/98      7/99
                                                                   
ML Michigan
Municipal Bond Fund+--
Class C Shares*                 $10,000      $10,839   $11,445   $12,476   $13,000   $12,978
ML Michigan
Municipal Bond Fund+--
Class D Shares*                 $9,600       $10,448   $11,079   $12,153   $12,729   $12,772
Lehman Brothers Municipal
Bond Index++                    $10,000      $11,107   $11,840   $13,054   $13,836   $14,234


                                7/00         7/01
                                       
ML Michigan
Municipal Bond Fund+--
Class C Shares*                 $13,056      $14,225
ML Michigan
Municipal Bond Fund+--
Class D Shares*                 $12,900      $14,127
Lehman Brothers Municipal
Bond Index++                    $14,848      $16,344


*     Assuming maximum sales charge, transaction costs and other operating
      expenses, including advisory fees.

**    Commencement of operations.

+     ML Michigan Municipal Bond Fund invests primarily in long-term
      investment-grade obligations issued by or on behalf of the state of
      Michigan, its political subdivisions, agencies and instrumentalities and
      obligations of other qualifying issuers.

++    This unmanaged Index consists of long-term revenue bonds, prerefunded
      bonds, general obligation bonds and insured bonds. The starting date for
      the Index in the Class C & Class D Shares' graph is from 10/31/94. Past
      performance is not indicative of future results.

Recent Performance Results*



                                                                6-Month         12-Month     Since Inception   Standardized
As of July 31, 2001                                           Total Return    Total Return     Total Return    30-Day Yield
===========================================================================================================================
                                                                                                   
ML Michigan Municipal Bond Fund Class A Shares                    +3.01%          +9.61%          +53.96%          3.90%
- ---------------------------------------------------------------------------------------------------------------------------
ML Michigan Municipal Bond Fund Class B Shares                    +2.76           +9.06           +47.45           3.56
- ---------------------------------------------------------------------------------------------------------------------------
ML Michigan Municipal Bond Fund Class C Shares                    +2.71           +8.95           +42.25           3.46
- ---------------------------------------------------------------------------------------------------------------------------
ML Michigan Municipal Bond Fund Class D Shares                    +2.96           +9.51           +47.14           3.81
===========================================================================================================================


*     Investment results shown do not reflect sales charges; results would be
      lower if a sales charge was included. Total investment returns are based
      on changes in net asset values for the periods shown, and assume
      reinvestment of all dividends and capital gains distributions at net asset
      value on the payable date. The Fund's since inception dates are from
      1/29/93 for Class A & Class B Shares and from 10/21/94 for Class C & Class
      D Shares.

5


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

SCHEDULE OF INVESTMENTS                                           (in Thousands)



S&P      Moody's   Face
Ratings  Ratings  Amount                                       Issue                                                Value
- --------------------------------------------------------------------------------------------------------------------------
Michigan -- 101.6%
- --------------------------------------------------------------------------------------------------------------------------
                                                                                                       
AAA      Aa1      $1,000   Breitung Township, Michigan, School District, GO, Refunding, 6.30% due 5/01/2019        $ 1,030
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,075   Crawford Ausable, Michigan, School District, School Building and Site, GO,
                           5.625% due 5/01/2016                                                                      1,150
- --------------------------------------------------------------------------------------------------------------------------
                           Detroit, Michigan, Water Supply System Revenue Bonds (c):
AAA      NR*       1,000   DRIVERS, Series 200, 8.51% due 7/01/2028 (e)                                              1,140
AAA      Aaa       1,000   Senior Lien, Series A, 5% due 7/01/2030                                                     970
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       2,900   Detroit, Michigan, Water Supply System, Revenue Refunding Bonds, INFLOS,
                           9.982% due 7/01/2022 (c)(e)                                                               3,118
- --------------------------------------------------------------------------------------------------------------------------
                           Eastern Michigan University, Revenue Refunding Bonds (a):
AAA      Aaa       1,025   6% due 6/01/2020                                                                          1,124
AAA      Aaa       1,000   6% due 6/01/2024                                                                          1,092
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,060   Freeland, Michigan, Community School District, GO (School Building and Site),
                           5.25% due 5/01/2020                                                                       1,082
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa         970   Grand Traverse County, Michigan, Hospital Revenue Refunding Bonds (Munson
                           Healthcare), Series A, 6.25% due 7/01/2022 (a)                                            1,000
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa         910   Harper Creek, Michigan, Community School District, GO, 5.50% due 5/01/2013                  979
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       3,240   Hartland, Michigan, Consolidated School District, GO, 6% due 5/01/2010 (c)(f)             3,678
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aa1       2,500   Haslett, Michigan, Public School District, GO, Refunding, 6.625% due 5/01/2019            2,608
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,395   Howell, Michigan, Public Schools, GO, Refunding, 5.25% due 5/01/2010                      1,500
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       2,000   Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue
                           Refunding and Improvement Bonds (Bronson Methodist Hospital), Series A,
                           6.375% due 5/15/2005 (b)(f)                                                               2,209
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,475   Lakeshore, Michigan, Public Schools, GO, Refunding, 5% due 5/01/2009                      1,560
- --------------------------------------------------------------------------------------------------------------------------
NR*      Aa1       1,250   Michigan State Building Authority, Revenue Refunding Bonds, RIB, Series 517X,
                           8.05% due 10/15/2010 (e)                                                                  1,491
- --------------------------------------------------------------------------------------------------------------------------
AA-      NR*       1,895   Michigan State, HDA, Rental Housing Revenue Refunding Bonds, Series A,
                           6.60% due 4/01/2012                                                                       1,980
- --------------------------------------------------------------------------------------------------------------------------
                           Michigan State, HDA, Revenue Refunding Bonds:
AA+      NR*         730   AMT, Series B, 6.20% due 6/01/2027 (g)                                                      761
AA+      NR*         560   AMT, Series D, 6.85% due 6/01/2026 (g)                                                      565
AA+      NR*       1,500   Series D, 5.95% due 12/01/2016                                                            1,588
- --------------------------------------------------------------------------------------------------------------------------


PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Michigan Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.

AMT        Alternative Minimum Tax (subject to)
DRIVERS    Derivative Inverse Tax-Exempt Receipts
GO         General Obligation Bonds
HDA        Housing Development Authority
INFLOS     Inverse Floating Rate Municipal Bonds
PCR        Pollution Control Revenue Bonds
RIB        Residual Interest Bonds
VRDN       Variable Rate Demand Notes

6


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

SCHEDULE OF INVESTMENTS (concluded)                               (in Thousands)



S&P      Moody's   Face
Ratings  Ratings  Amount                                       Issue                                                Value
- --------------------------------------------------------------------------------------------------------------------------
Michigan (concluded)
- --------------------------------------------------------------------------------------------------------------------------
                                                                                                       
                           Michigan State Hospital Finance Authority, Revenue Refunding Bonds, Series A:
AA       Aa2      $2,000   (Ascension Health Credit), 6.125% due 11/15/2026                                        $ 2,103
AAA      Aaa       1,500   (Mercy Mount Clemens), 6% due 5/15/2014 (b)                                               1,643
AAA      Aaa       1,000   (Trinity Health), 6% due 12/01/2027 (a)                                                   1,082
- --------------------------------------------------------------------------------------------------------------------------
BBB      Ba1       1,000   Michigan State Strategic Fund, Limited Obligation Revenue Bonds
                           (Waste Management Inc. Project), AMT, 6.625% due 12/01/2012                               1,025
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,060   Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds
                           (Detroit Edison Company), Series AA, 6.40% due 9/01/2025 (b)                              1,142
- --------------------------------------------------------------------------------------------------------------------------
NR*      VMIG1@      900   Michigan State Strategic Fund, PCR, Refunding (Consumers Power Project),
                           VRDN, 2.75% due 4/15/2018 (a)(d)                                                            900
- --------------------------------------------------------------------------------------------------------------------------
AA       Aa3       2,000   Michigan State Trunk Line, Revenue Refunding Bond, Series A, 5.25% due 11/01/2011         2,158
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       2,000   Northern Michigan University, Revenue Refunding Bonds, 5% due 12/01/2025 (b)              1,964
- --------------------------------------------------------------------------------------------------------------------------
AAA      Aaa       1,045   Romulus, Michigan Community Schools, GO, Refunding, 5% due 5/01/2029                      1,020
- --------------------------------------------------------------------------------------------------------------------------
AA       Aa3       1,785   Royal Oak, Michigan, Hospital Finance Authority Revenue Bonds (Beaumont
                           Properties, Inc.), Series E, 6.625% due 1/01/2019                                         1,838
- --------------------------------------------------------------------------------------------------------------------------
NR*      Aaa       1,500   Saint Clair County, Michigan, Economic Revenue Refunding Bonds (Detroit Edison
                           Company), RIB, Series 282, 9.78% due 8/01/2024 (a)(e)                                     1,868
- --------------------------------------------------------------------------------------------------------------------------
A1+      VMIG1@      500   University of Michigan, University Hospital Revenue Refunding Bonds, VRDN,
                           Series A, 2.80% due 12/01/2019 (d)                                                          500
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $45,167) -- 101.6%                                                                       47,868

Liabilities in Excess of Other Assets -- (1.6%)                                                                       (733)
                                                                                                                   -------
Net Assets -- 100.0%                                                                                               $47,135
                                                                                                                   =======
- --------------------------------------------------------------------------------------------------------------------------


(a)   AMBAC Insured.
(b)   MBIA Insured.
(c)   FGIC Insured.
(d)   The interest rate is subject to change periodically based upon prevailing
      market rates. The interest rate shown is the rate in effect at July 31,
      2001.
(e)   The interest rate is subject to change periodically and inversely based
      upon prevailing market rates. The interest rate shown is the rate in
      effect at July 31, 2001.
(f)   Prerefunded.
(g)   FHA Insured.
*     Not Rated.
@     Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

7


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001

                                                                                                        
Assets:              Investments, at value (identified cost -- $45,167,347)................                      $ 47,868,246
                     Cash..................................................................                             3,331
                     Receivables:
                     Interest..............................................................    $   577,019
                     Beneficial interest sold..............................................          4,227            581,246
                                                                                               -----------
                     Prepaid expenses and other assets.....................................                             4,652
                                                                                                                 ------------
                     Total assets..........................................................                        48,457,475
                                                                                                                 ------------
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities:         Payables:
                     Securities purchased..................................................        971,270
                     Beneficial interest redeemed..........................................        238,492
                     Dividends to shareholders.............................................         44,159
                     Investment adviser....................................................         21,400
                     Distributor...........................................................         15,653          1,290,974
                                                                                               -----------
                     Accrued expenses......................................................                            31,453
                                                                                                                 ------------
                     Total liabilities.....................................................                         1,322,427
                                                                                                                 ------------
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets:          Net assets............................................................                      $ 47,135,048
                                                                                                                 ============
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets           Class A Shares of beneficial interest, $.10 par value, unlimited
Consist of:          number of shares authorized...........................................                      $     78,809
                     Class B Shares of beneficial interest, $.10 par value, unlimited
                     number of shares authorized...........................................                           333,086
                     Class C Shares of beneficial interest, $.10 par value, unlimited
                     number of shares authorized...........................................                            34,822
                     Class D Shares of beneficial interest, $.10 par value, unlimited
                     number of shares authorized...........................................                            25,917
                     Paid-in capital in excess of par......................................                        49,592,086
                     Accumulated realized capital losses on investments -- net.............                        (5,630,571)
                     Unrealized appreciation on investments -- net.........................                         2,700,899
                                                                                                                 ------------
                     Net assets............................................................                      $ 47,135,048
                                                                                                                 ============
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value:     Class A -- Based on net assets of $7,859,710 and 788,093 shares
                     of beneficial interest outstanding....................................                      $       9.97
                                                                                                                 ============
                     Class B -- Based on net assets of $33,219,850 and 3,330,860 shares
                     of beneficial interest outstanding....................................                      $       9.97
                                                                                                                 ============
                     Class C -- Based on net assets of $3,472,951 and 348,218 shares
                     of beneficial interest outstanding....................................                      $       9.97
                                                                                                                 ============
                     Class D -- Based on net assets of $2,582,537 and 259,170 shares
                     of beneficial interest outstanding....................................                      $       9.96
                                                                                                                 ============
- -----------------------------------------------------------------------------------------------------------------------------



                      See Notes to Financial Statements.

8


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION (continued)

Statement of Operations



                                                                                                           For the Year Ended
                                                                                                                July 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                         
Investment Income:   Interest and amortization of premium and discount earned..............                       $ 2,839,439
- -----------------------------------------------------------------------------------------------------------------------------
Expenses:            Investment advisory fees..............................................    $   273,034
                     Account maintenance and distribution fees -- Class B..................        175,867
                     Professional fees.....................................................         69,456
                     Accounting services...................................................         67,023
                     Printing and shareholder reports......................................         42,791
                     Transfer agent fees -- Class B........................................         21,660
                     Account maintenance and distribution fees -- Class C..................         20,761
                     Registration fees.....................................................         10,795
                     Trustees' fees and expenses...........................................          8,464
                     Pricing fees..........................................................          5,562
                     Transfer agent fees -- Class A........................................          4,463
                     Custodian fees........................................................          3,842
                     Account maintenance fees -- Class D...................................          2,473
                     Transfer agent fees -- Class C........................................          2,039
                     Transfer agent fees -- Class D........................................          1,300
                     Other.................................................................          8,283
                                                                                               -----------
                     Total expenses........................................................                           717,813
                                                                                                                  -----------
                     Investment income -- net .............................................                         2,121,626
                                                                                                                  -----------
- -----------------------------------------------------------------------------------------------------------------------------
Realized &           Realized gain on investments -- net ..................................                           493,595
Unrealized Gain on   Change in unrealized appreciation on investments -- net...............                         1,758,716
                                                                                                                  -----------
Investments -- Net:  Net Increase in Net Assets Resulting from Operations..................                       $ 4,373,937
                                                                                                                  ===========
- -----------------------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

9


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets



                                                                                                      For the Year Ended
                                                                                                           July 31,
                                                                                                -----------------------------
Increase (Decrease) in Net Assets:                                                                   2001             2000
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Operations:          Investment income -- net ..............................................    $  2,121,626    $   2,887,901
                     Realized gain (loss) on investments -- net ............................         493,595       (4,053,410)
                     Change in unrealized appreciation on investments -- net................       1,758,716          907,403
                                                                                                ------------    -------------
                     Net increase (decrease) in net assets resulting from operations........       4,373,937         (258,106)
                                                                                                ------------    -------------
- -----------------------------------------------------------------------------------------------------------------------------
Dividends to         Investment income -- net:
Shareholders:          Class A.............................................................         (399,874)        (520,210)
                       Class B.............................................................       (1,467,712)      (2,058,203)
                       Class C.............................................................         (140,773)        (159,208)
                       Class D.............................................................         (113,267)        (150,280)
                                                                                                ------------    -------------
                     Net decrease in net assets resulting from dividends to shareholders...       (2,121,626)      (2,887,901)
                                                                                                ------------    -------------
- -----------------------------------------------------------------------------------------------------------------------------
Beneficial Interest  Net decrease in net assets derived from beneficial interest
Transactions:        transactions..........................................................       (7,611,016)     (16,265,525)
                                                                                                ------------    -------------
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets:          Total decrease in net assets..........................................       (5,358,705)     (19,411,532)
                     Beginning of year.....................................................       52,493,753       71,905,285
                                                                                                ------------    -------------
                     End of year...........................................................     $ 47,135,048    $ 52,493,753
                                                                                                ============    ============
- -----------------------------------------------------------------------------------------------------------------------------


                      See Notes to Financial Statements.

10


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights



                                                                                                   Class A
The following per share data and ratios have been derived                    ----------------------------------------------------
from information provided in the financial statements.                                    For the Year Ended July 31,
                                                                             ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                                         2001      2000       1999        1998      1997
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Per Share            Net asset value, beginning of year..................    $   9.53   $   9.91   $  10.33   $  10.34   $   9.92
Operating                                                                    --------   --------   --------   --------   --------
Performance:         Investment income -- net............................         .46        .48        .46        .50        .52
                     Realized and unrealized gain (loss) on
                     investments -- net..................................         .44       (.38)      (.42)      (.01)       .42
                                                                             --------   --------   --------   --------   --------
                     Total from investment operations....................         .90        .10        .04        .49        .94
                                                                             --------   --------   --------   --------   --------
                     Less dividends from investment income -- net........        (.46)      (.48)      (.46)      (.50)      (.52)
                                                                             --------   --------   --------   --------   --------
                     Net asset value, end of year........................    $   9.97   $   9.53   $   9.91   $  10.33   $  10.34
                                                                             ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share..................        9.61%      1.21%       .34%      4.84%      9.79%
Return:*                                                                     ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to            Expenses, net of reimbursement......................        1.04%       .79%       .93%       .80%       .57%
Average                                                                      ========   ========   ========   ========   ========
Net Assets:          Expenses............................................        1.04%       .79%       .93%       .83%       .80%
                                                                             ========   ========   ========   ========   ========
                     Investment income -- net............................        4.68%      5.10%      4.51%      4.81%      5.21%
                                                                             ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands)..............    $  7,860   $  9,310   $  9,384   $ 11,762   $ 11,841
Data:                                                                        ========   ========   ========   ========   ========
                     Portfolio turnover..................................       59.61%     85.25%    129.08%     65.39%     35.09%
                                                                             ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------


            *     Total investment returns exclude the effects of sales charges.

                      See Notes to Financial Statements.

11


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



                                                                                                  Class B
The following per share data and ratios have been derived                   ----------------------------------------------------
from information provided in the financial statements.                                   For the Year Ended July 31,
                                                                            ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                                        2001      2000       1999        1998      1997
- --------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Per Share            Net asset value, beginning of year..................   $   9.53   $   9.91   $  10.33   $  10.34   $   9.92
Operating                                                                   --------   --------   --------   --------   --------
Performance:         Investment income -- net............................        .41        .43        .41        .45        .47
                     Realized and unrealized gain (loss) on
                     investments -- net..................................        .44       (.38)      (.42)      (.01)       .42
                                                                            --------   --------   --------   --------   --------
                     Total from investment operations....................        .85        .05       (.01)       .44        .89
                                                                            --------   --------   --------   --------   --------
                     Less dividends from investment income -- net........       (.41)      (.43)      (.41)      (.45)      (.47)
                                                                            --------   --------   --------   --------   --------
                     Net asset value, end of year........................   $   9.97   $   9.53   $   9.91   $  10.33   $  10.34
                                                                            ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share..................       9.06%       .70%      (.17%)     4.31%      9.23%
Return:*                                                                    ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to            Expenses, net of reimbursement......................       1.55%      1.30%      1.44%      1.31%      1.08%
Average                                                                     ========   ========   ========   ========   ========
Net Assets:          Expenses............................................       1.55%      1.30%      1.44%      1.34%      1.31%
                                                                            ========   ========   ========   ========   ========
                     Investment income -- net............................       4.17%      4.59%      4.00%      4.30%      4.70%
                                                                            ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands)..............   $ 33,220   $ 37,514   $ 54,259   $ 61,918   $ 65,166
Data:                                                                       ========   ========   ========   ========   ========
                     Portfolio turnover..................................      59.61%     85.25%    129.08%     65.39%     35.09%
                                                                            ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------


            *     Total investment returns exclude the effects of sales charges.

                      See Notes to Financial Statements.

12


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



                                                                                                   Class C
The following per share data and ratios have been derived                    ----------------------------------------------------
from information provided in the financial statements.                                    For the Year Ended July 31,
                                                                             ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                                         2001      2000       1999        1998      1997
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Per Share            Net asset value, beginning of year.................     $   9.53   $   9.91   $  10.32   $  10.33   $   9.92
Operating                                                                    --------   --------   --------   --------   --------
Performance:         Investment income -- net...........................          .40        .42        .40        .43        .46
                     Realized and unrealized gain (loss) on
                     investments -- net.................................          .44       (.38)      (.41)      (.01)       .41
                                                                             --------   --------   --------   --------   --------
                     Total from investment operations...................          .84        .04       (.01)       .42        .87
                                                                             --------   --------   --------   --------   --------
                     Less dividends from investment income -- net.......         (.40)      (.42)      (.40)      (.43)      (.46)
                                                                             --------   --------   --------   --------   --------
                     Net asset value, end of year.......................     $   9.97   $   9.53   $   9.91   $  10.32   $  10.33
                                                                             ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share.................         8.95%       .60%      (.17%)     4.20%      9.01%
Return:*                                                                     ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to            Expenses, net of reimbursement.....................         1.65%      1.40%      1.55%      1.42%      1.18%
Average                                                                      ========   ========   ========   ========   ========
Net Assets:          Expenses...........................................         1.65%      1.40%      1.55%      1.45%      1.41%
                                                                             ========   ========   ========   ========   ========
                     Investment income -- net...........................         4.07%      4.49%      3.89%      4.18%      4.60%
                                                                             ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands).............     $  3,473   $  3,440   $  3,950   $  2,802   $  1,319
Data:                                                                        ========   ========   ========   ========   ========
                     Portfolio turnover.................................        59.61%     85.25%    129.08%     65.39%     35.09%
                                                                             ========   ========   ========   ========   ========
- ---------------------------------------------------------------------------------------------------------------------------------


            *     Total investment returns exclude the effects of sales charges.

                      See Notes to Financial Statements.

13


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)



                                                                                                  Class D
The following per share data and ratios have been derived                   ----------------------------------------------------
from information provided in the financial statements.                                   For the Year Ended July 31,
                                                                            ----------------------------------------------------
Increase (Decrease) in Net Asset Value:                                        2001      2000       1999        1998      1997
- --------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Per Share            Net asset value, beginning of year..................   $   9.52   $   9.91   $  10.32   $  10.33   $   9.91
Operating                                                                   --------   --------   --------   --------   --------
Performance:         Investment income -- net............................        .45        .47        .45        .49        .51
                     Realized and unrealized gain (loss) on
                     investments -- net..................................        .44       (.39)      (.41)      (.01)       .42
                                                                            --------   --------   --------   --------   --------
                     Total from investment operations....................        .89        .08        .04        .48        .93
                                                                            --------   --------   --------   --------   --------
                     Less dividends from investment income -- net........       (.45)      (.47)      (.45)      (.49)      (.51)
                                                                            --------   --------   --------   --------   --------
                     Net asset value, end of year........................   $   9.96   $   9.52   $   9.91   $  10.32   $  10.33
                                                                            ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment     Based on net asset value per share..................       9.51%      1.00%       .34%      4.74%      9.69%
Return:*                                                                    ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to            Expenses, net of reimbursement......................       1.14%       .90%      1.04%       .90%       .68%
Average                                                                     ========   ========   ========   ========   ========
Net Assets:          Expenses............................................       1.14%       .90%      1.04%       .93%       .90%
                                                                            ========   ========   ========   ========   ========
                     Investment income -- net............................       4.58%      4.98%      4.40%      4.71%      5.11%
                                                                            ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental         Net assets, end of year (in thousands)..............   $  2,582   $  2,230   $  4,312   $  3,806   $  3,494
Data:                                                                       ========   ========   ========   ========   ========
                     Portfolio turnover..................................      59.61%     85.25%    129.08%     65.39%     35.09%
                                                                            ========   ========   ========   ========   ========
- --------------------------------------------------------------------------------------------------------------------------------


            *     Total investment returns exclude the effects of sales charges.

                      See Notes to Financial Statements.

14


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:

Merrill Lynch Michigan Municipal Bond Fund (the "Fund") is part of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing(SM) System. Shares
of Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The following
is a summary of significant accounting policies followed by the Fund.

(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

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

15


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

will adopt the provisions to amortize all premiums and discounts on debt
securities effective August 1, 2001, as now required under the new AICPA Audit
and Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund, but
will result in a $4,963 increase to the cost of securities and a corresponding
$4,963 decrease to net unrealized appreciation, based on debt securities held as
of July 31, 2001.

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

(f) Expenses -- Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.

2. Investment Advisory Agreement and Transactions with Affiliates:

The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is a limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

                                             Account
                                           Maintenance           Distribution
                                               Fee                   Fee
- --------------------------------------------------------------------------------
Class B ..............                         .25%                  .25%
Class C ..............                         .25%                  .35%
Class D ..............                         .10%                   --
- --------------------------------------------------------------------------------

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D shares as
follows:

                                              FAMD                 MLPF&S
- --------------------------------------------------------------------------------
Class A...............                        $ 95                 $  765
Class D...............                        $669                 $3,456
- --------------------------------------------------------------------------------

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $31,672 and $2,315 relating to transactions in Class B and Class C
Shares, respectively.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $31,006 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust

16


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

Company ("State Street"), effective January 1, 2001, pursuant to which State
Street provides certain accounting services to the Fund. The Fund pays a fee for
these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:

Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $28,268,588 and $34,708,421, respectively.

Net realized gains (losses) for the year ended July 31, 2001 and net unrealized
gains as of July 31, 2001 were as follows:

- ----------------------------------------------------------------------------
                                          Realized               Unrealized
                                       Gains (Losses)               Gains
- ----------------------------------------------------------------------------
Long-term investments .......            $  502,839             $  2,700,899
Financial futures contracts .                (9,244)                      --
                                         ----------             ------------
Total .......................            $  493,595             $  2,700,899
                                         ==========             ============
- ----------------------------------------------------------------------------

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $2,700,899 of which $2,707,243 is related to appreciated securities
and $6,344 is related to depreciated securities. The aggregate cost of
investments at July 31, 2001 for Federal income tax purposes was $45,167,347.

4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$7,611,016 and $16,265,525 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:

- ---------------------------------------------------------------------------
Class A Shares for the Year                                        Dollar
Ended July 31, 2001                        Shares                  Amount
- ---------------------------------------------------------------------------
Shares sold ........................        37,183             $    364,161
Shares issued to shareholders.......
in reinvestment of dividends........        15,171                  148,497
                                        ----------             ------------
Total issued .......................        52,354                  512,658
Shares redeemed ....................      (240,905)              (2,356,498)
                                        ----------             ------------
Net decrease .......................      (188,551)            $ (1,843,840)
                                        ==========             ============
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
Class A Shares for the Year                                        Dollar
Ended July 31, 2000                       Shares                   Amount
- ---------------------------------------------------------------------------
Shares sold ........................       355,751             $  3,485,957
Shares issued to shareholders
in reinvestment of dividends........        21,664                  203,232
                                        ----------             ------------
Total issued .......................       377,415                3,689,189
Shares redeemed ....................      (347,557)              (3,266,726)
                                        ----------             ------------
Net increase .......................        29,858             $    422,463
                                        ==========             ============
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
Class B Shares for the Year                                        Dollar
Ended July 31, 2001                        Shares                  Amount
- ---------------------------------------------------------------------------
Shares sold ........................       263,213             $  2,590,433
Shares issued to shareholders
in reinvestment of dividends........        47,383                  463,979
                                        ----------             ------------
Total issued .......................       310,596                3,054,412
Automatic conversion
of shares ..........................       (49,601)                (483,882)
Shares redeemed ....................      (865,397)              (8,464,980)
                                        ----------             ------------
Net decrease .......................      (604,402)            $ (5,894,450)
                                        ==========             ============
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
Class B Shares for the Year                                        Dollar
Ended July 31, 2000                       Shares                   Amount
- ---------------------------------------------------------------------------
Shares sold ........................       176,641             $  1,662,836
Shares issued to shareholders
in reinvestment of dividends........        72,579                  680,977
                                        ----------             ------------
Total issued .......................       249,220                2,343,813
Automatic conversion
of shares ..........................       (11,094)                (105,147)
Shares redeemed ....................    (1,777,055)             (16,695,375)
                                        ----------             ------------
Net decrease .......................    (1,538,929)            $(14,456,709)
                                        ==========             ============
- ---------------------------------------------------------------------------

- ---------------------------------------------------------------------------
Class C Shares for the Year                                        Dollar
Ended July 31, 2001                       Shares                   Amount
- ---------------------------------------------------------------------------
Shares sold ........................       119,970             $  1,187,224
Shares issued to shareholders
in reinvestment of dividends........        10,828                  106,082
                                        ----------             ------------
Total issued .......................       130,798                1,293,306
Shares redeemed ....................      (143,454)              (1,407,390)
                                        ----------             ------------
Net decrease .......................       (12,656)            $   (114,084)
                                        ==========             ============
- ---------------------------------------------------------------------------

17


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

- ----------------------------------------------------------------------------
Class C Shares for the Year                                         Dollar
Ended July 31, 2000                        Shares                   Amount
- ----------------------------------------------------------------------------
Shares sold .......................          87,411             $    821,620
Shares issued to shareholders
in reinvestment of dividends.......          12,833                  120,348
                                         ----------             ------------
Total issued ......................         100,244                  941,968
Shares redeemed ...................        (137,911)              (1,297,617)
                                         ----------             ------------
Net decrease ......................         (37,667)            $   (355,649)
                                         ==========             ============
- ----------------------------------------------------------------------------

- ----------------------------------------------------------------------------
Class D Shares for the Year                                         Dollar
Ended July 31, 2001                        Shares                   Amount
- ----------------------------------------------------------------------------
Shares sold .......................          38,970             $    375,887
Automatic conversion
of shares .........................          49,651                  483,882
Shares issued to shareholders
in reinvestment of dividends.......           5,565                   54,480
                                         ----------             ------------
Total issued ......................          94,186                  914,249
Shares redeemed ...................         (69,101)                (672,891)
                                         ----------             ------------
Net increase ......................          25,085             $    241,358
                                         ==========             ============
- ----------------------------------------------------------------------------

- ----------------------------------------------------------------------------
Class D Shares for the Year                                         Dollar
Ended July 31, 2000                        Shares                   Amount
- ----------------------------------------------------------------------------
Shares sold .......................          40,670             $    384,099
Automatic conversion
of shares .........................          11,100                  105,147
Shares issued to shareholders
in reinvestment of dividends.......           9,422                   88,473
                                         ----------             ------------
Total issued ......................          61,192                  577,719
Shares redeemed ...................        (262,420)              (2,453,349)
                                         ----------             ------------
Net decrease ......................        (201,228)            $ (1,875,630)
                                         ==========             ============
- ----------------------------------------------------------------------------

5. Short-Term Borrowings:

On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and a    ed a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other l    rs. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

6. Capital Loss Carryforward:

At July 31, 2001, the Fund had a capital loss carryforward of approximately
$5,540,000, of which $708,000 expires in 2004, $457,000 expires in 2005,
$1,014,000 expires in 2008 and $3,361,000 expires in 2009. This amount will be
available to offset like amounts of any future taxable gains.

18


Merrill Lynch Michigan Municipal Bond Fund                         July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Michigan Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
broker; where replies were not received from the broker, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Michigan Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
New York, New York
September 10, 2001

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Michigan Municipal Bond Fund during its taxable year ended July 31, 2001 qualify
as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

19


[LOGO] Merrill Lynch  Investment Managers
                                                               [GRAPHIC OMITTED]

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Michigan
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

[RECYCLED LOGO] Printed on post-consumer recycled paper           #16561 -- 7/01

EX-99.17R

                                                                   EXHIBIT 17(r)

[LOGO] Merrill Lynch Investment Managers

Annual Report
July 31, 2001

Merrill Lynch
Minnesota
Municipal
Bond Fund

www.mlim.ml.com


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

DEAR SHAREHOLDER

The Municipal Market Environment

In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to this increased demand and long-term tax-exempt bond
yields declined to 5.40% by July 31, 2001, a five

1


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

basis point decline in long-term municipal bond yields from January 2001 levels.

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June and July 2001. Given
continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates artificially high, although not as high as in recent years. As
these pressures abated, short-term municipal interest rates declined to
approximately 2.5%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.

Fiscal Year in Review

We entered the fiscal year ended July 31, 2001 fully invested in Minnesota
municipal bonds, with a relatively neutral market position. We adopted this
strategy to maintain a high level of tax-exempt income, anticipating clearer
signs of future economic growth and inflation expectations. During the first six
months of the fiscal year, municipal bond prices generally increased in
anticipation of a weakening economy. To better participate in a declining
interest rate environment, we restructured a portion of the Fund. However,
toward the end of the first six months of the fiscal year, the Federal Reserve
Board reversed its course and began aggressively easing monetary policy.
Simultaneously, the Federal Government began considering a significant reduction
in Federal income taxes. In response to these developments, we began to reduce
the Fund's exposure to highly interest rate-sensitive securities.

During the last six months of the fiscal year, we maintained a fully invested
position but also continued to

2


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

reduce the Fund's exposure to highly interest rate-sensitive securities. We
pursued this strategy in response to the Federal Reserve Board's 275 basis point
reduction in the Federal Funds rate and enactment of a relatively large
reduction in Federal taxes, including a tax rebate. Additionally, the absolute
yield levels available on municipal bonds approached multi-year lows. During the
fiscal year, we also improved the Fund's credit quality in response to the
deterioration in creditworthiness of certain holdings. At the end of the fiscal
year, approximately 90% of the Fund's net assets were invested in securities
rated A or better by at least one of the major rating agencies.

For the fiscal year ended July 31, 2001, the Fund's Class A, Class B, Class C
and Class D Shares had returns of +8.95%, +8.30%, +8.19% and +8.84%,
respectively. These results were slightly below the Lipper, Inc. average of
other Minnesota municipal bond funds and the Fund's unmanaged benchmark Lehman
Brothers Municipal Bond Index, which had a return of +10.08% for the same
period. (Fund results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be found on
pages 4 and 5 of this report to shareholders.)

Going forward, we intend to remain fully invested to seek to provide a high
level of tax-exempt income, looking for opportunities in both new-issue and
secondary markets to improve the Fund's structure and to enhance performance.

In Conclusion

We appreciate your ongoing interest in the Merrill Lynch Minnesota Municipal
Bond Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.

Sincerely,


/s/ Terry K. Glenn

Terry K. Glenn
President and Trustee


/s/ Vincent R. Giordano

Vincent R. Giordano
Senior Vice President


/s/ Michael Kalinoski

Michael Kalinoski
Vice President and Portfolio Manager

September 5, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Michael A. Kalinoski, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

Custodian

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

Transfer Agent

Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

3


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:

 .     Class A Shares incur a maximum initial sales charge (front-end load) of 4%
      and bear no ongoing distribution or account maintenance fees. Class A
      Shares are available only to eligible investors.

 .     Class B Shares are subject to a maximum contingent deferred sales charge
      of 4% if redeemed during the first year, decreasing 1% each year
      thereafter to 0% after the fourth year. In addition, Class B Shares are
      subject to a distribution fee of 0.25% and an account maintenance fee of
      0.25%. These shares automatically convert to Class D Shares after
      approximately ten years. (There is no initial sales charge for automatic
      share conversions.)

 .     Class C Shares are subject to a distribution fee of 0.35% and an account
      maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
      contingent deferred sales charge if redeemed within one year of purchase.

 .     Class D Shares incur a maximum initial sales charge of 4% and an account
      maintenance fee of 0.10% (but no distribution fee).

      None of the past results shown should be considered a representation of
      future performance. Performance results do not reflect the deduction of
      taxes that a shareholder would pay on fund distributions or the redemption
      of fund shares. Figures shown in the "Recent Performance Results" and
      "Average Annual Total Return" tables assume reinvestment of all dividends
      and capital gains distributions at net asset value on the payable date.
      Investment return and principal value of shares will fluctuate so that
      shares, when redeemed, may be worth more or less than their original cost.
      Dividends paid to each class of shares will vary because of the different
      levels of account maintenance, distribution and transfer agency fees
      applicable to each class, which are deducted from the income available to
      be paid to shareholders.

Average Annual Total Return

                                               % Return Without   % Return With
                                                  Sales Charge    Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/01                               +8.91%            +4.55%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                             +5.86             +5.00
- --------------------------------------------------------------------------------
Inception (3/27/92)
through 6/30/01                                      +6.20             +5.73
- --------------------------------------------------------------------------------
 *    Maximum sales charge is 4%.
**    Assuming maximum sales charge.

                                                    % Return         % Return
                                                  Without CDSC      With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/01                               +8.46%            +4.46%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                             +5.34             +5.34
- --------------------------------------------------------------------------------
Inception (3/27/92)
through 6/30/01                                      +5.67             +5.67
- --------------------------------------------------------------------------------
 *    Maximum contingent deferred sales charge is 4% and is reduced to 0% after
      4 years.
**    Assuming payment of applicable contingent deferred sales charge.

================================================================================
                                                    % Return         % Return
                                                  Without CDSC      With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/01                               +8.35%            +7.35%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                             +5.24             +5.24
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                      +5.53             +5.53
- --------------------------------------------------------------------------------
 *    Maximum contingent deferred sales charge is 1% and is reduced to 0% after
      1 year.
**    Assuming payment of applicable contingent deferred sales charge.

================================================================================
                                               % Return Without   % Return With
                                                  Sales Charge    Sales Charge**
================================================================================
Class D Shares*
================================================================================
One Year Ended 6/30/01                               +8.79%            +4.44%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/01                             +5.75             +4.89
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/01                                      +6.07             +5.42
- --------------------------------------------------------------------------------
 *    Maximum sales charge is 4%.
**    Assuming maximum sales charge.

4


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

PERFORMANCE DATA (concluded)

Merrill Lynch Minnesota Municipal Bond Fund--Edgar

Total Return Based on a $10,000 Investment--Class A Shares and Class B Shares

A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from March 27, 1992 to July 2001:



                                    3/27/92**        7/92              7/93             7/94              7/95             7/96
                                                                                                         
ML Minnesota Municipal
Bond Fund+--Class A Shares*         $ 9,600          $10,356           $11,258          $11,469           $12,093          $12,695
ML Minnesota Municipal
Bond Fund+--Class B Shares*         $10,000          $10,769           $11,648          $11,805           $12,385          $12,935
Lehman Brothers Municipal
Bond Index++                        $10,000          $10,690           $11,635          $11,853           $12,786          $13,630


                                    7/97             7/98              7/99             7/00              7/01
                                                                                           
ML Minnesota Municipal
Bond Fund+--Class A Shares*         $13,928          $14,743           $15,050          $15,569           $16,962
ML Minnesota Municipal
Bond Fund+--Class B Shares*         $14,911          $14,869           $15,101          $15,559           $16,850
Lehman Brothers Municipal
Bond Index++                        $15,028          $15,929           $16,387          $17,093           $18,815


Total Return Based on a $10,000 Investment--Class C Shares and Class D Shares

A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the Lehman Brothers
Municipal Bond Index. Values are from October 21, 1994 to July 2001:




                                    10/21/94**       7/95              7/96             7/97              7/98             7/99
                                                                                                         
ML Minnesota Municipal
Bond Fund+--Class C Shares          $10,000          $10,713           $11,177          $12,187           $12,833          $13,009
ML Minnesota Municipal
Bond Fund+--Class D Shares          $ 9,600          $10,327           $10,831          $11,882           $12,564          $12,800
Lehman Brothers Municipal
Bond Index++                        $10,000          $11,107           $11,840          $13,054           $13,836          $14,234


                                    7/00             7/01
                                               
ML Minnesota Municipal
Bond Fund+--Class C Shares          $13,389          $14,486
ML Minnesota Municipal
Bond Fund+--Class D Shares          $13,242          $14,413
Lehman Brothers Municipal
Bond Index++                        $14,848          $16,344


*     Assuming maximum sales charge, transaction costs and other operating
      expenses, including advisory fees.

**    Commencement of operations.

+     ML Minnesota Municipal Bond Fund invests primarily in long-term
      investment-grade obligations issued by or on behalf of the state of
      Minnesota, its political subdivisions, agencies and instrumentalities and
      obligations of other qualifying issuers.

++    This unmanaged Index consists of long-term revenue bonds, prerefunded
      bonds, general obligation bonds and insured bonds. The starting date for
      the Index in the Class A & Class B Shares' graph is from 3/31/92 and in
      the Class C & Class D Shares' graph is from 10/31/94.

      Past performance is not predictive of future performance.

Recent Performance Results*



                                                       6-Month           12-Month     Since Inception   Standardized
As of July 31, 2001                                 Total Return       Total Return     Total Return    30-Day Yield
====================================================================================================================
                                                                                                
ML Minnesota Municipal Bond Fund Class A Shares        +2.82%             +8.95%          +76.68%           3.79%
- --------------------------------------------------------------------------------------------------------------------
ML Minnesota Municipal Bond Fund Class B Shares        +2.56              +8.30           +68.50            3.45
- --------------------------------------------------------------------------------------------------------------------
ML Minnesota Municipal Bond Fund Class C Shares        +2.51              +8.19           +44.86            3.35
- --------------------------------------------------------------------------------------------------------------------
ML Minnesota Municipal Bond Fund Class D Shares        +2.77              +8.84           +50.12            3.70
====================================================================================================================


*     Investment results shown do not reflect sales charges; results would be
      lower if a sales charge was included. Total investment returns are based
      on changes in net asset values for the periods shown, and assume
      reinvestment of all dividends and capital gains distributions at net asset
      value on the payable date. The Fund's since inception dates are from
      3/27/92 for Class A & Class B Shares and from 10/21/94 for Class C & Class
      D Shares.

5


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

SCHEDULE OF INVESTMENTS                                           (in Thousands)



S&P       Moody's   Face
Ratings   Ratings   Amount                                            Issue                                            Value
- -----------------------------------------------------------------------------------------------------------------------------
Minnesota -- 100.7%
                                                                                                          
AA-       Aa3       $1,750   Anoka County, Minnesota, Solid Waste Disposal Revenue Bonds (Natural Rural Utilities),
                             AMT, Series A, 6.95% due 12/01/2008                                                      $ 1,798
- -----------------------------------------------------------------------------------------------------------------------------
A1+       NR*        1,100   Beltrami County, Minnesota, Environmental Control Revenue Bonds (Northwood
                             Panelboard Co. Project), VRDN, AMT, 2.80% due 7/01/2025 (h)                                1,100
- -----------------------------------------------------------------------------------------------------------------------------
AAA       NR*        3,530   Coon Rapids, Minnesota, M/F Housing Revenue Refunding Bonds (Browns Meadow),
                             AMT, 6.85% due 8/01/2033 (c)                                                               3,659
- -----------------------------------------------------------------------------------------------------------------------------
AAA       NR*          500   Dakota County, Minnesota, Community Development Agency, M/F Mortgage Housing
                             Revenue Refunding Bonds (Southfork Apartments), 5.625% due 2/01/2026                         510
- -----------------------------------------------------------------------------------------------------------------------------
NR*       Aaa        1,000   Eden Prairie, Minnesota, M/F Housing Revenue Refunding Bonds (Parkway Apartments
                             Project), Series A, 5.70% due 8/20/2022 (e)                                                1,033
- -----------------------------------------------------------------------------------------------------------------------------
NR*       Aaa          500   Elk River, Minnesota, Independent School District Number 728, GO, Series A,
                             5.50% due 2/01/2021 (f)                                                                      522
- -----------------------------------------------------------------------------------------------------------------------------
AAA       NR*        1,500   Minneapolis and Saint Paul, Minnesota, Metropolitan Airports Commission, Airport
                             Revenue Bonds, DRIVERS, AMT, Series 203, 8.44% due 1/01/2012 (b)(g)                        1,732
- -----------------------------------------------------------------------------------------------------------------------------
AA+       Aa1        1,000   Minneapolis, Minnesota, COP (Special School District Number 001), 5.75% due 2/01/2014      1,069
- -----------------------------------------------------------------------------------------------------------------------------
A         NR*          485   Minneapolis, Minnesota, Community Development Agency, M/F Housing Revenue Bonds
                             (Riverside Homes Project), AMT, 6.20% due 9/01/2029                                          496
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aa1        1,000   Minneapolis, Minnesota, GO, Tax Increment, Series E, 5% due 3/01/2026                        996
- -----------------------------------------------------------------------------------------------------------------------------
AAA       NR*        1,300   Minneapolis, Minnesota, M/F Mortgage Revenue Refunding Bonds (Riverside Plaza),
                             AMT, 5.20% due 12/20/2030 (e)                                                              1,263
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aa1        1,000   Minneapolis, Minnesota, Sales Tax Refunding Bonds, GO, 6.25% due 4/01/2012                 1,040
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,025   Minnesota Agriculture and Economic Development Board, Health Care Revenue
                             Refunding Bonds (Benedictine Health), Series A, 5.25% due 2/15/2014 (f)                    1,065
- -----------------------------------------------------------------------------------------------------------------------------
                             Minnesota State, HFA, S/F Mortgage Revenue Bonds:
AA+       Aa1          210     AMT, Series C, 5.30% due 7/01/2025                                                         213
AA+       Aa1        1,120     AMT, Series E, 6.85% due 1/01/2024                                                       1,153
AA+       Aa1          975     AMT, Series L, 6.70% due 7/01/2020                                                       1,021
AA+       Aa1          540     Series A, 6.95% due 7/01/2016                                                              554
AA+       Aa1        1,255     Series D-1, 6.50% due 1/01/2017                                                          1,299
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Northern Municipal Power Agency, Minnesota, Electric System Revenue Refunding Bonds,
                             Series B, 4.75% due 1/01/2020 (a)                                                            957
- -----------------------------------------------------------------------------------------------------------------------------


PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Minnesota Municipal Bond Fund's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list below and at right.

AMT       Alternative Minimum Tax (subject to)
COP       Certificates of Participation
DRIVERS   Derivative Inverse Tax-Exempt Receipts
GO        General Obligation Bonds
HFA       Housing Finance Agency
IDR       Industrial Development Revenue Bonds
IRS       Inverse Rate Securities
M/F       Multi-Family
PCR       Pollution Control Revenue Bonds
S/F       Single-Family
VRDN      Variable Rate Demand Notes

6


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

SCHEDULE OF INVESTMENTS (concluded)                               (in Thousands)



S&P       Moody's   Face
Ratings   Ratings   Amount                                            Issue                                            Value
- -----------------------------------------------------------------------------------------------------------------------------
Minnesota (concluded)
                                                                                                          
AAA       A3        $  750   Northfield, Minnesota, College Facility Revenue Refunding Bonds (Saint Olaf College
                             Project), 6.40% due 10/01/2021                                                           $   784
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aaa          500   Ramsey County, Minnesota, GO (Capital Improvement Plan), Series A,
                             6.25% due 2/01/2010                                                                          560
- -----------------------------------------------------------------------------------------------------------------------------
NR*       Aa3        1,110   Ramsey County, Minnesota, Housing and Redevelopment Authority, M/F Housing
                             Revenue Bonds (Hanover Townhouses Project), AMT, 6% due 7/01/2031                          1,122
- -----------------------------------------------------------------------------------------------------------------------------
AA+       NR*        2,450   Rochester, Minnesota, Health Care Facilities Revenue Bonds, IRS, Series H,
                             9.091% due 11/15/2015 (g)                                                                  2,640
- -----------------------------------------------------------------------------------------------------------------------------
                             Saint Cloud, Minnesota, Health Care Revenue Refunding Bonds (Saint Cloud Hospital
                             Obligation Group), Series A (d):
NR*       Aaa        1,000     6.25% due 5/01/2020                                                                      1,116
NR*       Aaa          500     5.75% due 5/01/2026                                                                        530
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Saint Francis, Minnesota, Independent School District No. 015, GO, Series A,
                             6.35% due 2/01/2013 (d)                                                                    1,109
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aa2        1,000   Saint Paul, Minnesota, GO (Tax Increment -- Block 39 Project), Series A,
                             4.75% due 2/01/2019                                                                          969
- -----------------------------------------------------------------------------------------------------------------------------
                             Saint Paul, Minnesota, Housing and Redevelopment Authority, Revenue Refunding Bonds:
AA        NR*        1,000     (District Cooling of Saint Paul), Series J, 5.125% due 3/01/2012                         1,032
AAA       Aaa          500     (Downtown Tax Increment District), 6.45% due 8/01/2008 (a)                                 565
- -----------------------------------------------------------------------------------------------------------------------------
AA+       Aa1          805   Saint Paul, Minnesota, Independent School District Number 625, GO, Series B,
                             6% due 2/01/2015                                                                             848
- -----------------------------------------------------------------------------------------------------------------------------
                             Sartell, Minnesota, Refunding (Champion International Corporation):
BBB       Baa1         990     IDR, 6.95% due 7/01/2012                                                                 1,029
BBB       Baa1         665     PCR, 6.95% due 10/01/2012                                                                  691
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,215   Scott County, Minnesota, Housing and Redevelopment Authority, Facility Lease Revenue
                             Bonds (Justice Center Project), 5.50% due 12/01/2015 (a)                                   1,260
- -----------------------------------------------------------------------------------------------------------------------------
AAA       Aaa        1,000   Southern Minnesota, Municipal Power Agency, Power Supply System Revenue Refunding
                             Bonds, 5% due 1/01/2009 (a)                                                                1,041
- -----------------------------------------------------------------------------------------------------------------------------
AA        Aa2        1,200   University of Minnesota Revenue Refunding Bonds, Series A, 5.75% due 7/01/2016             1,338
- -----------------------------------------------------------------------------------------------------------------------------
AA        NR*        1,500   Waconia, Minnesota, Health Care Facilities Revenue Bonds (Ridgeview Medical Center
                             Project), Series A, 6.125% due 1/01/2029                                                   1,593
- -----------------------------------------------------------------------------------------------------------------------------
NR*       Aaa        1,400   Windom, Minnesota, Independent School District No. 177, GO, 4.75% due 2/01/2024 (d)        1,323
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $39,140) -- 100.7%                                                                          41,030
Liabilities in Excess of Other Assets -- (0.7%)                                                                          (267)
                                                                                                                      -------
Net Assets -- 100.0%                                                                                                  $40,763
                                                                                                                      =======
- -----------------------------------------------------------------------------------------------------------------------------


(a)   AMBAC Insured.
(b)   FGIC Insured.
(c)   FHA Insured
(d)   FSA Insured.
(e)   GNMA Collateralized.
(f)   MBIA Insured.
(g)   The interest rate is subject to change periodically and inversely based
      upon prevailing market rates. The interest rate shown is the rate in
      effect at July 31, 2001.
(h)   The interest rate is subject to change periodically based upon prevailing
      market rates. The interest rate shown is the rate in effect at July 31,
      2001.
  *   Not Rated.

Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

7


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001

                                                                                                           
Assets:            Investments, at value (identified cost -- $39,140,361)                                       $ 41,030,113
                   Cash                                                                                               71,823
                   Receivables:
                     Interest ..................................................................   $  646,388
                     Beneficial interest sold ..................................................      142,968        789,356
                                                                                                   ----------

                   Prepaid registration fees and other assets ..................................                      10,455
                                                                                                                ------------
                   Total assets ................................................................                  41,901,747
                                                                                                                ------------
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities:       Payables:
                     Securities purchased ......................................................    1,035,127
                     Dividends to shareholders .................................................       36,517
                     Investment adviser ........................................................       18,247
                     Distributor ...............................................................       14,375      1,104,266
                                                                                                   ----------
                   Accrued expenses and other liabilities ......................................                      34,550
                                                                                                                ------------
                   Total liabilities ...........................................................                   1,138,816
                                                                                                                ------------
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets:        Net assets ..................................................................                $ 40,762,931
                                                                                                                ============
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets         Class A Shares of beneficial interest, $.10 par value, unlimited number of
Consist of:        shares authorized ...........................................................                $     38,333
                   Class B Shares of beneficial interest, $.10 par value, unlimited number of
                   shares authorized ...........................................................                     299,669
                   Class C Shares of beneficial interest, $.10 par value, unlimited number of
                   shares authorized ...........................................................                      22,468
                   Class D Shares of beneficial interest, $.10 par value, unlimited number of
                   shares authorized ...........................................................                      19,651
                   Paid-in capital in excess of par ............................................                  38,549,995
                   Accumulated realized capital losses on investments -- net ...................                     (56,937)
                   Unrealized appreciation on investments -- net ...............................                   1,889,752
                                                                                                                ------------
                   Net assets ..................................................................                $ 40,762,931
                                                                                                                ============
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value:   Class A -- Based on net assets of $4,109,721 and 383,332 shares
                   of beneficial interest outstanding ..........................................                $      10.72
                                                                                                                ============
                   Class B -- Based on net assets of $32,134,894 and 2,996,692 shares
                   of beneficial interest outstanding ..........................................                $      10.72
                                                                                                                ============
                   Class C -- Based on net assets of $2,409,689 and 224,680 shares
                   of beneficial interest outstanding ..........................................                $      10.72
                                                                                                                ============
                   Class D -- Based on net assets of $2,108,627 and 196,514 shares
                   of beneficial interest outstanding ..........................................                $      10.73
                                                                                                                ============
- ----------------------------------------------------------------------------------------------------------------------------



                       See Notes to Financial Statements.

8


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION (continued)

Statement of Operations



                                                                                                      For the Year Ended
                                                                                                           July 31, 2001
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                   
Investment Income:    Interest and amortization of premium and discount earned                              $  2,343,101
- ------------------------------------------------------------------------------------------------------------------------
Expenses:             Investment advisory fees ......................................   $  221,646
                      Account maintenance and distribution fees -- Class B ..........      160,988
                      Professional fees .............................................       73,755
                      Printing and shareholder reports ..............................       38,401
                      Accounting services ...........................................       27,002
                      Transfer agent fees -- Class B ................................       18,585
                      Account maintenance and distribution fees -- Class C ..........       12,192
                      Trustees' fees and expenses ...................................        7,987
                      Registration fees .............................................        7,024
                      Pricing fees ..................................................        6,236
                      Custodian fees ................................................        3,986
                      Transfer agent fees -- Class A ................................        2,083
                      Account maintenance fees -- Class D ...........................        1,893
                      Transfer agent fees -- Class C ................................        1,195
                      Transfer agent fees -- Class D ................................          951
                      Other .........................................................        7,078
                                                                                        ----------
                      Total expenses ................................................      591,002
                                                                                        -----------
                      Investment income -- net ......................................    1,752,099
                                                                                        ------------
- ------------------------------------------------------------------------------------------------------------------------
Realized &            Realized gain on investments -- net ...........................                           277,750
Unrealized Gain on    Change in unrealized appreciation on investments -- net .......                         1,241,761
Investments -- Net:                                                                                        ------------
                      Net Increase in Net Assets Resulting from Operations ..........                      $  3,271,610
                                                                                                           ============
- ------------------------------------------------------------------------------------------------------------------------


                       See Notes to Financial Statements.
9


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets



                                                                                                      For the Year Ended
                                                                                                           July 31,
                                                                                                 ---------------------------
Increase (Decrease) in Net Assets:                                                                   2001           2000
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Operations:           Investment income -- net ...............................................   $  1,752,099   $  1,970,869
                      Realized gain on investments -- net ....................................        277,750        182,532
                      Change in unrealized appreciation on investments -- net ................      1,241,761     (1,036,596)
                                                                                                 ------------   ------------
                      Net increase in net assets resulting from operations ...................      3,271,610      1,116,805
                                                                                                 ------------   ------------
- ----------------------------------------------------------------------------------------------------------------------------
Dividends to          Investment income -- net:
Shareholders:           Class A ..............................................................       (200,025)      (232,332)
                        Class B ..............................................................     (1,378,694)    (1,572,900)
                        Class C ..............................................................        (84,766)       (75,069)
                        Class D ..............................................................        (88,614)       (90,568)
                                                                                                 ------------   ------------
                      Net decrease in net assets resulting from dividends to shareholders ....     (1,752,099)    (1,970,869)
                                                                                                 ------------   ------------
- ----------------------------------------------------------------------------------------------------------------------------
Beneficial Interest   Net decrease in net assets derived from beneficial
Transactions:         interest transactions ..................................................       (692,050)    (6,455,015)
                                                                                                 ------------   ------------
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets:           Total increase (decrease) in net assets ................................        827,461     (7,309,079)
                      Beginning of year ......................................................     39,935,470     47,244,549
                                                                                                 ------------   ------------
                      End of year ............................................................   $ 40,762,931   $ 39,935,470
                                                                                                 ============   ============
- ----------------------------------------------------------------------------------------------------------------------------


                       See Notes to Financial Statements.

10


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights



                                                                                             Class A
                                                                     --------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.                             For the Year Ended July 31,
                                                                     --------------------------------------------------------
Increase (Decrease) in Net Asset Value:                                2001        2000        1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
Per Share           Net asset value, beginning of year ...........   $  10.32    $  10.50    $  10.79    $  10.72    $  10.28
Operating                                                            --------    --------    --------    --------    --------
Performance:        Investment income -- net .....................        .51         .52         .52         .54         .53
                    Realized and unrealized gain (loss) on
                    investments -- net ...........................        .40        (.18)       (.29)        .07         .44
                                                                     --------    --------    --------    --------    --------
                    Total from investment operations .............        .91         .34         .23         .61         .97
                                                                     --------    --------    --------    --------    --------
                    Less dividends and distributions:
                      Investment income -- net ...................       (.51)       (.52)       (.52)       (.54)       (.53)
                      In excess of realized gain on
                      investments -- net .........................         --          --          --          --+         --
                                                                     --------    --------    --------    --------    --------
                    Total dividends and distributions ............       (.51)       (.52)       (.52)       (.54)       (.53)
                                                                     --------    --------    --------    --------    --------
                    Net asset value, end of year .................   $  10.72    $  10.32    $  10.50    $  10.79    $  10.72
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment    Based on net asset value per share ...........      8.95%       3.45%       2.08%       5.85%       9.71%
Return:*                                                             ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average   Expenses .....................................      1.03%        .97%       1.02%       .91%         .92%
Net Assets:                                                          ========    ========    ========    ========    ========
                    Investment income -- net .....................      4.79%       5.12%       4.80%       4.98%       5.09%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental        Net assets, end of year (in thousands) .......   $  4,110    $  4,141    $  6,067    $  6,993    $  5,390
Data:                                                                ========    ========    ========    ========    ========
                    Portfolio turnover ...........................     45.63%      43.42%      26.09%      56.43%      28.42%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------


      *     Total investment returns exclude the effects of sales charges.
      +     Amount is less than $.01 per share.

            See Notes to Financial Statements.

11


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



                                                                                              Class B
                                                                     --------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.                             For the Year Ended July 31,
                                                                     --------------------------------------------------------
Increase (Decrease) in Net Asset Value:                                2001        2000        1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
Per Share           Net asset value, beginning of year ...........   $  10.33    $  10.50    $  10.79    $  10.72    $  10.28
Operating                                                            --------    --------    --------    --------    --------
Performance:        Investment income -- net .....................        .45         .47         .46         .48         .48
                    Realized and unrealized gain (loss) on
                    investments -- net ...........................        .39        (.17)       (.29)        .07         .44
                                                                     --------    --------    --------    --------    --------
                    Total from investment operations .............        .84         .30         .17         .55         .92
                                                                     --------    --------    --------    --------    --------
                    Less dividends and distributions:
                      Investment income -- net ...................       (.45)       (.47)       (.46)       (.48)       (.48)
                      In excess of realized gain on
                      investments -- net .........................         --          --          --          --+         --
                                                                     --------    --------    --------    --------    --------
                    Total dividends and distributions ............       (.45)       (.47)       (.46)       (.48)       (.48)
                                                                     --------    --------    --------    --------    --------
                    Net asset value, end of year .................   $  10.72    $  10.33    $  10.50    $  10.79    $  10.72
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment    Based on net asset value per share ...........      8.30%       3.03%       1.56%       5.31%       9.15%
Return:*                                                             ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average   Expenses .....................................      1.53%       1.47%       1.53%       1.42%       1.43%
Net Assets:                                                          ========    ========    ========    ========    ========
                    Investment income -- net .....................      4.28%       4.61%       4.29%       4.47%       4.58%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental        Net assets, end of year (in thousands) .......   $ 32,135    $ 32,524    $ 37,507    $ 38,585    $ 41,274
Data:                                                                ========    ========    ========    ========    ========
                    Portfolio turnover ...........................     45.63%      43.42%      26.09%      56.43%      28.42%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------


      *     Total investment returns exclude the effects of sales charges.
      +     Amount is less than $.01 per share.

            See Notes to Financial Statements.


12


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)



                                                                                              Class C
                                                                     --------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.                              For the Year Ended July 31,
                                                                     --------------------------------------------------------
Increase (Decrease) in Net Asset Value:                                2001        2000        1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
Per Share           Net asset value, beginning of year ...........   $  10.33    $  10.50    $  10.80    $  10.72    $  10.28
Operating                                                            --------    --------    --------    --------    --------
Performance:        Investment income -- net .....................        .44         .46         .45         .47         .47
                    Realized and unrealized gain (loss) on
                    investments -- net ...........................        .39        (.17)       (.30)        .08         .44
                                                                     --------    --------    --------    --------    --------
                    Total from investment operations .............        .83         .29         .15         .55         .91
                                                                     --------    --------    --------    --------    --------
                    Less dividends and distributions:
                      Investment income -- net ...................       (.44)       (.46)       (.45)       (.47)       (.47)
                      In excess of realized gain on
                      investments -- net .........................         --          --          --          --+         --
                                                                     --------    --------    --------    --------    --------
                    Total dividends and distributions ............       (.44)       (.46)       (.45)       (.47)       (.47)
                                                                     --------    --------    --------    --------    --------
                    Net asset value, end of year .................   $  10.72    $  10.33    $  10.50    $  10.80    $  10.72
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment    Based on net asset value per share ...........      8.19%       2.92%       1.37%       5.30%       9.04%
Return:*                                                             ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average   Expenses .....................................      1.64%       1.57%       1.63%       1.52%       1.53%
Net Assets:                                                          ========    ========    ========    ========    ========
                    Investment income -- net .....................      4.17%       4.52%       4.19%       4.37%       4.48%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental        Net assets, end of year (in thousands) .......   $  2,410    $  1,672    $  1,721    $  1,437    $  1,201
Data:                                                                ========    ========    ========    ========    ========
                    Portfolio turnover ...........................     45.63%      43.42%      26.09%      56.43%      28.42%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------


      *     Total investment returns exclude the effects of sales charges.
      +     Amount is less than $.01 per share.

            See Notes to Financial Statements.

13


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)



                                                                                             Class D
                                                                     --------------------------------------------------------
The following per share data and ratios have been derived
from information provided in the financial statements.                              For the Year Ended July 31,
                                                                     --------------------------------------------------------
Increase (Decrease) in Net Asset Value:                                2001        2000        1999        1998        1997
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
Per Share           Net asset value, beginning of year ...........   $  10.33    $  10.50    $  10.80    $  10.73    $  10.28
Operating                                                            --------    --------    --------    --------    --------
Performance:        Investment income -- net .....................        .50         .51         .51         .53         .52
                    Realized and unrealized gain (loss) on
                    investments -- net ...........................        .40        (.17)       (.30)        .07         .45
                                                                     --------    --------    --------    --------    --------
                    Total from investment operations .............        .90         .34         .21         .60         .97
                                                                     --------    --------    --------    --------    --------
                    Less dividends and distributions:
                      Investment income -- net ...................       (.50)       (.51)       (.51)       (.53)       (.52)
                      In excess of realized gain on
                      investments -- net .........................         --          --          --          --+         --
                                                                     --------    --------    --------    --------    --------
                    Total dividends and distributions ............       (.50)       (.51)       (.51)       (.53)       (.52)
                                                                     --------    --------    --------    --------    --------
                    Net asset value, end of year .................   $  10.73    $  10.33    $  10.50    $  10.80    $  10.73
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment    Based on net asset value per share ...........      8.84%       3.45%       1.88%       5.74%       9.70%
Return:*                                                             ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average   Expenses .....................................      1.13%       1.07%       1.13%       1.01%       1.02%
Net Assets:                                                          ========    ========    ========    ========    ========
                    Investment income -- net .....................      4.68%       5.02%       4.69%       4.88%       4.99%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental        Net assets, end of year (in thousands) .......   $  2,108    $  1,598    $  1,950    $  1,141    $    924
Data:                                                                ========    ========    ========    ========    ========
                    Portfolio turnover ...........................     45.63%      43.42%      26.09%      56.43%      28.42%
                                                                     ========    ========    ========    ========    ========
- -----------------------------------------------------------------------------------------------------------------------------


      *     Total investment returns exclude the effects of sales charges.
      +     Amount is less than $.01 per share.

            See Notes to Financial Statements.

14


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:

Merrill Lynch Minnesota Municipal Bond Fund (the "Fund") is part of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. The
Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM)
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.

(a) Valuation of investments -- Municipal bonds and other portfolio securities
in which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

(d) Security transactions and investment income -- Security transactions are
recorded on the dates the

15


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

transactions are entered into (the trade dates). Realized gains and losses on
security transactions are determined on the identified cost basis. Interest
income is recognized on the accrual basis. The Fund will adopt the provisions to
amortize all premiums and discounts on debt securities effective August 1, 2001,
as now required under the new AICPA Audit and Accounting Guide for Investment
Companies. The cumulative effect of this accounting change will have no impact
on the total net assets of the Fund, but will result in a $10,884 increase to
the cost of securities and a corresponding $10,884 decrease to net unrealized
appreciation, based on debt securities held as of July 31, 2001.

(e) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.

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

(g) Expenses -- Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.

2. Investment Advisory Agreement and Transactions with Affiliates:

The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

- --------------------------------------------------------------------------------
                                                     Account        Distribution
                                                 Maintenance Fee         Fee
- --------------------------------------------------------------------------------
Class B .....................................        .25%                .25%
Class C .....................................        .25%                .35%
Class D .....................................        .10%                 --
- --------------------------------------------------------------------------------

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

- --------------------------------------------------------------------------------
                                                            FAMD          MLPF&S
- --------------------------------------------------------------------------------
Class A .....................................               $ 41          $  438
Class D .....................................               $133          $2,061
- --------------------------------------------------------------------------------

16


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $7,255 relating to transactions in Class B Shares.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $3,123 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:

Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $17,839,662 and $18,315,117, respectively.

Net realized gains for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:

- --------------------------------------------------------------------------------
                                                     Realized        Unrealized
                                                       Gains            Gains
- --------------------------------------------------------------------------------
Long-term investments ....................           $277,750        $ 1,889,752
                                                     --------        -----------
Total ....................................           $277,750        $ 1,889,752
                                                     ========        ===========
- --------------------------------------------------------------------------------

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $1,889,752, of which $1,933,205 related to appreciated securities and
$43,453 related to depreciated securities. The aggregate cost of investments at
July 31, 2001 for Federal income tax purposes was $39,140,361.

4. Beneficial Interest Transactions:

Net decrease in net assets derived from beneficial interest transactions was
$692,050 and $6,455,015 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:

- --------------------------------------------------------------------------------
Class A Shares for the Year                                           Dollar
Ended July 31, 2001                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................             41,648       $   444,268
Shares issued to shareholders
in reinvestment of dividends .............              9,475           100,091
                                                    ---------       -----------
Total issued .............................             51,123           544,359
Shares redeemed ..........................            (68,892)         (730,225)
                                                    ---------       -----------
Net decrease .............................            (17,769)      $  (185,866)
                                                    =========       ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class A Shares for the Year                                           Dollar
Ended July 31, 2000                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................             26,372       $   268,604
Shares issued to shareholders
in reinvestment of dividends .............             11,752           119,534
                                                    ---------       -----------
Total issued .............................             38,124           388,138
Shares redeemed ..........................           (215,094)       (2,208,086)
                                                    ---------       -----------
Net decrease .............................           (176,970)      $(1,819,948)
                                                    =========       ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class B Shares for the Year                                            Dollar
Ended July 31, 2001                                    Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................            248,427       $ 2,629,696
Shares issued to shareholders
in reinvestment of dividends .............             64,656           683,268
                                                    ---------       -----------
Total issued .............................            313,083         3,312,964
Automatic conversion
of shares ................................            (30,716)         (322,428)
Shares redeemed ..........................           (435,151)       (4,598,895)
                                                    ---------       -----------
Net decrease .............................           (152,784)      $(1,608,359)
                                                    =========       ===========
- --------------------------------------------------------------------------------

17


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

- --------------------------------------------------------------------------------
Class B Shares for the Year                                           Dollar
Ended July 31, 2000                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................            216,963       $ 2,207,654

Shares issued to shareholders
in reinvestment of dividends .............             78,027           793,481
                                                    ---------       -----------
Total issued .............................            294,990         3,001,135
Automatic conversion
of shares ................................             (6,875)          (69,500)
Shares redeemed ..........................           (711,692)       (7,232,241)
                                                    ---------       -----------
Net decrease .............................           (423,577)      $(4,300,606)
                                                    =========       ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class C Shares for the Year                                           Dollar
Ended July 31, 2001                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................             78,788       $   830,960
Shares issued to shareholders
in reinvestment of dividends .............              5,927            62,722
                                                    ---------       -----------
Total issued .............................             84,715           893,682
Shares redeemed ..........................            (21,930)         (232,455)
                                                    ---------       -----------
Net increase .............................             62,785       $   661,227
                                                    =========       ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class C Shares for the Year                                           Dollar
Ended July 31, 2000                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................             38,107       $   386,695
Shares issued to shareholders
in reinvestment of dividends .............              5,190            52,780
                                                    ---------       -----------
Total issued .............................             43,297           439,475
Shares redeemed ..........................            (45,261)         (460,819)
                                                    ---------       -----------
Net decrease .............................             (1,964)      $   (21,344)
                                                    =========       ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class D Shares for the Year                                           Dollar
Ended July 31, 2001                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................             21,091       $   223,736
Automatic conversion
of shares ................................             30,695           322,428
Shares issued to shareholders
in reinvestment of dividends .............              3,904            41,321
                                                    ---------       -----------
Total issued .............................             55,690           587,485
Shares redeemed ..........................            (13,873)         (146,537)
                                                    ---------       -----------
Net increase .............................             41,817       $   440,948
                                                    =========       ===========
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Class D Shares for the Year                                           Dollar
Ended July 31, 2000                                   Shares          Amount
- --------------------------------------------------------------------------------
Shares sold ..............................            116,085       $ 1,182,236
Automatic conversion
of shares ................................              6,874            69,500
Shares issued to shareholders
in reinvestment of dividends .............              3,582            36,457
                                                    ---------       -----------
Total issued .............................            126,541         1,288,193
Shares redeemed ..........................           (157,469)       (1,601,310)
                                                    ---------       -----------
Net decrease .............................            (30,928)      $  (313,117)
                                                    =========       ===========
- --------------------------------------------------------------------------------

5. Short-Term Borrowings:

On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

18


Merrill Lynch Minnesota Municipal Bond Fund                        July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Minnesota Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
broker; where replies were not received from the broker, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Minnesota Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
New York, New York
September 10, 2001

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Minnesota Municipal Bond Fund during its taxable year ended July 31, 2001
qualify as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

19


[LOGO] Merrill Lynch Investment Managers

                                                               [GRAPHIC OMITTED]

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Minnesota
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

[RECYCLE LOGO] Printed on post-consumer recycled paper            #16187 -- 7/01

EX-99.17S

                                                                   EXHIBIT 17(S)

(BULL LOGO)
Merrill Lynch Investment Managers

Annual Report

July 31, 2001


Merrill Lynch
North Carolina
Municipal
Bond Fund

www.mlim.ml.com

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch North Carolina
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

Printed on post-consumer recylcled paper

                                     Page 1


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

DEAR SHAREHOLDER

The Municipal Market Environment
In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board to bolster US economic activity and consumer confidence.
US economic activity, as measured by gross domestic product (GDP), grew 1.3%
during the first quarter of 2001, while the second quarter's GDP recently was
estimated at 0.7%. The Federal Reserve Board, at each of its meetings this year,
lowered short-term interest rates to foster greater economic growth. In the
first seven months of 2001, the Federal Reserve Board lowered short-term
interest rates from 6.50% to 3.75%. Lower short-term interest rates should boost
economic growth by allowing businesses to finance daily operations and company
expansions more easily. Lower interest rates also can reduce mortgage rates,
making housing more affordable to consumers, lifting both housing and related
home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to this increased demand and long-term tax-exempt bond
yields declined to 5.40% by July 31, 2001, a five basis point decline in long-
term municipal bond yields from January 2001 levels.

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term tax-
exempt bonds was issued, an increase of more than 40% compared to the same 12-
month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

                                     Page 2


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June and July 2001. Given
continued weak equity markets, much of these monies were reinvested in tax-
exempt products, increasing an already strong demand. Additionally, short-term
municipal interest rates moved lower in response to the easier Federal Reserve
Board monetary policy. Seasonal tax pressures kept short-term interest rates
artificially high, although not as high as in recent years. As these pressures
abated, short-term municipal interest rates declined to approximately 2.5%. As
interest rates declined, investors extended maturities to take advantage of the
steep municipal bond yield curve. All of these factors contributed to a very
positive technical environment for municipal bonds in recent months. It is
likely that much of this positive environment may continue in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.

Fiscal Year in Review
We entered the fiscal year ended July 31, 2001 fully invested in North Carolina
municipal bonds, with a relatively neutral market position. We adopted this
strategy to maintain a high level of tax-exempt income, anticipating clearer
signs of future economic growth and inflation expectations. During the first six
months of the fiscal year, municipal bond prices generally increased in
anticipation of a weakening economy. To better participate in a declining
interest rate environment, we restructured a portion of the Fund. However,
toward the end of the first six months of the fiscal year, the Federal Reserve
Board reversed its course and began aggressively easing monetary policy.
Simultaneously, the Federal Government began considering a significant reduction
in Federal income taxes. In response to these developments, we began to reduce
the Fund's exposure to highly interest rate-sensitive securities.

During the last six months of the fiscal year, we maintained a fully invested
position but also continued to reduce the Fund's exposure to highly interest
rate-sensitive securities. We pursued this strategy in response to the Federal
Reserve Board's 275 basis point reduction in the Federal Funds rate and
enactment of a relatively large reduction in Federal taxes, including a tax
rebate. Additionally, the absolute yield levels available on municipal bonds
approached multi-year lows. During the fiscal year, we also improved the Fund's
credit quality and continued our preference for premium coupon bonds. At the end
of the fiscal year, approximately 90% of the Fund's net assets were invested in
securities rated A or better by at least one of the major rating agencies.

For the fiscal year ended July 31, 2001, the Fund's Class A, Class B, Class C
and Class D Shares had total returns of +9.13%, +8.58%, +8.58% and +9.02%,
respectively. These results were slightly below the Lipper, Inc. average of
other North Carolina municipal bond funds and below the +10.08% return of the
unmanaged bench-mark Lehman Brothers Municipal Bond Index for the same period.
(Fund results shown do not reflect sales charges and would be lower if sales
charges were included. Complete performance information can be found on pages
3 - 5 of this report to shareholders.)

                                     Page 3


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

Going forward, we intend to remain fully invested to seek to provide a high
level of tax-exempt income, looking for opportunities in both new-issue and
secondary markets to improve the Fund's structure and to enhance performance.

In Conclusion

We appreciate your ongoing interest in Merrill Lynch North Carolina Municipal
Bond Fund, and we look forward to assisting you with your financial needs in the
months and years ahead.

Sincerely,

(Terry K. Glenn)
Terry K. Glenn
President and Trustee

(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President

(Michael Kalinoski)
Michael Kalinoski
Vice President and Portfolio Manager

September 5, 2001

                                     Page 4


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:

* Class A Shares incur a maximum initial sales charge (front-end load) of 4% and
bear no ongoing distribution or account maintenance fees. Class A Shares are
available only to eligible investors.

* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are subject to a distribution
fee of 0.25% and an account maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)

* Class C Shares are subject to a distribution fee of 0.35% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.

* Class D Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.10% (but no distribution fee).

None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in the "Recent Performance Results" and "Average Annual Total
Return" tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders. The Fund's
Investment Adviser voluntarily waived a portion of its management fee. Without
such a waiver, the Fund's performance would have been lower.

                                     Page 5


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

PERFORMANCE DATA (continued)

Total Return Based on a $10,000 Investment

A line graph illustrating the growth of a $10,000 investment in Merrill Lynch
North Carolina Municipal Bond Fund++ Class A and Class B Shares* compared to a
similar investment in Lehman Brothers Municipal Bond Index. Values illustrated
are as follows:

Merill Lynch North Carolina Municipal Bond Fund++--Class A Shares*:

Date                    Value

09/25/1992          $ 9,600.00
July 1993           $10,706.00
July 1994           $10,825.00
July 1995           $11,539.00
July 1996           $12,204.00
July 1997           $13,445.00
July 1998           $14,250.00
July 1999           $14,395.00
July 2000           $14,812.00
July 2001           $16,164.00

Merill Lynch North Carolina Municipal Bond Fund++--Class B Shares*:

Date                    Value

09/25/1992          $10,000.00
July 1993           $11,106.00
July 1994           $11,173.00
July 1995           $11,850.00
July 1996           $12,467.00
July 1997           $13,678.00
July 1998           $14,423.00
July 1999           $14,482.00
July 2000           $14,827.00
July 2001           $16,099.00

Lehman Brothers Municipal Bond Index++++:

Date                    Value

09/30/1992          $10,000.00
July 1993           $10,920.00
July 1994           $11,125.00
July 1995           $12,001.00
July 1996           $12,793.00
July 1997           $14,105.00
July 1998           $14,950.00
July 1999           $15,380.00
July 2000           $16,043.00
July 2001           $17,660.00

A line graph illustrating the growth of a $10,000 investment in Merrill Lynch
North Carolina Municipal Bond Fund++ Class C and Class D Shares* compared to a
similar investment in Lehman Brothers Municipal Bond Index. Values illustrated
are as follows:

Merill Lynch North Carolina Municipal Bond Fund++--Class C Shares*:

Date                    Value

10/21/1994          $10,000.00
July 1995           $10,887.00
July 1996           $11,453.00
July 1997           $12,541.00
July 1998           $13,212.00
July 1999           $13,266.00
July 2000           $13,555.00
July 2001           $14,718.00

Merill Lynch North Carolina Municipal Bond Fund++--Class D Shares*:

Date                    Value

10/21/1994          $ 9,600.00
July 1995           $10,502.00
July 1996           $11,106.00
July 1997           $12,222.00
July 1998           $12,941.00
July 1999           $13,060.00
July 2000           $13,413.00
July 2001           $14,623.00

Lehman Brothers Municipal Bond Index++++:

Date                    Value

10/31/94            $10,000.00
July 1995           $11,107.00
July 1996           $11,840.00
July 1997           $13,054.00
July 1998           $13,836.00
July 1999           $14,234.00
July 2000           $14,848.00
July 2001           $16,344.00

*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++ML North Carolina Municipal Bond Fund invests primarily in long-term
investment-grade obligations issued by or on behalf of the state of North
Carolina, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers.
++++This unmanaged Index consists of long-term revenue bonds, prerefunded bonds,
general obligation bonds and insured bonds. The starting date for the Index in
the Class A & Class B Shares' graph is from 9/30/92 and in the Class C & Class D
Shares' graph is from 10/31/94.

Past performance is not predictive of future performance.

                                     Page 6


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

PERFORMANCE DATA (concluded)

Average Annual Total Return

                                     % Return Without % Return With
                                       Sales Charge   Sales Charge**
Class A Shares*

One Year Ended 6/30/01                     +9.25%         +4.88%
Five Years Ended 6/30/01                   +5.70          +4.84
Inception (9/25/92)
through 6/30/01                            +5.96          +5.47

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

                                        % Return        % Return
                                       Without CDSC    With CDSC**
Class B Shares*

One Year Ended 6/30/01                     +8.70%         +4.70
Five Years Ended 6/30/01                   +5.16          +5.16
Inception (9/25/92)
through 6/30/01                            +5.42          +5.42

*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payment of applicable contingent deferred sales charge.

                                         % Return        % Return
                                       Without CDSC    With CDSC**
Class C Shares*

One Year Ended 6/30/01                     +8.59%         +7.59%
Five Years Ended 6/30/01                   +5.06          +5.06
Inception (10/21/94)
through 6/30/01                            +5.74          +5.74

*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.

                                     % Return Without % Return With
                                       Sales Charge   Sales Charge**
Class D Shares*

One Year Ended 6/30/01                     +9.14%         +4.78%
Five Years Ended 6/30/01                   +5.59          +4.73
Inception (10/21/94)
through 6/30/01                            +6.27          +5.63

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

Recent Performance Results*



                                                        6-Month          12-Month     Since Inception     Standardized
As of July 31, 2001                                   Total Return     Total Return     Total Return      30-Day Yield
                                                                                             
ML North Carolina Municipal Bond Fund Class A Shares      +3.26%          +9.13%           +68.38%           3.43%
ML North Carolina Municipal Bond Fund Class B Shares      +2.90           +8.58            +61.01            3.07
ML North Carolina Municipal Bond Fund Class C Shares      +2.95           +8.58            +47.18            2.97
ML North Carolina Municipal Bond Fund Class D Shares      +3.11           +9.02            +52.32            3.34


*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the payable
date. The Fund's since inception dates are from 9/25/92 for Class A & Class B
Shares and from 10/21/94 for Class C & Class D Shares.

                                     Page 7


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

SCHEDULE OF INVESTMENTS (in Thousands)



S&P     Moody's  Face
Ratings Ratings  Amount                               Issue                                                Value
                                                                                              
North Carolina--95.8%
AAA     Aaa     $1,195      Bladen County, North Carolina, GO, 5.60% due 5/01/2018 (e)                      $  1,279

AAA     Aaa        920      Brunswick County, North Carolina, COP, 6% due 6/01/2016 (e)                        1,019

AAA     NR*      1,650      Charlotte, North Carolina, Water and Sewer System Revenue Bonds,
                            DRIVERS, Series 205, 8.27% due 6/01/2012 (h)                                       1,922

BBB+    A3         500      Chatham County, North Carolina, Industrial Facilities and Pollution
                            Control Financing Authority Revenue Bonds (Carolina Power and Light
                            Company), 6.30% due 6/15/2014                                                        523

AAA     Aaa      1,000      Cumberland County, North Carolina, COP (Civic Center Project),
                            Series A, 6.40% due 12/01/2004 (a)(g)                                              1,119

AA      NR*        500      Cumberland County, North Carolina, Hospital Facilities Revenue
                            Refunding Bonds (Cumberland County Hospital System Inc.), 5.25% due 10/01/2013       520

AAA     NR*        500      Durham County, North Carolina, M/F Housing Revenue Bonds (Alston Village
                            Apartments), AMT, 5.65% due 3/01/2034 (c)                                            507

AAA     Aaa        460      Greenville, North Carolina, Combined Enterprise System Revenue
                            Refunding Bonds, 5.75% due 9/01/2015 (e)                                             514

NR*     Baa1     1,500      Haywood County, North Carolina, Industrial Facilities and Pollution
                            Control Financing Authority Revenue Bonds (Champion International Corporation
                            Project), AMT, 6.25% due 9/01/2025                                                 1,524

NR*     Aaa        750      Iredell County, North Carolina, Public Facilities, Corporate Installment
                            Payment Revenue Bonds (School Projects), 6% due 6/01/2017 (a)                        826

A-      A3       3,000      Martin County, North Carolina, Industrial Facilities and Pollution
                            Control Financing Authority Revenue Bonds (Solid Waste Disposal--Weyerhaeuser
                            Company), AMT, 6.80% due 5/01/2024                                                 3,179

AAA     Aaa      1,500      North Carolina Eastern Municipal Power Agency, Power System Revenue
                            Bonds, Series B, 5.875% due 1/01/2021 (f)                                          1,599

AA+     Aa1      1,500      North Carolina Educational Facilities Finance Agency Revenue Bonds
                            (Duke University Project), Series C, 6.75% due 10/01/2021                          1,539

AAA     NR*        900      North Carolina Educational Facilities Finance Agency, Revenue
                            Refunding Bonds (Elon College Project), 6.375% due 1/01/2007 (b)                     931

                            North Carolina HFA, S/F Revenue Bonds:
AA      Aa2      2,295        AMT, Series V, 6.80% due 9/01/2025 (d)                                           2,371
AA      Aa2      1,330        AMT, Series X, 6.70% due 9/01/2026                                               1,389
AA      Aa2      1,515        Series W, 6.50% due 3/01/2018                                                    1,578

AAA     Aaa      1,750      North Carolina Medical Care Commission, Health Care Facilities Revenue
                            Bonds (Duke University Health System), Series B, 4.75% due 6/01/2021 (f)           1,672


PORTFOLIO ABBREVIATIONS

To simplify the listings of North Carolina Municipal Bond Fund's portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list below and at right.

ACES SM    Adjustable Convertible Extendible Securities
AMT        Alternative Minimum Tax (subject to)
COP        Certificates of Participation
DRIVERS    Derivative Inverse Tax-Exempt Receipts
GO         General Obligation Bonds
HFA        Housing Finance Agency
M/F        Multi-Family
S/F        Single-Family
VRDN       Variable Rate Demand Notes

                                     Page 8


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

SCHEDULE OF INVESTMENTS (concluded) (in Thousands)



S&P     Moody's  Face
Ratings Ratings  Amount                               Issue                                                Value
                                                                                              
North Carolina (concluded)
NR*     VMIG1++ $  150      North Carolina Medical Care Commission, Hospital Revenue Bonds
                            (Pooled Financing Project), ACES, Series A, 2.75% due 10/01/2020 (i)            $    150

AAA     Aaa        500      North Carolina Medical Care Commission, Hospital Revenue Refunding
                            Bonds (Pitt County Memorial Hospital), Series A, 4.75% due 12/01/2028 (f)            465

                            North Carolina Municipal Power Agency Number 1, Catawba Electric
                            Revenue Refunding Bonds, Series B:
A       NR*      1,080        6.375% due 1/01/2013                                                             1,193
BBB+    Baa1       500        6.375% due 1/01/2013                                                               541

NR*     A2       1,175      North Carolina State Educational Assistance Authority Revenue Bonds
                            (Guaranteed Student Loan), AMT, Sub-lien, Series C, 6.35% due 7/01/2016            1,230

                            Piedmont Triad Airport Authority, North Carolina, Airport Revenue
                            Refunding Bonds, Series A (e):
AAA     Aaa      1,000        6.375% due 7/01/2016                                                             1,124
AAA     Aaa      1,000        6% due 7/01/2024                                                                 1,090

NR*     Aaa      1,000      Raleigh Durham, North Carolina, Airport Authority, Airport Revenue
                            Bonds, Series A, 5.25% due 11/01/2015 (j)                                          1,047

A1+     NR*        300      Raleigh Durham, North Carolina, Airport Authority, Special Facility
                            Revenue Refunding Bonds (American Airlines Inc.), VRDN, Series B,
                            2.75% due 11/01/2005 (i)                                                             300

AAA     Aa1        695      Raleigh, North Carolina, Combined Enterprise System Revenue Bonds,
                            5.25% due 3/01/2017                                                                  719

AAA     Aaa      1,000      Randolph County, North Carolina, COP, 5.75% due 6/01/2022 (e)                      1,065

AA      NR*        500      University of North Carolina, Chapel Hill, Hospital Revenue Bonds,
                            6.375% due 2/15/2002 (g)                                                             520

AAA     Aaa        500      University of North Carolina, System Pool Revenue Bonds, Series B,
                            4.50% due 10/01/2023 (f)                                                             455

Puerto Rico--1.7%

AAA     Aaa        500      Puerto Rico Electric Power Authority, Power Revenue Bonds,
                            Trust Receipts, Class R, Series 16 HH, 8.632% due 7/01/2013 (h)                      600

Total Investments (Cost--$32,752)--97.5%                                                                      34,510

Other Assets Less Liabilities--2.5%                                                                              871
                                                                                                            --------
Net Assets--100.0%                                                                                          $ 35,381
                                                                                                            ========


(a) AMBAC Insured.
(b) Connie Lee Insured.
(c) FNMA Collateralized.
(d) FNMA/GNMA Collateralized.
(e) FSA Insured.
(f) MBIA Insured.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at July
31, 2001.
(i) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31, 2001.
(j) FGIC Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.

See Notes to Financial Statements.

                                     Page 9


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001

                                                                                                      
Assets:             Investments, at value (identified cost--$32,752,058)                                    $ 34,509,912
                    Cash                                                                                          26,458
                    Receivables:
                      Interest                                                             $    493,544
                      Securities sold                                                           470,800
                      Beneficial interest sold                                                   19,876          984,220
                                                                                           ------------
                    Prepaid expenses and other assets                                                             13,112
                                                                                                            ------------
                    Total assets                                                                              35,533,702
                                                                                                            ------------

Liabilities:        Payables:
                      Beneficial interest redeemed                                               69,293
                      Dividends to shareholders                                                  28,784
                      Investment adviser                                                         15,864
                      Distributor                                                                10,645          124,586
                                                                                           ------------
                    Accrued expenses                                                                              28,542
                                                                                                            ------------
                    Total liabilities                                                                            153,128
                                                                                                            ------------

Net Assets:         Net assets                                                                              $ 35,380,574
                                                                                                            ============

Net Assets          Class A Shares of beneficial interest, $.10 par value,
Consist of:         unlimited number of shares authorized                                                   $     60,928
                    Class B Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                                        219,019
                    Class C Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                                         16,483
                    Class D Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                                         38,204
                    Paid-in capital in excess of par                                                          34,703,468
                    Accumulated realized capital losses on investments--net                                     (964,967)
                    Accumulated distributions in excess of realized capital
                    gains on investments--net                                                                   (450,415)
                    Unrealized appreciation on investments--net                                                1,757,854
                                                                                                            ------------
                    Net assets                                                                              $ 35,380,574
                                                                                                            ============

Net Asset Value:    Class A--Based on net assets of $6,440,726 and 609,280 shares
                    of beneficial interest outstanding                                                      $      10.57
                                                                                                            ============
                    Class B--Based on net assets of $23,157,367 and 2,190,192 shares
                    of beneficial interest outstanding                                                      $      10.57
                                                                                                            ============
                    Class C--Based on net assets of $1,742,440 and 164,827 shares
                    of beneficial interest outstanding                                                      $      10.57
                                                                                                            ============
                    Class D--Based on net assets of $4,040,041 and 382,039 shares
                    of beneficial interest outstanding                                                      $      10.57
                                                                                                            ============



                      See Notes to Financial Statements.

                                    Page 10


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION (continued)



Statement of Operations
                                                                                                For the Year Ended
                                                                                                   July 31, 2001
                                                                                                      
Investment Income:  Interest and amortization of premium and discount earned                                $  2,079,463

Expenses:           Investment advisory fees                                               $    199,979
                    Account maintenance and distribution fees--Class B                          121,592
                    Professional fees                                                            68,718
                    Accounting services                                                          49,050
                    Printing and shareholder reports                                             42,641
                    Transfer agent fees--Class B                                                 15,700
                    Account maintenance and distribution fees--Class C                           10,289
                    Trustees' fees and expenses                                                   7,835
                    Pricing fees                                                                  5,003
                    Transfer agent fees--Class A                                                  3,734
                    Account maintenance fees--Class D                                             3,535
                    Registration fees                                                             3,025
                    Custodian fees                                                                3,006
                    Transfer agent fees--Class D                                                  2,045
                    Transfer agent fees--Class C                                                  1,096
                    Other                                                                         6,892
                                                                                           ------------
                    Total expenses                                                                               544,140
                                                                                                            ------------
                    Investment income--net                                                                     1,535,323
                                                                                                            ------------

Realized &          Realized gain on investments--net                                                            351,239
Unrealized          Change in unrealized appreciation on investments--net                                      1,182,188
Gain on                                                                                                     ------------
Investments--Net:   Net Increase in Net Assets Resulting from Operations                                    $  3,068,750
                                                                                                            ============


                    See Notes to Financial Statements.

Statements of Changes in Net Assets



                                                                                                   For the Year
                                                                                                   Ended July 31,
Increase (Decrease) in Net Assets:                                                             2001            2000
                                                                                                      
Operations:         Investment income--net                                                 $  1,535,323     $  1,850,486
                    Realized gain (loss) on investments--net                                    351,239       (1,316,206)
                    Change in unrealized appreciation on investments--net                     1,182,188          140,428
                                                                                           ------------     ------------
                    Net increase in net assets resulting from operations                      3,068,750          674,708
                                                                                           ------------     ------------

Dividends to        Investment income--net:
Shareholders:         Class A                                                                  (313,088)        (384,105)
                      Class B                                                                  (995,563)      (1,244,868)
                      Class C                                                                   (68,513)         (89,429)
                      Class D                                                                  (158,159)        (132,084)
                                                                                           ------------     ------------
                    Net decrease in net assets resulting from
                    dividends to shareholders                                                (1,535,323)      (1,850,486)
                                                                                           ------------     ------------
Beneficial          Net decrease in net assets derived from beneficial
Interest            interest transactions                                                    (3,542,756)      (8,875,330)
Transactions:                                                                              ------------     ------------

Net Assets:         Total decrease in net assets                                             (2,009,329)     (10,051,108)
                    Beginning of year                                                        37,389,903       47,441,011
                                                                                           ------------     ------------
                    End of year                                                            $ 35,380,574     $ 37,389,903
                                                                                           ============     ============

                    See Notes to Financial Statements.

                                    Page 11


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION (continued)

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



                                                                                          Class A
                                                                                   For the Year Ended July 31,
                                                                         2001      2000      1999      1998       1997
                                                                                                 
Increase (Decrease) in Net Asset Value:
Per Share           Net asset value, beginning of year                $  10.14   $  10.35  $  11.00  $  10.87   $  10.36
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .48        .49       .47       .50        .51
                    Realized and unrealized gain (loss) on
                    investments--net                                       .43       (.21)     (.35)      .13        .51
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations.                      .91        .28       .12       .63       1.02
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.48)      (.49)     (.47)     (.50)      (.51)
                      Realized gain on investments--net                     --         --      (.20)     --++         --
                      In excess of realized gain on investments--net        --         --      (.10)       --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.48)      (.49)     (.77)     (.50)      (.51)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.57   $  10.14  $  10.35  $  11.00   $  10.87
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    9.13%      2.90%     1.02%     5.99%     10.17%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to           Expenses, net of reimbursement                        1.11%       .96%     1.03%      .90%       .80%
Average                                                               ========   ========  ========  ========   ========
Net Assets:         Expenses                                              1.11%       .96%     1.03%      .90%       .88%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                                4.61%      4.90%     4.39%     4.59%      4.89%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands)            $  6,441   $  7,177  $  9,094  $  8,753   $  8,542
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   28.58%     58.02%    47.52%   125.23%     94.59%
                                                                      ========   ========  ========  ========   ========


*Total investment returns exclude the effects of sales charges.
++Amount is less than $.01 per share.

See Notes to Financial Statements.

                                    Page 12


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                           Class B
                                                                                   For the Year Ended July 31,
                                                                         2001      2000      1999      1998       1997
                                                                                                 
Increase (Decrease) in Net Asset Value:
Per Share           Net asset value, beginning of year                $  10.14   $  10.35  $  11.01 $   10.88   $  10.36
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .42        .44       .42       .45        .46
                    Realized and unrealized gain (loss) on
                    investments--net                                       .43       (.21)     (.36)      .13        .52
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .85        .23       .06       .58        .98
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.42)      (.44)     (.42)     (.45)      (.46)
                      Realized gain on investments--net                     --         --      (.20)     --++         --
                      In excess of realized gain on investments--net        --         --      (.10)       --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.42)      (.44)     (.72)     (.45)      (.46)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.57   $  10.14  $  10.35 $   11.01   $  10.88
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    8.58%      2.38%      .41%     5.45%      9.71%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to           Expenses, net of reimbursement                        1.63%      1.46%     1.54%     1.41%      1.31%
Average                                                               ========   ========  ========  ========   ========
Net Assets:         Expenses                                              1.63%      1.46%     1.54%     1.41%      1.39%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                                4.09%      4.39%     3.88%     4.08%      4.39%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands).           $ 23,157   $ 25,533 $  32,886  $ 37,204   $ 41,137
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   28.58%     58.02%    47.52%   125.23%     94.59%
                                                                      ========   ========  ========  ========   ========


*Total investment returns exclude the effects of sales charges.
++Amount is less than $.01 per share.

See Notes to Financial Statements.

FINANCIAL INFORMATION (continued)

Financial Highlights (continued)

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



                                                                                           Class C
                                                                                   For the Year Ended July 31,
                                                                         2001      2000      1999      1998       1997
                                                                                                 
Increase (Decrease) in Net Asset Value:
Per Share           Net asset value, beginning of year                $  10.13   $  10.35  $  11.00 $   10.87   $  10.36
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .41        .43       .41       .44        .45
                    Realized and unrealized gain (loss) on
                    investments--net                                       .44       (.22)     (.35)      .13        .51
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations.                      .85        .21       .06       .57        .96
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.41)      (.43)     (.41)     (.44)      (.45)
                      Realized gain on investments--net                     --         --      (.20)     --++         --
                      In excess of realized gain on investments--net        --         --      (.10)       --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.41)      (.43)     (.71)     (.44)      (.45)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.57   $  10.13  $  10.35 $   11.00   $  10.87
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    8.58%      2.18%      .41%     5.35%      9.50%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to           Expenses, net of reimbursement                        1.73%      1.56%     1.64%     1.51%      1.41%
Average                                                               ========   ========  ========  ========   ========
Net Assets:         Expenses                                              1.73%      1.56%     1.64%     1.51%      1.49%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                                4.00%      4.29%     3.78%     3.98%      4.28%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands).           $  1,743   $  1,868  $  2,404  $  2,527   $  2,052
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   28.58%     58.02%    47.52%   125.23%     94.59%
                                                                      ========   ========  ========  ========   ========


*Total investment returns exclude the effects of sales charges.
++Amount is less than $.01 per share.

See Notes to Financial Statements.

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)

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



                                                                                           Class D
                                                                                   For the Year Ended July 31,
                                                                         2001      2000      1999      1998       1997
                                                                                                 
Increase (Decrease) in Net Asset Value:
Per Share           Net asset value, beginning of year                $  10.14  $   10.36  $  11.01 $   10.88   $  10.37
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .47        .48       .46       .49        .50
                    Realized and unrealized gain (loss) on
                    investments--net                                       .43       (.22)     (.35)      .13        .51
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations.                      .90        .26       .11       .62       1.01
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.47)      (.48)     (.46)     (.49)      (.50)
                      Realized gain on investments--net                     --         --      (.20)     --++         --
                      In excess of realized gain on investments--net        --         --      (.10)       --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                    (.47)      (.48)     (.76)     (.49)      (.50)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.57   $  10.14  $  10.36 $   11.01   $  10.88
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    9.02%      2.70%      .92%     5.88%     10.05%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to           Expenses, net of reimbursement                        1.24%      1.05%     1.14%     1.00%       .90%
Average                                                               ========   ========  ========  ========   ========
Net Assets:         Expenses                                              1.24%      1.05%     1.14%     1.00%       .98%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                                4.47%      4.81%     4.28%     4.49%      4.79%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands).           $  4,040   $  2,812  $  3,057  $  2,534   $  2,132
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   28.58%     58.02%    47.52%   125.23%     94.59%
                                                                      ========   ========  ========  ========   ========


*Total investment returns exclude the effects of sales charges.
++Amount is less than $.01 per share.

See Notes to Financial Statements.

                                    Page 13


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:
Merrill Lynch North Carolina Municipal Bond Fund (the "Fund") is part of Merrill
Lynch Multi-State Municipal Series Trust (the "Trust"). The Fund is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. The
Fund offers four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.

(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

                                    Page 14


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effective August 1, 2001, as now required under the new AICPA Audit
and Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund, but
will result in a $4,741 increase to the cost of securities and a corresponding
$4,741 decrease to net unrealized appreciation, based on debt securities held as
of July 31, 2001.

(e) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.

(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.

(g) Expenses--Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.

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

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

                                     Account     Distribution
                                 Maintenance Fee     Fee

Class B                                 .25%        .25%
Class C                                 .25%        .35%
Class D                                 .10%         --

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

                             FAMD     MLPF&S

Class A                      $625     $4,163
Class D                      $548     $6,103

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $33,735 relating to transactions in Class B Shares.

                                    Page 15


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $20,010 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FAMD, FDS, and/or ML & Co.

3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001 were $10,217,936 and $13,735,045, respectively.

Net realized gains for the year ended July 31, 2001 and unrealized gains as of
July 31, 2001 were as follows:

                                     Realized     Unrealized
                                      Gains         Gains

Long-term investments.           $   351,239     $ 1,757,854
                                  -----------    -----------
Total                            $   351,239     $ 1,757,854
                                  ===========    ===========

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $1,757,854, of which $1,774,159 related to appreciated securities and
$16,305 related to depreciated securities. The aggregate cost of investments at
July 31, 2001 for Federal income tax purposes was $32,752,058.


4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$3,542,756 and $8,875,330 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:

Class A Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                            55,573   $    574,171
Shares issued to share-
holders in reinvestment of
dividends                              18,940        196,441
                                 ------------    -----------
Total issued                           74,513        770,612
Shares redeemed                      (173,402)    (1,803,749)
                                 ------------    -----------
Net decrease                          (98,889)   $(1,033,137)
                                 ============    ===========

Class A Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                            55,087   $    546,722
Shares issued to share-
holders in reinvestment of
dividends                              22,455        223,330
                                 ------------    -----------
Total issued                           77,542        770,052
Shares redeemed                      (247,780)    (2,459,641)
                                 ------------    -----------
Net decrease                         (170,238)   $(1,689,589)
                                 ============    ===========

Class B Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                           242,776    $ 2,514,251
Shares issued to share-
holders in reinvestment of
dividends                              47,267        490,204
                                 ------------    -----------
Total issued                          290,043      3,004,455
Automatic conversion of
shares                                (99,506)    (1,031,140)
Shares redeemed                      (519,188)    (5,369,677)
                                 ------------    -----------
Net decrease                         (328,651)   $(3,396,362)
                                 ============    ===========

Class B Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                           245,344    $ 2,451,876
Shares issued to share-
holders in reinvestment of
dividends                              62,744        624,044
                                 ------------    -----------
Total issued                          308,088      3,075,920
Automatic conversion of
shares                                 (5,001)       (51,019)
Shares redeemed                      (960,435)    (9,555,842)
                                 ------------    -----------
Net decrease                         (657,348)   $(6,530,941)
                                 ============    ===========

                                    Page 16


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)


Class C Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                            12,910    $   134,525
Shares issued to share-
holders in reinvestment of
dividends                               3,357         34,796
                                 ------------    -----------
Total issued                           16,267        169,321
Shares redeemed                       (35,706)      (367,964)
                                 ------------    -----------
Net decrease                          (19,439)   $  (198,643)
                                 ============    ===========

Class C Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                            30,185    $   305,056
Shares issued to share-
holders in reinvestment of
dividends                               5,039         50,099
                                 ------------    -----------
Total issued                           35,224        355,155
Shares redeemed                       (83,184)      (824,697)
                                 ------------    -----------
Net decrease                          (47,960)   $  (469,542)
                                 ============    ===========

Class D Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                            46,137    $   479,906
Automatic conversion of
shares                                 99,502      1,031,140
Shares issued to share-
holders in reinvestment of
dividends                               7,648         79,385
                                 ------------    -----------
Total issued                          153,287      1,590,431
Shares redeemed                       (48,598)      (505,045)
                                 ------------    -----------
Net increase                          104,689    $ 1,085,386
                                 ============    ===========

Class D Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                            53,713    $   526,005
Automatic conversion of
shares                                  5,001         51,019
Shares issued to share-
holders in reinvestment of
dividends                               7,063         70,284
                                 ------------    -----------
Total issued                           65,777        647,308
Shares redeemed                       (83,571)      (832,566)
                                 ------------    -----------
Net decrease                          (17,794)   $  (185,258)
                                 ============    ===========

5. Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds managed by MLIM
and its affiliates, renewed and amended a $1,000,000,000 credit agreement with
Bank One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.

6. Capital Loss Carryforward:
At July 31, 2001, the Fund had a net capital loss carryforward of approximately
$1,222,000, of which $730,000 expires in 2008 and $492,000 expires in 2009. This
amount will be available to offset like amounts of any future taxable gains.

                                    Page 17


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholders, Merrill Lynch North Carolina Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch North Carolina Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch North
Carolina Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust
as of July 31, 2001, the results of its operations, the changes in its net
assets, and the financial highlights for the respective stated periods in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP
New York, New York
September 10, 2001

                                    Page 18


Merrill Lynch North Carolina Municipal Bond Fund
July 31, 2001

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
North Carolina Municipal Bond Fund during its taxable year ended July 31, 2001
qualify as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.


OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Michael A. Kalinoski, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

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

Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863

                                    Page 19

EX-99.17T

                                                                   EXHIBIT 17(t)

(BULL LOGO)
Merrill Lynch Investment Managers

Annual Report

July 31, 2001


Merrill Lynch
Ohio
Municipal
Bond Fund


www.mlim.ml.com


This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.


Merrill Lynch Ohio
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011


Printed on post-consumer recycled paper


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


DEAR SHAREHOLDER



The Municipal Market Environment
In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the
FederalReserve Board's responses to these factors. For the six-month period
ended July 31, 2001, US economic growth remained weak despite repeated actions
by the Federal Reserve Board to bolster US economic activity and consumer
confidence. US economic activity, as measured by gross domestic product (GDP),
grew 1.3% during the first quarter of 2001, while the second quarter's GDP
recently was estimated at 0.7%. The Federal Reserve Board, at each of its
meetings this year, lowered short-term interest rates to foster greater economic
growth. In the first seven months of 2001, the Federal Reserve Board lowered
short-term interest rates from 6.50% to 3.75%. Lower short-term interest rates
should boost economic growth by allowing businesses to finance daily operations
and company expansions more easily. Lower interest rates also can reduce
mortgage rates, making housing more affordable to consumers, lifting both
housing and related home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.

During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long-term tax-exempt
bond yields rose to 5.65%, an increase of approximately 15 basis points from the
end of January 2001 levels. However, during June and July 2001, both
institutional and retail investor demand for tax-exempt securities significantly
increased. For the remainder of the period, the municipal bond market was able
to respond positively to this increased demand and long-term tax-exempt bond
yields declined to 5.40% by July 31, 2001, a five basis point decline in long-
term municipal bond yields from January 2001 levels.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001



The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long-term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term tax-
exempt bonds was issued, an increase of more than 40% compared to the same 12-
month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June 2001 and July 2001.
Given continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally, short-
term municipal interest rates moved lower in response to the easier Federal
Reserve Board monetary policy. Seasonal tax pressures kept short-term interest
rates artificially high, although not as high as in recent years. As these
pressures abated, short-term municipal interest rates declined to approximately
2.5%. As interest rates declined, investors extended maturities to take
advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. It is likely that much of this positive environment may continue
in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.


Fiscal Year in Review
Given the generally favorable environment for the tax-exempt market during the
last 12 months, performance results for the Fund have been disappointing. For
the fiscal year ended July 31, 2001, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +7.51, +6.96%, +6.86% and 7.40%,
respectively. (Fund results shown do not reflect sales charges and would be
lower if sales charges were included. Complete performance information can be
found on pages 4 and 6 of this report to shareholders.) The largest single
negative influence on total returns was attributable to adverse developments
concerning the Fund's former position in senior unsecured debt issued by USG
Corporation. A leading producer of wallboard, the company has fallen victim to
escalating concerns over exposure to asbestos liability in recent months. With
speculation rising that a voluntary bankruptcy filing was being considered in
order to escape the rising tide of litigation, the bonds were sold in order to
eliminate any further damage to the Fund. In late June, the company did file for
Chapter 11 bankruptcy protection, casting further doubt on recovery prospects
for bondholders. On a total return basis, the Fund's results fell short relative
to its unmanaged benchmark, the Lehman Brothers Municipal Bond Index, which had
a return of +10.08% and the average of its peer group of tax-exempt open-ended
mutual funds, as measured by Lipper, Inc. for the same 12-month period.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001



Renewed demand for tax-exempt bonds by both retail and institutional investors
in recent months has more than offset the 36% jump in debt issuance by the state
of Ohio and its many political subdivisions through the fiscal year ended July
31, 2001. Amidst a generally favorable environment, we sought to enhance Fund
performance by maintaining a fully invested position for much of the fiscal
year. More specifically, our portfolio strategy has been designed to capitalize
on recent trends in the tax-exempt market that have included a significant shift
in the term structure of interest rates as well as a resurgent appetite for
credit risk.

The Federal Reserve Board's aggressive campaign to revive a moribund economy has
prompted short-term interest rates to fall more sharply than long-term interest
rates, thus causing the term structure of interest rates to become more
positively sloped. Under these circumstances, the opportunity exists to leverage
income through the use of derivative securities designed to capitalize on
historically low borrowing costs as reflected in low short-term interest rates.
While we have utilized this strategy for some time, we believed that the
opportunity was compelling enough to warrant increasing exposure further as a
means to enhance the Fund's distribution yield. In recognition of the greater
volatility associated with these products, great care was taken in selecting
appropriate underlying characteristics in order to limit the heightened degree
of risk. Furthermore, some of the Fund's more interest rate-sensitive holdings
were sold in recent months not only to realize gains from market appreciation,
but also to reduce the Fund's overall risk profile.

Another development arising from the Federal Reserve Board's abrupt and forceful
shift in monetary policy last January has been the change in investor sentiment
regarding credit risk after more than a year of deteriorating valuations for
speculative-grade securities. Encouraged by prospects of steadily declining
short-term interest rates, fixed-income investors have since demonstrated a
renewed appetite for both low investment-grade and speculative-grade credits in
anticipation of the stimulative impact of an easier monetary policy. Implicit in
the decision to reallocate asset weightings in this manner has been the belief
that credit spreads already reflect current weak economic conditions. The
anticipatory nature of markets suggests that investors are looking beyond
present circumstances and are beginning to discount an eventual economic
rebound. As part of an effort to generate a competitive rate of return, we
maintained a modest degree of exposure to low investment-grade credits. Given
the improved climate for these types of investments, this exposure has provided
an incremental benefit to shareholders in the form of enhanced relative
performance.

Looking ahead, our portfolio strategy will reflect our belief that much of the
decline in long-term interest rates has already occurred. However, it also
appears likely that a sustained period of muted economic growth accompanied by
low inflation and continued accommodation by monetary policymakers will provide
a favorable backdrop for fixed-income markets. In view of this outlook, we
expect a continuation of the present strategy, which calls for income
enhancement within the context of seeking reduced volatility for the Fund's
portfolio.


In Conclusion
We appreciate your ongoing interest in Merrill Lynch Ohio Municipal Bond Fund,
and we look forward to assisting you with your financial needs in the months and
years ahead.


Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee



(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President



(Theodore R. Jaeckel Jr.)
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager


September 5, 2001


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


PERFORMANCE DATA

About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:

* Class A Shares incur a maximum initial sales charge (front-end load) of 4% and
bear no ongoing distribution or account maintenance fees. Class A Shares are
available only to eligible investors.

* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are subject to a distribution
fee of 0.25% and an account maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately ten years. (There is no initial
sales charge for automatic share conversions.)

* Class C Shares are subject to a distribution fee of 0.35% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.

* Class D Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.10% (but no distribution fee).

None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in the "Recent Performance Results" and "Average Annual Total
Return" tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.



Average Annual Total Return
                                     % Return Without % Return With
                                       Sales Charge   Sales Charge**
Class A Shares*

One Year Ended 6/30/01                     +7.24%         +2.95%
Five Years Ended 6/30/01                   +4.95          +4.10
Inception (2/28/92)
through 6/30/01                            +6.00          +5.53

*Maximum sales charge is 4%.
**Assuming maximum sales charge.


                                        % Return        % Return
                                       Without CDSC    With CDSC**
Class B Shares*

One Year Ended 6/30/01                     +6.70%         +2.70%
Five Years Ended 6/30/01                   +4.42          +4.42
Inception (2/28/92)
through 6/30/01                            +5.46          +5.46

*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.


                                         % Return        % Return
                                       Without CDSC    With CDSC**
Class C Shares*

One Year Ended 6/30/01                     +6.59%         +5.59%
Five Years Ended 6/30/01                   +4.32          +4.32
Inception (10/21/94)
through 6/30/01                            +5.23          +5.23

*Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
**Assuming payment of applicable contingent deferred sales charge.


                                     % Return Without % Return With
                                       Sales Charge   Sales Charge**
Class D Shares*

One Year Ended 6/30/01                     +7.24%         +2.95%
Five Years Ended 6/30/01                   +4.87          +4.02
Inception (10/21/94)
through 6/30/01                            +5.77          +5.12

*Maximum sales charge is 4%.
**Assuming maximum sales charge.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


PERFORMANCE DATA (continued)


Total Return Based on a $10,000 Investment

A line graph illustrating the growth of a $10,000 investment in Merrill Lynch
Ohio Municipal Bond Fund++ Class A and Class B Shares* compared to a similar
investment in Lehman Brothers Municipal Bond Index. Values illustrated are as
follows:

Merill Lynch Ohio Municipal Bond Fund++-
Class A Shares*:

Date                    Value

02/28/1992          $ 9,600.00
 July 1992          $10,388.00
 July 1993          $11,480.00
 July 1994          $11,606.00
 July 1995          $12,306.00
 July 1996          $13,113.00
 July 1997          $14,398.00
 July 1998          $15,180.00
 July 1999          $15,421.00
 July 2000          $15,618.00
 July 2001          $16,791.00


Merill Lynch Ohio Municipal Bond Fund++-
Class B Shares*:

Date                    Value

02/28/1992          $10,000.00
 July 1992          $10,798.00
 July 1993          $11,872.00
 July 1994          $11,942.00
 July 1995          $12,598.00
 July 1996          $13,355.00
 July 1997          $14,590.00
 July 1998          $15,305.00
 July 1999          $15,470.00
 July 2000          $15,589.00
 July 2001          $16,674.00


Lehman Brothers Municipal Bond Index++++:

Date                    Value

 07/31/92           $10,000.00
July 1993           $10,884.00
July 1994           $11,088.00
July 1995           $11,961.00
July 1996           $12,750.00
July 1997           $14,057.00
July 1998           $14,899.00
July 1999           $15,328.00
July 2000           $15,989.00
July 2001           $17,600.00


A line graph illustrating the growth of a $10,000 investment in Merrill Lynch
Ohio Municipal Bond Fund++ Class C and Class D Shares* compared to a similar
investment in Lehman Brothers Municipal Bond Index. Values illustrated are as
follows:

Merill Lynch Ohio Municipal Bond Fund++-
Class C Shares*:

Date                    Value

 10/21/94           $10,000.00
July 1995           $10,850.00
July 1996           $11,490.00
July 1997           $12,540.00
July 1998           $13,141.00
July 1999           $13,270.00
July 2000           $13,359.00
July 2001           $14,275.00


Merill Lynch Ohio Municipal Bond Fund++-
Class D Shares*:

Date                    Value

 10/21/94           $ 9,600.00
July 1995           $10,458.00
July 1996           $11,133.00
July 1997           $12,202.00
July 1998           $12,863.00
July 1999           $13,055.00
July 2000           $13,209.00
July 2001           $14,186.00


Lehman Brothers Municipal Bond Index++++:

Date                    Value

 10/31/94           $10,000.00
July 1995           $11,107.00
July 1996           $11,840.00
July 1997           $13,054.00
July 1998           $13,836.00
July 1999           $14,234.00
July 2000           $14,848.00
July 2001           $16,344.00


*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++ML Ohio Municipal Bond Fund invests primarily in long-term investment-grade
obligations issued by or on behalf of the State of Ohio, its political
subdivisions, agencies and instrumentalities, and obligations of other
qualifying issuers.
++++This unmanaged Index consists of long-term revenue bonds, prerefunded bonds,
general obligation bonds and insured bonds. The starting date for the Index in
the Class C & Class D Shares' graph is from 10/31/94.

Past performance is not predictive of future performance.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


PERFORMANCE DATA (concluded)

Recent Performance Results*



                                                 6-Month          12-Month      Since Inception    Standardized
As of July 31, 2001                            Total Return     Total Return      Total Return     30-Day Yield
                                                                                       
ML Ohio Municipal Bond Fund Class A Shares         +2.36%         +7.51%             +74.91%           3.44%
ML Ohio Municipal Bond Fund Class B Shares         +2.10          +6.96              +66.74            3.08
ML Ohio Municipal Bond Fund Class C Shares         +2.05          +6.86              +42.73            2.98
ML Ohio Municipal Bond Fund Class D Shares         +2.40          +7.40              +47.76            3.34


*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the payable
date. The Fund's since inception periods are from 2/28/92 for Class A & Class B
Shares and from 10/21/94 for Class C & Class D Shares.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


OFFICERS AND TRUSTEES


Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Theodore R. Jaeckel Jr., Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

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

Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


SCHEDULE OF INVESTMENTS
        (in Thousands)



S&P     Moody's   Face
Ratings Ratings  Amount                               Issue                                             Value
                                                                                            
Ohio--91.2%
AAA       Aaa   $   425    Avon, Ohio, Local School District, GO, 6% due 12/01/2020 (b)                 $    460

AA+       Aa2     2,785    Cincinnati, Ohio, Water System Revenue Bonds, 5.50% due 12/01/2017              2,941

NR*       Ba2     1,350    Cleveland, Ohio, Airport Special Revenue Refunding Bonds
                           (Continental Airlines Inc. Project), AMT, 5.70% due 12/01/2019                  1,179

AAA       Aaa       600    Cleveland, Ohio, GO, Refunding, 4.625% due 10/01/2018 (d)                         574

AAA       Aaa       150    Cleveland, Ohio, Waterworks Revenue Bonds, First Mortgage F-92,
                           Series A, 6.25% due 1/01/2015 (b)                                                 155

NR*       NR*     1,000    Cuyahoga County, Ohio, Health Care Facilities Revenue Refunding Bonds
                           (Benjamin Rose Institute Project), 5.50% due 12/01/2028                           826

A1+       VMIG1++   200    Cuyahoga County, Ohio, Hospital Revenue Bonds (The Cleveland Clinic),
                           VRDN, Series D, 2.80% due 1/01/2026 (h)                                           200

AAA       NR*     1,600    Forest Hills, Ohio, Local School District, GO, 6.25% due 12/01/2020 (d)         1,771

AAA       Aaa     1,200    Huron County, Ohio, GO, Human Services Building, 7.25% due 12/01/2013 (d)       1,387

AAA       Aaa     1,740    Lakota, Ohio, Local School District, GO, 7% due 12/01/2010 (b)                  2,113

A+        NR*     1,660    Loveland, Ohio, City School District, GO, 6.65% due 12/01/2002 (g)              1,776

NR*       NR*     1,000    Lucas County, Ohio, Health Care Facility Revenue Refunding and
                           Improvement Bonds (Sunset Retirement Communities), Series A,
                           6.50% due 8/15/2020                                                             1,041

NR*       NR*     2,000    Lucas County, Ohio, Hospital Revenue Bonds (Flower Hospital),
                           6.125% due 12/01/2004 (g)                                                       2,192

AAA       Aaa     2,500    Mahoning County, Ohio, Hospital Facilities Revenue Refunding Bonds
                           (YHA Inc. Project), Series A, 7% due 10/15/2002 (d)(g)                          2,626

A         A2      2,000    Moraine, Ohio, Solid Waste Disposal Revenue Bonds (General Motors Corp.
                           Project), AMT, 6.75% due 7/01/2014                                              2,359

AAA       Aaa     3,000    North Canton, Ohio, City School District GO, 6.70% due 12/01/2004 (b)(g)        3,384

                           Ohio HFA, Mortgage Revenue Bonds, AMT (e):
NR*       Aaa     1,220       Series A-1, 6.15% due 3/01/2029                                              1,278
AAA       Aaa       665       Series B-2, 6.70% due 3/01/2025                                                700

AAA       Aaa       545    Ohio HFA, S/F Mortgage Revenue Bonds, AMT, RIB, Series B,
                           10.785% due 3/31/2031 (a)(e)                                                      567

NR*       NR*     1,000    Ohio State Higher Educational Facility, Commission Revenue Bonds
                           (University of Findlay Project), 6.125% due 9/01/2016                           1,037

AA        Aa2     1,000    Ohio State Higher Educational Facility, Commission Revenue
                           Refunding Bonds (Case Western Reserve University), Series D, 6.25%
                           due 7/01/2014                                                                   1,169

AA        Aa3     1,410    Ohio State Higher Educational Facility Revenue Refunding Bonds
                           (Case Western Reserve University), 6.25% due 10/01/2016                         1,650



PORTFOLIO ABBREVIATIONS


To simplify the listings of Merrill Lynch Ohio Municipal Bond Fund's portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list at right.

AMT       Alternative Minimum Tax (subject to)
DRIVERS   Derivative Inverse Tax-Exempt Receipts
GO        General Obligation Bonds
HFA       Housing Finance Agency
RIB       Residual Interest Bonds
S/F       Single-Family
VRDN      Variable Rate Demand Notes



Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001

SCHEDULE OF INVESTMENTS (concluded)
           in Thousands)



S&P     Moody's   Face
Ratings Ratings  Amount                               Issue                                             Value
                                                                                            
Ohio (concluded)
AA        Aa3   $ 3,000    Ohio State Turnpike Commission, Turnpike Revenue Bonds,
                           Series A, 5.55% due 2/15/2013                                                $  3,227

AAA       Aaa     1,000    Ohio State Water Development Authority, Pollution Control
                           Facilities Revenue Refunding Bonds (Pennsylvania Power Co.
                           Project), 6.15% due 8/01/2023 (b)                                               1,069

AA        NR*       525    Reading, Ohio, Development Revenue Bonds (Sisters of Notre
                           Dame--Saint Mary's Educational Institute), 5.85% due 2/01/2015                    555

NR*       Aaa     1,125    Springfield, Ohio, GO, Refunding, 6% due 12/01/2023 (c)                         1,229

AAA       Aaa     1,000    Summit County, Ohio, GO, Refunding, 6.50% due 12/01/2016 (c)                    1,153

NR*       Aa3     1,000    Toledo - Lucas County, Ohio, Port Authority Revenue Refunding Bonds
                           (Cargill Inc. Project), 5.90% due 12/01/2015                                    1,038

AAA       Aaa     2,000    Westerville, Ohio, Minerva Park and Blendon Township, Joint
                           Hospital District Revenue Refunding Bonds (Saint Ann's Hospital),
                           Series B, 7% due 9/15/2003 (b)(f)(g)                                            2,056

Puerto Rico--10.7%

NR*       Aa2     2,000    Puerto Rico Industrial Tourist Educational, Medical and Environmental
                           Control Facilities Revenue Bonds (Ascension Health), RIB, Series 377,
                           9.41% due 11/15/2030 (a)                                                        2,375

AAA       NR*     1,000    Puerto Rico Public Buildings Authority Revenue Bonds, DRIVERS,
                           Series 211, 7.927% due 7/01/2021 (a)(d)                                         1,048

NR*       Aaa     1,300    Puerto Rico Public Finance Corporation Revenue Bonds, RIB,
                           Series 519X, 5.50% due 8/01/2018 (a)(d)                                         1,466

Total Investments (Cost--$43,429)--101.9%                                                                 46,601

Liabilities in Excess of Other Assets--(1.9%)                                                               (884)
                                                                                                       ---------
Net Assets--100.0%                                                                                     $  45,717
                                                                                                       =========


(a)The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at July
31, 2001.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)GNMA Collateralized.
(f)Escrowed to maturity.
(g)Prerefunded.
(h)The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31, 2001.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.

See Notes to Financial Statements.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


FINANCIAL INFORMATION



Statement of Assets and Liabilities as of July 31, 2001
                                                                                                   
Assets:             Investments, at value (identified cost--$43,429,328)                                    $ 46,600,589
                    Cash                                                                                          30,787
                    Receivables:
                      Securities sold                                                      $  2,731,551
                      Interest                                                                  645,563
                      Beneficial interest sold                                                   30,088        3,407,202
                                                                                           ------------
                    Prepaid expenses and other assets                                                             12,094
                                                                                                            ------------
                    Total assets                                                                              50,050,672
                                                                                                            ------------

Liabilities:        Payables:
                      Securities purchased                                                    4,162,566
                      Beneficial interest redeemed                                               60,019
                      Dividends to shareholders                                                  42,100
                      Investment adviser                                                         20,741
                      Distributor                                                                15,232        4,300,658
                                                                                           ------------
                    Accrued expenses and other liabilities                                                        32,771
                                                                                                            ------------
                    Total liabilities                                                                          4,333,429
                                                                                                            ------------

Net Assets:         Net assets                                                                              $ 45,717,243
                                                                                                            ============

Net Assets          Class A Shares of beneficial interest, $.10 par value,
Consist of:         unlimited number of shares authorized                                                   $     58,832
                    Class B Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                                        309,503
                    Class C Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                                         31,858
                    Class D Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                                         40,099
                    Paid-in capital in excess of par                                                          46,269,228
                    Accumulated realized capital losses on investments--net                                   (2,778,085)
                    Accumulated distributions in excess of realized capital gains on
                    investments--net                                                                          (1,385,453)
                    Unrealized appreciation on investments--net                                                3,171,261
                                                                                                            ------------
                    Net assets                                                                              $ 45,717,243
                                                                                                            ============
Net Asset Value:    Class A--Based on net assets of $6,109,025 and 588,322 shares
                    of beneficial interest outstanding                                                      $      10.38
                                                                                                            ============
                    Class B--Based on net assets of $32,138,002 and 3,095,025 shares
                    of beneficial interest outstanding                                                      $      10.38
                                                                                                            ============
                    Class C--Based on net assets of $3,307,832 and 318,583 shares
                    of beneficial interest outstanding                                                      $      10.38
                                                                                                            ============
                    Class D--Based on net assets of $4,162,384 and 400,986 shares
                    of beneficial interest outstanding                                                      $      10.38
                                                                                                            ============


                      See Notes to Financial Statements.


Statement of Operations



                                                                                                       For the Year Ended
                                                                                                           July 31, 2001
                                                                                                      
Investment Income:  Interest and amortization of premium and discount earned                                $  2,776,585

Expenses:           Investment advisory fees                                               $    261,298
                    Account maintenance and distribution fees--Class B                          174,740
                    Accounting services                                                          70,341
                    Professional fees                                                            68,311
                    Printing and shareholder reports                                             31,486
                    Transfer agent fees--Class B                                                 23,530
                    Account maintenance and distribution fees--Class C                           14,902
                    Trustees' fees and expenses                                                   8,284
                    Registration fees                                                             6,059
                    Pricing fees                                                                  5,492
                    Account maintenance fees--Class D                                             4,093
                    Transfer agent fees--Class A                                                  3,495
                    Custodian fees                                                                2,622
                    Transfer agent fees--Class D                                                  2,376
                    Transfer agent fees--Class C                                                  1,699
                    Other                                                                         6,530
                                                                                           ------------
                    Total expenses                                                                               685,258
                                                                                                            ------------
                    Investment income--net                                                                     2,091,327
                                                                                                            ------------

Realized &          Realized loss on investments--net                                                           (687,983)
Unrealized          Change in unrealized appreciation on investments--net                                      1,848,145
Gain (Loss) on                                                                                              ------------
Investments--Net:   Net Increase in Net Assets Resulting from Operations                                    $  3,251,489
                                                                                                            ============


                    See Notes to Financial Statements.


Statements of Changes in Net Assets



                                                                                                     For the Year
                                                                                                    Ended July 31,
Increase (Decrease) in Net Assets:                                                              2001             2000
                                                                                                   
Operations:         Investment income--net                                                 $  2,091,327     $  2,598,150
                    Realized loss on investments--net                                          (687,983)      (2,610,120)
                    Change in unrealized appreciation on investments--net                     1,848,145          (80,009)
                                                                                           ------------     ------------
                    Net increase (decrease) in net assets resulting from operations           3,251,489          (91,979)
                                                                                           ------------     ------------

Dividends &         Investment income--net:
Distributions to      Class A                                                                  (288,749)        (357,104)
Shareholders:         Class B                                                                (1,505,589)      (1,905,493)
                      Class C                                                                  (103,919)         (96,674)
                      Class D                                                                  (193,070)        (238,879)
                    In excess of realized gain on investments--net:
                      Class A                                                                        --         (181,498)
                      Class B                                                                        --       (1,029,522)
                      Class C                                                                        --          (51,882)
                      Class D                                                                        --         (122,551)
                                                                                           ------------     ------------
                    Net decrease in net assets resulting from dividends
                    and distributions to shareholders                                        (2,091,327)      (3,983,603)
                                                                                           ------------     ------------

Beneficial          Net decrease in net assets derived from beneficial
Interest            interest transactions                                                    (5,539,146)     (14,461,235)
Transactions:                                                                              ------------     ------------

Net Assets:         Total decrease in net assets                                             (4,378,984)     (18,536,817)
                    Beginning of year                                                        50,096,227       68,633,044
                                                                                           ------------     ------------
                    End of year                                                            $ 45,717,243     $ 50,096,227
                                                                                           ============     ============


                    See Notes to Financial Statements.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


FINANCIAL INFORMATION (continued)


Financial Highlights



The following per share data and ratios have been derived                                   Class A
from information provided in the financial statements.                           For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998      1997
                                                                                              
Per Share           Net asset value, beginning of year                $  10.13   $  10.77  $  11.21  $  11.17   $  10.70
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .49        .51       .52       .55        .55
                    Realized and unrealized gain (loss) on
                    investments--net                                       .25       (.40)     (.34)      .04        .47
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .74        .11       .18       .59       1.02
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.49)      (.51)     (.52)     (.55)      (.55)
                      Realized gain on investments--net                     --         --      (.10)       --         --
                      In excess of realized gain on investments--net        --       (.24)       --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.49)      (.75)     (.62)     (.55)      (.55)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.38   $  10.13  $  10.77  $  11.21   $  11.17
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    7.51%      1.28%     1.59%     5.43%      9.80%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to Average   Expenses                                              1.03%       .87%      .92%      .83%       .80%
Net Assets:                                                           ========   ========  ========  ========   ========
                    Investment income--net                                4.83%      5.00%     4.70%     4.92%      5.07%
                                                                      ========   ========  ========  ========   ========
Supplemental        Net assets, end of year (in thousands)            $  6,109   $  6,060  $  9,161  $  9,252   $  8,506
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   38.01%     57.46%    82.55%    35.46%     52.57%
                                                                      ========   ========  ========  ========   ========


The following per share data and ratios have been derived                                   Class B
from information provided in the financial statements.                           For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998      1997
                                                                                              
Per Share           Net asset value, beginning of year                $  10.13   $  10.77  $  11.21  $  11.17   $  10.70
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .44        .46       .47       .50        .49
                    Realized and unrealized gain (loss) on
                    investments--net                                       .25       (.40)     (.34)      .04        .47
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .69        .06       .13       .54        .96
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.44)      (.46)     (.47)     (.50)      (.49)
                      Realized gain on investments--net                     --         --      (.10)       --         --
                      In excess of realized gain on investments--net        --       (.24)       --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.44)      (.70)     (.57)     (.50)      (.49)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.38   $  10.13  $  10.77  $  11.21   $  11.17
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    6.96%       .77%     1.08%     4.90%      9.25%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to Average   Expenses                                              1.54%      1.38%     1.43%     1.34%      1.31%
Net Assets:                                                           ========   ========  ========  ========   ========
                    Investment income--net                                4.31%      4.49%     4.19%     4.41%      4.56%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands)            $ 32,138   $ 37,864  $ 50,892  $ 55,554   $ 60,072
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   38.01%     57.46%    82.55%    35.46%     52.57%
                                                                      ========   ========  ========  ========   ========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


FINANCIAL INFORMATION (concluded)


Financial Highlights (concluded)



The following per share data and ratios have been derived                                   Class C
from information provided in the financial statements.                           For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998      1997
                                                                                              
Per Share           Net asset value, beginning of year                $  10.13   $  10.77  $  11.21  $  11.17   $  10.70
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .43        .44       .46       .48        .48
                    Realized and unrealized gain (loss) on
                    investments--net                                       .25       (.40)     (.34)      .04        .47
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .68        .04       .12       .52        .95
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.43)      (.44)     (.46)     (.48)      (.48)
                      Realized gain on investments--net                     --         --      (.10)       --         --
                      In excess of realized gain on investments--net        --       (.24)       --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.43)      (.68)     (.56)     (.48)      (.48)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.38   $  10.13  $  10.77  $  11.21   $  11.17
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    6.86%       .67%      .98%     4.79%      9.14%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to Average   Expenses                                              1.65%      1.48%     1.53%     1.44%      1.41%
Net Assets:                                                           ========   ========  ========  ========   ========
                    Investment income--net                                4.18%      4.39%     4.08%     4.31%      4.46%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands)            $  3,308   $  2,057  $  2,713  $  2,526   $  2,412
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   38.01%     57.46%    82.55%    35.46%     52.57%
                                                                      ========   ========  ========  ========   ========


The following per share data and ratios have been derived                                   Class D
from information provided in the financial statements.                           For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998      1997
                                                                                              
Per Share           Net asset value, beginning of year                $  10.13   $  10.77  $  11.21  $  11.16   $  10.70
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .48        .50       .51       .54        .54
                    Realized and unrealized gain (loss) on
                    investments--net                                       .25       (.40)     (.34)      .05        .46
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .73        .10       .17       .59       1.00
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                              (.48)      (.50)     (.51)     (.54)      (.54)
                      Realized gain on investments--net                     --         --      (.10)       --         --
                      In excess of realized gain on investments--net        --       (.24)       --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                     (.48)      (.74)     (.61)     (.54)      (.54)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.38   $  10.13  $  10.77  $  11.21   $  11.16
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                    7.40%      1.18%     1.49%     5.42%      9.60%
Return:*                                                              ========   ========  ========  ========   ========

Ratios to Average   Expenses                                              1.13%       .97%     1.02%      .93%       .90%
Net Assets:                                                           ========   ========  ========  ========   ========
                    Investment income--net                                4.72%      4.90%     4.59%     4.82%      4.97%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands)            $  4,162   $  4,115  $  5,867  $  5,267   $  4,310
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                   38.01%     57.46%    82.55%    35.46%     52.57%
                                                                      ========   ========  ========  ========   ========


*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS


1. Significant Accounting Policies:
Merrill Lynch Ohio Municipal Bond Fund (the "Fund") is part of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. The Fund offers
four classes of shares under the Merrill Lynch Select Pricingsm System. Shares
of Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The following
is a summary of significant accounting policies followed by the Fund.

(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


NOTES TO FINANCIAL STATEMENTS (continued)


(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effective August 1, 2001, as now required under the new AICPA Audit
and Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund, but
will result in a $34,353 increase to the cost of securities and a corresponding
$34,353 decrease to net unrealized appreciation, based on debt securities held
as of July 31, 2001.

(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.

(f) Expenses--Certain expenses have been allocated to the individual Funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each Fund included in the Trust.


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

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

                             Account        Distribution
                         Maintenance Fee        Fee

Class B                       .25%              .25%
Class C                       .25%              .35%
Class D                       .10%               --

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

                             FAMD     MLPF&S

Class A                     $173     $ 2,405
Class D                     $948     $11,283

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $40,253 and $1 relating to transactions in Class B and Class C
Shares, respectively.

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


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


NOTES TO FINANCIAL STATEMENTS (continued)


Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $31,064 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 2001, were $17,621,300 and $20,092,276, respectively.

Net realized losses for the year ended July 31, 2001, and net unrealized gains
as of July 31, 2001 were as follows:

                                     Realized     Unrealized
                                      Losses        Gains

Long-term investments.            $  (687,983)  $  3,171,261
                                  -----------   ------------
Total                             $  (687,983)  $  3,171,261
                                  ===========   ============

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $3,171,261, of which $3,196,297 related to appreciated securities and
$25,036 related to depreciated securities. The aggregate cost of investments at
July 31, 2001 for Federal income tax purposes was $43,429,328.

4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$5,539,146 and $14,461,235 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:


Class A Shares

For the Year Ended                                  Dollar
July 31, 2001                         Shares        Amount

Shares sold                           138,942  $   1,425,781
Shares issued to share-
holders in reinvestment of
dividends                              16,115        165,361
                                -------------   ------------
Total issued                          155,057      1,591,142
Shares redeemed                      (164,734)    (1,695,174)
                                -------------   ------------
Net decrease                           (9,677)  $   (104,032)
                                =============   ============


Class A Shares

For the Year Ended                                  Dollar
July 31, 2000                         Shares        Amount

Shares sold                            44,863    $   453,112
Shares issued to share-
holders in reinvestment of
dividends and distributions            32,167        323,755
                                -------------   ------------
Total issued                           77,030        776,867
Shares redeemed                      (329,401)    (3,328,352)
                                -------------   ------------
Net decrease                         (252,371)  $ (2,551,485)
                                =============   ============


Class B Shares

For the Year Ended                                  Dollar
July 31, 2001                         Shares        Amount

Shares sold                           363,686   $  3,729,101
Shares issued to share-
holders in reinvestment of
dividends                              71,462        733,293
                                -------------   ------------
Total issued                          435,148      4,462,394
Automatic conversion of
shares                                (94,785)      (976,086)
Shares redeemed                      (981,906)   (10,060,535)
                                -------------   ------------
Net decrease                         (641,543)  $ (6,574,227)
                                =============   ============


Class B Shares

For the Year Ended                                  Dollar
July 31, 2000                         Shares        Amount

Shares sold                           271,408   $  2,765,352
Shares issued to share-
holders in reinvestment of
dividends and distributions           152,050      1,529,598
                                -------------   ------------
Total issued                          423,458      4,294,950
Automatic conversion of
shares                                (33,581)      (348,151)
Shares redeemed                    (1,377,200)   (13,956,528)
                                -------------   ------------
Net decrease                         (987,323)  $(10,009,729)
                                =============   ============


Class C Shares

For the Year Ended                                  Dollar
July 31, 2001                         Shares        Amount

Shares sold                           128,886   $  1,329,440
Shares issued to share-
holders in reinvestment of
dividends                               4,448         45,658
                                -------------   ------------
Total issued                          133,334      1,375,098
Shares redeemed                       (17,786)      (182,180)
                                -------------   ------------
Net increase                          115,548   $  1,192,918
                                =============   ============


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001


NOTES TO FINANCIAL STATEMENTS (continued)


Class C Shares

For the Year Ended                                  Dollar
July 31, 2000                         Shares        Amount

Shares sold                            19,805   $    198,840
Shares issued to share-
holders in reinvestment of
dividends and distributions             7,571         76,159
                                -------------   ------------
Total issued                           27,376        274,999
Shares redeemed                       (76,157)      (777,562)
                                -------------   ------------
Net decrease                          (48,781)  $   (502,563)
                                =============   ============


Class D Shares

For the Year Ended                                  Dollar
July 31, 2001                         Shares        Amount

Shares sold                            61,666   $    631,035
Automatic conversion
of shares                              94,827        976,086
Shares issued to share-
holders in reinvestment of
dividends                               8,926         91,554
                                -------------   ------------
Total issued                          165,419      1,698,675
Shares redeemed                      (170,738)    (1,752,480)
                                -------------   ------------
Net decrease                           (5,319)  $    (53,805)
                                =============   ============


Class D Shares

For the Year Ended                                  Dollar
July 31, 2000                         Shares        Amount

Shares sold                           100,119   $  1,036,036
Automatic conversion
of shares                              33,583        348,151
Shares issued to share-
holders in reinvestment of
dividends and distributions            19,074        191,717
                                -------------   ------------
Total issued                          152,776      1,575,904
Shares redeemed                      (291,291)    (2,973,362)
                                -------------   ------------
Net decrease                         (138,515)  $ (1,397,458)
                                =============   ============

5. Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds managed by MLIM
and its affiliates, renewed and amended a $1,000,000,000 credit agreement with
Bank One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.


6. Capital Loss Carryforward:
At July 31, 2001, the Fund had a net capital loss carryforward of approximately
$2,974,000, of which $763,000 expires in 2008 and $2,211,000 expires in 2009.
This amount will be available to offset like amounts of any future taxable
gains.


Merrill Lynch Ohio Municipal Bond Fund
July 31, 2001



INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Ohio Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian and
broker; where replies were not received from the broker, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Ohio
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of
July 31, 2001, the results of its operations, the changes in its net assets, and
the financial highlights for the respective stated periods in conformity with
accounting principles generally accepted in the United States of America.



Deloitte & Touche LLP
New York, New York
September 10, 2001


IMPORTANT TAX INFORMATION (unaudited)


All of the net investment income distributions paid monthly by Merrill Lynch
Ohio Municipal Bond Fund during its taxable year ended July 31, 2001 qualify as
tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

EX-99.17U

                                                                   EXHIBIT 17(u)

(BULL LOGO)
Merrill Lynch Investment Managers

Annual Report

July 31, 2001


Merrill Lynch
Texas
Municipal
Bond Fund

This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.

Merrill Lynch Texas
Municipal Bond Fund
Merrill Lynch Multi-State
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011

Printed on post-consumer recycled paper


www.mlim.ml.com

Merrill Lynch Texas Municipal Bond Fund

July 31, 2001


TO OUR SHAREHOLDERS


The Municipal Market Environment

In recent months, investors' attention has been largely focused on weak US
economic growth, volatile US equity markets, and most importantly, the Federal
Reserve Board's responses to these factors. For the six-month period ended July
31, 2001, US economic growth remained weak despite repeated actions by the
Federal Reserve Board


to bolster US economic activity and consumer confidence. US economic activity,
as measured by gross domestic product (GDP), grew 1.3% during the first quarter
of 2001, while the second quarter's GDP recently was estimated at 0.7%. The
Federal Reserve Board, at each of its meetings this year, lowered short-term
interest rates to foster greater economic growth. In the first seven months of
2001, the Federal Reserve Board lowered short-term interest rates from 6.50% to
3.75%. Lower short-term interest rates should boost economic growth by allowing
businesses to finance daily operations and company expansions more easily. Lower
interest rates also can reduce mortgage rates, making housing more affordable to
consumers, lifting both housing and related home furnishing industries.

Despite considerable weekly and monthly volatility, fixed-income bond yields for
the six months ended July 31, 2001 were little changed from their late January
2001 levels. Yields initially declined into March before rising in early May and
declined again for the remainder of the July period. Citing weakening
employment, declines in business investment and profits and continued modest
consumer spending, the Federal Reserve Board lowered short-term interest rates
on a monthly basis through April 2001. Long-term taxable fixed-income interest
rates responded by declining to recent historic lows. By late March, long-term
US Treasury bond yields declined approximately 25 basis points (0.25%) to 5.26%.

Initially, equity markets, especially the NASDAQ, rallied strongly expecting the
Federal Reserve Board to take whatever action was necessary to restore both
economic growth and corporate profitability. During late April and May 2001,
many investors reallocated assets out of US Treasury securities back into
equities. Corporate treasurers also issued significant amounts of taxable debt
to take advantage of historically low interest rates. These higher-yielding
issues helped reduce the demand for US Treasury obligations. Additionally, a
strong Producer Price Index released in early May ignited smoldering
inflationary fears among many investors. These investors believed that the 250
basis point decline in short-term interest rates by the Federal Reserve Board
through May would eventually rekindle a strong US economy with concomitant
inflationary pressures. As a result of these factors, US Treasury bond prices
declined sharply and yields rose to 5.90% by mid-May 2001.

However, in early June, a report was issued stating that US manufacturing
remained weak. Additionally, large numbers of US companies began to release
weaker-than-expected earnings reports that pushed equity prices lower. These
factors combined to renew investor demand for US Treasury issues and bond prices
began to rise. The fixed-income markets continued to improve in late June and
throughout July as equities remained under considerable pressure. A sizeable
decline in national employment released in early July also served to emphasize
the ongoing decline in economic activity despite the Federal Reserve Board's
easing of monetary policy in 2001. Weak foreign economies, particularly in Japan
and Argentina, also bolstered investor demand for US Treasury obligations. The
resultant positive market environment saw US Treasury yields decline to end July
2001 at 5.52%, essentially unchanged from their January 2001 closing yields of
5.50%.


During the six months ended July 31, 2001, the tax-exempt bond market also
reacted to both the Federal Reserve Board's monetary policy and equity market
volatility. However, its reaction was far more muted both in intensity and
degree. The equity market rally in April and early May, combined with the
possibility that the Federal Reserve Board was close to the end of its current
interest rate reduction cycle, initially pushed municipal bond yields higher. By
late May, as measured by the Bond Buyer Revenue Bond Index, long- term
tax-exempt bond yields rose to 5.65%, an increase of approximately 15 basis
points from the end of January 2001 levels. However, during June and July 2001,
both institutional and retail investor demand for tax-exempt securities
significantly increased. For the remainder of the period, the municipal bond
market was able to respond positively to this increased demand and long-term
tax- exempt bond yields declined to 5.40% by July 31, 2001, a five basis point
decline in long-term municipal bond yields from January 2001 levels.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

The recent relative outperformance of the tax-exempt bond market has been
particularly impressive given the dramatic increase in long- term municipal bond
issuance during the six-month period ended July 31, 2001. Historically, low
municipal bond yields have continued to allow municipalities to refund
outstanding, higher-couponed debt. Also, as yields began to rise in early April,
tax-exempt issuers rushed to issue new financing, fearing higher yields in the
coming months. During the past six months, almost $145 billion in long-term
tax-exempt bonds was issued, an increase of more than 40% compared to the same
12-month period a year ago. During July 2001, tax-exempt bond issuance was
particularly heavy with more than $75 billion in long-term municipal bonds
underwritten, an increase of more than 45% compared to the same period a year
ago.

Historically, early July has often been a period of weak investor demand for
tax-exempt products. Seasonal tax pressures, particularly in April, often result
in the liquidation of municipal securities to meet Federal and state tax
payments. In recent months, there was no appreciable selling by retail accounts.
However, it was recently noted that thus far in 2001, net new cash inflows into
municipal bond mutual funds reached $4 billion. The same 12-month period a year
ago saw net new cash outflows of more than $13 billion. This suggests that the
positive technical structure of the municipal market remains intact. Also, the
months of June and July have tended to be periods of strong retail demand in
response to the large coupon income payments and proceeds from bond maturities
and early redemptions these months generated. Analysts estimated that investors
received more than $60 billion in such proceeds in June and July 2001. Given
continued weak equity markets, much of these monies were reinvested in
tax-exempt products, increasing an already strong demand. Additionally,
short-term municipal interest rates moved lower in response to the easier
Federal Reserve Board monetary policy. Seasonal tax pressures kept short-term
interest rates


artificially high, although not as high as in recent years. As these pressures
abated, short-term municipal interest rates declined to approximately 2.5%. As
interest rates declined, investors extended maturities to take advantage of the
steep municipal bond yield curve. All of these factors contributed to a very
positive technical environment for municipal bonds in recent months. It is
likely that much of this positive environment may continue in the coming months.

Looking forward, the municipal market's direction is uncertain. Should the US
economy materially weaken into late summer, the Federal Reserve Board may be
forced to ease monetary conditions to a greater extent than financial markets
currently expect. The prospect of two or three additional interest rate easings
is likely to push fixed-income bond yields, including municipal bonds, lower.
However, should the cumulative 300 basis point decline in short-term interest
rates by the Federal Reserve Board so far this year, in addition to the economic
stimulus expected to be generated by recent Federal tax reform, combine to
restore consumer confidence and economic activity, tax-exempt bond yields are
unlikely to decline further. However, given the strong technical position of the
municipal bond market, the tax-exempt market is likely to continue to outperform
its taxable counterpart in the near future.

Fiscal Year in Review
For the fiscal year ended July 31, 2001, the Fund's Class A, Class B, Class C
and Class D Shares had total returns of +9.98, +9.43%, +9.30% and +9.97%,
respectively. (Fund results shown do not reflect sales charges and would be
lower if sales charges were included. Complete performance information can be
found on pages 5 - 7 of this report to shareholders.) On a total return basis,
the Fund's results closely mirrored its unmanaged benchmark, the Lehman Brothers
Municipal Bond Index, which had a return of +10.08% and the average of its peer
group of tax-exempt open-ended mutual funds, as measured by Lipper, Inc. for the
same 12-month period.

Renewed demand for tax-exempt bonds by both retail and institutional investors
in recent months has more than offset the 39% jump in debt issuance by the state
of Texas and its many political subdivisions through the fiscal year ended July
31, 2001. Amidst a generally favorable environment, we sought to enhance Fund
performance by maintaining a fully invested position for much of the fiscal
year. More specifically, our portfolio strategy has been designed to capitalize
on recent trends in the tax-exempt market that have included a significant shift
in the term structure of interest rates as well as a resurgent appetite for
credit risk. The Fund's performance benefited from these efforts to provide a
competitive rate of return.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

The Federal Reserve Board's aggressive campaign to revive a moribund economy has
prompted short-term interest rates to fall more sharply than long-term interest
rates, thus causing the term structure of


interest rates to become more positively sloped. Under these circumstances, the
opportunity exists to leverage income through the use of derivative securities
designed to capitalize on historically low borrowing costs as reflected in low
short-term interest rates. While we have utilized this strategy for some time,
we believed that the opportunity was compelling enough to warrant increasing
exposure further as a means to enhance the Fund's distribution yield. In
recognition of the greater volatility associated with these products, great care
was taken in selecting appropriate underlying characteristics in order to limit
the heightened degree of risk. Furthermore, some of the Fund's more interest
rate-sensitive holdings were sold in recent months not only to realize gains
from market appreciation, but also to reduce the Fund's overall risk profile.

Another development arising from the Federal Reserve Board's abrupt and forceful
shift in monetary policy last January has been the change in investor sentiment
regarding credit risk after more than a year of deteriorating valuations for
speculative-grade securities. Encouraged by prospects of steadily declining
short-term interest rates, fixed-income investors have since demonstrated a
renewed appetite for both low investment-grade and speculative-grade credits in
anticipation of the stimulative impact of an easier monetary policy. Implicit in
the decision to reallocate asset weightings in this manner has been the belief
that credit spreads already reflect current weak economic conditions. The
anticipatory nature of markets suggests that investors are looking beyond
present circumstances and are beginning to discount an eventual economic
rebound. As part of an effort to generate a competitive rate of return, we
maintained a modest degree of exposure to low investment-grade credits. Given
the improved climate for these types of investments, this exposure has provided
an incremental benefit to shareholders in the form of enhanced relative
performance.

Looking ahead, our portfolio strategy will reflect our belief that much of the
decline in long-term interest rates has already occurred. However, it also
appears likely that a sustained period of muted economic growth accompanied by
low inflation and continued accommodation by monetary policymakers will provide
a favorable backdrop for fixed-income markets. In view of this outlook, we
expect a continuation of the present strategy, which calls for income
enhancement within the context of reduced volatility.

In Conclusion
We appreciate your ongoing interest in Merrill Lynch Texas Municipal Bond Fund,
and we look forward to assisting you with your financial needs in the months and
years ahead.

Sincerely,


(Terry K. Glenn)
Terry K. Glenn
President and Trustee


(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President



(Theodore R. Jaeckel Jr.)
Theodore R. Jaeckel Jr.
Vice President and Portfolio Manager

September 6, 2001



Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

PERFORMANCE DATA


About Fund Performance

Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:

* Class A Shares incur a maximum initial sales charge (front-end load) of 4% and
bear no ongoing distribution or account maintenance fees. Class A Shares are
available only to eligible investors.

* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are subject to a distribution
fee of 0.25% and an account maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)

* Class C Shares are subject to a distribution fee of 0.35% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.

* Class D Shares incur a maximum initial sales charge of 4% and an account
maintenance fee of 0.10% (but no distribution fee).

None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Figures shown in the "Recent Performance Results" and "Average Annual Total
Return" tables assume reinvestment of all dividends and capital gains


distributions at net asset value on the payable date. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.

Average Annual Total Return

                                     % Return Without % Return With
                                       Sales Charge   Sales Charge**
Class A Shares*
One Year Ended 6/30/01                     +9.73%         +5.34%
Five Years Ended 6/30/01                   +4.93          +4.07
Inception (8/30/91)
through 6/30/01                            +6.28          +5.84

*Maximum sales charge is 4%.
**Assuming maximum sales charge.

                                        % Return        % Return
                                       Without CDSC    With CDSC**

Class B Shares*
One Year Ended 6/30/01                     +9.18%         +5.18%
Five Years Ended 6/30/01                   +4.40          +4.40
Inception (8/30/91)
through 6/30/01                            +5.74          +5.74

*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payment of applicable contingent deferred sales charge.

                                         % Return        % Return
                                       Without CDSC    With CDSC**
Class C Shares*
One Year Ended 6/30/01                     +9.06%         +8.06%
Five Years Ended 6/30/01                   +4.28          +4.28
Inception (10/21/94)
through 6/30/01                            +5.00          +5.00

*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
**Assuming payment of applicable contingent deferred sales charge.

                                     % Return Without % Return With
                                       Sales Charge   Sales Charge**
Class D Shares*
One Year Ended 6/30/01                     +9.51%         +5.13%
Five Years Ended 6/30/01                   +4.80          +3.95
Inception (10/21/94)
through 6/30/01                            +5.55          +4.91


*Maximum sales charge is 4%.
**Assuming maximum sales charge.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

PERFORMANCE DATA (continued)


Total Return Based on a $10,000 Investment

A line graph illustrating the growth of a $10,000 investment in Merrill Lynch
Texas Municipal Bond Fund++ Class A and Class B Shares* compared to a similar
investment in Lehman Brothers Municipal Bond Index. Values illustrated are as
follows:

Merrill Lynch Texas Municipal Bond Fund++--
Class A Shares*:

Date                    Value

08/30/1991          $ 9,600.00
July 1992           $11,056.00
July 1993           $12,068.00
July 1994           $12,359.00
July 1995           $13,149.00
July 1996           $13,864.00
July 1997           $15,166.00
July 1998           $15,899.00
July 1999           $15,967.00
July 2000           $16,157.00
July 2001           $17,789.00


Merill Lynch Texas Municipal Bond Fund++-
Class B Shares*:

Date                    Value

08/30/1991          $10,000.00
July 1992           $11,464.00
July 1993           $12,450.00
July 1994           $12,685.00
July 1995           $13,427.00
July 1996           $14,084.00
July 1997           $15,329.00
July 1998           $15,988.00
July 1999           $15,975.00
July 2000           $16,084.00
July 2001           $17,601.00


Lehman Brothers Municipal Bond Index++++:


Date                    Value

08/30/1991          $10,000.00
July 1992           $11,226.00
July 1993           $12,218.00
July 1994           $12,447.00
July 1995           $13,427.00
July 1996           $14,313.00
July 1997           $15,781.00
July 1998           $16,727.00
July 1999           $17,208.00
July 2000           $17,950.00
July 2001           $19,759.00


A line graph illustrating the growth of a $10,000 investment in Merrill Lynch
Texas Municipal Bond Fund++ Class C and Class D Shares* compared to a similar
investment in Lehman Brothers Municipal Bond Index. Values illustrated are as
follows:

Merill Lynch Texas Municipal Bond Fund++--
Class C Shares*:

Date                    Value

10/21/1994          $10,000.00
July 1995           $10,807.00
July 1996           $11,334.00
July 1997           $12,321.00
July 1998           $12,836.00
July 1999           $12,813.00
July 2000           $12,887.00
July 2001           $14,085.00


Merill Lynch Texas Municipal Bond Fund++-
Class D Shares*:

Date                    Value

10/21/1994          $ 9,600.00
July 1995           $10,439.00
July 1996           $10,985.00
July 1997           $12,015.00
July 1998           $12,582.00
July 1999           $12,612.00
July 2000           $12,751.00
July 2001           $14,022.00


Lehman Brothers Municipal Bond Index++++:

Date                    Value

10/31/1994          $10,000.00
July 1995           $11,107.00


July 1996           $11,840.00
July 1997           $13,054.00
July 1998           $13,836.00
July 1999           $14,234.00
July 2000           $14,848.00
July 2001           $16,344.00


*Assuming maximum sales charge, transaction costs and other operating expenses,
including advisory fees.
**Commencement of operations.
++ML Texas Municipal Bond Fund invests primarily in long-term investment-grade
obligations issued by or on behalf of the state of Texas, its political
subdivisions, agencies and instrumentalities and obligations of other qualifying
issuers.
++++This unmanaged Index consists of long-term revenue bonds, prerefunded bonds,
general obligation bonds and insured bonds. The starting date for the Index in
the Class C & Class D Shares' graph is from 10/31/94.

Past performance is not predictive of future performance.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

PERFORMANCE DATA (concluded)




Recent Performance Results*

                                                   6-Month         12-Month    Since Inception    Standardized
As of July 31, 2001                              Total Return    Total Return    Total Return     30-Day Yield
                                                                                      
ML Texas Municipal Bond Fund Class A Shares         +3.39%           +9.98%         +85.05%           3.99%
ML Texas Municipal Bond Fund Class B Shares         +3.13            +9.43          +76.01            3.66
ML Texas Municipal Bond Fund Class C Shares         +3.08            +9.30          +40.87            3.55
ML Texas Municipal Bond Fund Class D Shares         +3.44            +9.97          +46.08            3.90


*Investment results shown do not reflect sales charges; results shown would be
lower if a sales charge was included. Total investment returns are based on
changes in net asset values for the periods shown, and assume reinvestment of
all dividends and capital gains distributions at net asset value on the payable
date. The Fund's since inception periods are from 8/30/91 for Class A & Class B
Shares and from 10/21/94 for Class C & Class D Shares.


Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

OFFICERS AND TRUSTEES

Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Theodore R. Jaeckel Jr., Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary

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

Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863




Merrill Lynch Texas Municipal Bond Fund
July 31, 2001




SCHEDULE OF INVESTMENTS
(in Thousands)

S&P     Moody's   Face
Ratings Ratings  Amount                               Issue                                              Value

Texas--95.5%
                                                                                              
BBB-    Baa3     $1,500    Alliance Airport Authority, Inc., Texas, Special Facilities Revenue
                           Bonds (American Airlines Inc. Project), AMT, 7% due 12/01/2011                 $  1,655

BBB-    Baa3      1,300    Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises
                           Inc.), First Tier, Series A, 6.70% due 1/01/2028                                  1,341



                                                                                              
AAA     NR*       1,415    Cameron County, Texas, Housing Finance Corporation, S/F Mortgage Revenue
                           Refunding Bonds, Series B-1, 6.75% due 9/01/2025 (c)                              1,485

AAA     Aaa       1,000    Dallas-Fort Worth, Texas, International Airport Facility Improvement
                           Corporation Revenue Bonds (United Parcel Service, Inc.), AMT, 6.60%
                           due 5/01/2032                                                                     1,042

AAA     NR*       1,000    Dallas-Fort Worth, Texas, International Airport Revenue Bonds, DRIVERS,
                           AMT, Series 201, 8.98% due 11/01/2024 (e)(g)                                      1,128

AA      NR*       1,260    Fort Bend County, Texas, Municipal Utility District Number 23, GO,
                           6.625% due 9/01/2024                                                              1,379

AA+     Aa1       1,400    Fort Worth, Texas, Certificates of Obligation, GO, 6.25% due 3/01/2021            1,488

AA      NR*       1,000    Gregg County, Texas, Health Facilities Development Corporation,
                           Hospital Revenue Bonds (Good Shepherd Medical Center Project),
                           6.875% due 10/01/2020                                                             1,128

                           Gulf Coast, Texas, Waste Disposal Authority Revenue Bonds
                           (Champion International Corporation), AMT:
BBB     NR*         725       7.25% due 4/01/2002 (f)                                                          759
BBB     Baa1      1,025       7.25% due 4/01/2017                                                            1,061

A1+     NR*         400    Harris County, Texas, Health Facilities Development Corporation, Hospital
                           Revenue Refunding Bonds (Methodist Hospital), VRDN, 2.75% due 12/01/2025 (h)        400

                           Harris County, Texas, Health Facilities Development Corporation,
                           Revenue Refunding Bonds:
NR*     Aa3       1,000       RITR, Series 6, 8.195% due 7/01/2027 (a)(g)                                    1,214
AAA     Aa3       2,500       (School Health Care System), Series B, 6.25% due 7/01/2027 (a)                 2,960

BBB-    Baa2      1,000    Lower Colorado River Authority, Texas, PCR (Samsung Austin Semiconductor),
                           AMT, 6.95% due 4/01/2030                                                          1,044




                                                                                              
AAA     Aaa       1,410    Pflugerville, Texas, Independent School District, GO, 5.75% due 8/15/2020         1,496

AA      NR*       1,000    Red River, Texas, Education Finance Revenue Bonds (Saint Mark's School--
                           Texas Project), 6% due 8/15/2019                                                  1,069

AAA     Aaa       1,395    Richardson, Texas, Certificates of Obligation, Hotel Occupancy, GO,
                           Series A, 6% due 2/15/2016                                                        1,529



PORTFOLIO ABBREVIATIONS

To simplify the listings of Merrill Lynch Texas Municipal Bond Fund's portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list at right.

AMT        Alternative Minimum Tax (subject to)
DRIVERS    Derivative Inverse Tax-Exempt Receipts
GO         General Obligation Bonds
PCR        Pollution Control Revenue Bonds
RIB        Residual Interest Bonds
RITR       Residual Interest Trust Receipts
S/F        Single-Family
VRDN       Variable Rate Demand Notes


Merrill Lynch Texas Municipal Bond Fund
July 31, 2001



SCHEDULE OF INVESTMENTS (concluded)
(in Thousands)

S&P     Moody's   Face
Ratings Ratings  Amount                               Issue                                              Value

Texas (concluded)
                                                                                              
NR*     Aaa      $  915    South Plains, Texas, Housing Finance Corporation, S/F Mortgage
                           Revenue Bonds, AMT, Series A, 7.30% due 9/01/2031 (c)                          $  1,042

                           Southeast Texas, Housing Finance Corporation Revenue Bonds, AMT (b)(d):



                                                                                              
NR*     Aaa       1,750       Series A, 8% due 11/01/2025                                                    1,953
NR*     Aaa         865       Series B, 8.50% due 11/01/2025                                                   956

AA      Aa1       2,000    Texas State, GO, Refunding, RIB, Series B, 8.719% due 9/30/2011 (g)               2,570

AA      Aa1         800    Texas State, GO, Veterans' Housing Assistance Fund II, AMT, Series A,
                           7% due 12/01/2025                                                                   844

AA      NR*         805    Texas State, GO, Water Development Board, 7% due 8/01/2004 (f)                      891

AAA     Aaa       1,000    Ysleta, Texas, Independent School District, Public Facility Corporation,
                           School Facility Lease Revenue Bonds, 6.0% due 11/15/2009 (f)                      1,136

Total Investments (Cost--$29,092)--95.5%                                                                    31,570

Other Assets Less Liabilities--4.5%                                                                          1,489
                                                                                                          --------
Net Assets--100.0%                                                                                        $ 33,059
                                                                                                          ========



(a) Escrowed to maturity.
(b) FHLMC Collateralized.
(c) FNMA/GNMA Collateralized.
(d) GNMA Collateralized.
(e) FGIC Insured.
(f) Prerefunded.
(g) The interest rate is subject to change periodically and inversely based upon
    prevailing market rates. The interest rate shown is the rate in effect at
    July 31, 2001.
(h) The interest rate is subject to change periodically based upon prevailing
    market rates. The interest rate shown is the rate in effect at July 31,
    2001.

*Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001




FINANCIAL INFORMATION

Statement of Assets and Liabilities as of July 31, 2001
                                                                                                   
Assets:             Investments, at value (identified cost--$29,091,817)                   $ 31,570,323
                    Cash                                                                         47,652
                    Receivables:
                      Securities sold                                                      $    951,666
                      Interest                                                                  598,203
                      Beneficial interest sold                                                   14,995        1,564,864
                                                                                           ------------
                    Prepaid registration fees and other assets                                   23,582
                                                                                           ------------
                    Total assets                                                             33,206,421
                                                                                           ------------

Liabilities:        Payables:
                      Beneficial interest redeemed                                               59,280
                      Dividends to shareholders                                                  30,997
                      Investment adviser                                                         14,893
                      Distributor                                                                11,374          116,544
                                                                                           ------------
                    Accrued expenses and other liabilities                                       30,522
                                                                                           ------------
                    Total liabilities                                                           147,066
                                                                                           ------------

Net Assets:         Net assets                                                             $ 33,059,355
                                                                                           ============

Net Assets          Class A Shares of beneficial interest, $.10 par value,
Consist of:         unlimited number of shares authorized                                  $     42,268



                                                                                     
                    Class B Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                       260,913
                    Class C Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                         6,895
                    Class D Shares of beneficial interest, $.10 par value,
                    unlimited number of shares authorized                                        13,655
                    Paid-in capital in excess of par                                         33,744,874
                    Accumulated realized capital losses on investments--net                 (2,067,174)
                    Accumulated distributions in excess of realized capital gains on
                    investments--net                                                        (1,420,582)
                    Unrealized appreciation on investments--net                               2,478,506
                                                                                           ------------
                    Net assets                                                             $ 33,059,355
                                                                                           ============

Net Asset Value:    Class A--Based on net assets of $4,316,012 and 422,684 shares
                    of beneficial interest outstanding                                      $     10.21
                                                                                           ============
                    Class B--Based on net assets of $26,642,103 and 2,609,131 shares
                    of beneficial interest outstanding                                      $     10.21
                                                                                           ============
                    Class C--Based on net assets of $704,824 and 68,951 shares
                    of beneficial interest outstanding                                      $     10.22
                                                                                           ============
                    Class D--Based on net assets of $1,396,416 and 136,546 shares
                    of beneficial interest outstanding                                      $     10.23
                                                                                           ============



                      See Notes to Financial Statements.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001


FINANCIAL INFORMATION (continued)



Statement of Operations

                                                                                      For the Year Ended
                                                                                          July 31, 2001
                                                                                     
Investment Income:  Interest and amortization of premium and discount earned               $  2,098,463

Expenses:           Investment advisory fees                                               $    193,780
                    Account maintenance and distribution fees--Class B                          142,221
                    Professional fees                                                            75,063
                    Accounting services                                                          45,173
                    Printing and shareholder reports                                             41,324
                    Transfer agent fees--Class B                                                 18,352
                    Trustees' fees and expenses                                                   7,777
                    Pricing fees                                                                  4,623
                    Account maintenance and distribution fees--Class C                            4,255
                    Registration fees                                                             2,759
                    Transfer agent fees--Class A                                                  2,734
                    Custodian fees                                                                2,696
                    Account maintenance fees--Class D                                             1,170
                    Transfer agent fees--Class D                                                    678
                    Transfer agent fees--Class C                                                    515
                    Other                                                                         6,655
                                                                                           ------------
                    Total expenses                                                              549,775
                                                                                           ------------
                    Investment income--net                                                    1,548,688



                                                                                     
                                                                                           ------------
Realized &
Unrealized Gain on
Investments--Net:   Realized gain on investments--net                                           255,000
                    Change in unrealized appreciation on investments--net                     1,425,630
                                                                                           ------------

                    Net Increase in Net Assets Resulting from Operations                   $  3,229,318
                                                                                           ============



                      See Notes to Financial Statements.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION (continued)



Statements of Changes in Net Assets

                                                                                                  For the Year
                                                                                                 Ended July 31,
                                                                                                   
Increase (Decrease) in Net Assets:                                                             2001             2000
Operations:         Investment income--net                                                 $  1,548,688     $  2,073,679
                    Realized gain (loss) on investments--net                                    255,000      (3,055,126)
                    Change in unrealized appreciation on investments--net                     1,425,630          673,319
                                                                                           ------------     ------------
                    Net increase (decrease) in net assets resulting from operations           3,229,318        (308,128)
                                                                                           ------------     ------------

Dividends &
Distributions to
Shareholders:       Investment income--net:
                      Class A                                                                 (236,971)        (352,552)
                      Class B                                                               (1,226,758)      (1,639,682)
                      Class C                                                                  (29,815)         (33,780)
                      Class D                                                                  (55,144)         (47,665)




                                                                                                   
                    In excess of realized gain on investments--net:
                      Class A                                                                        --        (217,989)
                      Class B                                                                        --      (1,151,503)
                      Class C                                                                        --         (23,657)
                      Class D                                                                        --         (27,433)
                                                                                           ------------     ------------
                    Net decrease in net assets resulting from dividends
                    and distributions to shareholders                                       (1,548,688)      (3,494,261)
                                                                                           ------------     ------------

Beneficial
Interest
Transactions:       Net decrease in net assets derived from beneficial
                    interest transactions                                                   (6,312,061)     (13,555,873)
                                                                                           ------------     ------------

Net Assets:         Total decrease in net assets                                            (4,631,431)     (17,358,262)
                    Beginning of year                                                        37,690,786       55,049,048
                                                                                           ------------     ------------
                    End of year                                                            $ 33,059,355     $ 37,690,786
                                                                                           ============     ============



                      See Notes to Financial Statements.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION (continued)



Financial Highlights
The following per share data and ratios have been derived                                 Class A
from information provided in the financial statements.                         For the Year Ended July 31,
                                                                                              
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998        1997
Per Share           Net asset value, beginning of year                $   9.74   $  10.45  $  10.90  $  10.96   $  10.57



                                                                                              
                                                                      --------   --------  --------  --------   --------
Operating
Performance:        Investment income--net                                 .48        .50       .51       .58        .57
                    Realized and unrealized gain (loss) on
                    investments--net                                       .47      (.41)     (.45)     (.06)        .39
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .95        .09       .06       .52        .96
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                             (.48)      (.50)     (.51)     (.58)      (.57)
                      In excess of realized gain on investments--net        --      (.30)        --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                    (.48)      (.80)     (.51)     (.58)      (.57)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.21   $   9.74  $  10.45  $  10.90   $  10.96
                                                                      ========   ========  ========  ========   ========

Total Investment
Return:*            Based on net asset value per share                   9.98%      1.19%      .43%     4.83%      9.39%
                                                                      ========   ========  ========  ========   ========

Ratios to Average
Net Assets:         Expenses                                             1.13%       .96%      .98%      .87%       .83%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                               4.83%      5.12%     4.67%     5.25%      5.37%
                                                                      ========   ========  ========  ========   ========

Supplemental
Data:               Net assets, end of year (in thousands)            $  4,316   $  5,924  $  8,545  $  9,842   $ 10,707
                                                                      ========   ========  ========  ========   ========
                    Portfolio turnover                                  26.93%     97.91%   129.23%    24.61%     47.83%
                                                                      ========   ========  ========  ========   ========

The following per share data and ratios have been derived                                 Class B
from information provided in the financial statements.                         For the Year Ended July 31,






Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998        1997
                                                                                              
Per Share           Net asset value, beginning of year                $   9.74   $  10.45  $  10.90  $  10.96   $  10.57
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .43        .45       .45       .52        .52
                    Realized and unrealized gain (loss) on
                    investments--net                                       .47      (.41)     (.45)     (.06)        .39
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .90        .04        --       .46        .91
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                             (.43)      (.45)     (.45)     (.52)      (.52)
                      In excess of realized gain on investments--net        --      (.30)        --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                    (.43)      (.75)     (.45)     (.52)      (.52)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.21   $   9.74  $  10.45 $   10.90   $  10.96
                                                                      ========   ========  ========  ========   ========

Total Investment
Return:*            Based on net asset value per share                   9.43%       .68%    (.08%)     4.30%      8.84%
                                                                      ========   ========  ========  ========   ========

Ratios to Average
Net Assets:         Expenses                                             1.64%      1.47%     1.49%     1.38%      1.34%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                               4.31%      4.61%     4.15%     4.74%      4.86%
                                                                      ========   ========  ========  ========   ========

Supplemental
Data:               Net assets, end of year (in thousands)            $ 26,642   $ 30,090  $ 44,502  $ 48,887   $ 56,115
                                                                      ========   ========  ========  ========   ========
                    Portfolio turnover                                  26.93%     97.91%   129.23%    24.61%     47.83%
                                                                      ========   ========  ========  ========   ========



*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)



The following per share data and ratios have been derived                                 Class C
from information provided in the financial statements.                         For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998        1997
                                                                                              
Per Share           Net asset value, beginning of year                $   9.75   $  10.46  $  10.91  $  10.97   $  10.58
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .42        .44       .44       .51        .51
                    Realized and unrealized gain (loss) on
                    investments--net                                       .47      (.41)     (.45)     (.06)        .39
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .89        .03     (.01)       .45        .90
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                             (.42)      (.44)     (.44)     (.51)      (.51)
                      In excess of realized gain on investments--net        --      (.30)        --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                    (.42)      (.74)     (.44)     (.51)      (.51)
                                                                      --------   --------  --------  --------   --------
                    Net asset value, end of year                      $  10.22   $   9.75  $  10.46  $  10.91   $  10.97
                                                                      ========   ========  ========  ========   ========

Total Investment    Based on net asset value per share                   9.30%       .58%    (.18%)     4.18%      8.71%



                                                                                              
Return:*                                                              ========   ========  ========  ========   ========
Ratios to Average   Expenses                                             1.75%      1.58%     1.59%     1.48%      1.45%
Net Assets:                                                           ========   ========  ========  ========   ========
                    Investment income--net                               4.20%      4.51%     4.06%     4.63%      4.75%
                                                                      ========   ========  ========  ========   ========

Supplemental        Net assets, end of year (in thousands)            $    705   $    733  $    836  $  1,304   $    917
Data:                                                                 ========   ========  ========  ========   ========
                    Portfolio turnover                                  26.93%     97.91%   129.23%    24.61%     47.83%
                                                                      ========   ========  ========  ========   ========



The following per share data and ratios have been derived                                 Class D
from information provided in the financial statements.                         For the Year Ended July 31,
Increase (Decrease) in Net Asset Value:                                  2001      2000      1999      1998        1997
                                                                                              
Per Share           Net asset value, beginning of year                $   9.75   $  10.46  $  10.92  $  10.98   $  10.58
Operating                                                             --------   --------  --------  --------   --------
Performance:        Investment income--net                                 .47        .49       .50       .57        .56
                    Realized and unrealized gain (loss) on
                    investments--net                                       .48      (.41)     (.46)     (.06)        .40
                                                                      --------   --------  --------  --------   --------
                    Total from investment operations                       .95        .08       .04       .51       .96]
                                                                      --------   --------  --------  --------   --------
                    Less dividends and distributions:
                      Investment income--net                             (.47)      (.49)     (.50)     (.57)      (.56)
                      In excess of realized gain on investments--net        --      (.30)        --        --         --
                                                                      --------   --------  --------  --------   --------
                    Total dividends and distributions                    (.47)      (.79)     (.50)     (.57)      (.56)
                                                                      --------   --------  --------  --------   --------



                                                                                              
                    Net asset value, end of year                      $  10.23   $   9.75  $  10.46  $  10.92   $  10.98
                                                                      ========   ========  ========  ========   ========

Total Investment
Return:*            Based on net asset value per share                   9.97%      1.10%      .24%     4.72%      9.38%
                                                                      ========   ========  ========  ========   ========

Ratios to Average
Net Assets:         Expenses                                             1.25%      1.06%     1.11%      .97%       .93%
                                                                      ========   ========  ========  ========   ========
                    Investment income--net                               4.71%      5.03%     4.49%     5.15%      5.27%
                                                                      ========   ========  ========  ========   ========

Supplemental
Data:               Net assets, end of year (in thousands)            $  1,396   $    944 $   1,166  $    338   $    335
                                                                      ========   ========  ========  ========   ========
                    Portfolio turnover                                  26.93%     97.91%   129.23%    24.61%     47.83%
                                                                      ========   ========  ========  ========   ========



*Total investment returns exclude the effects of sales charges.

See Notes to Financial Statements.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:
Merrill Lynch Texas Municipal Bond Fund (the "Fund") is part of Merrill Lynch
Multi-State Municipal Series Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM System. Shares
of Class A and Class D are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D


Shares bear certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.

(a) Valuation of investments--Municipal bonds and other portfolio securities in
which the Fund invests are traded primarily in the over-the-counter municipal
bond and money markets and are valued at the last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make markets in the securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by a pricing service retained by the
Trust, which may utilize a matrix system for valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.

(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies 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. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.

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

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

(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security


transactions are determined on the identified cost basis. Interest income is
recognized on the accrual basis. The Fund will adopt the provisions to amortize
all premiums and discounts on debt securities effective August 1, 2001, as now
required under the new AICPA Audit and Accounting Guide for Investment
Companies. The cumulative effect of this accounting change will have no impact
on the total net assets of the Fund and no cumulative adjustment will be
necessary.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

(e) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.

(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses.

(g) Expenses--Certain expenses have been allocated to the individual funds in
the Trust on a pro rata basis based upon the respective aggregate net asset
value of each fund included in the Trust.

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

FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: .55% of the Fund's average daily net assets not exceeding $500
million; .525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and .50% of average daily net assets in excess of $1
billion.

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

                                     Account     Distribution


                                 Maintenance Fee     Fee

Class B                                .25%          .25%
Class C                                .25%          .35%
Class D                                .10%           --

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

For the year ended July 31, 2001, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D Shares as
follows:

                             FAMD     MLPF&S

Class A                      $ 5       $ 70
Class D                      $47       $735

For the year ended July 31, 2001, MLPF&S received contingent deferred sales
charges of $9,866 and $103 relating to transactions in Class B and Class C
Shares, respectively.

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

Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM at its cost for
such services. For the year ended July 31, 2001, the Fund reimbursed FAM an
aggregate of $14,697 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS (continued)

Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, FDS, FAMD, and/or ML & Co.

3. Investments:
Purchases and sales of investments, excluding short-term securities,


for the year ended July 31, 2001 were $9,173,769 and $15,319,012, respectively.

Net realized gains for the year ended July 31, 2001 and net unrealized gains as
of July 31, 2001 were as follows:

                                     Realized     Unrealized
                                      Gains         Gains

Long-term investments.            $   255,000    $ 2,478,506
                                  -----------    -----------
Total                             $   255,000    $ 2,478,506
                                  ===========    ===========

As of July 31, 2001, net unrealized appreciation for Federal income tax purposes
aggregated $2,478,506, all of which related to appreciated securities. The
aggregate cost of investments at July 31, 2001 for Federal income tax purposes
was $29,091,817.

4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions was
$6,312,061 and $13,555,873 for the years ended July 31, 2001 and July 31, 2000,
respectively.

Transactions in shares of beneficial interest for each class were as follows:

Class A Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                            32,627    $   328,774
Shares issued to shareholders
in reinvestment of dividends           11,882        118,574
                                 ------------   ------------
Total issued                           44,509        447,348
Shares redeemed                     (229,949)    (2,279,420)
                                 ------------   ------------
Net decrease                        (185,440)  $ (1,832,072)
                                 ============   ============

Class A Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                            45,456    $   438,851
Shares issued to share-
holders in reinvestment of
dividends and distributions            33,822        325,457
                                 ------------   ------------
Total issued                           79,278        764,308
Shares redeemed                     (288,975)    (2,799,204)
                                 ------------   ------------
Net decrease                        (209,697)  $ (2,034,896)
                                 ============   ============

Class B Shares for the Year                         Dollar


Ended July 31, 2001                   Shares        Amount

Shares sold                            60,327    $   603,005
Shares issued to shareholders
in reinvestment of dividends           57,237        571,589
                                 ------------   ------------
Total issued                          117,564      1,174,594
Automatic conversion of
shares                               (52,024)      (518,426)
Shares redeemed                     (545,691)    (5,471,517)
                                 ------------   ------------
Net decrease                        (480,151)  $ (4,815,349)
                                 ============   ============

Class B Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                            75,628    $   739,360
Shares issued to share-
holders in reinvestment of
dividends and distributions           136,933      1,316,321
                                 ------------   ------------
Total issued                          212,561      2,055,681
Automatic conversion of
shares                                (5,674)       (53,695)
Shares redeemed                   (1,377,138)   (13,323,564)
                                 ------------   ------------
Net decrease                      (1,170,251)  $(11,321,578)
                                 ============   ============

Class C Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                             4,664     $   46,683
Shares issued to shareholders
in reinvestment of dividends            1,700         17,011
                                 ------------   ------------
Total issued                            6,364         63,694
Shares redeemed                      (12,561)      (125,528)
                                 ------------   ------------
Net decrease                          (6,197)   $   (61,834)
                                 ============   ============

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

NOTES TO FINANCIAL STATEMENTS (concluded)

Class C Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                             6,140     $   60,526
Shares issued to share-


holders in reinvestment of
dividends and distributions             3,770         36,232
                                 ------------   ------------
Total issued                            9,910         96,758
Shares redeemed                      (14,751)      (143,672)
                                 ------------   ------------
Net decrease                          (4,841)    $  (46,914)
                                 ============   ============


Class D Shares for the Year                         Dollar
Ended July 31, 2001                   Shares        Amount

Shares sold                             3,323     $   33,373
Automatic conversion
of shares                              51,931        518,426
Shares issued to shareholders
in reinvestment of dividends            2,470         24,726
                                 ------------   ------------
Total issued                           57,724        576,525
Shares redeemed                      (17,979)      (179,331)
                                 ------------   ------------
Net increase                           39,745    $   397,194
                                 ============   ============


Class D Shares for the Year                         Dollar
Ended July 31, 2000                   Shares        Amount

Shares sold                             2,501     $   23,921
Automatic conversion
of shares                               5,662         53,695
Shares issued to share-
holders in reinvestment of
dividends and distributions             3,029         29,156
                                 ------------   ------------
Total issued                           11,192        106,772
Shares redeemed                      (25,835)      (259,257)
                                 ------------   ------------
Net decrease                         (14,643)   $  (152,485)
                                 ============   ============

5. Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds managed by FAM and
its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended July 31, 2001.


6. Capital Loss Carryforward:
At July 31, 2001, the Fund had a net capital loss carryforward of approximately
$3,343,000, of which $1,864,000 expires in 2008 and $1,479,000 expires in 2009.
This amount will be available to offset like amounts of any future taxable
gains.

Merrill Lynch Texas Municipal Bond Fund
July 31, 2001

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Texas Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust as of July 31, 2001, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at July 31, 2001 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Texas
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of
July 31, 2001, the results of its operations, the changes in its net assets, and
the financial highlights for the respective stated periods in conformity with
accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP


New York, New York
September 12, 2001

IMPORTANT TAX INFORMATION (unaudited)

All of the net investment income distributions paid monthly by Merrill Lynch
Texas Municipal Bond Fund during its taxable year ended July 31, 2001 qualify as
tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.