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

Securities Act File No. 33-37103
Investment Company Act File No. 811-6180

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

				REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
				Pre-Effective Amendment No.
				Post-Effective Amendment No. 18
				and/or
				REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
				Amendment No. 20
				(Check appropriate box or boxes)

Merrill Lynch Utilities and Telecommunications Fund, Inc.

(Exact Name of Registrant as Specified in Charter)

800 Scudders Mill Road, Plainsboro, New Jersey 08536

(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code: (609) 282-2800

Robert C. Doll, Jr.
Merrill Lynch Utilities and Telecommunications Fund, Inc.
800 Scudders Mill Road

Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey, 08543-9011
(Name and Address of Agent for Service)

Copies to:

Counsel for the Fund: Sidley Austin Brown & Wood LLP 787 Seventh Avenue New York, New York 10019-6018 Attention: Frank P. Bruno, Esq.				Andrew J. Donohue, Esq. Merrill Lynch Investment Managers, L.P. P.O. Box 9011 Princeton, New Jersey 08543-9011

It is proposed that this filing will become effective (check appropriate box):

		immediately upon filing pursuant to paragraph (b)

		on (date) pursuant to paragraph (b)

		60 days after filing pursuant to paragraph (a)(1)

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

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

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

If appropriate, check the following box:

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

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

Prospectus

March 28, 2005

Merrill Lynch Utilities and Telecommunications Fund, Inc.

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

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

PAGE

Key Facts

Details About the Fund

Your Account

Management of the Fund

For More Information

Merrill Lynch Utilities and Telecommunications Fund, Inc.

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.

Utilities companies — companies that are primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water.

Equity Securities — common stock, preferred stock, securities convertible into common stock or securities or other instruments whose price is linked to the value of common stock.

Fixed-Income Securities — securities that represent an obligation by the issuer to pay a specified rate of interest or dividend at specified times.

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

Merrill Lynch Utilities and Telecommunications Fund at a Glance 

What is the Fund's investment objective? 

The investment objective of the Fund is to seek both capital appreciation and current income. 

What are the Fund's main investment strategies? 

The Fund seeks to achieve its investment objective by investing in a diversified portfolio of securities that, at the time of purchase, are issued by utilities companies. Under normal circumstances, the Fund will invest at least 80% of its assets in equity and debt securities issued by domestic and foreign utilities companies. The Fund may invest in both equity securities and fixed-income securities. The Fund intends to invest primarily in equity securities, but Fund management may change its allocation among these types of investments as it deems appropriate to seek to achieve the Fund's objective. The fixed income securities in which the Fund invests generally are limited to those rated investment grade. The foreign securities in which the Fund invests may be issued by companies located in both developed and emerging markets. 

What are the main risks of investing in the Fund? 

The Fund cannot gurantee that it will achieve its investment objective. 

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 because a particular stock or bond market in which the Fund invests is rising or falling, or in response to interest rate changes. In addition, there are specific factors that may affect the value of a particular security. The Fund's investments in fixed income securities may also be subject to credit risk, that is, the risk that an issuer will be unable to pay interest or principal when due. Also, Fund management may select securities that underperform the markets, the relevant indices or other funds with similar investment objectives and investment strategies. If the value of the Fund's investments go down, you may lose money.  

As a sector fund that invests primarily in utilities companies, the Fund is subject to the risks associated with this sector. Therefore, the Fund is more vulnerable to price changes of utilities companies securities and factors that affect the utilities industry than a more broadly diversified mutual fund. The prices of securities issued by utilities companies historically have changed more in response to interest rate movements than other stocks. Generally, when interest rates go up, the value of securities issued by utilities companies goes  

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down. Conversely, when interest rates go down, the value of certain securities issued by utilities companies may go up. There is no guarantee that this relationship will continue in the future. 

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

Who should invest? 

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

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

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

• Want a professionally managed and diversified portfolio of utilities companies 

• Want to diversify your portfolio to include utilities companies 

• Are willing to accept the risks of foreign investing in order to seek both capital appreciation and current income 

• Are willing to accept the risk that the value of your investment may decline in order to seek both capital appreciation and current income 

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

Risk/Return Bar Chart 

The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance for Class B shares for each of the past ten calendar years. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the average annual total returns for each class of the Fund's shares with those of the Standard & Poor's 500 Index and the Standard & Poor's Utilities Index, each a broad measure of market performance. How the Fund performed in the past (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. 

During the period shown in the bar chart, the highest return for a quarter was 17.92% (quarter ended December 31, 1999) and the lowest return for a quarter was -17.82% (quarter ended September 30, 2002). The year to date return as of December 31, 2004 was 24.82%. 

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

Average Annual Total Returns (for the periods ended December 31, 2004)				One Year					Five Years					Ten Years
Merrill Lynch Utilities and Telecommunications Fund — Class A#: Return Before Taxes##				20.58	%				0.04	%				9.42	%
Merrill Lynch Utilities and Telecommunications Fund— Class B: Return Before Taxes## Return After Taxes on Distributions## Return After Taxes on Distributions and Sale of Fund Shares##				20.82 20.14 13.48	% % %				0.12 -2.54 -0.91	% % %				9.30   6.88 7.13	% % %
Merrill Lynch Utilities and Telecommunications Fund— Class C: Return Before Taxes##				23.93	%				0.36	%				9.28	%
Merrill Lynch Utilities and Telecommunications Fund — Class I#: Return Before Taxes##				20.88	%				0.30	%				9.71	%
Standard & Poor's (S&P) 500 Index*				10.88	%				-2.30	%				12.07	%
Standard & Poor's (S&P) Utilities Index*				24.28	%				3.73	%				8.16	%

# 

Prior to April 14, 2003, Class A shares were designated Class D and Class I shares were designated Class A. Historical performance information for each class includes the prior designated class. 

## 

Includes all applicable fees and sales charges. 

* 

The S&P 500 Index is a widely recognized, unmanaged index of common stock prices. The S&P Utilities Index is comprised of all stocks in electric and natural gas utilities companies and is designed to measure the performance of electric and natural gas utilities within the S&P 500 Index. Performance of the index does not reflect the deduction of fees, expenses or taxes. Past performance is not predictive of future performance. 

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

UNDERSTANDING EXPENSES

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

Expenses paid directly by the shareholder:

Shareholder Fees — these fees include sales charges that you may pay when you buy or sell shares of the Fund.

Expenses paid indirectly by the shareholder:

Annual Fund Operating Expenses — expenses that cover the costs of operating the Fund.

Management Fee — a fee paid to the Investment Adviser for managing the Fund.

Distribution Fees — fees used to support the Fund's marketing and distribution efforts, such as compensating financial advisers and other financial intermediaries, advertising and promotion.

Service (Account Maintenance) Fees — fees used to compensate securities dealers and other financial intermediaries for account maintenance activities.

Fees and Expenses 

The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial adviser or other financial intermediary can help you with this decision. 

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

Shareholder Fees (fees paid directly from your investment):(a)				Class A					Class B(b)					Class C					Class I
Maximum sales charge (load) imposed on purchases (as a percentage of offering price)				4.00	%(c)				None					None					4.00	%(c)
Maximum deferred sales charge (load) (as a percentage of original purchase price or redemption proceeds, whichever is lower)				None(d	)				4.00	%(c)				1.00	%(c)				None(d	)
Maximum sales charge (load) imposed on dividend reinvestments				None					None					None					None
Redemption Fee				None					None					None					None
Exchange Fee				None					None					None					None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fee				0.60	%				0.60	%				0.60	%				0.60	%
Distribution and/or Service (12b-1) Fees(e)				0.25	%				0.75	%				0.80	%				None
Other expenses (including transfer agency fees)(f)				0.43	%				0.46	%				0.45	%				0.43	%
Total Annual Fund Operating Expenses				1.28	%				1.81	%				1.85	%				1.03	%

(a) 

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

(b) 

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

(c) 

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

(d) 

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

(e) 

The Fund calls the "Service Fee" an "Account Maintenance Fee." Account Maintenance Fee is the term used elsewhere in this Prospectus and in all other Fund materials. If you hold Class B or Class C shares over time, it may cost you more in distribution and account maintenance (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the other classes. 

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(continued from previous page) 

(f) 

Financial Data Services, Inc., an affiliate of the Investment Adviser, provides transfer agency services to the Fund. The Fund pays a fee for these services. The Investment Adviser or its affiliates also provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser or its affiliates for these services. 

Examples: 

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

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

EXPENSES IF YOU DID REDEEM YOUR SHARES: 

				1 Year					3 Years					5 Years					10 Years
Class A			$	525				$	790				$	1,074				$	1,883
Class B			$	584				$	869				$	1,180				$	2,127
Class C			$	288				$	582				$	1,001				$	2,169
Class I			$	501				$	715				$	946				$	1,609

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES: 

				1 Year					3 Years					5 Years					10 Years
Class A			$	525				$	790				$	1,074				$	1,883
Class B			$	184				$	569				$	980				$	2,127
Class C			$	188				$	582				$	1,001				$	2,169
Class I			$	501				$	715				$	946				$	1,609

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

ABOUT THE PORTFOLIO MANAGER

Kathleen M. Anderson is the Fund's portfolio manager and is primarily responsible for the day-to-day management of the Fund's portfolio.

ABOUT THE INVESTMENT ADVISER

The Fund is managed by Merrill Lynch Investment Managers.

How the Fund Invests 

The Fund's investment objective is to seek both capital appreciation and current income. 

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

Under normal circumstances, the Fund will invest at least 80% of its assets in equity and debt securities issued by domestic and foreign utilities companies. Utilities companies include telecommunications companies. This policy is a non-fundamental policy of the Fund and may not be changed without 60 days' prior notice to shareholders. The Fund may invest in common stock, preferred stock and bonds. The bonds in which the Fund may invest generally are limited to those rated investment grade. 

The Fund intends to invest primarily in equity securities, but Fund management may change its allocation among these types of investments as it deems appropriate to seek to meet the Fund's objective. 

The Fund may invest in securities of utilities companies throughout the world. There are no limits on the geographic allocation of the Fund's investments. Fund management, however, anticipates that the Fund's investments will focus primarily on securities issued by utilities companies in the United States, and that the Fund's investments in securities issued by non-U.S. companies will primarily focus on Canadian, Japanese and Western European companies. The Fund may also invest in companies in emerging markets, but the Fund's management anticipates that a substantially greater percentage of the Fund's investments will be in developed countries. 

In selecting securities for the Fund's portfolio, Fund management emphasizes securities of utilities companies that have strong financial characteristics. Fund management selects the securities in which it will invest by a combination approach of top-down and bottom-up investment analysis. First, Fund management makes a target geographic allocation through top-down research and analysis of such factors as data and forecasts about general regional economic strength, political and economic stability, and valuation of currency. Next, Fund management assesses the financial strength of individual utilities companies utilizing a bottom-up examination that considers such factors as financial resources, quality of management and overall business prospects for the utilities company in comparison to its industry peers. 

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To meet its objective of current income, the Fund may invest in U.S. utilities companies that pay higher than average dividends, but have a lower potential for capital appreciation. The average dividend yields of common stocks issued by domestic utilities companies historically have significantly exceeded those of other companies' common stocks. To meet its objective of capital appreciation, the Fund may also invest in U.S. and foreign utilities companies that are viewed more as growth investments because they tend to pay a lower dividend and may have a greater potential for growth than more mature utilities companies. 

The Fund will also look for utilities companies that may prosper in a deregulated environment. Historically, utilities companies have been highly regulated. However, actions continue to be taken to deregulate utilities companies, particularly electric utilities and telecommunication companies, and permit competition among them. Deregulation may allow utilities companies to increase their earnings at a faster rate than was allowed in a regulated environment. Deregulation presents both risks and opportunities for investors in utilities company securities. For example, in recent years, changes in regulation in the United States increasingly have allowed utilities companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some instances, utilities companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The emergence of competition and deregulation may result in certain utilities companies being able to earn more than their traditional regulated rates of return, while others may be forced to defend their core business from increased competition and may be less profitable. 

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

The Fund may invest up to 5% of its total assets in lower rated debt securities also known as junk bonds. The Fund may also invest in American Depositary Receipts, convertible securities, when-issued securities, standby commitments, repurchase agreements and illiquid securities. 

The Fund may use derivatives, such as options and futures, to hedge against potential movements in interest rates, currencies and market movements. 

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

The Fund may invest up to 20% of its assets in securities of companies that are not utilities companies. Any investments outside the utility industry will be selected to meet the Fund's investment objective of capital appreciation and current income. 

The Fund will normally invest a portion of its assets in short-term fixed-income securities, such as commercial paper. Except during temporary defensive periods, the Fund's investment in short-term securities will not normally exceed 20% of its total assets. During temporary defensive periods, the Fund may invest without limitation in short-term fixed-income securities. The Fund may also increase its investments in these securities when Fund management is unable to find enough attractive long-term investments, to reduce exposure to equities when management believes it is advisable to do so or to meet redemptions. Investments in short-term fixed-income securities can be sold easily and have limited risk of loss but earn only limited returns. These investments may prevent the Fund from achieving its investment objectives. 

The Fund may invest its uninvested cash balances in affiliated money market funds and may also lend its portfolio securities. 

Investment Risks 

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

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

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

Utility Industry Risk — When interest rates go up, the value of securities issued by high yielding utilities companies historically has gone down. Although the average dividend yield of utilities industry stocks has been higher than  

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those of other companies, the total return of utilities industry securities has historically underperformed those of industrial companies. In most countries and localities, the utilities industry is regulated by government entities, which can increase costs and delays for new projects and make it difficult to pass increased costs on to consumers. In certain areas, deregulation of utilities has resulted in increased competition and reduced profitability for certain companies. Reduced profitability, as well as new uses of funds (such as for expansion, operations or stock buybacks), could result in reduced dividend payout rates for utilities companies. In addition, utilities companies face the risk of increases in the cost and reduced availability of fuel (such as oil, coal, nuclear or natural gas) and high interest costs for borrowing to finance new projects. 

Sector Risk — Sector risk is the risk that the Fund's concentration in the securities of companies in a specific market sector or industry will cause the Fund to be more exposed to the price movements of companies in and developments affecting that sector than a broadly diversified fund. Because the Fund invests primarily in one sector, there is the risk that the Fund will perform poorly during a downturn in that sector. 

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

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

Foreign Securities Risk — Securities traded on foreign markets have often (though not always) performed differently from securities traded in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there may be fewer  

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

investors on foreign exchanges and a smaller number of securities traded each day, it may make it difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States. 

Foreign Economy Risk — The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign instruments in their capital markets or in certain industries. Any of these actions could severely affect securities prices, impair the Fund's ability to purchase or sell foreign securities or transfer the Fund's assets or income back into the United States, or otherwise adversely affect the Fund's operations.  

Other potential foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing legal judgments in foreign courts and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States. 

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

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

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

Settlement Risk — Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement and clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates. 

At times, settlements in certain foreign countries have not kept pace with the number of securities transactions. These problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon  

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable for any losses incurred. 

Emerging Markets Risk — Many of the markets in which the Fund may invest generally are considered to be emerging markets. The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include those in countries defined as emerging or developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets are riskier because they develop unevenly and may never fully develop. They are more likely to experience hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, the securities markets in many of these countries have far lower trading volumes and less liquidity than developed markets. Since these markets are often small, they may be more likely to suffer sharp and frequent price changes or long term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. In addition, traditional measures of investment value used in the United States, such as price to earnings ratios, may not apply to certain small markets. 

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

Sovereign Debt — The Fund may invest in sovereign debt securities. These securities are issued or guaranteed by foreign governmental entities. These investments are subject to the risk that a governmental entity may delay or refuse to pay interest or repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entity's debt position in relation to the economy or the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a  

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governmental entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for collecting sovereign debts that a government does not pay nor are there bankruptcy proceedings through which all or part of the sovereign debt that a governmental entity has not repaid may be collected. 

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

Borrowing and Leverage Risk — The Fund may borrow for temporary or emergency purposes, including to meet redemptions, for the payment of dividends, for share repurchases or for the clearance of transactions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the return on the Fund's portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund's return. Certain securities that the Fund may buy or other techniques that the Fund may use may create leverage, including, but not limited to, when issued securities, forward commitments and futures contracts and options. 

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

Depositary Receipts — The Fund may invest in securities of foreign issuers in the form of depositary receipts or other securities that are convertible into securities of foreign issuers. American Depositary Receipts are receipts typically issued by an American bank or trust company that evidence underlying securities issued by a foreign corporation. European Depositary Receipts (issued  

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

in Europe) and Global Depositary Receipts (issued throughout the world) each evidence a similar ownership arrangement. The Fund may invest in unsponsored Depositary Receipts. The issuers of unsponsored Depositary Receipts are not obligated to disclose information that is, in the United States, considered material. Therefore, there may be less information available regarding these issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. Depositary Receipts are generally subject to the same risks as the foreign securities that they evidence or into which they may be converted. 

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

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

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

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

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

The Fund may use derivatives for hedging purposes, including anticipatory hedges, or to seek to enhance returns. Hedging is a strategy in which the Fund uses a derivative to offset the risks associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund  

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or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced and may be increased. There can be no assurance that the Fund's hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so. 

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

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

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

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

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

Securities Lending — The Fund may lend securities with a value up to 33% of its total assets to financial institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral. Securities lending involves  

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and/or the value of the collateral falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences to the Fund. 

When Issued and Delayed Delivery Securities and Forward Commitments — The Fund may purchase or sell securities that it is entitled to receive on a when issued basis. The Fund may also purchase or sell securities on a delayed delivery basis or through a forward commitment. When issued and delayed delivery securities and forward commitments involve the risk that the security the Fund buys will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party will not meet its obligation. If this occurs, the Fund loses both the investment opportunity for the assets it set aside to pay for the security and any gain in the security's price. 

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

Repurchase Agreements; Purchase and Sale Contracts — The Fund may enter into certain types of repurchase agreements or purchase and sale contracts. Under a repurchase agreement, the seller agrees to repurchase a security at a mutually agreed-upon time and price. A purchase and sale contract is similar to a repurchase agreement, but purchase and sale contracts provide that the purchaser receives any interest on the security paid during the period. If a repurchase agreement or purchase and sale contract is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. If the other party to a repurchase agreement or purchase and sale contract defaults on its obligation under the agreement, the Fund may suffer delays and incur costs  

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or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in either situation and the market value declines, the Fund may lose money. 

Statement of Additional Information 

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

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

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Pricing of Shares 

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

For example, if you select Class A or Class I shares, you generally pay a sales charge at the time of purchase. If you buy Class A shares, you also pay an ongoing account maintenance fee of 0.25% per year. You may be eligible for a sales charge reduction or waiver. 

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

If you select Class B or Class C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.50% per year for Class B shares and 0.55% per year for Class C shares and an account maintenance fee of 0.25% per year for both classes of shares. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, you may be subject to a deferred sales charge when you sell Class B or Class C shares. 

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

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

Class A

Class B

Class C

Class I

Availability

Generally available through selected securities dealers and other financial intermediaries.

Generally available through selected securities dealers and other financial intermediaries.

Generally available through selected securities dealers and other financial intermediaries.

Limited to certain eligible investors including: • Current Class I shareholders • Participants in certain programs sponsored by the Investment Adviser or its affiliates, or selected securities dealers or other financial intermediaries • Certain employees and affiliates of the Investment Adviser or its affiliates, or of selected securities dealers and other financial intermediaries.

Initial Sales Charge?

Yes. Payable at time of purchase. Lower sales charges available for larger investments.

No. Entire purchase price is invested in shares of the Fund.

No. Entire purchase price is invested in shares of the Fund.

Yes. Payable at time of purchase. Lower sales charges available for larger investments.

Deferred Sales Charge?

No. (May be charged for purchases over $1 million that are redeemed within one year).

Yes. Payable if you redeem within six years of purchase.

Yes. Payable if you redeem within one year of purchase.

No. (May be charged for purchases over $1 million that are redeemed within one year.)

Account Maintenance and Distribution Fees?

0.25% Annual Account Maintenance Fee. No Distribution Fee.

0.25% Annual Account Maintenance Fee. 0.50% Annual Distribution Fee.

0.25% Annual Account Maintenance Fee. 0.55% Annual Distribution Fee.

No.

Conversion to Class A shares?

N/A

Yes, automatically after approximately ten years.

No.

No.

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

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

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

Class A and Class I Shares — Initial Sales Charge Options 

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

Your Investment			As a % of Offering Price			As a % of Your Investment#			Dealer Compensation as a % of 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 I 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% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class I shares by certain employer-sponsored retirement or saving plans. 

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

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

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

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

• 

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

• 

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

• 

Employer-sponsored retirement or savings plans that meet certain eligibility requirements 

• 

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

• 

Investors, including directors or trustees of the Investment Adviser or its affiliates or of mutual funds sponsored by  

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the Investment Adviser or its affiliates, employees or customers of the Investment Adviser or its affiliates, and employees or customers of selected securities dealers that meet certain qualifications 

• 

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

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

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

If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class I shares, you should buy Class I shares since Class A shares are subject to an annual 0.25% account maintenance fee, while Class I shares are not. The Distributor normally pays the annual 0.25% Class A account maintenance fee to dealers as a service fee on a monthly basis. 

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

Class B and Class C Shares — Deferred Sales Charge Options 

If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within six years after purchase or your Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.50% for Class B shares and 0.55% for Class C shares and account  

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maintenance fees of 0.25% for both classes of shares each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the financial adviser, selected securities dealer or other financial intermediary who assists you in purchasing Fund shares. 

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

The Distributor currently pays dealers a sales concession of 1.00% of the purchase price of Class C shares from its own resources at the time of sale. The Distributor pays the annual 0.55% Class C shares distribution fee and the annual 0.25% Class C shares account maintenance fee as an ongoing concession and as a service fee, respectively, to dealers for Class C shares held for over a year and normally retains the Class C distribution fee and account maintenance fee during the first year after purchase. Under certain circumstances, the Distributor will pay the full Class C shares distribution fee and account maintenance fee to dealers beginning in the first year after purchase in lieu of paying the sales concession. 

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

Class B Shares 

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

Years Since Purchase				Sales Charge#
0 — 1				4.00	%
1 — 2				4.00	%
2 — 3				3.00	%
3 — 4				3.00	%
4 — 5				2.00	%
5 — 6				1.00	%
6 and thereafter				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. Shares purchased prior to June 1, 2001 will be subject to the four-year contingent deferred sales charge schedule then in effect. Not all Select Pricing Funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the higher charge will apply. 

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

• 

Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59 years old 

• 

Redemption by certain eligible 401(a) and 401(k) plans, certain related accounts, group plans participating in the BlueprintSM Program sponsored by an affiliate of the Investment Adviser and certain retirement plan rollovers 

• 

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

• 

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 

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• 

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

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

Different conversion schedules apply to Class B shares of different Select Pricing 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 longer conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund's longer conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well. 

Class C Shares 

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

Class C shares do not offer a conversion privilege. 

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How to Buy, Sell, Transfer and Exchange Shares 

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

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

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If You Want to			Your Choices						Information Important for You to Know
Buy Shares			First, select the share class appropriate for you						Refer to the Select PricingSM System table in this Prospectus. Be sure to read this Prospectus carefully.
			Next, determine the amount of your investment						The minimum initial investment for the Fund is $1,000 for all accounts except: • $250 for certain fee-based programs • $100 for retirement plans (The minimums for initial investments may be waived under certain circumstances.)
			Have your financial adviser, selected securities dealer or other financial intermediary submit your purchase order						The price of your shares is based on the next calculation of net asset value after your order is placed. Any purchase orders placed prior to the close of 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 may charge a processing fee to confirm a purchase. Merrill Lynch, an affiliate of the Investment Adviser, generally charges a processing fee of $5.35.
			Or contact the Transfer Agent						To purchase shares directly, call the Transfer Agent at 1-800-637-3863 and request a purchase order. Mail the completed purchase application to the Transfer Agent at the address on the inside back cover of this Prospectus.
Add to Your Investment			Purchase additional shares						The minimum investment for additional purchases is generally $50 except that retirement plans have a minimum additional purchase of $1 and certain programs, such as automatic investment programs, may have higher minimums. (The minimums for additional purchases may be waived under certain circumstances.)
			Acquire additional shares through the automatic dividend reinvestment plan						All dividends are automatically reinvested without a sales charge.
			Participate in the automatic investment plan						You may invest a specific amount on a periodic basis through certain investment or central asset accounts sponsored by the Investment Adviser's affiliates.

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

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

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

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Short-Term Trading 

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

Because the Fund may invest a substantial portion of its assets in foreign securities that may trade in markets that close some time before the time at which the Fund calculates its net asset value, the Fund may be subject to the risks of time zone arbitrage – a market timing strategy that seeks to take advantage of changes in the value of the Fund's portfolio holdings during the period between the close of the markets in which the Fund's portfolio securities primarily  

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trade and the close of the New York Stock Exchange. For this reason, the Fund may, at times, fair value its portfolio securities in order to deter such market timing. See "Your Account – How Shares are Priced." 

The Fund applies these policies to all shareholders. However, Fund management may not be able to determine that a specific order, particularly with respect to orders made through omnibus accounts or 401(k) plans, is short-term or excessive, and will be disruptive to the Fund and so makes no representation that all such orders can or will be rejected. 

Anti-Money Laundering Requirements 

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

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

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 valueplus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates the net asset value of each class of its shares (generally by using market quotations) each day the New York Stock Exchange (the "Exchange") is open as of the close of business on the Exchange, based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund's net asset value may change on days when you will not be able to purchase or redeem the Fund's shares. 

Generally, trading in foreign securities, as well as U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the Exchange. The values of such securities used in computing the net asset value of a Fund's shares are determined as of such times. Foreign currency exchange rates also are generally determined prior to the close of business on the Exchange. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the Exchange that may not be reflected in the computation of a Fund's net asset value. If market quotations are not readily available or, in the Investment Adviser's judgment, do not accurately reflect fair value for a security or if a security's value has been materially affected by events occurring after the close of the market on which the security is principally traded, that security may be valued by another method that the Board of Directors believes accurately reflects the fair value. 

The Fund generally values fixed income portfolio securities using market prices provided by an independent pricing service approved by the Fund's Board of Directors. If market quotations are not readily available or, in the Investment Adviser's judgment, they do not accurately reflect fair value for a security, that security may be valued by another method that the Board of Directors believes more accurately reflects the fair value. Fair value determinations may be made by the Fund's independent pricing service using a matrix pricing system or by the Investment Adviser's Valuation Committee after consideration of the material factors that may affect that value of a particular security. 

Merrill Lynch Utilities and Telecommunications Fund, Inc.

35

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

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

The Fund's use of fair value pricing is designed to ensure that the Fund's net asset value reflects the value of its underlying portfolio securities as accurately as possible. There can be no assurance, however, that a fair valuation used by the Fund on any given day will more accurately reflect the market value of a security or securities than the market price of such security or securities on that day. 

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

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

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

Participation in Fee-Based Programs 

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

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

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

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

Merrill Lynch Utilities and Telecommunications Fund, Inc.

37

Dividends — ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid.

"BUYING A DIVIDEND"

Unless your investment is in a tax deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser.

Dividends and Taxes 

The Fund will distribute net investment income, if any, quarterly. The Fund attempts to pay a stable quarterly dividend. As a result, some quarters the Fund will pay a dividend of less than the full amount of investment income earned during the particular quarter, while other quarters the Fund will pay a dividend out of accumulated but previously undistributed investment income. The Fund intends to distribute all of its investment income earned each fiscal year. The Fund will distribute net realized capital gains, if any, at least annually. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax requirements. Dividends may be reinvested automatically in shares of the Fund at net asset value without a sales charge or may be taken in cash. If you would like to receive dividends in cash, contact your financial adviser, selected securities dealer, other financial intermediary or the Transfer Agent. Although this cannot be predicted with any certainty, the Fund anticipates that the majority of its dividends, if any, will consist of ordinary income. Capital gains may be taxable to you at different rates depending on how long the Fund held the assets sold. 

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

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

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

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

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

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

Electronic Delivery 

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

Merrill Lynch Utilities and Telecommunications Fund, Inc.

39

Merrill Lynch Investment Managers, L.P. 

Merrill Lynch Investment Managers, 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 Fund. The Investment Adviser has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the Investment Adviser may pay a fee for services it receives. 

For the fiscal year ended November 30, 2004 the Investment Adviser received a fee at the annual rate of 0.60% of the Fund's average daily net assets. 

Kathleen M. Anderson is a Vice President and the portfolio manager of the Fund. She has been the Fund's portfolio manager since 2002. Ms. Anderson has been a Director of Merrill Lynch Investment Managers ("MLIM") since 2000 and was a Vice President from 1994 to 2000. Ms. Anderson has been a portfolio manager with MLIM since 1998 and was a research analyst with MLIM from 1993 to 1998. For more information about the portfolio manager's compensation, other accounts she manages and her ownership of Fund shares, please see the Statement of Additional Information. 

Merrill Lynch Investment Managers, L.P. was organized as an investment adviser in 1976 and offers investment advisory services to more than 50 registered investment companies. Merrill Lynch Asset Management U.K. Limited was organized as an investment adviser in 1986 and acts as sub-adviser to more than 50 registered investment companies. Merrill Lynch Investment Managers, L.P. and its affiliates had approximately $492 billion in investment company and other portfolio assets under management as of February 2005. 

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

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

Conflicts of Interest 

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

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

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

Merrill Lynch Utilities and Telecommunications Fund, Inc.

41

Financial Highlights 

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

		Class A														Class B
		For the Year Ended November 30,														For the Year Ended November 30,
Increase (Decrease) in Net Asset Value		2004			2003			2002			2001			2000			2004			2003			2002			2001			2000
Per Share Operating Performance
Net asset value, beginning of year	$	8.23		$	7.40		$	9.67		$	11.81		$	19.17		$	8.19		$	7.37		$	9.61		$	11.75		$	19.10
Investment income — net#		.20			.19			.26			.32			.39			.14			.16			.22			.26			.31
Realized and unrealized gain (loss) — net		2.14			.85			(2.14	)		(1.46	)		.68			2.16			.82			(2.13	)		(1.47	)		.67
Total from investment operations		2.34			1.04			(1.88	)		(1.14	)		1.07			2.30			.98			(1.91	)		(1.21	)		.98
Less dividends and distributions:
Investment income— net		(.19	)		(.21	)		(.28	)		(.33	)		(.41	)		(.14	)		(.16	)		(.22	)		(.26	)		(.31	)
Realized gain — net		—			—			(.11	)		(.67	)		(7.80	)		—			—			(.11	)_		(.67	)		(7.80	)
In excess of realized gain — net		—			—			—			—			(.22	)		—			—			—			—			(.22	)
Total dividends and distributions		(.19	)		(.21	)		(.39	)		(1.00	)		(8.43	)		(.14	)		(.16	)		(.33	)		(.93	)		(8.33	)
Net asset value, end of year	$	10.38		$	8.23		$	7.40		$	9.67		$	11.81		$	10.35		$	8.19		$	7.37		$	9.61		$	11.75
Total Investment Return##
Based on net asset value per share		28.82	%		14.26	%		(19.83	%)		(10.67	%)		4.72	%		28.30	%		13.47	%		(20.16	%)		(11.25	%)		4.25	%
Ratios to Average Net Assets
Expenses		1.28	%		1.33	%		1.26	%		1.11	%		1.08	%		1.81	%		1.86	%		1.77	%		1.63	%		1.59	%
Investment income — net		2.11	%		2.42	%		3.13	%		2.86	%		2.34	%		1.58	%		2.08	%		2.63	%		2.40	%		1.83	%
Supplemental Data
Net assets, end of year (in thousands)	$	73,286		$	60,142		$	34,038		$	36,794		$	18,383		$	31,935		$	41,317		$	74,822		$	147,549		$	246,279
Portfolio turnover		10.89	%		21.20	%		31.16	%		45.66	%		51.79	%		10.89	%		21.20	%		31.16	%		45.66	%		51.79	%

# 

Based on average shares outstanding. 

## 

Total investment returns exclude the effects of sales charges. 

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

Financial Highlights 

		Class C														Class I
		For the Year Ended November 30,														For the Year Ended November 30,
Increase (Decrease) in Net Asset Value		2004			2003			2002			2001			2000			2004			2003			2002			2001			2000
Per Share Operating Performance
Net asset value, beginning of year	$	8.13		$	7.31		$	9.55		$	11.68		$	19.04		$	8.22		$	7.39		$	9.66		$	11.81		$	19.16
Investment income — net#		.14			.15			.21			.25			.28			.22			.21			.29			.34			.44
Realized and unrealized gain (loss) — net		2.12			.83			(2.11	)		(1.45	)		.69			2.14			.84			(2.15	)		(1.47	)		.68
Total from investment operations		2.26			.98			(1.90	)		(1.20	)		.97			2.36			1.05			(1.86	)		(1.13	)		1.12
Less dividends and distributions:
Investment income —net		(.14	)		(.16	)		(.23	)		(.26	)		(.31	)		(.21	)		(.22	)		(.30	)		(.35	)		(.45	)
Realized gain — net		—			—			(.11	)		(.67	)		(7.80	)		—			—			(.11	)		(.67	)		(7.80	)
In excess of realized gain — net		—			—			—			—			(.22	)		—			—			—			—			(.22	)
Total dividends and distributions		(.14	)		(.16	)		(.34	)		(.93	)		(8.33	)		(.21	)		(.22	)		(.41	)		(1.02	)		(8.47	)
Net asset value, end of year	$	10.25		$	8.13		$	7.31		$	9.55		$	11.68		$	10.37		$	8.22		$	7.39		$	9.66		$	11.81
Total Investment Return##
Based on net asset value per share		28.03	%		13.62	%		(20.27	%)		(11.24	%)		4.17	%		29.16	%		14.54	%		(19.64	%)		(10.54	%)		5.07	%
Ratios to Average Net Assets
Expenses		1.85	%		1.91	%		1.84	%		1.69	%		1.65	%		1.03	%		1.07	%		1.00	%		.86	%		.83	%
Investment income — net		1.53	%		1.93	%		2.55	%		2.31	%		1.75	%		2.36	%		2.77	%		3.39	%		3.15	%		2.59	%
Supplemental Data
Net assets, end of year (in thousands)	$	11,898		$	10,994		$	10,545		$	10,194		$	11,416		$	23,677		$	22,514		$	20,342		$	26,700		$	32,698
Portfolio turnover		10.89	%		21.20	%		31.16	%		45.66	%		51.79	%		10.89	%		21.20	%		31.16	%		45.66	%		51.79	%

# 

Based on average shares outstanding. 

## 

Total investment returns exclude the effects of sales charges. 

Merrill Lynch Utilities and Telecommunications Fund, Inc.

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Merrill Lynch Utilities and Telecommunications Fund, Inc.

For More Information

Shareholder Reports  Additional information about the Fund's investments is available in the Fund's Annual and Semi-Annual Reports. In the Fund's Annual Report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. You may obtain these reports at no cost at www.mutualfunds.ml.com or by calling 1-800-637-3863.  The Fund will send you one copy of each shareholder report and certain other mailings, regardless of the number of Fund accounts you have. To receive separate shareholder reports for each account, call your financial adviser or other financial intermediary or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and brokerage or mutual fund account number. If you have any questions, please call your financial adviser or other financial intermediary or call the Transfer Agent at 1-800-637-3863.  Statement of Additional Information  The Statement of Additional Information contains further information about the Fund. The portions of the Statement of Additional Information relating to the Fund are incorporated by reference into (legally considered part of) this Prospectus. The portions of the Statement of Additional Information that do not relate to the Fund are not incorporated by reference, are not part of this Prospectus, and should not be relied on by investors in the Fund. You may obtain a free copy at www.mutualfunds.ml.com or by writing to the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32231-5289 or by calling 1-800-637-3863.  Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the Securities and Exchange Commission's ("SEC") Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the public reference room. This information is also available on the SEC's Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.  You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is different from information contained in this Prospectus.  Investment Company Act file #811-6180  Code #11281-0305  © Merrill Lynch Investment Managers, L.P.		Prospectus March 28, 2005 Merrill Lynch Utilities and Telecommunications Fund, Inc. This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference. The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.   Investment Managers www.mlim.ml.com Mercury Advisors A Division of Merrill Lynch Investment Managers www.mercury.ml.com

                      STATEMENT OF ADDITIONAL INFORMATION



           MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC.

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



This Statement of Additional Information of Merrill Lynch Utilities and
Telecommunications Fund, Inc. (the "Fund") is not a prospectus and should be
read in conjunction with the Prospectus of the Fund, dated March 28, 2005,
which has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling 1-800-637-3863 or
by writing to the Fund at the above address. The Fund's Prospectus is
incorporated by reference into this Statement of Additional Information, and
Part I of this Statement of Additional Information and the portions of Part II
of this Statement of Additional Information that relate to the Fund have been
incorporated by reference into the Fund's Prospectus. The portions of Part II
of this Statement of Additional Information that do not relate to the Fund do
not form a part of the Fund's Statement of Additional Information, have not
been incorporated by reference into the Fund's Prospectus and should not be
relied upon by investors in the Fund. The Fund's audited financial statements
are incorporated into this Statement of Additional Information by reference to
the Fund's 2004 Annual Report. You may request a copy of the Annual Report at
no charge by calling 1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern
time on any business day.
























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


                     FAM DISTRIBUTORS, INC. -- DISTRIBUTOR



     The date of this Statement of Additional Information is March 28, 2005



                               TABLE OF CONTENTS


PART I
Investment Objectives and Policies ...................................... I-2
Investment Restrictions ................................................. I-4
Information on Directors and Officers ................................... I-5
Management and Advisory Arrangements .................................... I-9
Information on Sales Charges and Distribution Related Expenses ......... I-14
Computation of Offering Price Per Share ................................ I-16
Portfolio Transactions and Brokerage ................................... I-17
Fund Performance ....................................................... I-17
Additional Information ................................................. I-18
Financial Statements ................................................... I-18


PART II
Investment Risks and Considerations .................................... II-1
Management and Other Service Arrangements ............................. II-34
Purchase of Shares .................................................... II-42
Redemption of Shares .................................................. II-51
Shareholder Services .................................................. II-53
Pricing of Shares ..................................................... II-58
Portfolio Transactions and Brokerage .................................. II-60
Dividends and Taxes ................................................... II-63
Performance Data ...................................................... II-67
Proxy Voting Policies and Procedures .................................. II-69
General Information ................................................... II-72

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



              PART I: INFORMATION ABOUT MERRILL LYNCH UTILITIES AND
                          TELECOMMUNICATIONS FUND, INC.

Part I of this Statement of Additional Information sets forth information about
Merrill Lynch Utilities and Telecommunications Fund, Inc.. It includes
information about the Fund's Board of Directors, the advisory services provided
to and the management fees paid by the Fund, performance data for the Fund, and
information about other fees paid by and services provided to the Fund. This
Part I should be read in conjunction with the Fund's Prospectus and those
portions of Part II of this Statement of Additional Information that pertain to
the Fund.


I.     INVESTMENT OBJECTIVES AND POLICIES

The Fund's investment objective is to seek both capital appreciation and
current income. This objective is a fundamental policy of the Fund and may not
be changed without the approval of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Under normal circumstances, the Fund will invest at
least 80% of its net assets in equity and debt securities of domestic and/or
foreign utilities companies. For this purpose, net assets include any
borrowings for investment purposes. This policy is applied at the time of
purchase and later changes in value will not be deemed a violation. The Fund is
classified as a diversified, open-end management investment company under the
Investment Company Act. There can be no assurance that the Fund's investment
objective will be achieved.

The utilities companies in which the Fund will invest include companies that
are, in the opinion of Merrill Lynch Investment Managers, L.P. ("MLIM" or the
"Investment Adviser"), primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. There are no limits on the geographic
allocation of the Fund's investments. Fund management, however, anticipates
that the Fund's investments will focus primarily on securities issued by
utilities companies in the United States, and that the Fund's investments in
securities issued by foreign companies will primarily focus on Canadian,
Japanese and Western European companies. The Fund may also invest in companies
in emerging markets, but Fund management anticipates that a substantially
greater percentage of the Fund's investments will be in developed countries.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because the
expenses of the Fund, such as custodial and brokerage costs, are higher.

The Fund will invest in common stock (including preferred or debt securities
convertible into common stock), preferred stock and debt securities. The Fund
intends to invest primarily in equity securities, but the relative weightings
among common stocks, debt securities and preferred stock will vary from time to
time based upon the Investment Adviser's judgment of the extent to which
investments in each category will contribute to meeting the Fund's investment
objective. The fixed income securities in which the Fund will invest generally
will be limited to those rated investment grade, that is, rated in one of the
four highest rating categories by Standard & Poor's ("S&P") or Moody's
Investors Service, Inc. ("Moody's") (i.e., securities rated at least BBB by S&P
or Baa by Moody's), or deemed to be of equivalent quality in the judgment of
the Investment Adviser. Securities rated BBB/Baa can be considered to have
speculative characteristics. The Fund's commercial paper investments at the
time of purchase will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2"
by Moody's or, if not rated, will be of comparable quality as determined by the
Investment Adviser. The Fund may also invest up to 5% of its total assets at
the time of the purchase in fixed income securities rated below investment
grade by S&P or Moody's, or in unrated fixed income securities which, in the
judgment of the Investment Adviser possess similar credit characteristics as
fixed income securities rated investment grade or fixed income securities rated
below investment grade (commonly known as "junk bonds"). The Fund will not
invest in any fixed income securities with a rating lower than Caa by Moody's
or CCC by S&P. The Fund may, but need not, dispose of any security if it is
subsequently downgraded.


                                      I-2


The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depository Receipts ("GDR's") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company that evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe that evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form,
are designed for use in the U.S. securities markets, EDRs, which are issued in
bearer form, are designed for use in European securities markets, and GDRs are
tradable both in the U.S. and Europe and are designed for use throughout the
world. The Fund may invest in ADRs, EDRs or GDRs through both sponsored and
unsponsored arrangements. In a sponsored ADR, EDR or GDR arrangement, the
foreign issuer assumes the obligation to pay some or all of the depository's
transaction fees, whereas in an unsponsored arrangement the foreign issuer
assumes no obligations and the depository's transaction fees are paid by the
ADR, EDR or GDR holders. Foreign issuers in respect of whose securities
unsponsored ADRs, EDRs or GDRs have been issued are not necessarily obligated
to disclose material information in the markets in which the unsponsored ADRs,
EDRs or GDRs are traded and, therefore, there may not be a correlation between
such information and the market value of such securities.

The Fund may engage in various portfolio strategies to hedge its portfolio
against movements in the securities markets and exchange rates between
currencies by the use of options, futures and options thereon. Use of options
and futures transactions involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price of the
securities or currencies that are the subject of the hedge. There can be no
assurance that a liquid secondary market for options and futures contracts will
exist at any specific time.

The Fund may, under normal circumstances, invest up to 20% of its assets in
securities of issuers that are outside the utility industries. Such investments
may include common stock, debt securities or preferred stock and will be
selected to meet the Fund's investment objective of both capital appreciation
and current income. These securities may be issued by either U.S. or non-U.S.
companies. Some of these issuers may be in industries related to utility
industries and, therefore, may be subject to similar risks. Securities that are
issued by foreign companies or are denominated in foreign currencies are
subject to the risks associated with investing in foreign markets. The Fund is
also permitted to invest in U.S. Government Securities. Such investments may be
backed by the "full faith and credit" of the United States, including U.S.
Treasury bills, notes and bonds as well as certain agency securities and
mortgage-backed securities issued by the Government National Mortgage
Association. The guarantees on these securities do not extend to the
securities' yield or value or to the yield or value of the Fund's shares. Other
investments in agency securities are not necessarily backed by the "full faith
and credit" of the United States, such as certain securities issued by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, the Student Loan Marketing Association, and the Farm Credit Bank.


The Fund may invest in securities issued or guaranteed by foreign governments.
Such securities are typically denominated in foreign currencies and are subject
to the currency fluctuation and other risks of foreign securities investments.
The foreign government securities in which the Fund intends to invest generally
will consist of obligations supported by national, state or local governments
or similar political subdivisions. Foreign government securities also include
debt obligations of supranational entities, including international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Foreign government securities also include
debt securities of "quasi-governmental agencies" and debt securities
denominated in multinational currency units. Debt securities of
quasi-governmental agencies are issued by entities owned by either a national
or local government or are obligations of a political unit that is not backed
by the national government's full faith and credit and general taxing powers.
Foreign



                                      I-3


government securities also include mortgage-related securities issued or
guaranteed by national or local governmental instrumentalities including
quasi-governmental agencies. Foreign government securities will not be
considered government securities for purposes of determining the Fund's
compliance with diversification and concentration policies.


II.    INVESTMENT RESTRICTIONS

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

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

Under its fundamental investment restrictions, the Fund may not:

(1) 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 total assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S. Government
and its agencies and instrumentalities) except that, under normal
circumstances, the Fund will invest more than 25% of its total assets in the
securities of issuers in the utilities industry.


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

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

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

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


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


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


                                      I-4


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

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

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

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


(c) Invest in securities which cannot be readily resold or which cannot
otherwise be marketed, redeemed or put to the issuer or a third party, if at
the time of acquisition more than 15% of its net assets would be invested in
such securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of the Fund has otherwise
determined to be liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be liquid
by the Board of Directors are not subject to the limitations set forth in this
investment restriction.

(d) Notwithstanding fundamental restriction (7) above, borrow amounts in excess
of 10% of its total assets, taken at market value (including the amount
borrowed), and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares. In addition, the Fund
will not purchase securities while borrowings exceed 5% of its total assets.


(e) Change its policy to invest, under normal circumstances, at least 80% of
its assets in equity and debt securities issued by domestic and foreign
utilities companies unless the Fund provides its shareholders with at least 60
days prior written notice of such change.


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

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



III.   INFORMATION ON DIRECTORS AND OFFICERS

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


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



                                      I-5



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



Cynthia A. Montgomery and Edward D. Zinbarg are the members of the Fund's
Nominating Committee. The principal responsibilities of the Nominating
Committee are to identify individuals qualified to serve as non-interested
Directors of the Fund and to recommend its nominees for consideration by the
full Board. While the Nominating Committee is solely responsible for the
selection and nomination of the Fund's non-interested Directors, the Nominating
Committee may consider nominations for the office of Director made by Fund
shareholders as it deems appropriate. Fund shareholders who wish to recommend a
nominee should send nominations to the Secretary of the Fund that include
biographical information and set forth the qualifications of the proposed
nominee. The Nominating Committee met three times during the fiscal year ended
November 30, 2004.



  BIOGRAPHICAL INFORMATION



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







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

Ronald W. Forbes      Director      Director since   Professor Emeritus of Finance, School of       48 registered   None
(64)*                               1990             Business, State University of New York at      investment
                                                     Albany since 2000 and Professor thereof from   companies
                                                     1989 to 2000; International Consultant,        consisting of
                                                     Urban Institute, Washington, D.C. from 1995    48 portfolios
                                                     to 1999.

Cynthia A.            Director      Director since   Professor, Harvard Business School since       48 registered   Newell
Montgomery                          1994             1989; Associate Professor, J.L. Kellogg        investment      Rubbermaid, Inc.
(52)**                                               Graduate School of Management,                 companies       (manufacturing)
                                                     Northwestern University from 1985 to 1989;     consisting of
                                                     Associate Professor, Graduate School of        48 portfolios
                                                     Business Administration, University of
                                                     Michigan from 1979 to 1985; Director,
                                                     Harvard Business School of Publishing since
                                                     2005.

Jean Margo Reid       Director      Director since   Self-employed consultant since 2001; Counsel   48 registered   None
(59)                                2004             of Alliance Capital Management (investment     investment
                                                     adviser) in 2000; General Counsel, Director    companies
                                                     and Secretary of Sanford C. Bernstein & Co.,   consisting of
                                                     Inc. (investment adviser/broker-dealer) from   48 portfolios
                                                     1997 to 2000; Secretary, Sanford C. Bernstein
                                                     Fund, Inc. from 1994 to 2000; Director and
                                                     Secretary of SCB, Inc. since 1998; Director
                                                     and Secretary of SCB Partners, Inc. since
                                                     2000; and Director of Covenant House from
                                                     2001 to 2004.



                                       I-6






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

Roscoe S. Suddarth    Director      Director since   President, Middle East Institute, from 1995 to   48 registered   None
(69)                                2000             2001; Foreign Service Officer, United States     investment
                                                     Foreign Service, from 1961 to 1995; Career       companies
                                                     Minister, from 1989 to 1995; Deputy              consisting of
                                                     Inspector General, U.S. Department of State,     48 portfolios
                                                     from 1991 to 1994; U.S. Ambassador to the
                                                     Hashemite Kingdom of Jordan, from 1987 to
                                                     1990.

Richard R. West       Director      Director since   Professor of Finance from 1984 to 1995, Dean     48 registered   Bowne & Co.,
(67)                                1990             from 1984 to 1993 and since 1995 Dean            investment      Inc.
                                                     Emeritus of New York University's Leonard N.     companies       (financial
                                                     Stern School of Business Administration.         consisting of   printers);
                                                                                                      48 portfolios   Vornado Realty
                                                                                                                      Trust (real
                                                                                                                      estate
                                                                                                                      company);
                                                                                                                      Alexander's,
                                                                                                                      Inc. (real est
                                                                                                                      company).

Edward D. Zinbarg     Director      Director since   Self-employed financial consultant since 1994;   48 registered   None
(70)                                2000             Executive Vice President of the Prudential       investment
                                                     Insurance Company of America from 1988 to        companies
                                                     1994; Former Director of Prudential              consisting of
                                                     Reinsurance Company and former Trustee of        48 portfolios
                                                     the Prudential Foundation.



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

# The address of each non-interested Director is P.O. Box 9095, Princeton, New
   Jersey 08543-9095.
## Each Director serves until his or her successor is elected and qualified, or
   until his or her death, resignation, or removal as provided in the Fund's
   by-laws or charter or by statute, or until December 31 of the year in which
   he or she turns 72.
 * Chairman of the Board and the Audit Committee.
** Chairman of the Nominating Committee.


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








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

Robert C. Doll, Jr.*   President     Director** and    President of the MLIM/FAM-advised funds          124 registered None
 (50)                  and           President since   since 2005; President of MLIM and FAM            investment
                       Director      2005              since 2001; Co-Head (Americas Region)            companies
                                                       thereof from 2000 to 2001 and Senior Vice        consisting of
                                                       President from 1999 to 2001; President and       163 portfolios
                                                       Director of Princeton Services, Inc. ("Princeton
                                                       Services") since 2001; President of Princeton
                                                       Administrators, L.P. ("Princeton
                                                       Administrators") since 2001; Chief Investment
                                                       Officer of OppenheimerFunds, Inc. in 1999
                                                       and Executive Vice President thereof from
                                                       1991 to 1999.

Donald C. Burke        Vice          Vice President    First Vice President of MLIM and FAM since       126 registered None
 (44)                  President     since 1993 and    1997 and Treasurer thereof since 1999; Senior    investment
                       and           Treasurer since   Vice President and Treasurer of Princeton        companies
                       Treasurer     1999              Services since 1999 and Director since 2004;     consisting of
                                                       Vice President of FAMD since 1999; Vice          165 portfolios
                                                       President of MLIM and FAM from 1990 to
                                                       1997; Director of Taxation of MLIM from
                                                       1990 to 2001; Vice President, Treasurer and
                                                       Secretary of the IQ Funds since 2004.



                                       I-7






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

Kathleen              Vice          Vice President    Director of MLIM since 2000 and Vice            1 registered     None
Anderson(50)          President     since 2002        President from 1994 to 2000; portfolio          investment
                                                      manager of MLIM since 1998 and Research         company
                                                      Analyst of MLIM from 1993 to 1998.              consisting of 1
                                                                                                      portfolio

Jeffrey Hiller (53)   Chief         Chief             Chief Compliance Officer of the IQ Funds        127 registered   None
                      Compliance    Compliance        since 2004; Chief Compliance Officer of the     investment
                      Officer       Officer since     MLIM/FAM-advised funds and First Vice           companies
                                    2004              President and Chief Compliance Officer of       consisting of
                                                      MLIM (Americas Region) since 2004; Global       166 portfolios
                                                      Director of Compliance at Morgan Stanley
                                                      Investment Management from 2002 to 2004;
                                                      Managing Director and Global Director of
                                                      Compliance at Citigroup Asset Management
                                                      from 2000 to 2002; Chief Compliance Officer
                                                      at Soros Fund Management in 2000; Chief
                                                      Compliance Officer at Prudential Financial
                                                      from 1995 to 2000; Senior Counsel in the
                                                      Commission's Division of Enforcement in
                                                      Washington, D.C. from 1990 to 1995.

Alice A. Pellegrino   Secretary     Secretary since   Director (Legal Advisory) of MLIM since         124 registered   None
  (45)                              2004              2002; Vice President of MLIM from 1999 to       investment
                                                      2002; Attorney associated with MLIM since       companies
                                                      1997; Secretary of MLIM, FAM, FAMD and          consisting of
                                                      Princeton Services since 2004.                  163 portfolios




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

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


  SHARE OWNERSHIP



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







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

Interested Director:
  Robert C. Doll, Jr.                  None                   Over $100,000
Non-Interested Directors:
  Ronald W. Forbes                  $1-$10,000                Over $100,000
  Cynthia A. Montgomery                None                   Over $100,000
  Jean Margo Reid                      None                   Over $100,000
  Roscoe S. Suddarth                   None                   Over $100,000
  Richard R. West                      None                   Over $100,000
  Edward D. Zinbarg                    None                   Over $100,000



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



As of March 8, 2005, the Directors and officers of the Fund as a group owned an
aggregate of less than 1% of the outstanding shares of the Fund. As of December
31, 2004, none of the non-interested Directors of the Fund or their immediate
family members owned beneficially or of record any securities in Merrill Lynch
& Co., Inc. ("ML & Co.").



                                      I-8


  COMPENSATION OF DIRECTORS


The Fund pays each non-interested Director a combined fee of $3,000 per year
for service on the Board and the Audit Committee plus $500 per in-person Board
meeting attended and $500 per in-person Audit Committee meeting attended. The
Chairman of the Board and the Audit Committee receives an additional fee of
$1,429 per year. The Fund reimburses each non-interested Director for his or
her out-of-pocket expenses relating to attendance at Board, Audit Committee and
Nominating Committee meetings.

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







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

Ronald W. Forbes##             $8,083                  None                    $284,833
Cynthia A. Montgomery          $7,000                  None                    $248,833
Jean Margo Reid*               $1,750                  None                    $142,733
Charles C. Reilly##,**         $  333                  None                        $0
Kevin A. Ryan+                 $7,000                  None                    $181,317
Roscoe S. Suddarth             $7,000                  None                    $248,833
Richard R. West                $7,000                  None                    $248,833
Edward D. Zinbarg              $7,000                  None                    $248,833



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

 # For the number of MLIM/FAM-advised funds from which each Director receives
   compensation, see chart beginning on p. I-6.
## Chairman of the Board and the Audit Committee. Mr. Reilly served as
   Co-Chairman of the Audit Committee from December 1, 2003 to December 31,
   2003.
 * Ms. Reid became a Director effective August 19, 2004.
** Mr. Reilly retired as a Director effective January 1, 2004.
 + Mr. Ryan retired as a Director effective January 1, 2005.



IV.    MANAGEMENT AND ADVISORY ARRANGEMENTS

The Fund has entered into an investment advisory agreement with the Investment
Adviser (the "Investment Advisory Agreement"), pursuant to which the Investment
Adviser receives for its services to the Fund monthly compensation at the
annual rate of 0.60% of the Fund's average daily net assets.

The table below sets forth information about the total investment advisory fees
paid by the Fund to the Investment Adviser for the periods shown.






 FISCAL YEAR ENDED NOVEMBER 30,     INVESTMENT ADVISORY FEE
 ------------------------------     -----------------------

              2004                          $810,552
              2003                          $812,772
              2002                         $1,078,476




The Investment Adviser has entered into a sub-advisory agreement with Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM U.K.
may provide investment advisory services to the Investment Adviser with respect
to the Fund (the "Sub-Advisory Agreement"). The Investment Adviser paid no fees
to MLAM U.K. for the fiscal years ended November 30, 2004, 2003 and 2002.

At each quarterly meeting of the Board, the Board of Directors of the Fund
receives, reviews and evaluates information concerning the nature, extent and
quality of the personnel of and the services provided by the Investment
Adviser, MLAM U.K. and their affiliates. While particular focus is given to
information concerning profitability, comparability of fees and total expenses
and Fund performance at the meeting at which the renewal of the Investment
Advisory Agreement and Sub-Advisory Agreement are considered,



                                      I-9



the evaluation process with respect to the Investment Adviser and MLAM U.K. is
an ongoing one. In this regard, the Board's consideration of the Investment
Advisory Agreement and Sub-Advisory Agreement, respectively, included
deliberations at other quarterly meetings in addition to the annual renewal
meeting.

In connection with the Board's consideration of the Investment Advisory
Agreement and Sub-Advisory Agreement, the Board received from the Investment
Adviser financial and performance data for the Fund, information concerning the
profitability of the Fund to the Investment Adviser and information as to
services rendered to the Fund and compensation paid to affiliates of the
Investment Adviser by the Fund. The Board reviewed information regarding access
to research services from brokers to which the Investment Adviser may have
allocated Fund brokerage in a "soft dollar" arrangement. The Board also
received from Lipper Inc. information concerning the performance of the Fund
compared to certain other non-MLIM/FAM-advised open-end funds that invest
primarily in equity and debt securities of utilities companies issuers located
throughout the world, and comparing the Fund's fee rate for advisory and
administrative services and ratios for management expenses, investment-related
expenses and total expenses to those of other non-MLIM/FAM-advised open-end
funds as classified by Lipper Inc. The Board considered the compensation paid
to the Investment Adviser and the services provided to the Fund by the
Investment Adviser under the Investment Advisory Agreement and by MLAM U.K.
under the Sub-Advisory Agreement, as well as other services provided by the
Investment Adviser and its affiliates under other agreements, and the personnel
who provide these services. In addition to the management services provided to
the Fund, the Investment Adviser and its affiliates provide administrative
services, stockholder services, oversight of fund accounting, marketing
services, assistance in meeting legal and regulatory requirements, and other
services necessary for the operation of the Fund. The Board also considered the
direct and indirect benefits to the Investment Adviser and MLAM U.K. from their
relationship with the Fund. Based on their experience as Directors of the Fund
and as directors of other MLIM/FAM-advised funds, the Directors concluded that
the Fund benefits, and should continue to benefit, from those services.

In reviewing the Investment Advisory Agreement, the Board focused on the
experience, resources and strengths of the Investment Adviser, MLAM U.K. and
their affiliates in managing investment companies that invest in securities of
utilities companies issuers located throughout the world, among them other
MLIM/FAM-advised open-end funds that have investment objectives and strategies
similar to those of the Fund. The Board considered the amount of equity and
fixed income assets under the management of the Investment Adviser and its
affiliates, as well as the experience of the Fund's portfolio management team.
The Board noted that the Investment Adviser has over twenty-five years
experience investing in equity and fixed income securities, including foreign
equity securities, and that MLAM U.K. has almost twenty years of experience in
analyzing and investing in foreign equity securities. The Board also noted that
Ms. Anderson, the Fund's portfolio manager, has more than ten years' experience
analyzing and investing in equity and fixed income securities, including those
issued by utilities companies. The Board noted that the Investment Adviser has
a high level of expertise in managing the types of investments used by the Fund
and concluded that the Fund benefits, and should continue to benefit, from that
expertise. The Directors based their conclusions on their experience as
directors of other open-end investment companies managed by the Investment
Adviser and on their experience with the security analysis and risk management
performed by the Investment Adviser.

The Board also reviewed the compliance and administrative services provided to
the Fund by the Investment Adviser and/or MLAM U.K., including oversight of the
day-to-day operations and oversight of accounting. The Investment Adviser, MLAM
U.K. or their affiliates provide compliance and administrative services to the
Fund and all the MLIM/FAM-advised funds, as well as to a number of third party
fund groups. The Directors, based on their experience as directors of other
investment companies managed by the Investment Adviser and its affiliates as
well as of the Fund, also focused on the quality of the Investment Adviser's
compliance and administrative staff. The Board noted that, in addition to the
analysts



                                      I-10



dedicated to the Fund's management team and the analysts and compliance
personnel dedicated to the equity and fixed income management groups, the
Investment Adviser has a separate administrative, legal and compliance staff to
ensure a high level of quality in the compliance and administrative services
provided to the Fund. The Directors concluded, based on their experience as
Board members, that the compliance and administrative services provided by the
Investment Adviser were of a sufficiently high quality to benefit the Fund.

In reviewing the Investment Advisory Agreement, the Board evaluated the Fund's
fee rate for advisory and administrative services and the Fund's historical
performance as compared to those of other non-MLIM/FAM-advised open-end funds
classified as comparable by Lipper Inc. In particular, the Board noted that
the Fund had a contractual advisory fee rate at a common asset level that was
below the median of the eleven funds in the group of comparable funds. The
Board also found that the Fund's actual advisory fee rate -- which includes
advisory and administrative services and the effects of any fee waivers -- as a
percentage of total assets at a common asset level was at the median of the
funds being compared. The Board also compared the Fund's total expenses to
those of other, similarly managed funds and concluded that its overall expenses
were below the median of the group. The Board also determined that the Fund's
historical performance -- both including and excluding Fund expenses --, which
was in the high third quartile for the one and five year periods and in the
first quartile for the three year period, was reasonable in comparison to its
benchmark and the other funds in its performance group. The Board also
requested, received and considered profitability information related to the
management revenues from the Fund. Based upon all the information reviewed and
its discussions, the Board concluded that the management fee rate schedule was
reasonable in relation to the services provided by the Investment Adviser and
MLAM U.K. to the Fund as well as the costs incurred and benefits to be gained
by the Investment Adviser, MLAM U.K. and their affiliates in providing such
services. The Board also found the management fee and total expense ratio to be
reasonable in comparison to the fees charged by other comparable funds of
similar size.

The Board considered whether there should be changes in the investment advisory
fee rate or structure in order to enable the Fund to participate in any
economies of scale that the Investment Adviser may experience as a result of
growth in the Fund's assets. The Board determined that the current management
fee structure was reasonable and that no changes were currently necessary. The
non-interested Directors were represented by independent counsel who assisted
them in their deliberations in executive sessions during which they considered
and approved the Investment Advisory Agreement for an additional one year
period.

INFORMATION REGARDING THE PORTFOLIO MANAGER

Kathleen M. Anderson is the Fund's senior portfolio manager and is primarily
responsible for the day-to-day management of the Fund's portfolio.

OTHER FUNDS AND ACCOUNTS MANAGED

The following table sets forth information about funds and accounts other than
the Fund for which the Fund's portfolio manager is primarily responsible for
the day-to-day portfolio management as of the fiscal year November 30, 2004.







                                                                  OTHER
                                 REGISTERED                       POOLED
                                 INVESTMENT                     INVESTMENT                   OTHER
                                  COMPANIES                      VEHICLES                   ACCOUNTS
                           ----------------------        ----------------------       --------------------
                           NUMBER OF        TOTAL        NUMBER OF        TOTAL       NUMBER OF     TOTAL
   PORTFOLIO MANAGER       ACCOUNTS        ASSETS         ACCOUNTS       ASSETS        ACCOUNTS     ASSETS
   -----------------       --------        ------         --------       ------        --------     ------

Kathleen M. Anderson          1         $49,960,986           0            $0              0          $0



                                      I-11



	COMPENSATION STRUCTURE

The portfolio manager compensation program of Merrill Lynch Investment Managers
and its affiliates (collectively, herein "MLIM") is critical to MLIM's ability
to attract and retain the most talented asset management professionals. This
program ensures that compensation is aligned with maximizing investment returns
and it provides a competitive pay opportunity for competitive performance.

         COMPENSATION PROGRAM

The elements of total compensation for MLIM portfolio managers are base salary,
annual performance-based cash and stock compensation (cash and stock bonus) and
other benefits. MLIM has balanced these components of pay to provide portfolio
managers with a powerful incentive to achieve consistently superior investment
performance. By design, portfolio manager compensation levels fluctuate -- both
up and down -- with the relative investment performance of the portfolios that
they manage.

         Base Salary

Under the MLIM approach, like that of many asset management firms, base salaries
represent a relatively small portion of a portfolio manager's total
compensation. This approach serves to enhance the motivational value of the
performance-based (and therefore variable) compensation elements of the
compensation program.

         Performance-Based Compensation

MLIM believes that the best interests of investors are served by recruiting and
retaining exceptional asset management talent and managing their compensation
within a consistent and disciplined framework that emphasizes pay for
performance in the context of an intensely competitive market for talent. To
that end, the portfolio manager incentive compensation is based on a formulaic
compensation program.
MLIM's formulaic portfolio manager compensation program include: investment
performance relative to appropriate competitors or benchmarks over 1-, 3- and
5-year performance periods and a measure of operational efficiency. If a
portfolio manager's tenure is less than 5-years, performance periods will
reflect time in position. Portfolio managers are compensated based on products
they manage. A smaller discretionary element of portfolio manager compensation
may include consideration of: financial results, expense control, profit
margins, strategic planning and implementation, quality of client service,
market share, corporate reputation, capital allocation, compliance and risk
control, leadership, workforce diversity, technology and innovation. MLIM also
considers the extent to which individuals exemplify and foster Merrill Lynch's
principles of Client Focus, Respect for the Individual, Teamwork, Responsible
Citizenship and Integrity. All factors are considered collectively by MLIM
management.

         Cash Bonus

Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.

         Stock Bonus

A portion of the dollar value of the total annual performance-based bonus is
paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the "Company")
stock. Paying a portion of annual bonuses in stock puts compensation earned by a
portfolio manager for a given year "at risk" based on the Company's ability to
sustain and improve its performance over future periods.

The ultimate value of stock bonuses is dependent on future Company stock price
performance. As such, the stock bonus aligns each portfolio manager's financial
interests with those of the Company's shareholders and encourages a balance
between short-term goals and long-term strategic objectives.







                                      I-12



Management strongly believes that providing a significant portion of competitive
performance-based compensation in stock is in the best interests of investors
and shareholders. This approach ensures that portfolio managers participate as
shareholders in both the "downside risk" and "upside opportunity" of the
Company's performance. Portfolio managers therefore have a direct incentive to
protect the Company's reputation for integrity.

         OTHER COMPENSATION PROGRAMS

Portfolio managers who meet relative investment performance and expense
management objectives during a performance year are eligible to participate in a
deferred cash program. Awards under this program are in the form of deferred
cash that may be benchmarked to a menu of MLIM mutual funds (including their own
fund) during a five-year vesting period. The deferred cash program aligns the
interests of participating portfolio managers with the investment results of
MLIM products and promotes continuity of successful portfolio management teams.

         OTHER BENEFITS

Portfolio managers are also eligible to participate in broad-based plans offered
generally to Company employees, including broad-based retirement, 401(k),
health, and other employee benefit plans.


POTENTIAL MATERIAL CONFLICTS OF INTEREST


Real, potential or apparent conflicts of interest may arise when the portfolio
manager has day-to-day portfolio management responsibilities with respect to
more than one fund or account, including the following:


Certain investments may be appropriate for the Fund and also for other clients
advised by MLIM and its affiliates, including other client accounts managed by
the Fund's portfolio manager. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
client or in different amounts and at different times for more than one but
less than all clients. Likewise, because clients of MLIM and its affiliates may
have differing investment strategies, a particular security may be bought for
one or more clients when one or more other clients are selling the security.
The investment results for the Fund may differ from the results achieved by
other clients of MLIM and its affiliates and results among clients may differ.
In addition, purchases or sales of the same security may be made for two or
more clients on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by MLIM to be equitable to
each. MLIM will not determine allocations based on whether it receives a
performance based fee from the client. In some cases, the allocation procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of MLIM and its affiliates in the interest of achieving
the most favorable net results to the Fund.


To the extent that the Fund's portfolio manager has responsibilities for
managing accounts in addition to the Fund, the portfolio manager will need to
divide her time and attention among relevant accounts.


In some cases, a real, potential or apparent conflict may also arise where (i)
MLIM may have an incentive, such as a performance based fee, in managing one
account and not with respect to other accounts it manages or (ii) where a
member of the Fund's portfolio management team owns an interest in one fund or
account he or she manages and not another.


FUND OWNERSHIP


The following table sets forth the dollar range of equity securities of the
Fund beneficially owned by the Fund's portfolio manager as of the fiscal year
ended November 30, 2004.




                                      I-13





   PORTFOLIO MANAGER      DOLLAR RANGE
   -----------------      ------------

Kathleen M. Anderson          None



  TRANSFER AGENCY SERVICES



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





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

              2004                       $234,534
              2003                       $293,108
              2002                       $349,855



  ACCOUNTING SERVICES


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






 FISCAL YEAR ENDED        PAID TO          PAID TO THE
    NOVEMBER 30,       STATE STREET     INVESTMENT ADVISER
    ------------       ------------     ------------------

        2004             $ 90,836            $  2,770
        2003             $ 90,368            $  2,976
        2002             $103,371            $ 10,771



V.     INFORMATION ON SALES CHARGES AND DISTRIBUTION RELATED EXPENSES



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



  CLASS A AND CLASS I SALES CHARGE INFORMATION





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

                  2004                        $26,143           $1,904            $24,239             $1,694
                  2003                        $14,775            $837             $13,938               $0
                  2002                        $34,383           $2,305            $32,078               $0







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

                  2004                         $244              $11                $233                $0
                  2003                         $101              $ 9                 $92                $0
                  2002                         $615              $58                $557                $0





                                      I-14


  CLASS B AND C SALES CHARGES INFORMATION





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

                  2004                          $31,362            $31,362
                  2003                          $39,030            $39,030
                  2002                          $67,791            $67,791






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

                  2004                          $1,761              $1,761
                  2003                          $1,248              $1,248
                  2002                          $5,215              $5,215



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


As of November 30, 2004, direct cash distribution revenues for the period since
the commencement of operations of Class B shares exceeded direct cash
distribution expenses by $20,938,176 (62.53% of Class B average daily net
assets at that date). As of November 30, 2004, direct cash distribution
revenues for the period since the commencement of operations of Class C shares
exceeded direct cash distribution expenses by $514,911 (4.73% of Class C
average daily net assets at that date).

For the fiscal year ended November 30, 2004, the Fund paid the Distributor
$168,777 pursuant to the Class A Distribution Plan (based on average daily net
assets subject to such Class A Distribution Plan of approximately $67.1
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class A shares. For the fiscal year
ended November 30, 2004, the Fund paid the Distributor $255,406 pursuant to the
Class B Distribution Plan (based on average daily net assets subject to such
Class B Distribution Plan of approximately $33.9 million), all of which was
paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended November 30, 2004, the Fund paid the Distributor
$88,442 pursuant to the Class C Distribution Plan (based on average daily net
assets subject to such Class C Distribution Plan of approximately $11.0
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares.


  LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES


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



                                      I-15






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

CLASS B SHARES, FOR THE PERIOD
DECEMBER 28, 1990
(COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 2004
Under NASD Rule as Adopted       $770,051    $47,653     $44,438    $92,091      $25,382       $66,709        $159
Under Distributor's Voluntary
Maximum                          $770,051    $47,653     $ 4,325    $51,978      $25,382       $26,596        $159
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 2004
Under NASD Rule as Adopted       $ 36,465    $ 2,234     $   915    $ 3,149      $   595       $ 2,554        $ 65



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

 # Purchase price of all eligible Class B or Class C shares sold during the
   periods indicated other than shares acquired through dividend reinvestment
   and the exchange privilege.



## Includes amounts attributable to exchanges from Summit Cash Reserves Fund
   ("Summit") that are not reflected in Eligible Gross Sales. Shares of Summit
   can only be purchased by exchange from another fund (the "redeemed fund").
   Upon such an exchange, the maximum allowable sales charge payment to the
   redeemed fund is reduced in accordance with the amount of the redemption.
   This amount is then added to the maximum allowable sales charge payment with
   respect to Summit. Upon an exchange out of Summit, the remaining balance of
   this amount is deducted from the maximum allowable sales charge payment to
   Summit and added to the maximum allowable sales charge payment to the fund
   into which the exchange is made.

 * Interest is computed on a monthly basis based upon the prime rate, as
   reported in The Wall Street Journal plus 1.00% as permitted under the NASD
   Rule.
** Consists of CDSC payments, distribution fee payments and accruals. See "Key
   Facts -- Fees and Expenses" in the Prospectus. This figure may include CDSCs
   that were deferred when a shareholder redeemed shares prior to the expiration
   of the applicable CDSC period and invested the proceeds, without the
   imposition of a sales charge, in Class I shares in conjunction with the
   shareholder's participation in the Merrill Lynch Mutual Fund Advisor ("MFA")
   program. The CDSC is booked as a contingent obligation that may be payable if
   the shareholder terminates participation in the MFA program.

 + Provided to illustrate the extent to which the current level of distribution
   fee payments (not including any CDSC payments) is amortizing the unpaid
   balance. No assurance can be given that payments of the distribution fee will
   reach either the voluntary maximum (with respect to Class B shares) or the
   NASD maximum (with respect to Class B and Class C shares).


VI.    COMPUTATION OF OFFERING PRICE PER SHARE



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






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

Net Assets                                   $73,286,037         $31,935,495          $11,897,604          $23,677,234
Number of Shares Outstanding                  7,060,623           3,086,891            1,160,465             2,282,342
Net Asset Value Per
Share (net assets divided
by number of shares outstanding)                $10.38             $10.35               $10.25                $10.37
Sales Charge (for Class A and Class I
Shares: 4.00 % of offering price;
4.17 % of net asset value per share)#            .43                   ##                   ##                   .43
                                                ------             ------               ------                ------
Offering Price                                  $10.81             $10.35               $10.25                $10.80
                                                ======             ======               ======                ======



------------
 # Rounded to the nearest one-hundredth percent; assumes maximum sales charge
   is applicable.
## Class B and Class C shares are not subject to an initial sales charge but may
   be subject to a CDSC on redemption of shares. See Part II "Purchase of Shares
   -- Deferred Sales Charge Alternatives -- Class B and Class C Shares."





                                      I-16




VII.   PORTFOLIO TRANSACTIONS AND BROKERAGE



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



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






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

              2004                        $87,680                $9,324
              2003                       $144,694               $12,642
              2002                       $236,862               $14,813




For the fiscal year ended November 30, 2004, the brokerage commission paid to
Merrill Lynch represented 10.63% of the aggregate brokerage commissions paid
and involved 16.25% of the Fund's dollar amount of transactions involving
payments of brokerage commissions during the year.

For the fiscal years ended November 30, 2004, 2003 and 2002, the Fund's lending
agent received $1,506, $12,543 and $19,230, respectively, in securities lending
agent fees from the Fund.


VIII.  FUND PERFORMANCE


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







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

One Year Ended November 30, 2004                  23.66%              24.30%             27.03%             24.00%
Five Years Ended November 30, 2004                 1.17%               1.26%              1.47%              1.42%
Ten Years Ended November 30, 2004                  8.92%               8.80%              8.78%              9.19%







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

One Year Ended November 30, 2004             22.75%              23.62%             26.35%             22.98%
Five Years Ended November 30, 2004           -1.85%              -1.58%             -1.39%             -1.70%
Ten Years Ended November 30, 2004             6.26%               6.37%              6.32%              6.43%







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

One Year Ended November 30, 2004             15.30%             15.74%             17.51%              15.51%
Five Years Ended November 30, 2004           -0.17%              0.06%              0.23%              -0.03%
Ten Years Ended November 30, 2004             6.62%              6.69%              6.66%               6.78%



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





                                      I-17



IX.    ADDITIONAL INFORMATION

DESCRIPTION OF SHARES

The Fund was incorporated under Maryland law on September 26, 1990. In August
2000, the name of the Fund was changed from Merrill Lynch Global Utility Fund,
Inc. to Merrill Lynch Utilities and Telecommunications Fund, Inc. The Fund has
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class I Common Stock, each of which consists of 100,000,000 shares. Shares of
Class A, Class B, Class C and Class I Common Stock represent an interest in the
same assets of the Fund and are identical in all respects except that the Class
A, Class B and Class C shares bear certain expenses relating the distribution
of such shares and the account maintenance fee and have exclusive voting rights
with respect to matters relating to such account maintenance and/or
distribution expenditures (except that Class B shareholders may vote upon
material changes to expenses charged under the Class A distribution plan). The
Board of Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of Common Stock at a future date. Prior to April
14, 2003, Class A shares were designated Class D and Class I shares were
designated Class A.

PRINCIPAL SHAREHOLDERS


To the knowledge of the Fund, the following entities owned beneficially or of
record 5% or more of the Fund's shares as of March 11, 2005:





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

Merrill Lynch Trust Co., FSB TTEE FBO       800 Scudders Mill Road, Plainsboro, NJ      21.85% of Class I
Merrill Lynch #                                             08536



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

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



X.     FINANCIAL STATEMENTS



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





                                      I-18

                                    PART II


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

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

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

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


INVESTMENT RISKS AND CONSIDERATIONS

Set forth below are descriptions of some of the types of investments and
investment strategies that one or more of the Funds may use, and the risks and
considerations associated with those investments and investment strategies.
Please see each Fund's Prospectus and the "Investment Objectives and Policies"
section


                                      II-1



in Part I of each Fund's Statement of Additional Information for a complete
description of each Fund's investment policies and risks. Information contained
in this section about the risks and considerations associated with a Fund's
investments and/or investment strategies applies only to those Funds
specifically identified as making each type of investment or using each
investment strategy (each, a "Covered Fund"). Information that does not apply
to a Covered Fund does not form a part of that Covered Fund's Statement of
Additional Information and should not be relied on by investors in that Covered
Fund. Only information that is clearly identified as applicable to a Covered
Fund is considered to form a part of that Covered Fund's Statement of
Additional Information.


                                      II-2






                                                                      BALANCED CAPITAL  BASIC VALUE  DEVELOPING CAPITAL MARKETS

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




                                                                      DISCIPLINED EQUITY  EQUITY DIVIDEND  EUROFUND  FOCUS TWENTY

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




                                                                     FOCUS VALUE  FUNDAMENTAL GROWTH  GLOBAL ALLOCATION

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




                                                                      GLOBAL FINANCIAL SERVICES  GLOBAL GROWTH  GLOBAL SMALLCAP

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




                                                                      GLOBAL TECHNOLOGY  GLOBAL VALUE  HEALTHCARE

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




                                                                      ML INTERNATIONAL  INTERNATIONAL VALUE

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




                                                                      LARGE CAP SERIES FUNDS  LATIN AMERICA

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




                                                                      MID CAP VALUE OPPORTUNITIES  NATURAL RESOURCES    PACIFIC

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
















                                                                      SMALLCAP GROWTH               UTILITIES AND TELECOMMUNICATIONS

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








                                                                      VALUE OPPORTUNITIES




VALUE OPPORTUNITIES

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




                                      II-3



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

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

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



                                      II-4


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


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


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


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

Certain types of borrowings by a Fund may result in the Fund being subject to
covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Manager from managing a Fund's
portfolio in accordance with the Fund's investment objectives and policies.
However, a breach of any such



                                      II-5



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

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

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

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

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

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

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

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

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



                                      II-6



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

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

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

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

More flexibility is possible in the creation of a Manufactured Convertible than
in the purchase of a traditional convertible security. Because many
corporations have not issued convertible securities, the Manager may combine a
fixed income instrument and an equity feature with respect to the stock of the
issuer of the fixed income instrument to create a synthetic convertible
security otherwise unavailable in the market. The Manager may also combine a
fixed income instrument of an issuer with an equity feature with respect to the
stock of a different issuer when the Manager believes such a Manufactured
Convertible would better promote a Fund's objective than alternate investments.
For example, the Manager may combine an equity feature with respect to an
issuer's stock with a fixed income security of a different issuer in the same
industry to diversify the Fund's credit exposure, or with a U.S. Treasury
instrument to create a Manufactured Convertible with a higher credit profile
than a traditional convertible security issued by that issuer. A Manufactured
Convertible also is a more flexible investment in that its two components may
be purchased separately and, upon purchasing the separate securities,
"combined" to create a Manufactured Convertible. For example, the Fund may
purchase a warrant for eventual inclusion in a Manufactured Convertible while
postponing the purchase of a suitable bond to pair with the warrant pending
development of more favorable market conditions.



                                      II-7



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

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

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

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



                                      II-8



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


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


DERIVATIVES

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


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


                                      II-9



A Fund may use Derivatives, including the following:


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

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

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


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

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



                                     II-10



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

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

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

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

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



                                     II-11



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

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

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

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

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

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



                                     II-12



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

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

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

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


Futures

                                     II-13


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

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

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

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


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

Foreign Exchange Transactions. A Fund may engage in spot and forward foreign
exchange transactions and currency swaps, purchase and sell options on
currencies and purchase and sell currency futures and related options thereon
(collectively, "Currency Instruments") for purposes of hedging against the
decline in the value of currencies in which its portfolio holdings are
denominated against the U.S. dollar or, with respect to certain Funds, to seek
to enhance returns. Such transactions could be effected with respect to hedges
on non-U.S. dollar denominated securities owned by a Fund, sold by a Fund but
not yet delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in U.S.
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund may purchase a foreign currency put option enabling it to
sell a specified amount of yen for dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the dollar will tend to be offset by an increase in the value of
the put option. To offset, in whole or in part, the cost of acquiring such a
put option, the Fund may also sell a call option which, if exercised, requires
it to sell a specified amount of yen for dollars at a



                                     II-14


specified price by a future date (a technique called a "straddle"). By selling
such a call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar. "Straddles" of the type that may be used by a Fund are considered to
constitute hedging transactions and are consistent with the policies described
above. No Fund will attempt to hedge all of its foreign portfolio positions.


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


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


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

Limitations on Currency Hedging. Most Funds will not speculate in Currency
Instruments although certain Funds may use such instruments to seek to enhance
returns. Accordingly, a Fund will not hedge a currency in excess of the
aggregate market value of the securities that it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. A Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). A Fund will
only enter into a cross-hedge if the Manager believes that (i) there is a
demonstrable high correlation between the currency in which the cross-hedge is
denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.


Risk Factors in Hedging Foreign Currency Risks. Hedging transactions involving
Currency Instruments involve substantial risks, including correlation risk.
While a Fund's use of Currency Instruments to effect hedging strategies is
intended to reduce the volatility of the net asset value of the Fund's shares,
the


                                     II-15


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

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

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

Risk Factors in Derivatives

Derivatives are volatile and involve significant risks, including:

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

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

Leverage Risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.

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

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

A Fund intends to enter into transactions involving Derivatives only if there
appears to be a liquid secondary market for such instruments or, in the case of
illiquid instruments traded in OTC transactions, such instruments satisfy the
criteria set forth below under "Additional Risk Factors of OTC Transactions;


                                     II-16


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

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

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

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

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


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

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



                                     II-17



have a lower value or income potential than may have been anticipated when the
investment was made. Moreover, any securities received by a Fund upon
completion of an exchange offer or plan of reorganization may be restricted as
to resale. As a result of a Fund's participation in negotiations with respect
to any exchange offer or plan of reorganization with respect to an issuer of
Distressed Securities, the Fund may be restricted from disposing of such
securities.

FOREIGN INVESTMENT RISKS

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

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect a Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

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

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

Certain Risks of Holding Fund Assets Outside the United States. A Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities



                                     II-18



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

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

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

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

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



                                     II-19



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

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

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

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

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

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



                                     II-20



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

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

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

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

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



                                     II-21



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

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

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

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

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

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

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

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



                                     II-22



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

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

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

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



                                     II-23



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

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

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

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

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

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

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

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

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

To the extent that a Fund purchases mortgage-backed securities at a premium,
mortgage foreclosures and principal prepayments may result in a loss to the
extent of the premium paid. If a Fund buys such



                                     II-24



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

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


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


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


REAL ESTATE INVESTMENT TRUSTS ("REITS"). Investing in REITs involves certain
unique risks in addition to those risks associated with investing in the real
estate industry in general. Equity REITs may be affected by changes in the
value of the underlying property owned by the REITs, while mortgage REITs may
be affected by the quality of any credit extended. REITs are dependent upon
management skills, may not be diversified geographically or by property type,
and are subject to heavy cash flow dependency, default


                                     II-25



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


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


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

REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS. A Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
Under such agreements, the other party agrees, upon entering into the contract
with a Fund, to repurchase the security at a mutually agreed-upon time and
price in a specified currency, thereby determining the yield during the term of
the agreement. This results in a fixed rate of return insulated from market
fluctuations during such period, although such return may be affected by
currency fluctuations. In the case of repurchase agreements, the prices at
which the trades are conducted do not reflect accrued interest on the
underlying obligation; whereas, in the case of purchase and sale contracts, the
prices take into account accrued interest. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, a Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right
to seek additional collateral in the case of purchase and sale contracts. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral.

A purchase and sale contract differs from a repurchase agreement in that the
contract arrangements stipulate that securities are owned by the Fund. In the
event of a default under such a repurchase agreement or under a purchase and
sale contract, instead of the contractual fixed rate, the rate of return to the
Fund would be dependent upon intervening fluctuations of the market values of
such securities and the accrued interest on the securities. In such event, the
Fund would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the



                                     II-26



seller to perform. A Fund may not invest in repurchase agreements or purchase
and sale contracts maturing in more than seven days if such investments,
together with the Fund's other illiquid investments, would exceed 15% of the
Fund's net assets.

SECURITIES LENDING. Each Fund may lend securities with a value not exceeding
331/3% of its total assets or the limit prescribed by applicable law to banks,
brokers and other financial institutions. In return, the Fund receives
collateral in cash or securities issued or guaranteed by the U.S. Government,
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. Each Fund maintains the
ability to obtain the right to vote or consent on proxy proposals involving
material events affecting securities loaned. A Fund receives the income on the
loaned securities. Where a Fund receives securities as collateral, the Fund
receives a fee for its loans from the borrower and does not receive the income
on the collateral. Where a Fund receives cash collateral, it may invest such
collateral and retain the amount earned, net of any amount rebated to the
borrower. As a result, the Fund's yield may increase. Loans of securities are
terminable at any time and the borrower, after notice, is required to return
borrowed securities within the standard time period for settlement of
securities transactions. The Fund is obligated to return the collateral to the
borrower at the termination of the loan. A Fund could suffer a loss in the
event the Fund must return the cash collateral and there are losses on
investments made with the cash collateral. In the event the borrower defaults
on any of its obligations with respect to a securities loan, a Fund could
suffer a loss where there are losses on investments made with the cash
collateral or, where the value of the securities collateral falls below the
market value of the borrowed securities. A Fund could also experience delays
and costs in gaining access to the collateral. Each Fund may pay reasonable
finder's, lending agent, administrative and custodial fees in connection with
its loans. Each Fund has received an exemptive order from the Commission
permitting it to lend portfolio securities to Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its affiliates and to retain an affiliate of the Fund as
lending agent.

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

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

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

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



                                     II-27



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

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

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

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

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

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

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

SOVEREIGN DEBT. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not
be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability



                                     II-28



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

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

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


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

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

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



                                     II-29



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


UTILITY INDUSTRIES

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

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


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



                                     II-30


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

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

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


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


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

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



                                     II-31



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

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


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

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

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

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


                                     II-32



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

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

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

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

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



                                     II-33


SUITABILITY (ALL FUNDS)


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


INVESTMENT RESTRICTIONS (ALL FUNDS)

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

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

Each Fund's investments will be limited in order to allow the Fund to qualify
as a "regulated investment company" for purposes of the Code. See "Dividends
and Taxes -- Taxes." To qualify, among other requirements, each Fund will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. Foreign government securities (unlike U.S. government
securities) are not exempt from the diversification requirements of the Code
and the securities of each foreign government issuer are considered to be
obligations of a single issuer. These tax-related limitations may be changed by
the Directors of a Fund to the extent necessary to comply with changes to the
Federal tax requirements. A Fund that is "diversified" under the Investment
Company Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets.


MANAGEMENT AND OTHER SERVICE ARRANGEMENTS

DIRECTORS AND OFFICERS

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



                                     II-34


MANAGEMENT ARRANGEMENTS


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


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

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

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

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


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


                                     II-35


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

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


OTHER SERVICE ARRANGEMENTS


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

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

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

Transfer Agency Services. Financial Data Services, Inc. (the "Transfer Agent"),
a subsidiary of ML & Co., acts as each Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (each, a "Transfer Agency Agreement"). Pursuant to each Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Each Fund currently pays between $16.00 and $20.00 for each Class A
or Class I shareholder account, between $19.00 and $23.00 for each Class B or
Class C shareholder account, depending on the level of service required, and,
where applicable, $16.00 for each Class R shareholder account. Each Fund
reimburses the Transfer Agent's reasonable out-of-pocket expenses and pays a
fee of 0.10% of account assets for certain accounts that participate in the
Merrill Lynch Mutual Funds Advisor (Merrill Lynch MFASM) Program (the "MFA
Program"). For purposes of each Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co. See Part I, Section IV
"Management and Advisory Arrangements -- Transfer Agency Fees" of each Fund's
Statement of Additional Information for information on the transfer agency fees
paid by your Fund for the periods indicated.



                                     II-36



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

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


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

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

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



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


CODE OF ETHICS


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

SELECTIVE DISCLOSURE OF PORTFOLIO HOLDINGS

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



                                     II-37



often, as necessary, reports on compliance with these polices and procedure,
including reports on any violations of these policies and procedures that may
occur. In addition, the Directors receive an annual assessment of the adequacy
and effect of the policies and procedures with respect to the Fund, and any
changes thereto, and an annual review of the operation of the policies and
procedures.

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

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

Confidential Information -- whether or not publicly disclosed -- may be
disclosed to Fund Directors, the independent Directors' counsel, outside Fund
counsel, the Fund's accounting services provider and the Fund's independent
registered public accounting firm without meeting the conditions outlined
above. Confidential Information may, with the prior approval of the Fund's
Chief Compliance Officer or the



                                     II-38



Manager's General Counsel, also be disclosed to any auditor of the parties to a
service agreement involving the Fund, or as required by judicial or
administrative process or otherwise by applicable law or regulation. If
Confidential Information is disclosed to such persons, each such person will be
subject to restrictions on trading in the subject securities under either the
Fund's and Manager's Code of Ethics or an applicable confidentiality agreement,
or under applicable laws or regulations or court order.

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

Fund's Board of Directors
Fund's Transfer Agent
Fund's Independent Registered Public Accounting Firm
Fund's accounting services provider -- State Street Bank and Trust Company
Fund Custodian
Independent Rating Agencies -- Morningstar, Inc. and Lipper Inc.
Information aggregators -- Wall Street on Demand and Thomson Financial
Sponsors of 401(k) plans that include MLIM/FAM-advised funds -- E.I. Dupont de
Nemours and Company, Inc.
Consultants for pension plans that invest in MLIM/FAM-advised funds -- Rocaton
Investment Advisors, LLC; Mercer Investment Consulting; Watson Wyatt Investment
Consulting; Towers Perrin HR Services

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

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

POTENTIAL CONFLICTS OF INTEREST

Activities of the Manager, Merrill Lynch & Co., Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and their Affiliates (collectively, "Merrill
Lynch") and Other Accounts Managed by Merrill Lynch. Merrill Lynch is a
worldwide, full service investment banking, broker-dealer, asset management and




                                     II-39



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

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

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

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

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

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



                                     II-40



proprietary activities or portfolio strategies of Merrill Lynch and its
affiliates or the activities or strategies used for accounts managed by them or
other customer accounts could conflict with the transactions and strategies
employed by the Manager in managing the Fund.

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

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

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

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

It is possible that the Fund may invest in securities of companies with which
Merrill Lynch has or is trying to develop investment banking relationships as
well as securities of entities in which Merrill Lynch makes a market. The Fund
also may invest in securities of companies that Merrill Lynch provides or may
someday provide research coverage. Such investments could cause conflicts
between the interests of the Fund and the interests of other Merrill Lynch
clients. In making investment decisions for the Fund, the Manager is not
permitted to obtain or use material non-public information acquired by any
division, department or affiliate of Merrill Lynch in the course of these
activities. In addition, from time to time, Merrill Lynch's activities may
limit the Fund's flexibility in purchases and sales of securities. When Merrill
Lynch is engaged in an underwriting or other distribution of securities of an
entity, the Manager may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Fund.



                                     II-41



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

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

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



PURCHASE OF SHARES



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

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


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

The Fund or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may resume offering of shares


                                     II-42


from time to time. Any order may be rejected by the Fund or the Distributor.
Neither the Distributor, the securities dealers nor other financial
intermediaries are permitted to withhold placing orders to benefit themselves
by a price change.


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

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

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

Eligible Class I Investors. Class I shares are offered to a limited group of
investors. Investors who currently own Class I shares in a shareholder account
are entitled to purchase additional Class I shares of a Fund in that account.
Certain employer-sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class I shares at net asset value provided such
plans meet the required minimum number of eligible employees or required amount
of assets advised by the Manager or any of its affiliates. Class I shares are
available at net asset value to corporate warranty insurance reserve fund
programs and U.S. branches of foreign banking institutions provided that the
program or bank has $3 million or more initially invested in Select Pricing
Funds. Also eligible to purchase Class I shares at net asset value are
participants in certain investment programs including TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, certain other trusts managed by banks, thrifts or trust companies, and
certain purchases made in connection with certain fee-based programs. In
addition, Class I shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to



                                     II-43



members of the Boards of investment companies advised by MLIM, FAM or their
affiliates and to employees or customers of selected securities dealers that
meet certain qualifications. Certain persons who acquired shares of certain
closed-end funds advised by MLIM or FAM in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of a Fund also may purchase Class I shares of a Fund if certain
conditions are met. In addition, Class I shares of each Select Pricing Fund are
offered at net asset value to shareholders of certain continuously offered
closed-end funds advised by MLIM or FAM who wish to reinvest the net proceeds
from the sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds. See "Purchase of Shares -- Closed-End Fund
Reinvestment Options."

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

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


REDUCED INITIAL SALES CHARGES

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

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

Rights of Accumulation. Eligible investors may purchase shares of a Fund
subject to an initial sales charge at the offering price applicable to the
total of (a) the public offering price of the shares then being purchased plus
(b) an amount equal to the then current net asset value or cost, whichever is
higher, of the purchaser's combined holdings of all classes of shares of a Fund
and of any other Select Pricing Funds. The purchaser or the purchaser's
securities dealer or other financial intermediary must provide the Distributor
at the time of purchase with sufficient information to confirm qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit sharing or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.


Letter of Intent. Reduced sales charges are applicable to purchases aggregating
$25,000 or more of Class A or Class I shares of a Fund or any Select Pricing
Funds made within a 13 month period pursuant to a Letter of Intent. The Letter
of Intent is not available to employee benefit plans for which affiliates of
the Manager provide plan participant record-keeping services. The Letter of
Intent is not a binding obligation to purchase any amount of Class A or Class I
shares. If you bought Class A or Class I shares prior to signing a Letter of
Intent, those shares may be included under a subsequent Letter of Intent
executed within 90 days of the purchase if you inform the Distributor in
writing of your intent within the 90-day period. The value (at cost or maximum
offering price, whichever is higher) of Class A and Class I shares of a Select
Pricing Fund presently held on the date of the first purchase under the Letter
of Intent may be included as a credit toward the completion of such Letter, but
the reduced sales charge will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intent , you
will be notified and must pay, within 20 days of the expiration of such Letter,
the difference between the reduced sales charge and the applicable sales
charge. Class A or Class I shares equal to at least 5.00% of the intended
amount will be held in escrow during the 13-month period (while remaining



                                     II-44



registered in the name of the purchaser) for this purpose. The first purchase
under the Letter of Intent must be at least 5.00% of the dollar amount of such
Letter. You may be entitled to further reduced sales charges under a right of
accumulation for purchases made during the term of a Letter. You will not,
however, be entitled to further reduced sales charges on any purchases made
before the execution of the Letter.


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


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

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


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

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


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



                                     II-45


Acquisition of Certain Investment Companies. Class A shares may be offered at
net asset value in connection with the acquisition of the assets of or merger
or consolidation with a personal holding company or a public or private
investment company.



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



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


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



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


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



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


The following table sets forth the schedule that applies to the Class B CDSC:

                                     II-46





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

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


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


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

The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder (including one who owns the Class B
shares as joint tenant with his or her spouse), provided the redemption is
requested within one year of the death or initial determination of disability
or, if later, reasonably promptly following completion of probate. The Class B
CDSC also may be waived on redemptions of shares by certain eligible 401(a) and
401(k) plans. The CDSC may also be waived for any Class B shares that are
purchased by eligible 401(k) or eligible 401(a) plans that are rolled over into
a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC may be waived for any Class
B shares that were acquired and held at the time of the redemption in an
Employee AccessSM Account available through employers providing eligible 401(k)
plans. The Class B CDSC may also be waived for any Class B shares that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by MLIM Private Investors and held in such
account at the time of redemption. The Class B CDSC may also be waived or its
terms may be modified in connection with certain fee-based programs. The Class
B CDSC may also be waived in connection with involuntary termination of an
account in which Fund shares are held or for withdrawals through the Merrill
Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account
value at the time the plan is established, or on redemptions made in connection
with the payment of account custodial fees. See "Shareholder Services --
Fee-Based Programs" and "-- Systematic Withdrawal Plans."


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

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

Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements.
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class B shares with a waiver of the CDSC upon
redemption, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified



                                     II-47


investments and/or the services provided by Merrill Lynch to the Plan. Such
Class B shares will convert into Class A shares approximately ten years after
the plan purchases the first share of any Select Pricing Fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at 1-800-237-7777.

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

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

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


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


Contingent Deferred Sales Charges -- Class C Shares


Class C shares that are redeemed within one year of purchase may be subject to
a 1.00% CDSC charged as a percentage of the dollar amount subject thereto. In
determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC will
be assessed on shares derived from reinvestment of dividends. It will be
assumed that the redemption is first of shares held for over one year or shares
acquired pursuant to reinvestment of dividends and then of shares held longest
during the one-year period. A transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held, for withdrawals
through the Merrill Lynch Systematic Withdrawal Plan, and in connection with
the redemption of Class C shares by certain retirement plans or on redemptions
made in connection with the payment of account custodial fees. See "Shareholder
Services -- Systematic Withdrawal Plan."


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


                                     II-48


CLASS R SHARES


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

REDEMPTION FEE

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

     o  Redemptions resulting from death or disability

     o  Redemptions through a Systematic Withdrawal Plan

     o  Redemptions of shares purchased through an Automatic Investment Plan

     o  Redemptions of shares acquired through dividend reinvestment

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

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


CLOSED-END FUND REINVESTMENT OPTIONS


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

Subject to the conditions set forth below, shares of each Fund are offered at
net asset value to shareholders of certain continuously offered closed-end
funds advised by a Manager (an "Eligible Fund") who wish to reinvest the net
proceeds from a sale of eligible shares. Upon exercise of this reinvestment
option,



                                     II-49


shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive
Class I shares of a Fund and shareholders of Merrill Lynch Senior Floating Rate
Fund II, Inc. will receive Class C shares of a Fund.

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

DISTRIBUTION PLANS

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

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

Each Fund's Plans are subject to the provisions of Rule 12b-1 under the
Investment Company Act. In their consideration of a Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Plan to the Fund and the related class of shareholders. In
approving a Plan in accordance with Rule 12b-1, the non-Interested Directors
concluded that there is reasonable likelihood that the Plan will benefit the
Fund and its related class of shareholders.

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

Among other things, each Plan provides that the Directors will review quarterly
reports of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of
expenses incurred. As a result, distribution-related revenues from the Plans
may be more or less than distribution-related


                                     II-50


expenses of the related class. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration quarterly. Distribution-related revenues consist of the
account maintenance fees, the distribution fees and the CDSCs.
Distribution-related expenses consist of financial adviser compensation, branch
office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses and interest
expense. The distribution-related revenues paid with respect to one class will
not be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.

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

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES


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

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



REDEMPTION OF SHARES

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


The right to redeem shares may be suspended for more than seven days only (i)
for any period during which trading on the NYSE is restricted as determined by
the Securities and Exchange Commission (the "Commission") or during which the
NYSE is closed (other than customary weekend and holiday



                                     II-51



closings), (ii) for any period during which an emergency exists, as defined by
the Commission, as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
or (iii) for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.


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

REDEMPTION


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


You may also redeem shares held with the Transfer Agent by calling
1-800-MER-FUND. You must be the shareholder of record and the request must be
for an amount less than $50,000. Before telephone requests will be honored,
signature approval from all shareholders of record on the account must be
obtained. The shares being redeemed must have been held for at least 15 days.
Telephone redemption requests will not be honored if: (i) the accountholder is
deceased, (ii) the proceeds are to be sent to someone other than the
shareholder of record, (iii) funds are to be wired to the client's bank
account, (iv) a systematic withdrawal plan is in effect, (v) the request is by
an individual other than the accountholder of record, (vi) the account is held
by joint tenants who are divorced, (vii) the address on the account has changed
within the last 30 days or share certificates have been issued on the account,
or (viii) to protect against fraud, if the caller is unable to provide the
account number, the name and address registered on the account and the social
security number registered on the account. The Funds or the Transfer Agent may
temporarily suspend telephone transactions at any time.

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

REPURCHASE

                                     II-52


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


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


REINSTATEMENT PRIVILEGE - CLASS A AND CLASS I SHARES


If you redeemed Class A or Class I shares of a Fund, you may reinstate your
account by buying Class A or Class I shares, as the case may be, of the Fund at
net asset value without a sales charge up to the dollar amount you redeemed.
You may exercise the reinstatement privilege by sending a notice of exercise
along with a check for the amount to be reinstated to the Transfer Agent or by
contacting your financial adviser or other financial intermediary within 30
days after the date the redemption request was accepted by the Transfer Agent
or the Distributor. The reinstatement will be made at the net asset value per
share next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.



SHAREHOLDER SERVICES


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


INVESTMENT ACCOUNT


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

You may transfer Fund shares from a selected securities dealer or other
financial intermediary to another securities dealer or other financial
intermediary that has entered into an agreement with the Distributor. Certain
shareholder services may not be available for the transferred shares. After the
transfer, you may purchase additional shares of Funds owned before the
transfer. All future trading of these assets must be coordinated by the new
firm. If you wish to transfer your shares to a securities dealer or other
financial intermediary that has not entered into an agreement with the
Distributor, you must either (i) redeem



                                     II-53


your shares, paying any applicable CDSC or (ii) continue to maintain an
Investment Account at the Transfer Agent for those shares. You also may request
that the new securities dealer or other financial intermediary maintain the
shares in an account at the Transfer Agent registered in the name of the
securities dealer or other financial intermediary for your benefit whether the
securities dealer or other financial intermediary has entered into a selected
dealer agreement or not.


If you are considering transferring a tax-deferred retirement account, such as
an individual retirement account, from one selected securities dealer to
another securities dealer or other financial intermediary, you should be aware
that if the new firm will not take delivery of shares of the Fund, you must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or you must continue to
maintain a retirement account at the original selected securities dealer for
those shares.


EXCHANGE PRIVILEGE


U.S. shareholders of Class A, Class B, Class C and Class I shares of each Fund
have an exchange privilege with certain other Select Pricing Funds and Summit,
which is a money market fund advised by FAM specifically designated for
exchange by shareholders of Select Pricing Funds. In order to qualify for the
exchange privilege, the shares you wish to exchange are required to have a net
asset value of at least $100 and must have been held by you for at least 15
days. Before effecting an exchange, you should obtain a currently effective
prospectus of the fund into which you wish to make the exchange. Exercise of
the exchange privilege is treated as a sale of the exchanged shares and a
purchase of the acquired shares for Federal income tax purposes.

Exchanges of Class A and Class I Shares. You may exchange Class A or Class I
shares of a Fund for Class I shares of a second Select Pricing Fund if you hold
any Class I shares of the second fund in your account at the time of the
exchange or are eligible to purchase Class I shares of the second fund;
otherwise, you will receive Class A shares of the second fund. Class A shares
are exchangeable with shares of the same class of other Select Pricing Funds.

Exchanges of Class A or Class I shares outstanding ("outstanding Class A or
Class I shares") for Class A or Class I shares of a second Select Pricing Fund,
or for Class A shares of Summit ("new Class A or Class I shares") are effected
on the basis of relative net asset value per Class A or Class I share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class I shares and the
sales charge payable at the time of the exchange on the new Class A or Class I
shares. With respect to outstanding Class A or Class I shares received in a
previous exchange, the "sales charge previously paid" will include the
aggregate of the sales charges paid with respect to such Class A or Class I
shares in the initial purchase and any subsequent exchange. Class A or Class I
shares issued pursuant to dividend reinvestment are not subject to a sales
charge. For purposes of the exchange privilege, however, these shares will be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class I shares on which the dividend was
paid. Based on this formula, Class A and Class I shares of a Fund generally may
be exchanged into the Class A or Class I shares, respectively, of a second Fund
with a reduced sales charge or without a sales charge. If you held the
outstanding Class A or Class I shares used in the exchange for 30 days or less,
you may also be charged a redemption fee at the time of the exchange.


Exchanges of Class B and Class C Shares. Shareholders of certain Select Pricing
Funds with Class B and Class C shares outstanding ("outstanding Class B or
Class C shares") may exchange their Class B or Class C shares for Class B or
Class C shares, respectively, of a second Select Pricing Fund or for Class B
shares of Summit ("new Class B or Class C shares") on the basis of relative net
asset value per Class B or Class C share, without the payment of any CDSC.
Certain Select Pricing Funds impose different CDSC schedules. If you exchange
your Class B shares for shares of a fund with a different CDSC schedule the
higher schedule will apply. For purposes of computing the CDSC upon redemption
of new Class B or Class


                                     II-54



C shares, the time you held both the exchanged Class B or Class C shares and
the new Class B shares or Class C shares will count towards the holding period
of the new Class B or Class C shares. For example, if you exchange Class B
shares of a Fund for those of a second Fund after having held the Fund's Class
B shares for two-and-a-half years, the 3.00% CDSC that generally would apply to
a redemption would not apply to the exchange. Four years later if you decide to
redeem the Class B shares of the second Fund and receive cash, there will be no
CDSC due on this redemption since by adding the two-and-a-half year holding
period of the Fund Class B shares to the four year holding period for the
second Fund's Class B shares, you will be deemed to have held the second Fund's
Class B shares for more than six years. Class B shares of certain Select
Pricing Funds purchased prior to June 1, 2001 are subject to the four-year CDSC
schedule in effect at that time. This four-year CDSC schedule will also apply
to Class B shares received in exchange for such shares. If you held the
outstanding Class B or Class C shares used in the exchange for 30 days or less,
you may also be charged a redemption fee at the time of the exchange.

Exchanges for Shares of a Money Market Fund. You may exchange Class A and Class
I shares of a Fund for Class A shares of Summit and Class B and Class C shares
of a Fund for Class B shares of Summit. You may exchange Class A shares of
Summit back into Class A or Class I shares of a Fund. You may exchange Class B
shares of Summit back into Class B or Class C shares of a Fund and, in the
event of such an exchange, the period of time that you held Class B shares of
Summit will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and toward satisfaction of any Conversion Period
with respect to Class B shares. Class B shares of Summit will be subject to a
distribution fee at an annual rate of 0.75% of average daily net assets of such
Class B shares. Please see your financial adviser or other financial
intermediary for further information.

Prior to October 12, 1998, exchanges from certain Select Pricing Funds into a
money market fund were directed to certain money market funds advised by the
Manager other than Summit ("Other Money Funds"). If you exchanged Select
Pricing Fund shares for Other Money Funds and subsequently wish to exchange
Other Money Fund shares for shares of a Select Pricing Fund ("Acquired Fund"),
you will be subject to the CDSC schedule applicable to the Acquired Fund
shares, if any. The holding period for Other Money Fund shares will not count
toward satisfaction of the holding period requirement for reduction of the CDSC
imposed on Acquired Fund shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period. However, the time you held the
fund shares originally exchanged for Other Money Fund shares will count towards
the holding period of the Class B or C shares of the Acquired Fund for purposes
of reducing the CDSC or satisfying the Conversion Period.

Exchanges by Participants in Certain Programs. The exchange privilege is
modified with respect to certain participants in mutual fund advisory programs
and other fee-based programs sponsored by the Manager, an affiliate of the
Manager, or selected securities dealers or other financial intermediaries that
have an agreement with the Distributor. See "Fee -- Based Programs" below.

Exercise of the Exchange Privilege. To exercise the exchange privilege, you
should contact your financial adviser, who will advise each Fund of the
exchange. If you do not hold share certificates, you may exercise the exchange
privilege by wire through your securities dealer or other financial
intermediary. Each Fund reserves the right to require a properly completed
exchange application.

You may also request exchanges by calling the Transfer Agent at 1-800-637-3863
if your account is held with the Transfer Agent for amounts up to $50,000. The
request must be from the shareholder of record. Before telephone requests will
be honored, signature approval from all shareholders of record must be
obtained. The shares being exchanged must have been held for at least 15 days.
Telephone requests for an exchange will not be honored if: (i) the
accountholder is deceased, (ii) the request is by an individual other than the
accountholder of record, (iii) the account is held by joint tenants who are
divorced or the address on the account has changed within the last 30 days, or
(iv) if the caller is unable to provide the account number, the name and
address registered on the account and the social security number registered on
the account. Each Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.



                                     II-55


This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. Each Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain Funds may
suspend the continuous offering of their shares to the general public at any
time and may resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made. The exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.

FEE-BASED PROGRAMS


Certain fee-based programs offered by the Manager or its affiliates of a
selected securities dealer or other financial intermediaries that has an
agreement with the Distributor, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"), may permit
the purchase of Class I shares at net asset value. Under specified
circumstances, participants in certain Programs may exchange their shares in
the Program for Class I shares. Initial or deferred sales charges otherwise due
in connection with such exchanges may be waived or modified, as may the
Conversion Period applicable to the deposited shares. Termination of
participation in a Program may result in the redemption of shares or the
automatic exchange of shares to another class at net asset value. Shareholders
that participate in a fee based program generally have two options at
termination. The program can be terminated and the shares liquidated or the
program can be terminated and the shares held in an account. In general, when
shares are held whatever share class was held in the program can be held after
termination. Shares that have been held for less than specified periods within
the program may be subject to a fee upon redemption. Shareholders that held
Class A or Class I shares in the program are eligible to purchase additional
shares of the respective share class of the fund, but may be subject to upfront
sales charges. Additional purchases of Class I shares are eligible only if you
have an existing position at the time of purchase or are otherwise eligible for
Class I shares.


RETIREMENT AND EDUCATION SAVINGS PLANS


Individual retirement accounts and other retirement and education savings plans
are available from your financial intermediary. Under these plans, investments
may be made in a Fund (other than a Municipal Fund) and certain of the other
mutual funds sponsored by MLIM or its affiliates as well as in other
securities. There may be fees associated with investing through these plans.
Information with respect to these plans is available on request from your
financial intermediary.


Dividends received in each of the plans referred to above are exempt from
Federal taxation until distributed from the plans and, in the case of Roth IRAs
and education savings plans, may be exempt from taxation when distributed as
well. Investors considering participation in any retirement or education
savings plan should review specific tax laws relating to the plan and should
consult their attorneys or tax advisers with respect to the establishment and
maintenance of any such plan.

AUTOMATIC INVESTMENT PLANS


You may make additions to an Investment Account through a service known as the
Automatic Investment Plan. Under the Automatic Investment Plan, a Fund is
authorized, on a regular basis, to provide systematic additions to your
Investment Account through charges of $50 or more to your regular bank account
by either pre-authorized checks or automated clearing house debits. If you buy
shares of a Fund through Blueprint, no minimum charge to your bank account is
required. Alternatively, if you maintain a cash management account you may
arrange to have periodic investments made in a Fund. Contact your financial
intermediary for more information.


AUTOMATIC DIVIDEND REINVESTMENT PLAN

Unless you provide specific instructions as to the method of payment, dividends
will be automatically reinvested, without sales charge, in additional full and
fractional shares of the same Fund. You may, at any


                                     II-56



time, elect to have dividends paid in cash, rather than reinvested in shares of
a Fund (provided that, if a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, the payment will automatically be
reinvested in additional shares). If your account is maintained with the
Transfer Agent, you may contact the Transfer Agent in writing or by telephone
(1-800-637-3863). For other accounts, you should contact your financial
adviser, selected securities dealer or other financial intermediary. Your
instructions will be effected ten days after the receipt by the Transfer Agent
of such notice. A Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be deposited
directly in the shareholder's bank account.


SYSTEMATIC WITHDRAWAL PLANS


You may elect to receive systematic withdrawals from your Investment Account by
check or through automatic payment by direct deposit to your bank account on
either a monthly or quarterly basis as provided below. Quarterly withdrawals
are available if you have acquired shares of a Fund that have a value, based on
cost or the current offering price, of $5,000 or more, and monthly withdrawals
are available if your shares have a value of $10,000 or more.


At the time of each withdrawal payment, sufficient shares are redeemed from
your account to provide the withdrawal payment specified by you. You may
specify the dollar amount and class of shares to be redeemed. Redemptions will
be made at net asset value as determined as of the close of business on the
NYSE on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the NYSE is not open for business on such
date, the shares will be redeemed at the net asset value determined as of the
close of business on the NYSE on the following business day. The check for the
withdrawal payment will be mailed or the direct deposit will be made, on the
next business day following redemption. When you make systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
reinvested automatically in Fund shares. Your systematic withdrawal plan may be
terminated at any time, without charge or penalty, by you, a Fund, the Transfer
Agent or the Distributor.


The maximum number of Class B or Class C shares that can be redeemed from an
Investment Account annually will not exceed 10% of the value of shares of such
class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that might be due on such redemption of
Class B or Class C shares will be waived. Shares redeemed pursuant to a
systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are normally redeemed. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares." Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class A shares, you must make a new election to join
the systematic withdrawal program with respect to the Class A shares. If you
wish to change the amount being withdrawn in a systematic withdrawal plan, you
should contact your financial adviser or other financial intermediary.


Withdrawal payments should not be considered as dividends. Withdrawals
generally are treated as sales of shares and may result in taxable gain or
loss. If periodic withdrawals continuously exceed reinvested dividends, the
shareholder's original investment may be reduced correspondingly. Purchases of
additional shares concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities. A Fund will not
knowingly accept purchase orders for shares of a Fund from investors who
maintain a systematic withdrawal plan with respect to that Fund unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.


Alternatively, if your shares are held within a cash management account or
retirement account you may elect to have shares redeemed on a periodic basis as
determined by the program. The proceeds of



                                     II-57



systematic redemptions will be posted to your account three business days after
the date the shares are redeemed. All redemptions are made at net asset value.
A systematic redemption program may not be available if Fund shares are being
purchased within the account pursuant to the automatic investment program. For
more information shareholders should contact their financial adviser or other
financial intermediary.



PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

The net asset value of each class of shares of each Fund is determined once
daily Monday through Friday as of the close of business on the NYSE on each day
the NYSE is open for trading based on prices at the time of closing. The NYSE
generally closes at 4:00 p.m. Eastern time. Any assets or liabilities initially
expressed in terms of foreign currencies are translated into U.S. dollars at
the prevailing market rates as quoted by one or more banks or dealers on the
day of valuation. The NYSE is not open for trading on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.

Net asset value per share is computed by dividing the value of the securities
held by a Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time (on a class by
class basis), rounded to the nearest cent. Expenses, including the fees payable
to the Manager and Distributor, are accrued daily.

The principal asset of each Feeder Fund will normally be its interest in an
underlying Master Portfolio. The value of that interest is based on the net
assets of the Master Portfolio, which are comprised of the value of the
securities held by the Master Portfolio plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses of the Master Portfolio). Expenses of a
Master Portfolio, including the investment advisory fees, are accrued daily.
The net asset value of a Feeder Fund is equal to the value of the Feeder Fund's
proportionate interest in the net assets of the Master Portfolio plus any cash
or other assets, minus all liabilities (including accrued expenses) of the
Feeder Fund. To determine a Feeder Fund's net asset value per share, the Feeder
Fund's net asset value is divided by the total number of shares outstanding of
the Feeder Fund at such time (on a class by class basis), rounded to the
nearest cent. Expenses, including fees payable to the Administrator and
Distributor, are accrued daily.

The per share net asset value of Class A, Class B, Class C and Class R shares
generally will be lower than the per share net asset value of Class I shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, the daily expense accruals of the account maintenance fees applicable
with respect to Class A shares and the daily expense accruals of the account
maintenance and distribution fees applicable to Class R shares. Moreover, the
per share net asset value of the Class B, Class C and Class R shares generally
will be lower than the per share net asset value of Class A shares reflecting
the daily expense accruals of the distribution fees and higher transfer agency
fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the distribution fees applicable to Class R shares of a
Fund. In addition, the per share net asset value of Class B and Class C shares
generally will be lower than the per share net asset value of Class R shares
due to the daily expense accruals of the higher distribution fees and higher
transfer agency fees applicable to Class B and Class C shares. It is expected,
however, that the per share net asset value of all classes of a Fund will tend
to converge (although not necessarily meet) immediately after the payment of
dividends, which will differ by approximately the amount of the expense accrual
differentials between the classes.


Securities that are held by a Fund that are traded on stock exchanges or NASDAQ
National Market are valued at the last sale price or official close price on
the exchange, as of the close of business on the



                                     II-58



day the securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last available ask price for
short positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Fund. Long
positions traded in the OTC market, NASDAQ Small Cap or Bulletin Board are
valued at the last available bid price or yield equivalent obtained from one or
more dealers or pricing services approved by the Board of Directors of the
Fund. Short positions traded in the OTC market are valued at the last available
ask price. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market.

Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market,
the last ask price. Options purchased are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Swap agreements are valued daily based upon
quotations from market makers. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their last sale price as of the
close of such exchanges. Obligations with remaining maturities of 60 days or
less are valued at amortized cost unless the Manager believes that this method
no longer produces fair valuations. Repurchase agreements are valued at cost
plus accrued interest.

Each Fund employs pricing services to provide certain securities prices for the
Fund. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of a Fund, including valuations furnished
by the pricing services retained by the Fund, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of a Fund under the general supervision of the Fund's Board of
Directors. Such valuations and procedures will be reviewed periodically by the
Board of Directors of the Fund.

Generally, trading in foreign securities, as well as U.S. Government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the NYSE. The values of such securities
used in computing the net asset value of a Fund's shares are determined as of
such times. Foreign currency exchange rates also are generally determined prior
to the close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of a Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by a Fund's Board of Directors or by the Manager using a pricing
service and/or procedures approved by a Fund's Board of Directors.

For funds organized in a master-feeder structure, each investor in a Master
Portfolio may add to or reduce its investment in the Master Portfolio on each
day the NYSE is open for trading. The value of each investor's (including a
Feeder Fund's) interest in a Master Portfolio will be determined after the
close of business on the NYSE by multiplying the net asset value of the Master
Portfolio by the percentage, effective for that day, which represents that
investor's share of the aggregate interests in the Master Portfolio. Any
additions or withdrawals to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in a Master
Portfolio will then be recomputed as the percentage equal to the fraction (i)
the numerator of which is the value of such investor's investment in the Master
Portfolio as of the time of determination on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the investor's
investment in the Master Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Master Portfolio
as of such time on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Master Portfolio by all investors in the Master



                                     II-59


Portfolio. The percentage so determined will then be applied to determine the
value of the investor's interest in a Master Portfolio after the close of
business of the NYSE or the next determination of net asset value of the Master
Portfolio.

COMPUTATION OF OFFERING PRICE PER SHARE

See Part I, Section VI "Computation of Offering Price" of each Fund's Statement
of Additional Information for an illustration of the computation of the
offering price for Class A, Class B, Class C, Class I, and, if applicable,
Class R shares of your Fund.


PORTFOLIO TRANSACTIONS AND BROKERAGE


TRANSACTIONS IN PORTFOLIO SECURITIES


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

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


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


To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information that assists in the
valuation of investments. Examples of research-oriented services for which the
Manager might pay with Fund commissions include research reports and other
information on the economy, industries, groups of securities, individual
companies, statistical information, political developments, technical market
action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. Except as noted immediately below,
research services furnished by brokers may be used in servicing some or all
client accounts and not all services may be used in connection with the account
that paid commissions to the broker providing such services. In some cases,
research information received from brokers by



                                     II-60


mutual fund management personnel, or personnel principally responsible for the
Manager's individually managed portfolios, is not necessarily shared by and
between such personnel. Any investment advisory or other fees paid by a Fund to
the Manager are not reduced as a result of the Manager's receipt of research
services. In some cases the Manager may receive a service from a broker that
has both a "research" and a "non-research" use. When this occurs the Manager
makes a good faith allocation, under all the circumstances, between the
research and non-research uses of the service. The percentage of the service
that is used for research purposes may be paid for with client commissions,
while the Manager will use its own funds to pay for the percentage of the
service that is used for non-research purposes. In making this good faith
allocation, the Manager faces a potential conflict of interest, but the Manager
believes that its allocation procedures are reasonably designed to ensure that
it appropriately allocates the anticipated use of such services to their
research and non-research uses.

From time to time, a Fund may purchase new issues of securities in a fixed
price offering. In these situations, the broker may be a member of the selling
group that will, in addition to selling securities, provide the Manager with
research services. The NASD has adopted rules expressly permitting these types
of arrangements under certain circumstances. Generally, the broker will provide
research "credits" in these situations at a rate that is higher than that which
is available for typical secondary market transactions. These arrangements may
not fall within the safe harbor of Section 28(e).

The Manager does not consider sales of shares of the mutual funds it advises as
a factor in the selection of brokers or dealers to execute portfolio
transactions for a Fund; however, whether or not a particular broker or dealer
sells shares of the mutual funds advised by the Manager neither qualifies nor
disqualifies such broker or dealer to execute transactions for those mutual
funds.

Each Fund anticipates that its brokerage transactions involving foreign
securities generally will be conducted primarily on the principal stock
exchanges of the applicable country. Foreign equity securities may be held by a
Fund in the form of Depositary Receipts, or other securities convertible into
foreign equity securities. Depositary Receipts may be listed on stock
exchanges, or traded in over-the-counter markets in the United States or
Europe, as the case may be. American Depositary Receipts, like other securities
traded in the United States, will be subject to negotiated commission rates.
Because the shares of each Fund are redeemable on a daily basis in U.S.
dollars, each Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. Under present conditions, it is not believed
that these considerations will have significant effect on a Fund's portfolio
strategies.

See Part I, Section VII "Portfolio Transactions and Brokerage " of each Fund's
Statement of Additional Information for information about the brokerage
commissions paid by your Fund, including commissions paid to Merrill Lynch, if
any, for the periods indicated.

Each Fund may invest in certain securities traded in the OTC market and intends
to deal directly with the dealers who make a market in the particular
securities, except in those circumstances in which better prices and execution
are available elsewhere. Under the Investment Company Act, persons affiliated
with a Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Funds will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of a Fund may serve as its broker in OTC transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, a Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in


                                     II-61


which Merrill Lynch serves as placement agent except pursuant to procedures
approved by the Board of the Fund that either comply with rules adopted by the
Commission or with interpretations of the Commission staff.

Each Fund has received an exemptive order from the Commission permitting it to
lend portfolio securities to Merrill Lynch or its affiliates. Pursuant to that
order, each Fund also has retained an affiliated entity of the Manager as the
securities lending agent (the "lending agent") for a fee, including a fee based
on a share of the returns on investment of cash collateral. Please see Part I,
Section VII "Portfolio Transactions and Brokerage" of each Fund's Statement of
Additional Information for information on the securities lending fees paid the
lending agent by your Fund. In connection with securities lending activities,
the lending agent may, on behalf of a Fund, invest cash collateral received by
the Fund for such loans, among other things, in a private investment company
managed by the lending agent or in registered money market funds advised by the
Manager or its affiliates, or in a private investment company managed by the
lending agent. If a Fund acquires shares in either the private investment
company or an affiliated money market fund, shareholders would bear both their
proportionate share of the Fund's expenses, and indirectly, the expense of such
other entities. However, in accordance with the exemptive order, the manager to
the private investment company will not charge any advisory fees with respect
to shares purchased by a Fund. Such shares also will not be subject to a sales
load, redemption fee, distribution fee or service fee, or in the case of the
shares of an affiliated money market fund, the payment of any such sales load,
redemption fee, distribution fee or service fee will be offset by the Manager's
waiver of a portion of its advisory fee.

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

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

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

Portfolio Turnover

While a Fund generally does not expect to engage in trading for short term
gains, it will effect portfolio transactions without regard to holding period
if, in Fund management's judgment, such transactions


                                     II-62


are advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. The portfolio turnover rate is calculated by dividing the lesser of
a Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of U.S. government securities and all other securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. A high rate
of portfolio turnover results in certain tax consequences, such as increased
capital gain dividends and/or ordinary income dividends and in correspondingly
greater transaction costs in the form of dealer spreads and brokerage
commissions, which are borne directly by a Fund.


DIVIDENDS AND TAXES


DIVIDENDS

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

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

TAXES


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


The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the
RIC does not distribute, during each calendar year, 98% of its ordinary income,
determined on a calendar year basis, and 98% of its capital gains, determined,
in general on an October 31 year end, plus certain undistributed amounts from
the previous years. While each Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of a


                                     II-63


Fund's taxable income and capital gains will be distributed to achieve this
objective. In such event, a Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.


Dividends paid by a Fund from its ordinary income or from an excess of net
short-term capital gains over net long term capital losses (together referred to
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from an excess of net long term capital gains over net short
term capital losses (including gains or losses from certain transactions in
futures and options) ("capital gain dividends") are taxable to shareholders as
long term capital gains, regardless of the length of time the shareholder has
owned Fund shares. Certain dividend income and long-term capital gain applicable
are eligible for taxation at a reduced rate to non-corporate shareholders for
taxable years ending in or prior to 2008. Distributions comprised of dividends
from domestic corporations and certain foreign corporations (generally,
corporations incorporated in a possession of the United States, some
corporations eligible for treaty benefits under a treaty with the United States
and corporations whose stock is readily tradable on an established securities
market in the United States) are treated as "qualified dividend income" eligible
for taxation at a maximum tax rate of 15% in the hands of non-corporate
shareholders. A certain portion of the Fund's dividends when paid by a RIC to
non-corporate shareholders may be eligible for treatment as qualified dividend
income. In order for dividends paid by the Fund to be qualified dividend income,
the Fund must meet holding period and certain other requirements with respect to
the dividend-paying stocks in its portfolio and the non-corporate shareholder
must meet holding period and certain other requirements with respect to the
Fund's shares. To the extent that a Fund engages in securities lending with
respect to stock paying qualified dividend income, it may be limited in its
ability to pay qualified dividend income to its shareholders.

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

Ordinary income and capital gain dividends are taxable to shareholders even if
they are reinvested in additional shares of a Fund. A portion of a Fund's
ordinary income dividends attributable to the dividends received from domestic
corporations will be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. Each Fund will
allocate any dividends eligible for the dividends received deduction as well as
any qualified dividend income eligible for taxation at the maximum 15% rate,
among each class of the Fund's shares according to a method (which it believes
is consistent with the Commission rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to
shareholders of each class of stock during the taxable year, or such other
method as the Internal Revenue Service may prescribe. To the extent that a
Fund's dividends are attributable to dividends received from foreign
corporations, payments on certain types of preferred stock and other
distributions ineligible for the deduction, they will not qualify for the
dividends received deduction. If a Fund pays a dividend in January that was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which the dividend was declared.



                                     II-64


For the Select Pricing Funds no gain or loss will be recognized by Class B
shareholders on the conversion of their Class B shares into Class A shares. A
shareholder's tax basis in the Class A shares acquired upon conversion will be
the same as the shareholder's tax basis in the converted Class B shares, and
the holding period of the acquired Class A shares will include the holding
period for the converted Class B shares.

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

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


Certain Funds may invest in zero coupon U.S. Treasury bonds and other debt
securities that are issued at a discount or provide for deferred interest. Even
though a Fund receives no actual interest payments on these securities, it will
be deemed to receive income equal, generally, to a portion of the excess of the
face value of the securities over their issue price ("original issue discount")
each year that the securities are held. Since the original issue discount
income earned by a Fund in a taxable year may not be represented by cash
income, it may have to dispose of securities, which it might otherwise have
continued to hold, or borrow to generate cash in order to satisfy its
distribution requirements. In addition, a Fund's investment in foreign
currencies or foreign currency denominated or referenced debt securities,
certain asset-backed securities and contingent payment and inflation-indexed
debt instruments also may increase or accelerate the Fund's recognition of
income, including the recognition of taxable income in excess of cash generated
by such investments.


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


Under certain provisions of the Code, some shareholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amount withheld generally may be allowed as a refund or a
credit against a shareholder's Federal income tax liability, provided that the
required information is timely forwarded to the IRS.


Dividends and interest received by a Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
foreign countries and the U.S. may reduce or eliminate such taxes. Shareholders
of certain Funds that invest more than 50% of the value of their assets at the
close of a taxable year in foreign securities may be able to claim U.S. foreign
tax credits with respect to such foreign taxes paid by the Fund, subject to
certain requirements and limitations contained in the Code. For example,
certain retirement accounts and certain tax-exempt organizations cannot claim
foreign tax credits on investments in foreign securities held in a Fund. In
addition, a foreign tax credit may be claimed with respect to withholding tax
on a dividend only if the shareholder meets certain holding period
requirements. A Fund also must meet these holding period requirements, and if a
Fund fails to do so, it will not be able to "pass through" to shareholders the
ability to claim a credit or a deduction for the related


                                     II-65



foreign taxes paid by the Fund. Further, to the extent that a Fund engages in
securities lending with respect to security paying income subject to foreign
taxes, it may not be able to pass through to its shareholders the ability to
take a foreign tax credit. If a Fund satisfies the applicable requirements,
such Fund will be eligible to file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their proportionate shares of such foreign taxes in their U.S. income tax
returns as gross income, treat such proportionate shares as taxes paid by them,
and deduct such proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their U.S. income taxes.
No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding
tax on the income resulting from a Fund's election described in this paragraph
but may not be able to claim a credit or deduction against such U.S. tax for
the foreign taxes treated as having been paid by such shareholder. A Fund will
report annually to its shareholders the amount per share of such foreign taxes
and other information needed to claim the foreign tax credit. For this purpose,
a Fund will allocate foreign source income among each class of shareholders
according to a method similar to that described above for the allocation of
dividends eligible for the dividends-received deduction and dividends taxable
at the maximum 15% tax rate.

Certain transactions entered into by the Funds are subject to special tax rules
of the Code that may, among other things, (a) affect the character of gains and
losses realized, (b) disallow, suspend or otherwise limit the allowance of
certain losses or deductions, and (c) accelerate the recognition of income
without a corresponding receipt of cash (with which to make the necessary
distributions to satisfy distribution requirements applicable to RICs).
Operation of these rules could, therefore, affect the character, amount and
timing of distributions to shareholders. Special tax rules also may require a
Fund to mark to market certain types of positions in its portfolio (i.e., treat
them as sold on the last day of the taxable year), and may result in the
recognition of income without a corresponding receipt of cash. Funds engaging
in transactions affected by these provisions intend to monitor their
transactions, make appropriate tax elections and make appropriate entries in
their books and records to lessen the effect of these tax rules and avoid any
possible disqualification for the special treatment afforded RICs under the
Code.


PASSIVE FOREIGN INVESTMENT COMPANIES


If a Fund purchases shares of an investment company (or similar investment
entity) organized under foreign law, the Fund will generally be treated as
owning shares in a passive foreign investment company ("PFIC") for U.S. Federal
income tax purposes. A Fund may be subject to U.S. Federal income tax, and an
interest charge (at the rate applicable to tax underpayments) on tax liability
treated as having been deferred with respect to certain distributions from such
a company and on gain from the disposition of the shares of such a company
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its shareholders. However,
a Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, a Fund would recognize
as ordinary income any increase in the value of such shares as of the close of
the taxable year over their adjusted tax basis and as ordinary loss any
decrease in such value but only to the extent of previously recognized
"mark-to-market" gains. By making the mark-to-market election, a Fund could
avoid imposition of the interest charge with respect to excess distributions
from PFICs, but in any particular year might be required to recognize income in
excess of the distributions it received from PFICs.


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

Ordinary income and capital gain dividends may also be subject to state and
local taxes.

                                     II-66


Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.

Shareholders of each Fund are urged to consult their tax advisers regarding
specific questions as to Federal, foreign, state or local taxes with respect to
their Fund. Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in a Fund.


In the case of a Feeder Fund, such Fund is entitled to look to the underlying
assets of the Master Portfolio in which it has invested for purposes of
satisfying various qualification requirements of the Code applicable to RICs.
Each Master Portfolio is classified as a partnership for U.S. Federal income
tax purposes. If applicable tax provisions were to change, then the Board of a
Feeder Fund will determine, in its discretion, the appropriate course of action
for the Feeder Fund. One possible course of action would be to withdraw the
Feeder Fund's investments from the Master Portfolio and to retain an investment
manager to manage the Feeder Fund's assets in accordance with the investment
policies applicable to the Feeder Fund.



PERFORMANCE DATA


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

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

Quotations of average annual total return, after taxes, on dividends for the
specified periods are computed by finding the average annual compounded rates
of return that would equate the initial amount invested to the ending value of
such investment at the end of each period assuming payment of taxes on
dividends received during such period. Average annual total return after taxes
on dividends is computed assuming all dividends, less the taxes due on such
dividends, are reinvested and taking into account all applicable recurring and
nonrecurring expenses, including the maximum sales charge, in the case of Class
A and Class I shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares. The taxes due on dividends are calculated by
applying to each dividend the highest applicable marginal Federal individual
income tax rates in effect on the reinvestment date for that dividend. The
rates used correspond to the tax character (including eligibility for the
maximum 15% tax rate applicable to qualified dividend income) of each dividend.
The taxable amount and tax character of each dividend are specified by each
Fund on the dividend declaration date, but may be adjusted to reflect
subsequent recharacterizations of distributions. The applicable tax rates may
vary over the measurement period. The effects of state and local taxes are not
reflected. Applicable tax credits, such as foreign credits, are taken into
account according to Federal law. The ending value is determined assuming
complete redemption at the end of the applicable periods with no tax
consequences associated with such redemption.



                                     II-67



Quotations of average annual total return, after taxes, on both dividends and
redemption for the specified periods are computed by finding the average annual
compounded rates of return that would equate the initial amount invested to the
ending value of such investment at the end of each period assuming payment of
taxes on dividends received during such period as well as on complete
redemption. Average annual total return after taxes on distributions and
redemption is computed assuming all dividends, less the taxes due on such
dividends, are reinvested and taking into account all applicable recurring and
nonrecurring expenses, including the maximum sales charge in the case of Class
A and Class I shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares and assuming, for all classes of shares, complete
redemption and payment of taxes due on such redemption. The ending value is
determined assuming complete redemption at the end of the applicable periods,
subtracting capital gains taxes resulting from the redemption and adding the
presumed tax benefit from capital losses resulting from redemption. The taxes
due on dividends and on the deemed redemption are calculated by applying the
highest applicable marginal Federal individual income tax rates in effect on
the reinvestment and/or the redemption date. The rates used correspond to the
tax character (including eligibility for the maximum 15% tax rate applicable to
qualified dividend income) of each component of each dividend and/or the
redemption payment. The applicable tax rates may vary over the measurement
period. The effects of state and local taxes are not reflected.

A Fund also may quote annual, average annual and annualized total return and
aggregate total return performance data, both as a percentage and as a dollar
amount based on a hypothetical investment of $1,000 or some other amount, for
various periods other than those noted below. Such data will be computed as
described above, except that (1) as required by the periods of the quotations,
actual annual, annualized or aggregate data, rather than average annual data,
may be quoted and (2) the maximum applicable sales charges will not be included
with respect to annual or annualized rates of return calculations. Aside from
the impact on the performance data calculations of including or excluding the
maximum applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.


Yield quotations will be computed based on a 30-day period by dividing (a) the
net income based on the yield of each security earned during the period by (b)
the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period.


See Part I, Section VIII "Fund Performance" of each Fund's Statement of
Additional Information for performance information for the Class A, Class B,
Class C, Class I and, if applicable, Class R shares of your Fund for the
periods indicated.


A Fund's total return will vary depending on market conditions, the securities
comprising a Fund's portfolio, a Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The
value of an investment in a Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.


In order to reflect the reduced sales charges in the case of Class A or Class I
shares or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by a Fund in
advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the CDSC waiver and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.



On occasion, a Fund may compare its performance to, among other things, the
Fund's benchmark index indicated in the Prospectus, the Value Line Composite
Index, the Dow Jones Industrial Average, or


                                     II-68



to other published indices, or to performance data published by Lipper
Analytical Services, Inc., Morningstar Inc. ("MorningStar"), Money Magazine,
U.S. News & World Report, BusinessWeek, Forbes Magazine, Fortune Magazine or
other industry publications. When comparing its performance to a market index,
a Fund may refer to various statistical measures derived from the historic
performance of a Fund and the index, such as standard deviation and beta. As
with other performance data, performance comparisons should not be considered
indicative of a Fund's relative performance for any future period. In addition,
from time to time a Fund may include the Fund's Morningstar risk-adjusted
performance ratings assigned by Morningstar in advertising or supplemental
sales literature. From time to time a Fund may quote in advertisements or other
materials other applicable measures of Fund performance and may also make
reference to awards that may be given to the Manager. Certain Funds may also
compare their performance to composite indices developed by Fund Management.


A Fund may provide information designed to help investors understand how the
Fund is seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market, political or
other conditions, descriptive information or general principles of investing
such as asset allocation, diversification and risk tolerance, discussion of a
Fund's portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Fund's performance or portfolio composition to
that of other funds or types of investments, indices relevant to the comparison
being made, or to a hypothetical or model portfolio. A Fund may also quote
various measures of volatility and benchmark correlation in advertising and
other materials, and may compare these measures to those of other funds or
types of investments.


PROXY VOTING POLICIES AND PROCEDURES



Each Fund's Board of Directors has delegated to the Manager authority to vote
all proxies relating to the Fund's portfolio securities. The Manager has
adopted policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the account of
one or more of its clients, including a Fund. Pursuant to these Proxy Voting
Procedures, the Manager's primary objective when voting proxies is to make
proxy voting decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Manager believes is most likely
to enhance the economic value of the securities held by the Fund. The Proxy
Voting Procedures are designed to ensure that the Manager considers the
interests of its clients, including the Funds, and not the interests of the
Manager, when voting proxies and that real (or perceived) material conflicts
that may arise between the Manager's interest and those of the Manager's
clients are properly addressed and resolved.


In order to implement the Proxy Voting Procedures, the Manager has formed a
Proxy Voting Committee (the "Committee"). The Committee is comprised of the
Manager's Chief Investment Officer (the "CIO"), one or more other senior
investment professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel the CIO deems
appropriate. The Committee will also include two non-voting representatives
from the Manager's legal department appointed by the Manager's General Counsel.
The Committee's membership shall be limited to full-time employees of the
Manager. No person with any investment banking, trading, retail brokerage or
research responsibilities for the Manager's affiliates may serve as a member of
the Committee or participate in its decision making (except to the extent such
person is asked by the Committee to present information to the Committee, on
the same basis as other interested knowledgeable parties not affiliated with
the Manager might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy voting
authority to the Manager and seeks to ensure that all votes are consistent with
the best interests of those clients and are free from unwarranted and
inappropriate influences. The Committee establishes general proxy voting
policies for the Manager and is responsible for determining how those policies
are applied to specific proxy votes, in light of each issuer's unique
structure, management, strategic options and, in certain circumstances,
probable economic and other


                                     II-69


anticipated consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its generally
stated policies. In addition, the Committee will be responsible for ensuring
that all reporting and recordkeeping requirements related to proxy voting are
fulfilled.

The Committee may determine that the subject matter of a recurring proxy issue
is not suitable for general voting policies and requires a case-by-case
determination. In such cases, the Committee may elect not to adopt a specific
voting policy applicable to that issue. The Manager believes that certain proxy
voting issues require investment analysis -- such as approval of mergers and
other significant corporate transactions -- akin to investment decisions, and
are, therefore, not suitable for general guidelines. The Committee may elect to
adopt a common position for the Manager on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager to make
individual decisions on how best to maximize economic value for a Fund (similar
to normal buy/sell investment decisions made by such portfolio managers). While
it is expected that the Manager will generally seek to vote proxies over which
the Manager exercises voting authority in a uniform manner for all the
Manager's clients, the Committee, in conjunction with a Fund's portfolio
manager, may determine that the Fund's specific circumstances require that its
proxies be voted differently.

To assist the Manager in voting proxies, the Committee has retained
Institutional Shareholder Services ("ISS"). ISS is an independent adviser that
specializes in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to the Manager by ISS
include in-depth research, voting recommendations (although the Manager is not
obligated to follow such recommendations), vote execution, and recordkeeping.
ISS will also assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.

The Manager's Proxy Voting Procedures also address special circumstances that
can arise in connection with proxy voting. For instance, under the Proxy Voting
Procedures, the Manager generally will not seek to vote proxies related to
portfolio securities that are on loan, although it may do so under certain
circumstances. In addition, the Manager will vote proxies related to securities
of foreign issuers only on a best efforts basis and may elect not to vote at
all in certain countries where the Committee determines that the costs
associated with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such action is
in the best interests of a Fund.


From time to time, the Manager may be required to vote proxies in respect of an
issuer where an affiliate of the Manager (each, an "Affiliate"), or a money
management or other client of the Manager, including investment companies for
which the Manager provides investment advisory, administrative and/or other
services (each, a "Client") is involved. The Proxy Voting Procedures and the
Manager's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or
if the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary
to advise the Committee on how to vote or to cast votes on behalf of the
Manager's clients.

In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the Committee may pass the voting power to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do not
include contact with the Client and whose job evaluations would not be affected
by the Manager's relationship with the Client (or failure to retain



                                     II-70


such relationship). The subcommittee shall determine whether and how to vote
all proxies on behalf of the Manager's clients or, if the proxy matter is, in
their judgment, akin to an investment decision, to defer to the applicable
portfolio managers, provided that, if the subcommittee determines to alter the
Manager's normal voting guidelines or, on matters where the Manager's policy is
case-by-case, does not follow the voting recommendation of any proxy voting
service or other independent fiduciary that may be retained to provide research
or advice to the Manager on that matter, no proxies relating to the Client may
be voted unless the Secretary, or in the Secretary's absence, the Assistant
Secretary of the Committee concurs that the subcommittee's determination is
consistent with the Manager's fiduciary duties.

In addition to the general principles outlined above, the Manager has adopted
voting guidelines with respect to certain recurring proxy issues that are not
expected to involve unusual circumstances. These policies are guidelines only,
and the Manager may elect to vote differently from the recommendation set forth
in a voting guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any time upon
the request of a Committee member and may be amended or deleted upon the vote
of a majority of Committee members present at a Committee meeting at which
there is a quorum.

The Manager has adopted specific voting guidelines with respect to the
following proxy issues:


    o   Proposals related to the composition of the Board of Directors of
        issuers other than investment companies. As a general matter, the
        Committee believes that a company's Board of Directors (rather than
        shareholders) is most likely to have access to important, nonpublic
        information regarding a company's business and prospects, and is
        therefore best-positioned to set corporate policy and oversee
        management. The Committee, therefore, believes that the foundation of
        good corporate governance is the election of qualified, independent
        corporate directors who are likely to diligently represent the interests
        of shareholders and oversee management of the corporation in a manner
        that will seek to maximize shareholder value over time. In individual
        cases, the Committee may look at a nominee's number of other
        directorships, history of representing shareholder interests as a
        director of other companies or other factors, to the extent the
        Committee deems relevant.


    o   Proposals related to the selection of an issuer's independent auditors.
        As a general matter, the Committee believes that corporate auditors have
        a responsibility to represent the interests of shareholders and provide
        an independent view on the propriety of financial reporting decisions of
        corporate management. While the Committee will generally defer to a
        corporation's choice of auditor, in individual cases, the Committee may
        look at an auditors' history of representing shareholder interests as
        auditor of other companies, to the extent the Committee deems relevant.

    o   Proposals related to management compensation and employee benefits. As a
        general matter, the Committee favors disclosure of an issuer's
        compensation and benefit policies and opposes excessive compensation,
        but believes that compensation matters are normally best determined by
        an issuer's board of directors, rather than shareholders. Proposals to
        "micro-manage" an issuer's compensation practices or to set arbitrary
        restrictions on compensation or benefits will, therefore, generally not
        be supported.

    o   Proposals related to requests, principally from management, for approval
        of amendments that would alter an issuer's capital structure. As a
        general matter, the Committee will support requests that enhance the
        rights of common shareholders and oppose requests that appear to be
        unreasonably dilutive.

    o   Proposals related to requests for approval of amendments to an issuer's
        charter or by-laws. As a general matter, the Committee opposes poison
        pill provisions.

    o   Routine proposals related to requests regarding the formalities of
        corporate meetings.

                                     II-71



    o   Proposals related to proxy issues associated solely with holdings of
        investment company shares. As with other types of companies, the
        Committee believes that a fund's Board of Directors (rather than its
        shareholders) is best positioned to set fund policy and oversee
        management. However, the Committee opposes granting Boards of Directors
        authority over certain matters, such as changes to a fund's investment
        objective, which the Investment Company Act envisions will be approved
        directly by shareholders.


    o   Proposals related to limiting corporate conduct in some manner that
        relates to the shareholder's environmental or social concerns. The
        Committee generally believes that annual shareholder meetings are
        inappropriate forums for discussion of larger social issues, and opposes
        shareholder resolutions "micromanaging" corporate conduct or requesting
        release of information that would not help a shareholder evaluate an
        investment in the corporation as an economic matter. While the Committee
        is generally supportive of proposals to require corporate disclosure of
        matters that seem relevant and material to the economic interests of
        shareholders, the Committee is generally not supportive of proposals to
        require disclosure of corporate matters for other purposes.

Information about how a Fund voted proxies relating to securities held in the
Fund's portfolio during the most recent 12 month period ended June 30 is
available without charge (1) at www.mutualfunds.ml.com and (2) on the
Commission's web site at http://www.sec.gov.


GENERAL INFORMATION


DESCRIPTION OF SHARES


Shareholders of a Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and
generally on other matters submitted to the vote of shareholders of the Fund.
Shareholders of a class that bears distribution and/or account maintenance
expenses have exclusive voting rights with respect to matters relating to such
distribution and account maintenance expenditures (except that Class B
shareholders may vote upon any material changes to such expenses charged under
the Class A Distribution Plan). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the Directors of a Fund, in which event the
holders of the remaining shares would be unable to elect any person as a
Director.

Each Fund does not intend to hold annual meetings of shareholders in any year
in which the Investment Company Act does not require shareholders to act upon
any of the following matters: (i) election of Directors; (ii) approval of a
management agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent accountants. Shares issued are fully
paid and non-assessable and have no preemptive rights. Redemption and
conversion rights are discussed elsewhere herein and in each Fund's Prospectus.
Each share of Class A, Class B, Class C, Class I and Class R Common Stock is
entitled to participate equally in dividends and distributions declared by a
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities.


For Funds organized as Maryland corporations, the by-laws of the Fund require
that a special meeting of shareholders be held upon the written request of a
minimum percentage of the outstanding shares of the Fund entitled to vote at
such meeting, if they comply with applicable Maryland law.

Certain of the Funds are organized as "Massachusetts business trusts." Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust establishing a trust, a copy of which for
each applicable Fund, together with all amendments thereto (the "Declaration of
Trust"), is on file in the office of the Secretary of the Commonwealth of
Massachusetts, contains an express disclaimer of shareholder liability for acts
or obligations of the trust and provides for indemnification and reimbursement
of expenses


                                     II-72



out of the trust property for any shareholder held personally liable for the
obligations of the trust. The Declaration of Trust also provides that a trust
may maintain appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.



See Part I, Section IX "Additional Information -- Description of Shares" of
each Fund's Statement of Additional Information for additional capital stock
information for your Fund.


ADDITIONAL INFORMATION


Under a separate agreement, ML & Co. has granted each Fund the right to use the
"Merrill Lynch" name and has reserved the right to withdraw its consent to the
use of such name by a Fund at any time or to grant the use of such name to any
other company, and each Fund has granted ML & Co. under certain conditions, the
use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.



See Part I, Section IX "Additional Information -- Principal Shareholders"
section of each Fund's Statement of Additional Information for information on
the holders of 5% or more of any class of shares of your Fund.

                                     II-73



                                   APPENDIX A

                          DESCRIPTION OF BOND RATINGS


DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") BOND RATINGS

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

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

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

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

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

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

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

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

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

Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.


DESCRIPTION OF MOODY'S U.S. SHORT-TERM RATINGS

MIG 1/VMIG 1     This designation denotes superior credit quality. Excellent
                 protection is afforded by established cash flows, highly
                 reliable liquidity support, or demonstrated broad-based access
                 to the market for refinancing.


                                      A-1


MIG 2/VMIG 2     This designation denotes strong credit quality. Margins of
                 protection are ample, although not as large as in the preceding
                 group.

MIG 3/VMIG 3     This designation denotes acceptable credit quality. Liquidity
                 and cash-flow protection may be narrow, and market access for
                 refinancing is likely to be less well-established.

SG               This designation denotes speculative-grade credit quality. Debt
                 instruments in this category may lack sufficient margins of
                 protection.



DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS /DEMAND OBLIGATION RATINGS

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

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

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

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


Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.



DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S"), DEBT RATINGS

A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.

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

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

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

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


                                      A-2


II. Nature of and provisions of the obligation;

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

LONG TERM ISSUE CREDIT RATINGS


AAA                 An obligation rated "AAA" has the highest rating assigned by
                    Standard & Poor's. Capacity to meet its financial commitment
                    on the obligation is extremely strong.

AA                  An obligation rated "AA" differs from the highest rated
                    issues only in small degree. The Obligor's capacity to meet
                    its financial commitment on the obligation is very strong.

A                   An obligation rated "A" is somewhat more susceptible to the
                    adverse effects of changes in circumstances and economic
                    conditions than debt in higher-rated categories. However,
                    the obligor's capacity to meet its financial commitment on
                    the obligation is still strong.

BBB                 An obligation rated "BBB" exhibits adequate protection
                    parameters. However, adverse economic conditions or changing
                    circumstances are more likely to lead to a weakened capacity
                    of the obligor to meet its financial commitment on the
                    obligation.

BB, B, CCC, CC, C   An obligation rated "BB," "B," "CCC," "CC" and "C" are
                    regarded as having significant speculative characteristics.
                    "BB" indicates the least degree of speculation and "C" the
                    highest degree of speculation. While such debt will likely
                    have some quality and protective characteristics, these may
                    be outweighed by large uncertainties or major risk exposures
                    to adverse conditions.

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

c                   The 'c' subscript is used to provide additional information
                    to investors that the bank may terminate its obligation to
                    purchase tendered bonds if the long term credit rating of
                    the issuer is below an investment-grade level and/or the
                    issuer's bonds are deemed taxable.

p                   The letter 'p' indicates that the rating is provisional. A
                    provisional rating assumes the successful completion of the
                    project financed by the debt being rated and indicates that
                    payment of debt service requirements is largely or entirely
                    dependent upon the successful, timely completion of the
                    project. This rating, however, while addressing credit
                    quality subsequent to the completion of the project, makes
                    no comment on the likelihood of or the risk of default upon
                    failure of such completion. The investor should exercise his
                    own judgment with respect to such likelihood and risk.

*                   Continuance of the ratings is contingent upon Standard &
                    Poor's receipt of an executed copy of the escrow agreement
                    or closing documentation confirming investments and cash
                    flows.

r                   This symbol is attached to the ratings of instruments with
                    significant noncredit risks. It highlights risks to
                    principal or volatility of expected returns which are not
                    addressed in the credit rating.

N.R.                This indicates that no rating has been requested, that there
                    is insufficient information on which to base a rating, or
                    that Standard & Poor's does not rate a particular obligation
                    as a matter of policy.


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

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment

                                      A-3


of debt having an original maturity of no more than 365 days. Ratings are
graded into several categories, ranging from "A-1" for the highest-quality
obligations to "D" for the lowest. These categories are as follows:

A-1     A short-term obligation rated "A-1" is rated in the highest category by
        Standard & Poor's. The obligor's capacity to meet its financial
        commitment on the obligation is strong. Within this category, certain
        obligations are designated with a plus sign (+). This indicates that the
        obligor's capacity to meet its financial commitment on these obligations
        is extremely strong.

A-2     A short-term obligation rated "A-2" is somewhat more susceptible to the
        adverse effects of changes in circumstances and economic conditions than
        obligations in higher rating categories. However, the obligor's capacity
        to meet its financial commitment on the obligation is satisfactory.

A-3     A short-term obligation rated "A-3" exhibits adequate protection
        parameters. However, adverse economic conditions or changing
        circumstances are more likely to lead to a weakened capacity of the
        obligor to meet its financial commitment on the obligation.

B       A short-term obligation rated "B" is regarded as having significant
        speculative characteristics. The obligor currently has the capacity to
        meet its financial commitment on the obligation; however, it faces major
        ongoing uncertainties that could lead to the obligor's inadequate
        capacity to meet its financial commitment on the obligation.

C       A short-term obligation rated "C" is currently vulnerable to nonpayment
        and is dependent upon favorable business, financial and economic
        conditions for the obligor to meet its financial commitment on the
        obligation.

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

c       The "c" subscript is used to provide additional information to investors
        that the bank may terminate its obligation to purchase tendered bonds if
        the long term credit rating of the issuer is below an investment-grade
        level and/or the issuer's bonds are deemed taxable.

p       The letter "p" indicates that the rating is provisional. A provisional
        rating assumes the successful completion of the project financed by the
        debt being rated and indicates that payment of debt service requirements
        is largely or entirely dependent upon the successful, timely completion
        of the project. This rating, however, while addressing credit quality
        subsequent to completion of the project, makes no comment on the
        likelihood of or the risk of default upon failure of such completion.
        The investor should exercise his own judgment with respect to such
        likelihood and risk.

*       Continuance of the ratings is contingent upon Standard & Poor's receipt
        of an executed copy of the escrow agreement or closing.

r       The "r" highlights derivative, hybrid, and certain other obligations
        that Standard & Poor's believes may experience high volatility or high
        variability in expected returns as a result of noncredit risks. Examples
        of such obligations are securities with principal or interest return
        indexed to equities, commodities, or currencies; certain swaps and
        options, and interest-only and principal-only mortgage securities. The
        absence of an "r" symbol should not be taken as an indication that an
        obligation will exhibit no volatility or variability in total return.


                                      A-4


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


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

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

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


Note rating symbols are as follows:


SP-1     Strong capacity to pay principal and interest. An issue determined to
         possess a very strong capacity to pay debt service is given a plus (+)
         designation.

SP-2     Satisfactory capacity to pay principal and interest with some
         vulnerability to adverse financial and economic changes over the term
         of the notes.

SP-3     Speculative capacity to pay principal and interest.

DESCRIPTION OF FITCH RATINGS' ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The rating represents
Fitch's assessment of the issuer's ability to meet the obligations of a
specific debt issue or class of debt in a timely manner.


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


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


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


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


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

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


                                      A-5


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

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

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


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

DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation. The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer and any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength.

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

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

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

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

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

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

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

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


                                      A-6


DESCRIPTION OF FITCH'S SHORT TERM RATINGS
Fitch's short term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and investment notes.

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

Fitch short term ratings are as follows:


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

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

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

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

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

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

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

NR              Indicates that Fitch does not rate the specific issue.

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

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

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

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


Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.

                                      A-7


CODE #

                           PART C. OTHER INFORMATION


ITEM 23.  EXHIBITS.






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

      1(a)     --     Articles of Incorporation of the Registrant. (1)
       (b)     --     Articles of Amendment. (5)
       (c)     --     Articles Supplementary. (5)
       (d)     --     Amendment to Articles of Incorporation. (12)
      2        --     Amended and Restated By-Laws of the Registrant, dated April 14, 2003.*
      3        --     Instruments defining rights of Shareholders. (Incorporated by reference to Exhibits 1
                      and 2 above).
      4(a)     --     Management Agreement between the Registrant and Merrill Lynch Investment
                      Managers, L.P. ("MLIM" or the "Investment Adviser").(3)
       (b)     --     Sub-Advisory Agreement between the Investment Adviser and Merrill Lynch Asset
                      Management U.K. Limited.(7)
       (c)     --     Supplement to the Investment Advisory Agreement between the Registrant and the
                      Manager, dated January 13, 1994.*
      5        --     Form of Distribution Agreement between the Registrant and FAM Distributors,
                      Inc.(13)
      6        --     None.
      7        --     Form of Custody Agreement between the Registrant and JPMorgan Chase Bank.(14)
      8(a)     --     Form of Unified Transfer Agency between the Registrant and Financial Data Services,
                      Inc. Dividend Disbursing Agency and Shareholder Servicing Agency Agreement.(19)
       (b)     --     License Agreement relating to Use of Name between Merrill Lynch & Co., Inc. and
                      the Registrant.(3)
     (c)(1)    --     Amended and Restated Credit Agreement among the Registrant and a syndicate of
                      banks.(17)
     (c)(2)    --     Form of Second Amended and Restated Credit Agreement among the Fund, a
                      syndicate of banks and certain other parties.(18)
     (c)(3)    --     Form of Third Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties.(15)
     (c)(4)    --     Form of Fourth Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties.(20)
     (c)(5)    --     Form of Fifth Amended and Restated Credit Agreement among the Registrant, a
                      syndicate of banks and certain other parties.(8)
       (d)     --     Administrative Services Agreement between the Registrant and State Street Bank and
                      Trust Company.(11)
       (e)     --     Securities Lending Agency Agreement between the Registrant and QA Advisors LLC
                      (now MLIM LLC) dated August 10, 2001.(16)
      9        --     Opinion of Shearman & Sterling, counsel for the Registrant.(14)
     10        --     Consent of Deloitte & Touche LLP, independent registered public accounting firm for
                      the Registrant.*
     11        --     None.
     12        --     Certificate of the Investment Adviser.(2)
     13(a)     --     Amended and Restated Class A Distribution Plan.(6)
       (b)     --     Form of Amended and Restated Class B Distribution Plan.(13)
       (c)     --     Form of Amended and Restated Class C Distribution Plan.(13)
     14(a)     --     Revised Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(6)
       (b)     --     Powers of Attorney for Officers and Directors.(9)
     15        --     Code of Ethics.(10)
     16        --     Power of Attorney.(21)



* Filed herewith.

                                      C-1

---------------------
 1)      INCORPORATED BY REFERENCE TO EXHIBIT 1 TO THE REGISTRANT'S INITIAL
         REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 33-37103)
(2)      Incorporated by reference to the identically numbered exhibit numbers
         to Post-Effective Amendment No. 2 to the Registrant's Registration
         Statement on Form N-1A (File No. 33-37103).
(3)      Incorporated by reference to the corresponding exhibit numbers to
         Post-Effective Amendment No. 1 to the Registration Statement on Form
         N-1A (File No. 33-37103), as set forth below:

Exhibit  Incorporated by Reference to Exhibit  Number
Number
------
  4(a)   5
  8(b)   9(b)
(4)      Incorporated by reference to the identically numbered exhibit to
         Post-Effective Amendment No. 6 to the Registrant's Registration
         Statement on Form N-1A (File No. 33-37103) filed on October 12, 1994.

(5)      Incorporated by reference to the identically numbered exhibits to
         Post-Effective Amendment No. 7 to the Registrant's Registration
         Statement on Form N-1A (File No. 33-37103) filed on March 28, 1995.

(6)      Incorporated by reference to Exhibits 13(a) and 14 to Post-Effective
         Amendment No. 36 to the Registration Statement on Form N-1A of Merrill
         Lynch Pacific Fund, Inc. (File No. 2-56978), filed on April 17, 2003.
(7)      Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment
         No. 10 to the Registrant's Registration Statement on Form N-1A (File
         No. 33-37103) filed on March 3, 1998.


(8)      Incorporated by reference to Exhibit 8(c)(5) to Post-Effective
         Amendment No. 35 to the Registration Statement on Form N-1A of Merrill
         Lynch Bond Fund, Inc. (File No. 2-62329), Filed on January 14, 2005.

(9)      Incorporated by reference to Exhibit 14(b) to Post-Effective Amendment
         No. 16 to the Registration Statement on Form N-1A of Merrill Lynch
         Strategic Dividend Fund (File Nos. 33-14517 and 811-5178) filed on
         November 28, 2000.
(10)     Incorporated by reference to Exhibit 15 to Pre-Effective Amendment No.
         1 to the Registration Statement on Form N-1A of Merrill Lynch Inflation
         Protected Fund (File No. 333-110936) filed on January 22, 2004.
(11)     Incorporated by reference to Exhibit 8(d) to Post-Effective Amendment
         No. 1 to the Registration Statement on Form N-1A of Merrill Lynch Focus
         Twenty Fund, Inc. filed on March 20, 2001 (File No. 333-89775).
(12)     Incorporated by reference to the corresponding exhibit number to
         Post-Effective Amendment No. 14 to the Registration Statement on Form
         N-1A filed on March 16, 2001 (File No. 33-37103).

(13)     Incorporated by reference to the identically numbered exhibit to
         Post-Effective Amendment No. 10 to the Registration Statement under the
         Securities Act of 1933 on Form N-1A of Merrill Lynch Americas Income
         Fund, Inc. as filed on June 21, 2000 (File No. 33-64398).

(14)     Incorporated by reference from Exhibit 7 to Post-Effective Amendment
         No. 3 to the Registration Statement on Form N-1A of Merrill Lynch
         Strategy Series, Inc. (File No. 333-88849) filed on March 28, 2002.
(15)     Incorporated by reference to Exhibit (b)(3) to the Issuer Tender Offer
         Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund,
         Inc. (File No. 333-39837), filed on December 13, 2002.
(16)     Incorporated by reference to Exhibit 8(f) to Post-Effective Amendment
         No. 5 to the Registration Statement on Form N-1A of Merrill Lynch
         Global Technology Fund, Inc. (File No. 333-48929), filed on July 24,
         2002.
(17)     Incorporated by reference to Exhibit (b) to the Issuer Tender Offer
         Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund,
         Inc. (File No. 333-15973), filed on December 14, 2000.
(18)     Incorporated by reference to Exhibit (b)(2) of the Issuer Tender Offer
         Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund,
         Inc. (File No. 811-5870), filed with the SEC on December 14, 2001.

(19)     Incorporated by reference to Exhibit 8(a)(1) to Post-Effective
         Amendment No. 35 to the Registration Statement on Form N-1A of Merrill
         Lynch Bond Fund, Inc. (File No. 2-62329) filed on January 14, 2005.

(20)     Incorporated by reference to Exhibit 8(c)(4) to Post-Effective
         Amendment No. 8 to the Registration Statement on Form N-1A of Merrill
         Lynch Global Growth Fund, Inc. (File No. 333-3289) filed on December 4,
         2003.

(21)     Incorporated by reference to Exhibit 16 to Post-Effective Amendment
         No. 21 to the Registration Statement on Form N-1A of Merrill Lynch
         Global Allocation Fund, Inc. (File No. 33-22462) filed on February 14,
         2005.



ITEM 24.  PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

The Registrant does not control and is not under common control with any other
person.


ITEM 25.  INDEMNIFICATION.

Reference is made to Article VI of the Registrant's Articles of Incorporation,
as amended to date, Article VI of the Registrant's Amended and Restated By-Laws
(the "By-Laws") and Section 2-418 of the Maryland General Corporation Law and
Section 9 of the Distribution Agreement.

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


                                      C-2


the conduct of his office, the decision by the Registrant to indemnify such
person must be based upon the reasonable determination of independent counsel
or non-party independent directors, after review of the facts, that such
officer or director is not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.

Each officer and director of the Registrant claiming indemnification within the
scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at
the time the advance is proposed to be made, that there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification.

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

The Registrant may indemnify or purchase insurance to the extent provided in
Article VI on behalf of an employee or agent who is not an officer or director
of the Registrant.

The Registrant has purchased an insurance policy insuring its officers and
Directors against liabilities, and certain costs of defending claims against
such officers and Directors, to the extent such officers and Directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties.

The Management Agreement between the Registrant and MLIM limits the liability
of MLIM to liabilities arising from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations.

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

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


                                      C-3


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 26.  BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.

Merrill Lynch Investment Managers, L.P. ("MLIM" or the "Investment Adviser")
acts as investment adviser for a number of affiliated open-end and closed-end
registered investment companies, and also acts as sub-adviser to certain other
portfolios.

Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment Adviser,
acts as investment adviser for a number of affiliated open-end and closed-end
registered investment companies.

The address of each of these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665. The address of FAM, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of FAM Distributors, Inc. ("FAMD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10080. The address of the Fund's transfer agent, Financial Data Services, Inc.
("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.

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





                                POSITION(S) WITH THE                  OTHER SUBSTANTIAL BUSINESS,
NAME                             INVESTMENT ADVISER                PROFESSION, VOCATION OR EMPLOYMENT
----                             ------------------                ----------------------------------

ML & Co.                Limited Partner                        Financial Services Holding Company;
                                                               Limited Partner of FAM

Princeton Services      General Partner                        General Partner of FAM

Robert C. Doll, Jr.     President                              President of MLIM/FAM-advised funds;
                                                               President of FAM; Co-Head (Americas
                                                               Region) of MLIM from 1999 to 2001;
                                                               President and Director of Princeton
                                                               Services; President of Princeton
                                                               Administrators; Chief Investment Officer
                                                               of OppenheimerFunds, Inc., in 1999 and
                                                               Executive Vice President thereof from
                                                               1991 to 1999

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

Andrew J. Donohue       Senior Vice President and General      Senior Vice President and General
                        Counsel                                Counsel of FAM; Senior Vice President,
                                                               General Counsel and Director of
                                                               Princeton Services; President and
                                                               Director of FAMD

Alice A. Pellegrino     Secretary                              Secretary of FAM, Princeton Services and
                                                               FAMD




Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-adviser
for a number of affiliated registered investment companies advised by FAM or
MLIM. The address of each of these registered



                                      C-4


investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is 33 King William Street, London EC4R 9AS, England.

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





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

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

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

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

Debra Anne Searle      Company Secretary              None



ITEM 27.  PRINCIPAL UNDERWRITERS.


(a) FAMD acts as the principal underwriter for each of the following open-end
registered investment companies including the Registrant: Financial
Institutions Series Trust, Mercury Basic Value Fund, Inc., Mercury Funds II,
Merrill Lynch Balanced Capital Fund, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Bond Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Disciplined Equity Fund, Inc., Merrill Lynch Equity Dividend Fund, Merrill
Lynch EuroFund, Merrill Lynch Focus Twenty Fund, Inc., Merrill Lynch Focus
Value Fund, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Funds for Institutions Series, Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Financial Services Fund, Inc., Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch Inflation
Protected Fund, Merrill Lynch International Fund of Mercury Funds, Inc.,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Large Cap Series Funds,
Inc., Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Natural
Resources Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Principal
Protected Trust, Merrill Lynch Ready Assets Trust, Merrill Lynch Real
Investment Fund, Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short Term U.S. Government Fund, Inc., Merrill Lynch
Value Opportunities Fund, Inc., Merrill Lynch U.S. Government Mortgage Fund,
Merrill Lynch U.S. High Yield Fund, Inc., Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utilities and
Telecommunications Fund, Inc., Merrill Lynch Variable Series Funds, Inc.,
Merrill Lynch World Income Fund, Inc. and The Asset Program, Inc. FAMD also
acts as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch Senior Floating Rate Fund, Inc., and
Merrill Lynch Senior Floating Rate Fund II, Inc.

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


                                      C-5






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

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



(c) Not applicable.


ITEM 28.  LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules thereunder are maintained at
the offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536-9011), and its transfer agent, Financial Data Services, Inc. (4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484).


ITEM 29.  MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the Fund -- Merrill
Lynch Investment Managers" in the Prospectus constituting Part A of the
Registration Statement and under Part I "Management and Advisory Arrangements"
and Part II "Management and Other Service Arrangements" in the Statement of
Additional Information constituting Part B of the Registration Statement for
the Fund, the Registrant is not a party to any management-related service
contract.


ITEM 30.  UNDERTAKINGS.

Not applicable.



                                      C-6


                                   SIGNATURES


Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the
requirements for the effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Plainsboro, and the
State of New Jersey, on March 28, 2005.


                        MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND



                           (Registrant)


                        By: /s/ Donald C. Burke
                            -------------------

                        (Donald C. Burke, Vice President and Treasurer)



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






                SIGNATURE                  TITLE
       Robert C. Doll, Jr.*        President (Principal Executive
---------------------------------  Officer) and Director
       (Robert C. Doll, Jr.)


         Donald C. Burke*          Vice President and Treasurer
---------------------------------  (Principal Financial and
         (Donald C. Burke)         Accounting Officer)


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


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


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


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


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


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


      *By: /s/ Donald C. Burke
-----------------------------------
(Donald C. Burke, Attorney-In-Fact)                               March 28, 2005




                                      C-7

                                  EXHIBIT INDEX

  Exhibit
  Numbers        Description
  -------        ------------

     10      --  Consent of Deloitte & Touche LLP, independent registered public
                 accounting firm for the Registrant.

      2      --  Amended and Restated By-Laws

      4(c)   --  Supplement to Investment Advisory Agreement