KEYSTONE SMALL CAP STOCK FUND, 485BPOS, 1996-08-30

KEYSTONE SMALL CAP STOCK FUND
485BPOS, 1996-08-30

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996.

File Nos. 33-65169 and 811-07457

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 1 X

and

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 2 X

KEYSTONE SMALL COMPANY GROWTH FUND II
(Exact Name of Registrant as Specified in Charter)

200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (617) 338-3200

Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
Boston, MA 02116-5034
(Name and Address of Agent for Service)

It is proposed that this filing will become effective:

X immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i)
on (date) pursuant to paragraph (a)(i)
75 days after filing pursuant to paragraph (a)(ii)
on (date) pursuant to paragraph (a)(ii) of Rule 485.

The Registrant has filed a Declaration pursuant to Rule 24f-2 promulgated under
the Investment Company Act of 1940. A Rule 24f-2 Notice for the Registrant's
fiscal year ended May 31, 1996 was filed on July 26, 1996.

<PAGE>

KEYSTONE SMALL COMPANY GROWTH FUND II

CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT

This Post-Effective Amendment No. 1 to
Registration Statement consists of the following
pages, items of information and documents:

The Facing Sheet

The Contents Page

The Cross-Reference Sheet

PART A

Prospectus

PART B

Statement of Additional Information

PART C

PART C - OTHER INFORMATION - ITEMS 24 (a) and (b)

Financial Statements

Report of Independent Auditors

Exhibit Listing

PART C - OTHER INFORMATION - ITEMS 25-32- AND SIGNATURE PAGES

Number of Holders of Securities

Indemnification

Business and Other Connections

Principal Underwriter

Location of Accounts and Records

Undertakings

Signatures

Exhibits (including Powers of Attorney)

<PAGE>

KEYSTONE SMALL COMPANY GROWTH FUND II

Cross-Reference Sheet pursuant to Rule 495 under the Securities Act
of 1933.

Items in
Part A of
Form N-1A Prospectus Caption

1 Cover Page

2 Fee Table

3 Performance Data

4 Cover Page
The Fund
Investment Objective and Policies
Investment Restrictions
Risk Factors

5 Fund Management and Expenses

6 The Fund
Dividends and Taxes
Fund Shares
Shareholder Services
Pricing Shares

7 How to Buy Shares
Pricing Shares
Shareholder Services

8 How to Redeem Shares

9 Not Applicable

<PAGE>

KEYSTONE SMALL COMPANY GROWTH FUND II

Cross-Reference Sheet continued.

Items in
Part B of
Form N-1A Statement of Additional Information Caption

10 Cover Page

11 Table of Contents

12 Not applicable

13 Investment Objective and Policies
Investment Restrictions
Valuation of Securities
Appendix

14 Trustees and Officers

15 Additional Information

16 Investment Adviser
Principal Underwriter
Additional Information

17 Brokerage

18 Declaration of Trust

19 Valuation of Securities

20 Distributions and Taxes

21 Principal Underwriter

22 Standardized Total Return and Yield Quotations

23 Financial Statements

<PAGE>

KEYSTONE SMALL COMPANY GROWTH FUND II

PART A

PROSPECTUS

KEYSTONE SMALL COMPANY GROWTH FUND II

PROSPECTUS AUGUST 30, 1996

Keystone Small Company Growth Fund II (the "Fund") seeks to provide
long-term growth of capital.

The Fund offers Class A, B, and C shares. Information on share classes and
their fee and sales charge structures may be found in the "Fee Table," "How to
Buy Shares," "Alternative Sales Options," "Contingent Deferred Sales Charge and
Waiver of Sales Charges," "Distribution Plans," and "Fund Shares" sections of
this prospectus.

This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.

Additional information about the Fund is contained in a statement of
additional information dated August 30, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number provided on this page.

KEYSTONE SMALL COMPANY GROWTH FUND II
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

TABLE OF CONTENTS
Page
Fee Table 2
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 7
Risk Factors 7
Pricing Shares 8
Dividends and Taxes 9
Fund Management and Expenses 9
How to Buy Shares 11
Alternative Sales Options 12
Contingent Deferred Sales Charge and
Waiver of Sales Charges 15
Distribution Plans 17
How to Redeem Shares 18
Shareholder Services 19
Performance Data 22
Fund Shares 22
Additional Information 23
Additional Investment Information (i)
Exhibit A A-1

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE SMALL COMPANY GROWTH FUND II

The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of shares of the Fund will
bear directly or indirectly. For more complete descriptions of the various costs
and expenses, see the following sections of this prospectus: "Fund Management
and Expenses"; "How to Buy Shares"; "Alternative Sales Options"; "Contingent
Deferred Sales Charge and Waiver of Sales Charges"; "Distribution Plans"; and
"Shareholder Services."

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- -------------- --------------
<S> <C> <C> <C>

Maximum Sales...................................... 5.75%<F3> None None
Load Imposed on Purchases
(as a percentage of offering price)
Deferred Sales Load ............................... 0.00%<F4> 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original declining to 1.00% in year and 0.00%
purchase price or redemption proceeds) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> ................... $10.00 $10.00 $10.00

ANNUAL FUND OPERATING EXPENSES<F6>
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.70% 0.70% 0.70%
12b-1 Fees ........................................ 0.25% 1.00%<F7> 1.00%<F7>
Other Expenses .................................... 0.96% 0.96% 0.96%
----- ----- -----
Total Fund Operating Expenses
(After Expense Reimbursements) .................. 1.91% 2.66% 2.66%
===== ===== =====

<CAPTION>
EXAMPLES<F8> 1 YEAR 3 YEARS
------ -------
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each period:
<S> <C> <C>
Class A ............................................................................... $76 $114
Class B ............................................................................... $77 $113
Class C ............................................................................... $37 $ 83
You would pay the following expenses on the same investment, assuming no redemption at the
end of each period:
Class A ............................................................................... $76 $114
Class B ............................................................................... $27 $ 83
Class C ............................................................................... $27 $ 83

AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ----------

<FN>
<F1> Class B shares convert tax free to Class A shares after eight years. See "Class B Shares" for more information.

<F2> Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."

<F4> Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge for the 24-month
period following the date of purchase. See the "Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales
Charges" sections of this prospectus for an explanation of the charge.

<F5> There is no fee for exchange orders received by the Fund directly from a shareholder over the Keystone Automated Response
Line ("KARL"). (For a description of KARL, see "Shareholder Services.")

<F6> Expense ratios are estimated for the Fund's fiscal period ending May 31, 1997. Keystone has voluntarily agreed to limit the
expenses of the Fund's Class A, B, and C shares to 1.95%, 2.70%, and 2.70%, respectively, of each such class's average daily
net assets, should expenses exceed those limits. Keystone is under no obligation to maintain these limits. Total Fund
Operating Expenses include indirectly paid expenses. Keystone's voluntary expense limits do not include indirectly paid
expenses.
<F7> Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. ("NASD").

<F8> The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual return
for the Fund may be greater or less than 5%.
[/FN]
</TABLE>
<PAGE>

FINANCIAL HIGHLIGHTS
Keystone Small Company Growth Fund II
Class A Shares
(For a share outstanding throughout the period)

The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional Information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.

February 21, 1996
(Commencement of
Operations) to
May 31, 1996
================================================================================
NET ASSET VALUE BEGINNING OF PERIOD............................ $ 10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss............................................ (0.02)
Net realized and unrealized gain on investments................ 1.17
- --------------------------------------------------------------------------------
Total from investment operations............................... 1.15
- --------------------------------------------------------------------------------
NEW ASSET VALUE END OF PERIOD.................................. $ 11.15
================================================================================
TOTAL RETURN (b)............................................... 11.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................... 2.10%(a)(c)
Total expenses excluding reimbursement....................... 3.70%(c)
Net investment loss.......................................... (1.41%)(c)
Portfolio turnover rate........................................ 13%
Average commissions rate paid per share........................ $0.0607
- --------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS)........................... $ 8,201
================================================================================

FINANCIAL HIGHLIGHTS
Keystone Small Company Growth Fund II
Class B Shares
(For a share outstanding throughout the period)

February 21, 1996
(Commencement of
Operations) to
May 31, 1996
================================================================================
NET ASSET VALUE BEGINNING OF PERIOD............................ $ 10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss............................................ (0.03)
Net realized and unrealized gain on investments................ 1.15
- --------------------------------------------------------------------------------
Total from investment operations............................... 1.12
- --------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD.................................. $ 11.12
================================================================================
TOTAL RETURN (b)............................................... 11.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................... 2.85%(a)(c)
Total expenses excluding reimbursement....................... 4.45%(c)
Net investment loss.......................................... (2.16%)(c)
Portfolio turnover rate........................................ 13%
Average commission rate paid per share......................... $0.0607
- --------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS)........................... $12,487
================================================================================

(a) "Ratio of total expenses to average net assets" for the period ended May
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.70%.
(b) Excluding applicable sales charges.
(c) Annualized.
<PAGE>
FINANCIAL HIGHLIGHTS
Keystone Small Company Growth Fund II
Class C Shares
(For a share outstanding throughout the period)

February 21, 1996
(Commencement of
Operations) to
May 31, 1996
================================================================================
NET ASSET VALUE BEGINNING OF PERIOD............................ $ 10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss............................................ (0.02)
Net realized and unrealized gain on investments................ 1.14
- --------------------------------------------------------------------------------
Total from investment operations............................... 1.12
- --------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD.................................. $ 11.12
================================================================================
TOTAL RETURN (b)............................................... 11.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................... 2.85%(a)(c)
Total expenses excluding reimbursement....................... 4.44%(c)
Net investment loss.......................................... (2.20%)(c)
Portfolio turnover rate........................................ 13%
Average commission rate paid per share......................... $0.0607
- --------------------------------------------------------------------------------
NET ASSETS END OF PERIOD (THOUSANDS)........................... $ 8,315
================================================================================

<PAGE>

THE FUND
The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund was formed as a Massachusetts business
trust on December 13, 1995. The Fund is one of more than 30 mutual funds managed
or advised by Keystone Investment Management Company ("Keystone"), the Fund's
investment adviser.

INVESTMENT OBJECTIVE AND POLICIES

INVESTMENT OBJECTIVE
The Fund's investment objective is to provide shareholders with long-term
growth of capital.

The Fund's objective is fundamental and cannot be changed without the
approval of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 (the "1940 Act"), which means the lesser of (1)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares).

Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective.

PRINCIPAL INVESTMENTS
The Fund invests, under normal circumstances, at least 65% of its total
assets in equity securities of companies with small market capitalizations. For
this purpose, companies with small market capitalizations are those with market
capitalization of less than $1 billion ("small cap") at the time of the Fund's
investment. Companies whose capitalization falls outside this range after the
purchase continue to be considered small cap for this purpose.

While the Fund focuses on small cap stocks, it may also invest in other
types of securities without regard to the market capitalization of the issuer
and which may be listed on national exchanges or traded over the counter,
including other common stocks, debt securities convertible into common stocks or
having common stock characteristics, and rights and warrants to purchase common
stocks.

In addition to its other investment options, the Fund may invest in limited
partnerships, and up to 25% of its assets in foreign securities. The Fund does
not currently intend to invest more than 5% of its assets in foreign securities.

OTHER ELIGIBLE INVESTMENTS
When market conditions warrant, the Fund may invest up to 100% of its
assets for temporary or defensive purposes in money market instruments. Such
instruments, which must mature within one year of their purchase, consist of
United States ("U.S.") government securities; instruments, including
certificates of deposit, demand and time deposits and bankers' acceptances, of
banks that are members of the Federal Deposit Insurance Corporation and have at
least $1 billion in assets as of the date of their most recently published
financial statements, including U.S. branches of foreign banks and foreign
branches of U.S. banks; and prime commercial paper, including master demand
notes. When the Fund invests for defensive purposes, it seeks to limit the risk
of loss of principal and is not pursuing its investment objective.

The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid, securities that
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investment on
its books and (2) limiting its holdings of such securities to 15% of net assets.

The Fund may invest in restricted equity securities, including securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 (the
"1933 Act"). Generally, Rule 144A establishes a safe harbor from the
registration requirements of the 1933 Act for resales by large institutional
investors of securities not publicly traded in the U.S. The Fund may purchase
Rule 144A securities when such securities present an attractive investment
opportunity and otherwise meet the Fund's selection criteria. The Board of
Trustees has adopted guidelines and procedures pursuant to which Keystone
determines the liquidity of the Fund's Rule 144A securities. The Board monitors
Keystone's implementation of such guidelines and procedures.

At the present time, the Fund cannot accurately predict exactly how the
market for Rule 144A securities will develop. A Rule 144A security that was
readily marketable upon purchase may subsequently become illiquid. In such an
event, the Board of Trustees will consider what action, if any, is appropriate.

The Fund may enter into repurchase and reverse repurchase agreements,
purchase and sell securities and currencies on a when issued and delayed
delivery basis and purchase or sell securities on a forward commitment basis,
write covered call and put options and purchase call and put options to close
out existing positions and may employ new investment techniques with respect to
such options. The Fund may also enter into currency and other financial futures
contracts and related options transactions for hedging purposes and not for
speculation, and may employ new investment techniques with respect to such
futures contracts and related options.

For further information about the types of investments and investment
techniques available to the Fund, and the associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus and
the statement of additional information.

INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions summarized
below, which may not be changed without the vote of a majority of the Fund's
outstanding shares (as defined in the 1940 Act). These restrictions and certain
other fundamental and nonfundamental restrictions are set forth in the statement
of additional information.

The Fund may not do the following: (1) invest more than 5% of its total
assets in the securities of any one issuer (other than U.S. government
securities), except that up to 25% of its total assets may be invested without
regard to this limit; and (2) borrow, except that the Portfolio may borrow from
banks for temporary or emergency purposes, provided that, immediately after any
such borrowing there is asset coverage of at least 300% for all such borrowings,
and the Fund may enter into reverse repurchase agreements.

RISK FACTORS
Like any investment, your investment in the Fund involves some degree of
risk. Before you buy shares of the Fund, you should carefully evaluate your
ability to assume the risks your investment in the Fund poses. YOU CAN LOSE
MONEY BY INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN
THE VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE
VALUE OF YOUR INVESTMENT.

The Fund seeks to provide long-term growth of capital by investing
principally in equity securities of companies with small market capitalizations.
The Fund is best suited to patient investors who can afford to maintain their
investment over a relatively long period of time, and who are seeking a fund
that is aggressive and has the potential for high returns. The Fund involves a
high degree of risk and is not an appropriate investment for conservative
investors who are seeking preservation of capital and/or income.

Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks, including risks of investing in
foreign securities and derivatives, attendant to individual securities or
investment practices are discussed in "Additional Investment Information" and
the statement of additional information.

FUND RISKS. Investing in companies with small market capitalizations
involves greater risk than investing in larger companies. Their stock prices can
rise very quickly and drop dramatically in a short period of time. This
volatility results from a number of factors, including reliance by these
companies on limited product lines, markets and financial and management
resources. These and other factors may make small cap companies more susceptible
to setbacks or downturns. These companies may experience higher rates of
bankruptcy or other failures than larger companies. They may be more likely to
be negatively affected by changes in management. In addition, the stock of small
cap companies may be thinly traded.

Moreover, a need for cash due to large liquidations from the Fund when the
prices of small cap stocks are declining could result in losses to the Fund.

Lastly, investing in the Fund involves the risk common to investing in any
security, that is that the value of the securities held by the Fund will
fluctuate in response to changes in economic conditions or public expectations
about those securities. The net asset value of the Fund's shares will change
accordingly.

OTHER CONSIDERATIONS. The Fund, which normally invests at least 65% of its
assets in small cap stocks, does not, by itself, constitute a balanced
investment plan. The Fund may be appropriate as part of an overall investment
program. Investors may wish to consult their financial advisers when considering
what portion of their total assets to invest in small cap stocks.

PRICING SHARES
The net asset value of a Fund share is computed each day on which the New
York Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for purposes of pricing Fund shares)
except on days when changes in the value of the Fund's Portfolio securities do
not affect the current net asset value of its shares. The Exchange currently is
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset
value per share of the Fund is arrived at by determining the value of the Fund's
assets, subtracting its liabilities and dividing the result by the number of its
shares outstanding.

Current values for the Fund's securities are generally determined as
follows:

1. securities that are traded on a national securities exchange or on the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;

2. securities traded in the over-the-counter market, other than NMS, are
valued at the mean of the bid and asked prices at the time of valuation;

3. short-term instruments maturing in more than sixty days for which market
quotations are readily available are valued at current market value;

4. short-term instruments maturing in sixty days or less (including all
master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market;

5. short-term instruments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market; and

6. the following securities are valued at prices deemed in good faith to be
fair under procedures established by the Board of Trustees: (a) securities,
including restricted securities, for which complete quotations are not readily
available; (b) listed securities or those on NMS if, in the Fund's opinion, the
last sales price does not reflect a current market value or if no sale occurred;
and (c) other assets.

Foreign securities for which market quotations are not readily available
are generally valued on the basis of valuations provided by a pricing service,
approved by the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities, and various relationships between
securities and yield to maturity in determining value.

DIVIDENDS AND TAXES

The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code (the "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year.

The Fund will make distributions from its net investment income and net
capital gains, if any, annually. Shareholders receive Fund distributions in the
form of additional shares of that class of shares upon which the distribution is
based or, at the shareholder's option, in cash. Fund distributions in the form
of additional shares are made at net asset value without the imposition of a
sales charge.

Because Class A shares bear most of the costs of distribution of such
shares through payment of a front end sales charge while Class B and Class C
shares bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher, and
income distributions paid by the Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B and Class C shares.

If the Fund qualifies and if it distributes all of its net investment
income and net capital gains, if any, to shareholders, it will be relieved of
any federal income tax liability.

Dividends and distributions are taxable whether they are received in cash
or in shares. Income dividends and net short-term gains dividends are taxable as
ordinary income, and net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, such loss will be treated for tax
purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received. The Fund advises its shareholders annually as to the
federal tax status of all distributions made during the year. Any taxable
dividend declared in October, November, or December to shareholders of record in
such a month and paid by the following January 31 will be includable in the
taxable income of the shareholder as if paid on December 31 of the year in which
such dividend was declared.

FUND MANAGEMENT AND EXPENSES

BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Fund's Board of Trustees, Keystone provides
investment advice, management and administrative services to the Fund.

INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("Keystone
Investments"). Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116- 5034.

Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone and its affiliates. The
shares of Keystone Investments common stock beneficially owned by management are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr., and Rosemary
D. Van Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates, and the
Keystone Investments Family of Funds.

Pursuant to its Investment Advisory and Management Agreement with the Fund
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund, provides all necessary
office space, facilities, equipment and personnel and arranges, at the request
of the Fund, for its employees to serve as officers or agents of the Fund.

The Fund pays Keystone a fee for its services at the annual rate set forth
below:

AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE OF THE FUND

0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% of the next $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000.

Keystone's fee is computed as of the close of business each business day and
payable daily.

The Advisory Agreement continues in effect from year to year only so long
as such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of the Fund's disinterested trustees, as
defined n the 1940 Act (the "Independent Trustees") cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund or Keystone
or may be terminated by a vote of shareholders of the Fund. The Advisory
Agreement will terminate automatically upon its assignment.

The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.

PORTFOLIO MANAGER
Donald C. Dates is the Fund's portfolio manager. Mr. Dates is a Keystone
Senior Vice President and has more than 32 years of investment experience.

FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
advisory and distribution plan fees discussed in this prospectus, the principal
expenses that the Fund is expected to pay include, but are not limited to,
expenses of certain of its Trustees; transfer, dividend disbursing, and
shareholder servicing agent expenses; custodian expenses; fees of its
independent auditors; fees of legal counsel to its Independent Trustees; fees
payable to government agencies, including registration and qualification fees
attributable to the Fund and its shares under federal and state securities laws;
and certain extraordinary expenses. In addition, each class will pay all of the
expenses attributable to it. Such expenses are currently limited to Distribution
Plan expenses. The Fund also pays its brokerage commissions, interest charges,
and taxes.

For the fiscal period ended May 31, 1996, the Fund paid or accrued to
Keystone investment management and administrative services fees of $21,221,
which represented 0.70% of the Fund s average daily net asset value on an
annualized basis.

For the fiscal period ended May 31, 1996, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC") $17,953 for transfer agent
services.

Keystone has currently limited the expenses of the Fund's Class A, Class B,
and Class C shares to 1.95%, 2.70%, and 2.70%, respectively, of each such
class's average daily net assets. These expense limits do not include indirectly
paid expenses. Keystone intends to continue these expense limitations on a
calendar month-by-month basis. Keystone will periodically evaluate the foregoing
expense limitations and may modify or terminate them in the future. Keystone
will not be required to make a reimbursement to the extent it would result in
the Fund's inability to qualify as a regulated investment company under the
Code. Keystone reimbursed the Fund $48,532 for the fiscal period ended May 31,
1996. Keystone does not intend to seek repayment of this reimbursement.

SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may consider as a factor the number of shares of the Fund sold by such
broker-dealer. In addition, broker-dealers executing portfolio transactions may,
from time to time, be affiliated with the Fund, Keystone, the Fund's principal
underwriter, or their affiliates.

The Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising the Fund as well as in
advising its other clients.

PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal period ending May 31,
1996 was 13%. For further information about brokerage and distributions, see the
statement of additional information.

HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a
selling agreement with Keystone Investment Distributors Company (the "Principal
Underwriter"), the Fund's principal underwriter. The Principal Underwriter, a
wholly-owned subsidiary of Keystone, is located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.

In addition, you may open an account for the purchase of shares of the Fund
by mailing to the Fund, c/o KIRC, P.O. Box 2121, Boston, Massachusetts
02106-2121, a completed account application and a check payable to the Fund. You
may also open an account by telephoning 1-800-343-2898 to obtain the number of
an account to which you can wire or electronically transfer funds and then
sending in a completed account application. Subsequent investments in any amount
may be made by check, by wiring Federal funds, by direct deposit, or by an
electronic funds transfer ("EFT").

Orders for the purchase of shares of the Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Principal Underwriter (generally as
of the close of the Exchange on that day) plus, in the case of Class A shares,
the applicable sales charge. Orders received by broker-dealers or other firms
prior to the close of the Exchange and received by the Principal Underwriter
prior to the close of its business day will be confirmed at the offering price
effective as of the close of the Exchange on that day.

Orders for shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined
(generally, the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.

The Fund reserves the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly.

The initial purchase must be at least $1,000. There is no minimum amount
for subsequent purchases.

The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders.

Shareholder inquiries should be directed to KIRC by calling toll free
1-800- 343-2898 or writing to KIRC or to the firm from which you received this
prospectus.

ALTERNATIVE SALES OPTIONS
The Fund offers Class A, B, and C shares:

CLASS A SHARES -- FRONT-END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class
A shares are not subject to a deferred sales charge when they are redeemed
except as follows: Class A shares purchased (1) in an amount equal to or
exceeding $1,000,000 or (2) by a corporate or certain other qualified retirement
plan or a non-qualified deferred compensation plan or a Title I tax sheltered
annuity or TSA plan sponsored by an organization having 100 or more eligible
employees (a "Qualifying Plan"), in either case, without a front-end sales
charge, will be subject to a contingent deferred sales charge for the 24-month
period following the date of purchase.

CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
redeemed during the 72-month period from and including the month of purchase.
Class B shares that have been outstanding for eight years from and including the
month of purchase will automatically convert to Class A shares without the
imposition of a front-end sales charge or exchange fee.

CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.

Each class of shares, pursuant to its Distribution Plan or other plan, pays
an annual service fee of 0.25% of the Fund's average daily net assets
attributable to that class. In addition to the 0.25% service fee, the Class B
and C Distribution Plans provide for the payment of an annual distribution fee
of up to 0.75% of the average daily net assets attributable to their respective
classes. As a result, income distributions paid by the Fund with respect to
Class B and Class C shares will generally be less than those paid with respect
to Class A shares.

Investors who would rather pay the entire cost of distribution at the time
of investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares (in which case,
100% of the purchase price is invested immediately), depending on the amount of
the purchase and the intended length of investment.

The Fund will not normally accept any purchase of Class B shares in the
amount of $250,000 or more and will not normally accept any purchase of Class C
shares in the amount of $1,000,000 or more.

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

CLASS A SHARES

Class A shares are offered at net asset value plus an initial sales charge
as follows:

<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED<F1> OFFERING PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ............................... 5.75% 6.10% 5.25%
$50,000 but less than $100,000 .................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ................. 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ................. 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ............... 1.50% 1.52% 1.50%
- ----------
<FN>
<F1> Rounded to the nearest one-hundredth percent.
</FN>
</TABLE>
----------------------------------------------

Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a TSA plan
sponsored by a public educational entity having 5,000 or more eligible employees
(an "Educational TSA Plan") will be at net asset value without the imposition of
a front-end sales charge (each such purchase, an "NAV Purchase").

With respect to NAV Purchases, the Principal Underwriter will pay
broker-dealers or others concessions based on (1) the investor's cumulative
purchases during the one-year period beginning with the date of the initial NAV
Purchase and (2) the investor's cumulative purchases during each subsequent
one-year period beginning with the first NAV Purchase following the end of the
prior period. For such purchases, concessions will be paid at the following
rate: 1.00% of the investment amount up to $2,999,999; plus 0.50% of the
investment amount between $3,000,000 and $4,999,999; plus 0.25% of the
investment amount over $4,999,999.

With the exception of Class A shares acquired by an Educational TSA Plan,
Class A shares acquired in an NAV Purchase are subject to a contingent deferred
sales charge of 1.00% upon redemption during the 24-month period commencing on
the date the shares were originally purchased. Class A shares acquired by an
Educational TSA Plan in an NAV Purchase are not subject to a contingent deferred
sales charge.

The sales charge is paid to the Principal Underwriter, which in turn
normally reallows a portion to your broker-dealer. In addition, your broker-
dealer currently will be paid periodic service fees at an annual rate of up to
0.25% of the average daily net asset value of Class A shares maintained by such
recipient and outstanding on the books of the Fund for specified periods.

Upon written notice to broker-dealers with whom it has dealer agreements,
the Principal Underwriter may reallow up to the full applicable sales charge.

Initial sales charges may be eliminated for persons purchasing Class A
shares that are offered in connection with certain fee based programs, such as
wrap accounts sponsored or managed by broker-dealers, investment advisers, or
others who have entered into special agreements with the Principal Underwriter.
Initial sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of the Fund alone or in combination with Class A
shares of other Keystone America Funds. See Exhibit A to this prospectus.

Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after a change in the registered representative's employment when the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front-end sales charge, or (2)
was at some time subject to, but did not actually pay, a contingent deferred
sales charge with respect to the redemption proceeds.

Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the amount
invested represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front-end sales
charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds. This
special net asset value purchase is currently being offered on a calendar
month-by-month basis and may be modified or terminated in the future.

From February 21, 1996, through November 30, 1996, the Principal
Underwriter will reallow to broker-dealers or others a commission based uopn the
price paid for each Class A share sold at the following rates: full reallowance
plus an additional 0.50% for each Class A share sold with respect to purchases
to purchases in an amount in excess of $499,999; and full reallowance for each
Class A share sold with respect to purchases in an amount in excess of 499,999.
Such payments will be made to those broker-dealers and others selling such
shares who pay registered representatives making such sales a portion of the
additional amount payable under this special dealer offer, as determined in
accordance with their regular payment arrangements with such persons for sales
not made under a special dealer offer.

CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers),
as service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipients and outstanding on the
books of the Fund for specified periods.

CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. The Fund, with certain exceptions, imposes a deferred sales charge on
Class B shares in accordance with the following schedule:

DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------

First twelve-month period ................... 5.00%
Second twelve-month period .................. 4.00%
Third twelve-month period ................... 3.00%
Fourth twelve-month period .................. 3.00%
Fifth twelve-month period ................... 2.00%
Sixth twelve-month period ................... 1.00%

No deferred sales charge is imposed on amounts redeemed thereafter.

When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plan are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charges and Waiver of
Sales Charges" below.

Class B shares that have been outstanding for eight years from and
including the month of purchase will automatically convert to Class A shares
(which are subject to a lower Distribution Plan charge) without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to KIRC.) The Class B shares so converted will no longer be subject
to the higher expenses borne by Class B shares. Because the net asset value per
share of Class A shares may be higher or lower than that of the Class B shares
at the time of conversion, although the dollar value will be the same, a
shareholder may receive more or fewer Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Trustees will consider
what action, if any, is appropriate and in the best interest of such Class B
shareholders.

CLASS B DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
(the "Class B Distribution Plan") that provides for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as broker-dealers) (1) as commissions
for Class B shares sold and (2) as shareholder service fees. Amounts paid or
accrued to the Principal Underwriter under (1) and (2) in the aggregate may not
exceed the annual limitation referred to above.

The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party will receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.

From February 21, 1996, through November 30, 1996, the Principal
Underwriter will reallow to broker-dealers or others an increasaed commission
equal to 4.75% of the price paid for each Class B share sold. Such payments will
be made to those broker-dealers and others selling such shares who pay
registered representatives making such sales a portion of the additional amount
payable under this special dealer offer, as determined in accordance with their
regular payment arrangements with such persons for sales not made under a
special dealer offer.

CLASS C SHARES
Class C shares are offered only through dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Fund imposes a deferred sales charge of 1.00% on shares redeemed
within one year after the date of purchase. No deferred sales charge is imposed
on amounts redeemed thereafter. If imposed, the deferred sales charge is
deducted from the redemption proceeds otherwise payable to you. The deferred
sales charge is retained by the Principal Underwriter. See "Contingent Deferred
Sales Charges and Waiver of Sales Charges" below.

CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares
(the "Class C Distribution Plan") that provides for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the distribution of Class C shares. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) (1) as commissions for Class
C shares sold and (2) as shareholder service fees. Amounts paid or accrued to
the Principal Underwriter under (1) and (2) in the aggregate may not exceed the
annual limitation referred to above.

The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold, and, beginning approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules
- -- see "Distribution Plans") plus service fees which are paid at the annual rate
of 0.25%, respectively, of the average daily net asset value of each Class C
share maintained by the recipients and outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.

CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class
A, Class B, or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of purchase
of such shares.

No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of such shares;
(2) certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than 24
months; (4) Class B shares held for more than 72 months; or (5) Class C shares
held for more than one year from the date of purchase. Upon request for
redemption, shares not subject to the contingent deferred sales charge will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed.

With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.

In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under
the Systematic Income Plan of up to 1.5% per month of the shareholder's initial
account balance; (6) withdrawals consisting of loan proceeds to a retirement
plan participant; (7) financial hardship withdrawals made by a retirement plan
participant; or (8) withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan participant.

The Fund may also sell Class A, Class B or Class C shares at net asset
value without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with the Principal Underwriter and to a bank or trust company acting
as a trustee for a single account. See the statement of additional information.

ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to broker-dealers with whom it has dealer agreements
that relates to sales incentive campaigns conducted by such broker-dealers for
their representatives as well as financial assistance in connection with
pre-approved seminars, conferences and advertising. No such programs or
additional compensation will be offered to the extent they are prohibited by the
laws of any state or any self-regulatory agency such as the NASD. Broker-dealers
to whom substantially the entire sales charge on Class A shares is reallowed may
be deemed to be underwriters as that term is defined under the 1933 Act.

The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to broker-dealers that satisfy certain
criteria established from time to time by the Principal Underwriter. These
conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on the
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 0.25% of the value of shares sold by such broker-dealer.

The Principal Underwriter may also pay a transaction fee (up to the level
of payments allowed to dealers for the sale of shares, as described above) to
banks and other financial services firms that facilitate transactions in shares
of the Fund for their clients.

The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.

In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.

DISTRIBUTION PLANS
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.

The NASD limits the amount that the Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of its
shares, of which 0.75% may be used to pay such distribution costs and 0.25% may
be used to pay shareholder service fees. The NASD also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the 12b-1 Distribution Plan, plus interest at the
prime rate plus 1% on such amounts (less any deferred sales charges paid by
shareholders to the Principal Underwriter) remaining unpaid from time to time.

The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with the Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.

If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Distribution Plan.

In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the period beginning with the Fund's initial public offering through
approximately May 31, 1997. The Fund has agreed not to reduce the rate of
payment of 12b-1 fees in respect of such Class B shares, unless it terminates
such shares' Distribution Plan completely. If it terminates such Distribution
Plan, the Fund may be subject to possible adverse distribution consequences.

Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. If a Distribution Plan is terminated, the Principal
Underwriter will ask the Independent Trustees to take whatever action they deem
appropriate under the circumstances with respect to payment of such amounts.

Unpaid distribution costs at May 31, 1996 were $23,574 and $17,858 for the
Fund's Class B and Class C Distribution Plans, respectively.

During the fiscal period ended May 31, 1996, the Fund paid to the Principal
Underwriter $2,211 under its Class A Distribution Plan; $2,722 for Class B
shares originally sold prior to June 1, 1995 and exchanged into the Fund, and
$10,641 for all new shares sold under its Class B Distribution Plan; and $8,108
under its Class C Distribution Plan.

The Fund makes no payments in connection with the sale of its shares other
than the fee paid to its Principal Underwriter.

Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.

HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value upon
written order to the Fund, c/o KIRC, and presentation to the Fund of a properly
endorsed share certificate (if certificates have been issued). Your signature
(s) on the written order and certificates must be guaranteed as described below.
In order to redeem by telephone or to engage in telephone transactions
generally, you must complete the authorization in your account application.
Proceeds for shares redeemed on telephonic order will be deposited by wire or
EFT only to the bank account designated in your account application.

You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from broker-
dealers and described under "How to Buy Shares." If the Principal Underwriter
has received proper documentation, it will pay the redemption proceeds, less any
applicable deferred sales charge, to the broker-dealer placing the order within
seven days thereafter. The Principal Underwriter charges no fee for this
service. Your broker-dealer, however, may charge a service fee.

The redemption value equals the net asset value per share adjusted for
fractions of a cent and may be more or less than your cost depending upon
changes in the value of the Fund's portfolio securities between purchase and
redemption. A deferred sales charge may be imposed by the Fund at the time of
redemption of certain shares as explained in "How to Buy Shares." If imposed,
the deferred sales charge is deducted from the redemption proceeds otherwise
payable to you.

REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case, the Fund will mail the
redemption proceeds upon clearance of the purchase check, which may take 15 days
or more. Any delay may be avoided by purchasing shares either with a certified
check or by Federal Reserve or bank wire of funds or by EFT. Although the
mailing of a redemption check or the wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed or the proceeds wired or
sent EFT promptly after good payment has been collected.

The Fund computes the amount due you at the close of the Exchange at the
end of the day on which it has received all proper documentation from you.
Payment of the amount due on redemption, less any applicable contingent deferred
sales charge (as described above), will be made within seven days thereafter
except as discussed herein.

For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may not
only waive this requirement, but also may require additional documents in
certain cases. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less when the account address of record has
been the same for a minimum period of 30 days. The Fund and KIRC reserve the
right to withdraw this waiver at any time.

If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.

TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your
account by telephone by calling toll free 1-800-343-2898. You must complete the
Telephone Redemptions section of the application to enjoy telephone redemption
privileges.

In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.

If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.

SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.

REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property. The Fund has obligated itself, however, under the
1940 Act to redeem for cash all shares presented for redemption by any one
shareholder up to the lesser of $250,000 or 1% of the Fund's net assets in any
90-day period. Securities delivered in payment of redemptions would be valued at
the same value assigned to them in computing the net asset value per share and
would, to the extent permitted by law, be readily marketable. Shareholders
receiving such securities would incur brokerage costs upon the securities' sale.

GENERAL
The Fund reserves the right at any time to terminate, suspend, or change
the terms of any redemption method described in this prospectus, except
redemption by mail, and to impose fees.

Except as otherwise noted, neither the Fund, KIRC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL"), or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.

The Fund may temporarily suspend the right to redeem its shares when (1)
the Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.

SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or
by calling toll free 1-800-343-2898.

KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.

EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange
shares of the Fund for shares of certain other Keystone America Funds and
Keystone Liquid Trust ("KLT") as follows:

Class A shares may be exchanged for Class A shares of other Keystone
America Funds and Class A shares of KLT;

Class B shares, except as noted below, may be exchanged for the same type
of Class B shares of other Keystone America Funds and the same type of Class
B shares of KLT; and

Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.

Class B shares cannot be exchanged for Class B shares of Keystone Capital
Preservation and Income Fund during the 24-month period commencing with and
including the month of original purchase.

The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are

(1) Class A shares acquired in an NAV Purchase or otherwise without a
front-end sales charge,

(2) Class B shares that have been held for less than 72 months, or

(3) Class C shares that have been held for less than one year,

and are still subject to a deferred sales charge, such charge will carry over
to the shares being acquired in the exchange transaction.

You may exchange shares for another Keystone fund for a $10 fee by calling
or writing to Keystone. The exchange fee is waived for individual investors who
make an exchange using KARL. If the shares being tendered for exchange are still
subject to a deferred sales charge, such charge will carry over to the shares
being acquired in the exchange transaction. The Fund reserves the right to
terminate this exchange offer or to change its terms, including the right to
change the fee for any exchange.

Orders to exchange a certain class of shares of the Fund for the
corresponding class of shares of KLT will be executed by redeeming the shares of
the Fund and purchasing the corresponding class of shares of KLT at the net
asset value of such shares next determined after the proceeds from such
redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund prior
to 4:00 p.m. eastern time on any day the Fund is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after 4:00 p.m. eastern time on
any business day will be executed at the respective net asset values determined
at the close of the next business day.

An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.

An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange constitutes a sale for federal income tax purposes.

The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.

AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transer as
little as $100 per month or quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.

To establish or terminate an Automatic Investment Plan or to change the
amount or schedule of your automatic investments, you may write to or call
Keystone. Please include your account numbers. Termination may take up to 30
days.

RETIREMENT PLANS
The Fund has various retirement plans available to investors, including
Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified Employee
Pension Plans ("SEPs"); Salary Reduction Plans ("SARSEPs"); Tax Sheltered
Annuity Plans; 403(b)(7) Plans; 401(k) Plans; Keogh Plans; Corporate
Profit-Sharing Plans; and Money Purchase Plans. For details, including fees and
application forms, call toll free 1- 800-247-4075 or write to KIRC.

SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when the Systematic Income Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Moreover, because of the effect
of the applicable sales charge, a Class A investor should not make continuous
purchases of the Fund's shares while participating in the Systematic Income
Plan.

DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more shares
being purchased when the selected fund's net asset value is relatively low and
fewer shares being purchased when the fund's net asset value is relatively high
and may result in a lower average cost per share than a less systematic
investment approach.

Prior to participating in dollar cost averaging, you must establish an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and (2) the fund
in which the investment is to be made. Thereafter, on the first day of the
designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund.

If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent. See Exhibit A - "Reduced Sales Charges" at
the back of the prospectus.

TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent. See Exhibit A -
"Reduced Sales Charges" at the back of the prospectus.

OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.

PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current
yield." ALL DATA IS BASED ON HISTORICAL EARNINGS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
and current yield are computed separately for each class of shares of the Fund.
Total return refers to average annual compounded rates of return over specified
periods determined by comparing the initial amount invested in a particular
class to the ending redeemable value of that amount. The resulting equation
assumes reinvestment of all dividends and distributions and deduction of the
maximum sales charge or applicable contingent deferred sales charge and all
recurring charges, if any, applicable to all shareholder accounts. The exchange
fee is not included in the calculation.

Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.

The following information is provided with reference to the peformance for
one, three, five, and ten years of Keystone Small Company Growth Fund (S-4) (the
"S-4 Fund"),<F1> a registered investment company managed by Keystone that has an
identical investment objective and substantially similar investment policies and
strategies to those of the Fund.<F2> The following performance information is
being provided as of June 30, 1996.

<TABLE>
<CAPTION>
<S> <C>
One-year return (without CDSC)<F3>................................. 17.32%
One-year return.................................................... 14.43%
Three-year average annual return................................... 18.15%
Five-year average annual return.................................... 21.77%
Ten-year average annual return..................................... 14.02%
- ----------
<FN>
<F1> Until March 1995, the S-4 Fund had an active and a passive component.
Since March 1995, the S-4 Fund has been fully actively managed.
<F2> Past performance of the S-4 Fund is no guarantee of the future performance
of the Fund.
<F3> The contingent deferred sales charge (CDSC) for the S-4 Fund declines from
4% to 1% over four calendar years, with no redemption charges after the
fourth calendar year. (For the Fund, the contingent deferred sales charge
declines from 5% to 1% over the six years from the month of purchase,
with no redemption charges after the fourth calendar year.)
</FN>
</TABLE>

The Fund may also include comparative performance data for each class of
shares in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc., Standard & Poor's Corporation,
Ibbotson Associates or other industry publications.

FUND SHARES

The Fund issues Class A, B, and C shares, which participate in dividends
and distributions and have equal voting, liquidation and other rights except
that (1) expenses related to the distribution of each class of shares or other
expenses that the Board of Trustees may designate as class expenses from time to
time, are borne solely by each class; (2) each class of shares has exclusive
voting rights with respect to its Distribution Plan; (3) each class has
different exchange privileges; and (4) each class has a different designation.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares may be exchanged as explained under "Shareholder Services," but
will have no other preference, conversion, exchange or preemptive rights. Shares
are redeemable, transferable and freely assignable as collateral. The Fund is
authorized to issue additional series or classes of shares.

Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares. Shares of the Fund vote together except
when required by law to vote separately by class. The Fund does not have annual
meetings. The Fund will have special meetings, from time to time, as required
under its Declaration of Trust and under the 1940 Act. As provided in the Fund's
Declaration of Trust, shareholders have the right to remove Trustees by an
affirmative vote of two-thirds of the outstanding shares. A special meeting of
the shareholders will be held when holders of 10% of the outstanding shares
request a meeting for the purpose of removing a Trustee. The Fund is prepared to
assist shareholders in communications with one another for the purpose of
convening such a meeting as prescribed by Section 16(c) of the 1940 Act.

Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.

ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer agent and
dividend disbursing agent. Effective on or about September 23, 1996, KIRC's
address will be 200 Berkeley Street, Boston, MA 02116-5034.

When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.

Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>

ADDITIONAL INVESTMENT INFORMATION

The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.

OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such securities
may be held outside the U.S., and the Fund may be subject to the risks
associated with the holding of such property overseas. Examples of governmental
actions would be the imposition of currency controls, interest limitations,
withholding taxes, seizure of assets or the declaration of a moratorium. Various
provisions of federal law governing domestic branches do not apply to foreign
branches of domestic banks.

OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.

MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by the Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days notice) and to resell the note at any time to a third party. Notes acquired
by the Fund may have maturities of more than one year, provided that (1) the
Fund is entitled to payment of principal and accrued interest upon not more than
seven days notice, and (2) the rate of interest on such notes is adjusted
automatically at periodic intervals, which normally will not exceed 31 days, but
may extend up to one year. The notes are deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, Keystone considers, under
standards established by the Board of Trustees, earning power, cash flow and
other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund will invest in them only
if, at the time of investment, the issuer meets the criteria established for
commercial paper.

REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by Keystone
to be creditworthy. Such persons must be registered as U.S. government
securities dealers with an appropriate regulatory organization. Under such
agreements, the bank, primary dealer or other financial institution agrees upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, 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. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund intends
only to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Fund's custodian or in the Federal Reserve book entry
system. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses, including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees has established procedures to evaluate the creditworthiness of each
party with whom the Fund enters into repurchase agreements by setting guidelines
and standards of review for Keystone and monitoring Keystone's actions with
regard to repurchase agreements.

REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having to
sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement, it
will establish a segregated account with the Fund's custodian containing liquid
assets such as U.S. government securities or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities that the Fund is obligated to repurchase may decline below the
repurchase price. Reverse repurchase agreements magnify the potential for gain
or loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. In the event the buyer
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligation to
repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such determination.

FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities issued by issuers
located in certain foreign countries with developed markets as well as those
with emerging markets and the formerly communist countries of Eastern Europe and
the People's Republic of China. For this purpose, countries with emerging
markets are generally those where the per capital income is in the low to middle
ranges as determined by the International Bank for Reconstruction and
Development. At this time, the Fund does not intend to invest more than 5% of
its assets in foreign securities. While investment in foreign securities is
intended to reduce risk by providing further diversification, such investments
involve sovereign risk in addition to the credit and market risks normally
associated with domestic securities.

Investing in securities of foreign issuers generally involves more risk
than investing in securities of domestic issuers for the following reasons: (1)
there may be less public information available about foreign companies than is
available about U.S. companies; (2) foreign companies are not generally subject
to the uniform accounting, auditing and financial reporting standards and
practices applicable to U.S. companies; (3) foreign stock markets have less
volume than the U.S. market, and the securities of some foreign companies are
much less liquid and much more volatile than the securities of comparable U.S.
companies; (4) foreign securities transactions may involve higher brokerage
commissions and generally higher custodian fees; (5) there may be less
government regulation of stock markets, brokers, listed companies and banks in
foreign countries than in the U.S.; (6) the Fund may incur fees on currency
exchanges when it changes investments from one country to another; (7) the
Fund's foreign investments could be affected by expropriation, confiscatory
taxation, nationalization, establishment of currency exchange controls,
political or social instability or diplomatic developments (which would prevent
cash from being brought back to the United States); (8) fluctuations in foreign
exchange rates will affect the value of the Fund's investments, the value of
dividends and interest earned, gains and losses realized on the sale of
securities, net investment income and unrealized appreciation or depreciation of
investments; and (9) interest and dividends on foreign securities may be subject
to withholding taxes in a foreign country that could result in a reduction of
net investment income available for distribution.

Investing in securities of issuers in emerging market countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging market countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
companies in emerging markets countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities. Furthermore, investing in
securities of companies in the formerly communist countries of Eastern Europe
and the People's Republic of China involves additional risks to those associated
with investments in companies in non-formerly communist emerging markets
countries. Specifically, those countries could convert back to a single economic
system, and the claims of property owners prior to the expropriation by the
communist regime could be settled in favor of the former property owners, in
which case the Fund could lose its entire investment in those countries. These
risks are carefully considered by Keystone prior to the purchase of these
securities.

"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when
issued and delayed delivery basis. When issued or delayed delivery transactions
arise when securities or currencies are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. When the Fund engages in when issued and delayed
delivery transactions, the Fund relies on the buyer or seller, as the case may
be, to consummate the sale. Failure to do so may result in the Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. No payment or delivery is made by the Fund however,
until it receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments will be maintained until payment is made. When issued and delayed
delivery agreements are subject to risks from changes in value based upon
changes in the level of interest rates, currency rates and other market factors,
both before and after delivery. The Fund does not accrue any income on such
securities or currencies prior to their delivery. To the extent the Fund engages
in when issued and delayed delivery transactions, it will do so consistent with
its investment objective and policies and not for the purpose of investment
leverage. The Fund currently does not intend to invest more than 5% of its
assets in when issued or delayed delivery transactions.

LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if, as a result, the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made to borrowers deemed to be of good standing, under standards
approved by the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.

DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.

Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes, although the Fund generally uses derivatives
primarily as direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options for hedging purposes. Derivatives are a valuable tool which,
when used properly, can provide significant benefit to Fund shareholders.
Keystone is not an aggressive user of derivatives with respect to the Fund.
However, the Fund may take positions in those derivatives that are within its
investment policies if, in Keystone's judgement, this represents an effective
response to current or anticipated market conditions. Keystone's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objective and policies.

Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.

There are four principal types of derivative instruments -- options,
futures, forwards, and swaps -- from which virtually any type of derivative
transaction can be created. Further information regarding options, futures, and
forwards is provided later in this section and is provided in the Fund's
statement of additional information. The Fund does not presently engage in the
use of swaps.

While the judicious use of derivatives by experienced investment managers
such as Keystone can be beneficial, derivatives also involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in the Fund.

* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.

* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those associated
with stocks and bonds. The use of a derivative requires an understanding not
only of the underlying instrument, but also of the derivative itself, without
the benefit of observing the performance of the derivative under all possible
market conditions. In particular, the use and complexity of derivatives require
the maintenance of adequate controls to monitor the transactions entered into,
the ability to assess the risk that a derivative adds to the Fund's portfolio
and the ability to forecast price, interest rate or currency exchange rate
movements correctly.

* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as a
"counterparty") to comply with the terms of the derivative contract. The credit
risk for exchange traded derivatives is generally less than for privately
negotiated derivatives, since the clearing house, which is the issuer or
counterparty to each exchange-traded derivative, provides a guarantee of
performance. This guarantee is supported by a daily payment system (i.e., margin
requirements) operated by the clearing house in order to reduce overall credit
risk. For privately negotiated derivatives, there is no similar clearing agency
guarantee. Therefore, the Fund considers the creditworthiness of each
counterparty to a privately negotiated derivative in evaluating potential credit
risk.

* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly large
or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.

* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can result
in a loss substantially greater than the amount invested in the derivative
itself. In the case of swaps, the risk of loss generally is related to a
notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.

* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always perfectly
or even highly correlate or track the value of the assets, rates or indices they
are designed to closely track. Consequently, the Fund's use of derivatives may
not always be an effective means of, and sometimes could be counterproductive
to, furthering the Fund's investment objective.

OPTIONS TRANSACTIONS WRITING COVERED OPTIONS.
The Fund may write (i.e., sell) covered call and put options. By writing a
call option, the Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price. By
writing a put option, the Fund becomes obligated during the term of the option
to purchase the securities underlying the option at the exercise price if the
option is exercised. The Fund also may write straddles (combinations of covered
puts and calls on the same underlying security).

The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities that are available
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. The Fund does not expect, however, that this will occur.

The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid assets
having a value equal to or greater than the exercise price of the option.

The principal reason for writing call or put options is to obtain, through
a receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and, by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.

PURCHASING OPTIONS. The Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously written
put or call options of the same series.

If the Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised.

An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund generally will write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and, for some options, no secondary market may exist. In
such event, it might not be possible to effect a closing transaction in a
particular option.

Options on some securities are relatively new, and it is impossible to
predict the amount of trading interest that will exist in such options. There
can be no assurance that viable markets will develop or continue. The failure of
such markets to develop or continue could significantly impair the Fund's
ability to use such options to achieve its investment objective.

OPTIONS TRADING MARKETS. Options in which the Fund will trade are generally
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any exchange, but traded in the over-the-
counter market. Options traded in the over-the-counter market involve the
additional risk that securities dealers participating in such transactions could
fail to meet their obligations to the Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.

The staff of the Securities and Exchange Commission is of the view that the
premiums that the Fund pays for the purchase of unlisted options and the value
of securities used to cover unlisted options written by the Fund are considered
to be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its policies on illiquid securities.

FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into securities,
currency or index based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies is an agreement to buy or sell securities or currencies
at a specified price during a designated month. A futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. The Fund does not make payment or deliver securities upon entering into a
futures contract. Instead, it puts down a margin deposit, which is adjusted to
reflect changes in the value of the contract and which continues until the
contract is terminated.

The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the Fund's contract will tend to rise when the
value of the underlying securities or currencies declines and to fall when the
value of such securities or currencies increases. Thus, the Fund sells futures
contracts in order to offset a possible decline in the value of its securities
or currencies. If a futures contract is purchased by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. The Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.

The Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by the Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.

The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case, it would continue to bear market
risk on the transaction.

Although futures and related options transactions are intended to enable
the Fund to manage market, interest rate or exchange rate risk, unanticipated
changes in interest rates, exchange rates or market prices could result in
poorer performance than if it had not entered into these transactions. Even if
Keystone correctly predicts interest or exchange rate movements, a hedge could
be unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund. Keystone will attempt to minimize these risks through careful selection
and monitoring of the Fund's futures and options positions.

The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.

FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Fund may invest in securities of foreign issuers.
When the Fund invests in foreign securities, they usually will be denominated in
foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.

As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell. The
Fund intends to use these contracts to hedge the U.S. dollar value of a security
it already owns, particularly if the Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to accurately predict the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the U.S. dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund.
Although the Fund does not currently intend to do so, the Fund may also purchase
and sell options related to foreign currencies. The Fund does not intend to
enter into foreign currency transactions for speculation or leverage.
<PAGE>
EXHIBIT A

REDUCED SALES CHARGES

Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds. Only Class A shares subject to
an initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.

For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.

CONCURRENT PURCHASES

For purposes of qualifying for a reduced sales charge, a Purchaser may
combine concurrent direct purchases of Class A shares of two or more of the
"Eligible Funds," as defined below. For example, if a Purchaser concurrently
invested $75,000 in one of the other "Eligible Funds" and $75,000 in the Fund,
the sales charge would be that applicable to a $150,000 purchase, i.e., 3.75% of
the offering price, as indicated in the Sales Charge Schedule in the prospectus.

RIGHT OF ACCUMULATION

In calculating the sales charge applicable to current purchases of the
Fund's Class A shares, a Purchaser is entitled to accumulate current purchases
with the current value of previously purchased Class A shares of the Fund and
Class A shares of certain other eligible funds that are still held in (or
exchanged for shares of and are still held in) the same or another eligible fund
("Eligible Fund(s)"). The Eligible Funds are the Keystone America Funds and
Keystone Liquid Trust.

For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.

LETTER OF INTENT

A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.

After the Letter of Intent is received by KIRC, each investment made will
be entitled to the sales charge applicable to the level of investment indicated
on the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.

If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.

When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by KIRC. Any redemptions made by the Purchaser during the
thirteen-month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.

By signing the application, the Purchaser irrevocably constitutes and
appoints KIRC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.

The Purchaser or his dealer must inform the Principal Underwriter or KIRC
that a Letter of Intent is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FUND FAMILY

Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
Small Company Growth Fund II

[logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034

[recycle logo]

KEYSTONE

SMALL COMPANY GROWTH
FUND II

[logo]

PROSPECTUS AND
APPLICATION

<PAGE>

KEYSTONE SMALL COMPANY GROWTH FUND II

PART B

STATEMENT OF ADDITIONAL INFORMATION

KEYSTONE SMALL COMPANY GROWTH FUND II

STATEMENT OF ADDITIONAL INFORMATION

August 30, 1996

This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone Small
Company Growth Fund II (the "Fund") dated August 30, 1996. A copy of the
prospectus may be obtained from Keystone Investment Distributors Company (the
"Principal Underwriter"), the Fund's principal underwriter, 200 Berkeley Street,
Boston, Massachusetts 02116-5034, or your broker-dealer.

TABLE OF CONTENTS

Page

Investment Objective and Policies 2
Investment Restrictions 2
Distributions and Taxes 6
Valuation of Securities 7
Brokerage 8
Sales Charges 11
Distribution Plans 14
Trustees and Officers 19
Investment Adviser 23
Principal Underwriter 26
Declaration of Trust 28
Standardized Total Return
and Yield Quotations 30
Additional Information 31
Appendix A-1
Financial Statement F-1
Independent Auditors' Report F-13

<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund is an open-end, diversified management investment company. The
Fund's investment objective is to provide shareholders with long-term growth of
capital. It is expected that under ordinary circumstances at least 65% of its
total assets will be invested in equity securities of companies with small
market capitalization. For this purpose, companies with small market
capitalizations are those with market capitalization of less than $1 billion
("small cap") at the time of the Fund's investment. Companies whose
capitalization falls outside this range after the purchase continue to be
considered small cap for this purpose.

INVESTMENT RESTRICTIONS

Fundamental Investment Restrictions

The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the vote of a majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (the
"1940 Act")). Unless otherwise stated, all references to Fund assets are in
terms of current market value.

The Fund may not do the following:

(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; provided that these limitations do not apply
to investments in securities issued or guaranteed by the United States ("U.S.")
government or its agencies or instrumentalities;

(2) concentrate its investments in the securities of issuers in any one
industry other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities;

(3) borrow, except from banks for temporary or emergency purposes, provided
that, immediately after any such borrowing there is asset coverage of at least
300% for all such borrowings, and the Fund may enter into reverse repurchase
agreements;

(4) issue senior securities, except that the Fund may (a) make permitted
borrowings of money; (b) enter into firm commitment agreements and collateral
arrangements with respect to the writing of options on securities and engage in
permitted transactions in futures and options thereon and forward contracts; and
(c) issue shares of any additional permitted classes or series;

(5) engage in the business of underwriting securities issued by other
persons, except insofar as the Fund may be deemed to be an underwriter in
connection with the disposition of its portfolio investments;

(6) invest in real estate or commodities, except that the Fund may (a)
invest in securities directly or indirectly secured by real estate and interests
therein and securities of companies that invest in real estate and interests
therein, including mortgages and other liens; and (b) enter into financial
futures contracts and options thereon for hedging purposes and enter into
forward contracts; or

(7) make loans, except that the Fund may make, purchase, or hold publicly
and nonpublicly offered debt securities (including convertible securities) and
other debt investments, including loans, consistent with its investment
objective; (b) lend its portfolio securities to broker-dealers; and (c) enter
into repurchase agreements.

Other Fundamental Policies

Notwithstanding any other investment policy or restriction, the Fund may
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment objective,
policies and restrictions as the Fund.

Non-fundamental Investment Restrictions

The Fund has adopted the non-fundamental policies set forth below, which
may be changed without shareholder approval.

The Fund may not do the following:

(1) borrow money except for temporary or emergency purposes (not for
leveraging or investment), and it will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding;

(2) (a) sell securities short (except by selling futures contracts or
writing covered options), unless it owns, or by virtue of ownership of other
securities has the right to obtain without additional consideration securities
identical in kind and amount to the securities sold short; or (b) purchase
securities on margin, except for such short-term credits as are necessary for
the clearance of transactions, and provided that the Fund may make initial and
variation so-called "margin" payments in connection with purchases or sales of
futures contracts or of options on futures contracts or forwards or other
similar instruments;

(3) pledge, mortgage, or hypothecate its assets, except that the Fund may
pledge not more than one-third of its total assets (taken at current value) to
secure borrowings made in accordance with its investment restrictions on
borrowings, and provided that the Fund may make initial and variation margin
payments in connection with purchases or sales of futures contracts or of
options on futures contracts or forwards or other similar instruments;

(4) purchase the securities of any other investment company, except by
purchase in the open market subject only to customary broker's commissions and
provided that any such purchase will not result in duplication of sales charges
or management fees, and except in connection with any merger, consolidation, or
reorganization;

(5) invest in oil, gas, or other mineral leases or development programs
(except the Fund may invest in companies that own or invest in such interests);

(6) invest in real estate limited partnerships; or

(7) (a) write covered options, unless the securities underlying such
options are listed on a national securities exchange and the options are issued
by the Options Clearing Corporation; provided, however, that the securities
underlying such options may be traded on an automated quotations system
("NASDAQ") of the National Association of Securities Dealers, Inc. ("NASD") if
and to the extent permitted by applicable state regulations; or (b) purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Fund's net assets; included within that amount, but not to exceed 2% of the
value of the Fund's net assets, may be warrants that are not listed on the New
York or American Stock Exchanges; warrants acquired by the Fund at any time in
units or attached to securities are not subject to this restriction.

State Undertakings

Although not fundamental restrictions or policies requiring a shareholders'
vote to change, the Fund has undertaken to certain State securities authorities
that the Fund will not:

(1) purchase securities of issuers which the company is restricted from
selling to the public without registration under the Securities Act of 1933 if
by any reason thereof the value of its aggregate investment in such classes of
securities will exceed 10% of its total assets;

(2) purchase securities of unseasoned issuers, including their
predecessors, that have been in operation for less than three years if by reason
thereof the value of its aggregate investment in such classes of securities will
exceed 5% of its total assets;

(3) invest in puts, calls, straddles, spreads, and any combination thereof
if by reason thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets; and

(4) purchase or hold the securities of an issuer if the officers,
directors, or trustees of the Fund, its advisors or manager each owning
beneficially more than 1/2 of 1% of the securities of such issuer together own
beneficially more than 5% of the securities of that issuer.

These undertakings will remain in effect as long as the relevant State(s)
require(s) and shares of the Fund are registered in that State(s).

Other Non-fundamental Policies

In order to permit the sale of Fund shares in certain states or foreign
countries, the Fund may make commitments more restrictive than the investment
restrictions described above. Should the Fund determine that any such commitment
is no longer in the best interests of the Fund, it may revoke the commitment by
terminating sales of its shares in the state or country involved.

DISTRIBUTIONS AND TAXES

The Fund distributes to its shareholders dividends from net investment
income and net realized long-term and short-term capital gains annually in the
applicable class of shares or, at the option of the shareholder, in cash.
Distributions are taxable whether received in cash or additional shares.
(Distributions of ordinary income may be eligible in whole or in part for the
corporate 70% dividends received deduction.) Shareholders who have not opted,
prior to the record date for any distribution, to receive cash will have the
number of distributed shares determined on the basis of the Fund's net asset
value per share computed at the end of the day on the record date after
adjustment for the distribution. Net asset value is used in computing the number
of shares in both gains and income distribution reinvestments. Account
statements and/or checks, as appropriate, will be mailed to shareholders by the
15th of the appropriate month. Unless the Fund receives instructions to the
contrary from a shareholder before the record date, it will assume that the
shareholder wishes to receive that distribution and future gains and income
distributions in shares. Instructions continue in effect until changed in
writing.

Distributed long-term capital gains are taxable as such to the shareholder
regardless of the period of time Fund shares have been held by the shareholder.
If such shares are held less than six months and redeemed at a loss, however,
the shareholder will recognize a long-term capital loss on such shares to the
extent of the long-term capital gain distribution received in connection with
such shares. If the net asset value of the Fund's shares is reduced below a
shareholder's cost by a capital gains distribution, such distribution, to the
extent of the reduction, would be a return of investment though taxable as
stated above. Since distributions of capital gains depend upon profits actually
realized from the sale of securities by the Fund, they may or may not occur. The
foregoing comments relating to the taxation of dividends and distributions paid
on the Fund's shares relate solely to federal income taxation. Such dividends
and distributions may also be subject to state and local taxes.

When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined, to the best
of the Fund's ability, to be taxable as ordinary income. Shareholders of the
Fund will be advised annually of the federal income tax status of distributions.

VALUATION OF SECURITIES

Current values for the Fund's securities are generally determined as
follows:

(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;

(2) securities traded in the over-the-counter market, other than on NMS,
for which market quotations are readily available, are valued at the mean of the
bid and asked prices at the time of valuation;

(3) instruments maturing in more than sixty day for which market quotations
are readily available, are valued at current market value;

(4) instruments maturing in sixty days or less (including all master demand
notes) are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market;

(5) instruments maturing in more than sixty days when purchased that are
held on the sixtieth day prior to maturity are valued at amortized cost (market
value on the sixtieth day adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market; and

(6) the following securities are valued at prices deemed in good faith to
be fair under procedures established by the Board of Trustees: (a) securities,
including restricted securities, for which complete quotations are not readily
available; (b) listed securities or those on NMS if, in the Fund's opinion, the
last sales price does not reflect a current market value or if no sale occurred;
and (c) other assets.

Foreign securities for which market quotations are not readily available
are valued on the basis of valuations provided by a pricing service, approved by
the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.

BROKERAGE

It is the policy of the Fund's investment advisor, Keystone Investment
Management Company ("Keystone"), in effecting transactions for the Fund in
portfolio securities, to seek best execution of orders at the most favorable
prices. The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund, involving both price paid or received and any commissions
and other costs paid; the efficiency with which the transaction is effected; the
broker's ability to effect the transaction at all where a large block is
involved; the availability of the broker to stand ready to execute potentially
difficult transactions in the future; and the financial strength and stability
of the broker. Such considerations are weighed by management in determining the
overall reasonableness of brokerage commissions paid.

Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund or Keystone are considered to be in
addition to, and not in lieu of, services required to be performed by Keystone
under its Investment Advisory and Management Agreement with the Fund (the
"Advisory Agreement"). The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of Keystone who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for such
other clients. Under the Advisory Agreement, Keystone is permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
follows such a practice, it will do so on a basis that is fair and equitable to
the Fund.

The Fund expects to purchase and sell its securities through brokerage
transactions for which commissions are payable. Purchases from underwriters will
include the underwriting commission or concession, and purchases from dealers
serving as market makers will include a dealer's mark up or reflect a dealer's
mark down. Where transactions are made in the over-the-counter market, the Fund
will deal with primary market makers unless more favorable prices are otherwise
obtainable.

The Fund may participate, if and when practicable, in group bidding for the
direct purchase from an issuer of certain securities for the Fund in order to
take advantage of the lower purchase price available to members of such a group.

Neither Keystone nor the Fund intends to place securities transactions with
any particular broker-dealer or group thereof. The Fund's Board of Trustees has
determined, however, that the Fund consider sales of its shares when selecting
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution described above.

The policy of the Fund with respect to brokerage is and will be reviewed by
the Fund's Board of Trustees from time to time. Because of the possibility of
further regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be changed, modified or
eliminated.

Investment decisions for the Fund are made independently by Keystone from
those of the other funds and investment accounts managed by Keystone. It may
frequently develop, however, that the same investment decision is made for more
than one fund. Simultaneous transactions are inevitable when the same security
is suitable for the investment objective of more than one account. When two or
more funds or accounts are engaged in the purchase or sale of the same security,
the transactions are allocated as to amount in accordance with a formula that is
equitable to each fund or account. It is recognized that, in some cases, this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.

In no instance are portfolio securities purchased from or sold to Keystone,
the Principal Underwriter, or any of their affiliated persons (as defined in the
1940 Act).

For the fiscal period ended May 31, 1996, the Fund paid $33,494 in
brokerage commissions.

SALES CHARGES

General

The Fund offers Class A, B and C shares. Class A shares are offered with a
maximum sales charge of 5.75% payable at the time of purchase ("Front-End Load
Option"). Class B shares are subject to a contingent deferred sales charge
payable upon redemption during the 72-month period from and including the month
of purchase ("Back-End Load Option"). Class B shares that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to Keystone Investor Resource
Center, Inc., the Fund's transfer and dividend disbursing agent ("KIRC").) Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Fund as well as a table of
applicable sales charges for Class A shares; a discussion of reduced sales
charges that may apply to subsequent purchases; and a description of applicable
contingent deferred sales charges.

Contingent Deferred Sales Charges

In order to reimburse the Fund for certain expenses relating to the sale of
its shares (see "Distribution Plans"), a contingent deferred sales charge is
imposed at the time of redemption of certain Fund shares, as described below. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you. The deferred sales charge is retained by the Principal
Underwriter.

Class A Shares

With certain exceptions, purchases of Class A shares (1) in an amount equal
to or exceeding $1,000,000, and/or (2) made by a corporate or certain other
qualified retirement plans or a non- qualified deferred compensation plan or a
Title I tax sheltered annuity or TSA Plan sponsored by an organization having
100 or more eligible employees (a "Qualifying Plan"), in either case without a
front-end sales charge, will be subject to a contingent deferred sales charge of
1% during the 24-month period following the date of purchase. See "Calculation
of Contingent Deferred Sales Charge" below.

Class B Shares

The Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of net asset value or net cost of Class B shares redeemed during
succeeding twelve-month periods as follows: 5% during the first period; 4%
during the second period; 3% during the third period; 3% during the fourth
period; 2% during the fifth period, and 1% during the sixth period. No deferred
sales charge is imposed on amounts redeemed thereafter.

Amounts received by the Principal Underwriter under the Class B
Distribution Plan are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge" and
"Waiver of Sales Charges" below.

Class C Shares

With certain exceptions, the Fund will impose a deferred sales charge of
1.00% on Class C shares redeemed within one year after the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter. See
"Calculation of Contingent Deferred Sales Charge" below.

Calculation of Contingent Deferred Sales Charge

Any contingent deferred sales charge imposed upon the redemption of Class
A, Class B, or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of purchase
of such shares.

Upon request for redemption, shares not subject to the contingent deferred
sales charge will be redeemed first. Thereafter, shares held the longest will be
the first to be redeemed. There is no contingent deferred sales charge when the
shares of a class are exchanged for the shares of the same class of another
Keystone America Fund. Moreover, for the purpose of computing deferred sales
charges, when shares of one fund are exchanged for shares of another fund, the
date of purchase of the shares being acquired by exchange is deemed to be the
date the shares being tendered for exchange were originally purchased.

Waiver of Sales Charges

Shares of the Fund may also be sold, to the extent permitted by applicable
law, regulations, interpretations, or exemptions, at net asset value without the
imposition of an initial sales charge to (1) certain Directors, Trustees,
officers, full-time employees or sales representatives of the Fund, Keystone,
Keystone Investments, Inc. ("Keystone Investments"), the Principal Underwriter,
and certain of their affiliates who have been such for not less than ninety
days; (2) a pension and profit-sharing plan established by such companies, their
subsidiaries and affiliates, for the benefit of their Directors, Trustees,
officers, full-time employees, and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with the Principal Underwriter;
provided, however, that all such sales are made upon the written assurance that
the purchase is made for investment purposes and that the securities will not be
resold except through redemption by the Fund.

No initial sales charge is imposed on purchases of shares of the Fund by a
bank or trust company in a single account in the name of such bank or trust
company as trustee, if the initial investment in shares of the Fund or any fund
in the Keystone Investments Family of Funds, purchased pursuant to this waiver
is at least $500,000 and any commission paid at the time of such purchase is not
more than 1% of the amount invested.

With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.

In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under the Systematic Income Plan of
up to 1.5% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.

DISTRIBUTION PLANS

Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").

The Fund's Class A, B, and C Distribution Plans have been approved by the
Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").

The National Association of Securities Dealers, Inc. ("NASD") limits the
amount that the Fund may pay annually in distribution costs for sale of its
shares and shareholder service fees. The NASD limits annual expenditures to
1.00% of the aggregate average daily net asset value of its shares, of which
0.75% may be used to pay such distribution costs and 0.25% may be used to pay
shareholder service fees. The NASD also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales since the
inception of the Distribution Plan, plus interest at the prime rate plus 1.00%
on such amounts (less any contingent deferred sales charges paid by shareholders
to the Principal Underwriter).

Class A Distribution Plan.

The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
principal underwriter of the Fund (currently the Principal Underwriter) to
enable the Principal Underwriter to pay or to have paid to others who sell Class
A shares a service or other fee, at any such intervals as the Principal
Underwriter may determine, in respect of Class A shares maintained by any such
recipients and outstanding on the books of the Fund for specified periods.

Amounts paid by the Fund under the Class A Distribution Plan are currently
used to pay others, such as broker-dealers, service fees at an annual rate of up
to 0.25% of the average net asset value of Class A shares maintained by such
others and outstanding on the books of the Fund for specified periods.

Class B Distribution Plan.

The Class B Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the principal underwriter of the Fund
(currently the Principal Underwriter) (1) to enable the Principal Underwriter to
pay to others (broker-dealers) commissions in respect of Class B shares sold
since inception of the Distribution Plan; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class B shares maintained
by any such recipients and outstanding on the books of the Fund for specified
periods.

The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker-dealer or other party receives service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.

If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by the Class B Distribution Plan. If the Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.

In connection with financing its distribution costs, including commission
advances to broker-dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the period beginning with the Fund's initial public offering and
ending approximately May 31, 1997. The Fund has agreed not to reduce the rate of
payment of 12b-1 fees in respect of such Class B shares unless it terminates
such shares' Distribution Plan completely. If it terminates such Distribution
Plan, the Fund may be subject to possible adverse distribution consequences.

Class C Distribution Plan

The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the principal underwriter of the Fund
(currently the Principal Underwriter) (1) to enable the Principal Underwriter to
pay to others (broker-dealers) commissions in respect of Class C shares sold
since inception of the Distribution Plan; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class C shares maintained
by any such recipients and outstanding on the books of the Fund for specified
periods.

The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
and outstanding on the books of the Fund for specified periods.

Distribution Plans - General

Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.

Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares.

Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by the
Trustees, including the Independent Trustees.

While a Distribution Plan is in effect, the Fund will be required to commit
the selection and nomination of candidates for Independent Trustees to the
discretion of the Independent Trustees.

The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.

The Independent Trustees of the Fund have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.

For the fiscal period ended May 31, 1996, the Fund paid the Principal
Underwriter $2,211 under its Class A Distribution Plan; $2,722 for Class B
shares originally sold prior to June 1, 1995 and exchanged into the Fund, and
$10,641 for all new shares sold under its Class B Distribution Plan; and $8,108
under its Class C Distribution Plan.

As of May 31, 1996, pursuant to the NASD rules, the maximum uncollected
amount for which the Principal Underwriter may seek payment from the Fund under
its Class B and C Distribution Plans were $759,236 and $535,524, respectively.

TRUSTEES AND OFFICERS

The Trustees and Officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:

*ALBERT H. ELFNER, III: President, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, President and
Chief Executive Officer of Keystone Investments, Keystone,
Keystone Management, Inc. ("Keystone Management") and Keystone
Software, Inc. ("Keystone Software"); President, Chief
Executive Officer and Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Chairman of the
Board and Director of Keystone Institutional Company, Inc.
("Keystone Institutional")and Keystone Fixed Income Advisors
("KFIA"); Director and President of Keystone Asset
Corporation, Keystone Capital Corporation and Keystone Trust
Company; Director of the Principal Underwriter, KIRC, and
Fiduciary Investment Company, Inc. ("FICO"); Director of
Boston Children's Services Association; Trustee of Anatolia
College, Middlesex School, and Middlebury College; Member,
Board of Governors, New England Medical Center; former
Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"); former Director and Vice President,
Robert Van Partners, Inc.; and former Trustee of Neworld Bank.

FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Investments Family of Funds; Pro
fessor, Finance Department, George Washington University;
President, Amling & Company (investment advice); Member, Board
of Advisers, Credito Emilano (banking); and former Economics
and Financial Consultant, Riggs National Bank.

CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director
of all other funds in the Keystone Investments Family of
Funds; Investment Counselor to Appleton Partners, Inc.; former
Managing Director, Seaward Management Corporation (investment
advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company
(investment advice).

*GEORGE S. BISSELL: Chairman of the Board and Trustee of the
Fund; Chairman of the Board and Trustee or Director of all
other funds in the Keystone Investments Family of Funds;
Director of Keystone Investments; Chairman of the Board and
Trustee of Anatolia College; Trustee of University Hospital
(and Chairman of its Investment Committee); former Director
and Chairman of the Board of Hartwell Keystone; and former
Chairman of the Board and Chief Executive Officer of Keystone
Investments.

EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of
all other funds in the Keystone Investments Family of Funds;
Director and former Executive Vice President, National
Alliance of Business; former Vice President, Educational
Testing Services; former Dean, School of Business, Adelphi
University; and former Executive Director, Coalition of Essen
tial Schools, Brown University.

CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of
all other funds in the Keystone Investments Family of Funds;
former Group Vice President, Textron Corp.; and former
Director, Peoples Bank (Charlotte, NC).

K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Investments Family of Funds;
Chairman of the Board, Director, and Executive Vice President,
The London Harness Company; Managing Partner, Roscommon
Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief
Executive Officer, Gifford Gifts of Fine Foods; Chairman,
Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (educa
tion); and former Director, Keystone Investments and Keystone.

LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Investments Family of Funds;
Director of Phoenix Total Return Fund and Equifax, Inc.;
Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund,
and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.

F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of
all other funds in the Keystone Investments Family of Funds;
Of Counsel, Keyser, Crowley & Meub, P.C.; Member, Governor's
(VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Director, Vermont Yankee Nuclear Power
Corporation, Vermont Electric Power Company, Inc., Grand Trunk
Corporation, Central Vermont Railway, Inc., S.K.I. Ltd.,
Sherburne Corporation, Union Mutual Fire Insurance Company,
New England Guaranty Insurance Company, Inc., and the
Investment Company Institute; former Governor of Vermont;
former Director and President, Associated Industries of
Vermont; former Chairman and President, Vermont Marble
Company; former Director of Keystone; and former Director and
Chairman of the Board, Green Mountain Bank.

DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of
all other funds in the Keystone Investments Family of Funds;
Executive Vice President, DHR International, Inc. (executive
recruitment); former Senior Vice President, Boyden Inter-
national Inc. (executive recruitment); and Director, Commerce
and Industry Association of New Jersey, 411 International,
Inc., and J & M Cumming Paper Co.

RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Investments Family of Funds;
Chairman, Environmental Warranty, Inc., and Consultant, Drake
Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Con
necticut, Hartford Hospital, Old State House Association, and
Enhance Financial Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Kingswood-Oxford School and
Greater Hartford YMCA; former Director, Executive Vice
President, and Vice Chairman of The Travelers Corporation;
former Managing Director of Russell Miller, Inc.; and former
Member, Georgetown College Board of Advisors.

ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Investments Family of Funds; Part
ner, Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano,
P.C.; former President, Nassau County Bar Association; former
Associate Dean and Professor of Law, St. John's University
School of Law.

EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice
President of all other funds in the Keystone Investments
Family of Funds; Director, Senior Vice President, Chief
Financial Officer, and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone
Capital Corporation, and Keystone Trust Company; Treasurer of
Keystone Institutional and FICO; Treasurer and Director of
Keystone Management and Keystone Software; Vice President and
Treasurer of KFIA; Director of KIRC; former Treasurer and
Director of Hartwell Keystone; and former Treasurer of Robert
Van Partners, Inc.

JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice
President of all other funds in the Keystone Investments
Family of Funds; and President of Keystone.

J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other
funds in the Keystone Investments Family of Funds; Vice
President and former Controller of Keystone Investments,
Keystone, the Principal Underwriter, FICO, and Keystone
Software; and former Controller of Keystone Asset Corporation
and Keystone Capital Corporation.

ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of
the Fund; Senior Vice President and Secretary of all other
funds in the Keystone Investments Family of Funds; Senior Vice
President, General Counsel, and Secretary of Keystone; Senior
Vice President, General Counsel, Secretary, and Director of
the Principal Underwriter, Keystone Management, and Keystone
Software; Senior Vice President and General Counsel of
Keystone Institutional; Senior Vice President, General
Counsel, and Director of FICO and KIRC; Vice President and
Secretary of KFIA; Senior Vice President, General Counsel, and
Secretary of Keystone Investments, Keystone Asset Corporation,
Keystone Capital Corporation, and Keystone Trust Company; and
former Senior Vice President and Secretary of Hartwell
Keystone and Robert Van Partners, Inc.

DONALD C. DATES: Vice President of the Fund; Vice President of
certain other funds in the Keystone Investments Family of
Funds; and Senior Vice President of Keystone.

* This Trustee may be considered an "interested person" within the meaning
of the 1940 Act.

Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter, and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer, and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.

During the fiscal period ended May 31, 1996, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. During
the same period, the unaffiliated Trustees received no retainers or fees from
the Fund. Annual retainers and meeting fees paid by all funds in the Keystone
Investments Family of Funds (which includes over 30 mutual funds) for the
calendar year ended December 31, 1995 totaled approximately $450,716. As of July
31, 1996, the Trustees and officers beneficially owned less than 1% of each of
the Fund's then outstanding Class A, Class B, and Class C shares.

The address of all of the Fund's Trustees and officers and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.

INVESTMENT ADVISER

Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.

Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone and its affiliates. The
shares of Keystone Investments common stock beneficially owned by management are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr., and Rosemary
D. Van Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel, and general corporate services to Keystone, its affiliates, and the
Keystone Investments Family of Funds.

Pursuant to the Advisory Agreement and subject to the supervision of the
Fund's Board of Trustees, Keystone (1) furnishes to the Fund investment
advisory, management and administrative services, office facilities, equipment
and personnel in connection with its services for managing the investment and
reinvestment of the Fund's assets; and (2) pays (or causes to be paid) the
compensation of all officers and Trustees of the Fund who are affiliated with
the investment adviser and pays all expenses of Keystone incurred in connection
with the provision of its services.

All charges and expenses, other than those specifically referred to as
being borne by Keystone, will be paid by the Fund, including, but not limited
to, custodian charges and expenses; bookkeeping and auditors' charges and
expenses; transfer agent charges and expenses; fees of Independent Trustees;
brokerage commissions, brokers' fees and expenses; issue and transfer taxes;
costs and expenses under the Distribution Plans; taxes and trust fees payable to
governmental agencies; the cost of share certificates; fees and expenses of the
registration and qualification of the Fund and its shares with the Commission or
under state or other securities laws; expenses of preparing, printing and
mailing prospectuses, statements of additional information, notices, reports and
proxy materials to shareholders of the Fund; expenses of shareholders' and
Trustees' meetings; charges and expenses of legal counsel for the Fund and for
the Independent Trustees of the Fund on matters relating to the Fund; charges
and expenses of filing annual and other reports with the Commission and other
authorities, and all extraordinary charges and expenses of the Fund.

The Fund pays Keystone a fee for its services at the annual rate set forth
below:

Aggregate Net Asset Value
Annual Management Fee of the shares of the Fund

Keystone's fee is computed as of the close of business each business dayand
payable daily.

As a continuing condition of registration of shares in a state, Keystone
has agreed to reimburse the Fund annually for certain operating expenses
incurred by the Fund in excess of certain percentages of the Fund's average
daily net assets. However, Keystone is not required to make such reimbursements
to an extent which would result in the Fund's inability to qualify as a
regulated investment company under provisions of the Internal Revenue Code. This
condition may be modified or eliminated in the future.

The Fund is subject to certain annual state expense limitations, the most
restrictive of which is as follows:

2.50% of the first $30 million of Fund average net assets;
2.00% of the next $70 million of Fund average net assets; and
1.50% of Fund average net assets over $100 million.

During the period ended May 31, 1996, the Fund paid or accrued to Keystone
investment management and administrative services fees of $21,221, which
represented 0.70% of the Fund's average daily net asset value on an annualized
basis.

Keystone has voluntarily agreed to limit the expenses of the Fund's Class
A, Class B, and Class C shares to 1.95%, 2.70% and 2.70%, respectively, of each
such class's average daily net assets. These voluntary expense limitations are
continued on a calendar month-by-month basis and may be modified or terminated
in the future. Keystone will not be required to make any such reimbursement to
the extent it would result in the Fund's inability to qualify as a regulated
investment company under the provisions of the Internal Revenue Code. In
accordance with these voluntary expense limitations, Keystone reimbursed the
Fund $48,532 for the fiscal period ended May 31, 1996. Keystone does not intend
to seek repayment of this reimbursement.

Under the Advisory Agreement, any liability of Keystone in connection with
rendering services thereunder is limited to situations involving its willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties.

The Advisory Agreement continues in effect only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.

PRINCIPAL UNDERWRITER

The Fund has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with the Principal Underwriter, a Delaware
corporation and a wholly-owned subsidiary of Keystone.

The Principal Underwriter, as agent, currently has the right to obtain
subscriptions for and to sell to the public shares of the Fund. In so doing, the
Principal Underwriter may retain and employ representatives to promote
distribution of the Fund's shares and may obtain orders from brokers, dealers,
and others, acting as principals, for sales of shares. No such representative,
dealer or broker has any authority to act as agent for the Fund. The Principal
Underwriter has not undertaken to buy or to find purchasers for any specific
number of shares. The Principal Underwriter may receive payments from the Fund
pursuant to the Fund's Distribution Plans.

All subscriptions and sales of shares by the Principal Underwriter are at
the offering price of the shares, such price being in accordance with the
provisions of the Fund's Declaration of Trust, By-Laws, current prospectus and
statement of additional information. All orders are subject to acceptance by the
Fund and the Fund reserves the right, in its sole discretion, to reject any
order received. Under the Underwriting Agreements, the Fund is not liable to
anyone for failure to accept any order.

The Fund has agreed under the Underwriting Agreements to pay all expenses
in connection with registration of its shares with the Commission and auditing
and filing fees in connection with registration of its shares under the various
state "blue-sky" laws.

From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may provide to
selected dealers promotional materials and selling aids, including, but not
limited to, personal computers, related software, and Fund data files.

The Principal Underwriter has agreed that it will, in all respects, duly
conform with all state and federal laws applicable to the sale of the shares.
The Principal Underwriter has also agreed that it will indemnify and hold
harmless the Fund and each person who has been, is, or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.

The Underwriting Agreements will remain in effect as long as their terms
and continuance are approved by a majority of the Fund's Independent Trustees at
least annually at a meeting called for that purpose, and if their continuance is
approved annually by vote of a majority of Trustees, or by vote of a majority of
the outstanding shares of the Fund.

The Underwriting Agreements may be terminated by the Fund, without penalty,
on 60 days' written notice by the Board of Trustees or by a vote of a majority
of the Fund's outstanding shares. The Underwriting Agreements will terminate
automatically upon their assignment (as defined in the 1940 Act).

DECLARATION OF TRUST

Massachusetts Business Trust

The Fund is a Massachusetts business trust established under a Declaration
of Trust dated December 13, 1995, as later amended (the "Declaration of Trust").
The Fund is similar in most respects to a business corporation, with the
exception of shareholder liability as described below. A copy of the Declaration
of Trust is filed as an exhibit to the Registration Statement of which this
statement of additional information is a part. This summary is qualified in its
entirety by reference to the Declaration of Trust.

Description of Shares

The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues Class A, B, and C shares, but may issue additional classes or series of
shares.

Shareholder Liability

Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Fund's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Fund and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Fund or the Trustees; and (2) provides for indemnification out
of the Fund's property for any shareholder held personally liable for the
obligations of the Fund.

Voting Rights

Under the terms of the Declaration of Trust, the Fund does not hold annual
meetings. At meetings called for the initial election of Trustees or to consider
other matters, shares are entitled to one vote per share. Shares generally vote
together as one class on all matters. Classes of shares of the Fund have equal
voting rights except that each class of shares has exclusive voting rights with
respect to its respective Distribution Plan. No amendment may be made to the
Declaration of Trust that adversely affects any class of shares without the
approval of a majority of the shares of that class. Shares have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees to be elected
at a meeting and, in such event, the holders of the remaining 50% or less of the
shares voting will not be able to elect any Trustees.

After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.

Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the Fund's outstanding shares.
Any Trustee may voluntarily resign from office. Limitation of Trustees'
Liability

The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.

STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS

Total return quotations for a class of shares of the Fund, as they may
appear from time to time in advertisements, are calculated by finding the
average annual compounded rates of return over one, five and ten years periods,
or the time periods for which such class of shares has been effective, whichever
is relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added and the maximum sales
charge and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.

The cumulative total returns for the period from February 21, 1996
(commencement of operations) to May 31, 1996 were 5.09%, 6.20%, and 10.20% for
the Fund's Class A, Class B, and Class C shares, respectively.

Current yield quotations, as they may appear from time to time in
advertisements, will consist of a quotation based on a 30-day period ended on
the date of the most recent balance sheet of the Fund computed by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund does not presently
intend to advertise current yield.

ADDITIONAL INFORMATION

State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "Custodian") of all securities and
cash of the Fund. The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.

KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the Independent Auditors of the Fund.

KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, a
wholly-owned subsidiary of Keystone, is the Fund's transfer agent and dividend
disbursing agent. Effective on or about September 23, 1996, KIRC's address will
be 200 Berkeley Street, Boston, MA 20116-5034.

As of July 31, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book Entry,
4800 Deer Lake Dr. E, 3rd Floor, Jacksonville, FL 32246-6484, owned of record
27.683% of the outstanding Class A shares of the Fund.

As of July 31, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book Entry,
4800 Deer Lake Dr. E, 3rd Floor, Jacksonville, FL 32246-6484, owned of record
40.527% of the outstanding Class B shares of the Fund.

As of July 31, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book Entry,
4800 Deer Lake Dr. E, 3rd Floor, Jacksonville, FL 32246-6484, owned of record
66.343% of the outstanding Class C shares of the Fund.

As of July 31, 1996, PaineWebber FBO, LD Hancock Foundation Inc., P.O. Box
2203, Tupelo, MS 38803, owned of record 9.497% of the outstanding Class C shares
of the Fund.

Except as otherwise stated in its prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in its prospectus
without shareholder approval, including the right to impose or change fees for
services provided.

No dealer, salesman, or other person is authorized to give any information
or to make any representation not contained in the Fund's prospectus, statement
of additional information, or in supplemental sales literature issued by the
Fund or the Principal Underwriter, and no person is entitled to rely on any
information or representation not contained therein.

The Fund's prospectus and statement of additional information omit certain
information contained in the Fund's Registration Statement filed with the
Securities and Exchange Commission ("SEC"), which may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the fee prescribed by the
rules and regulations promulgated by the SEC.

The Fund is one of 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Fund Family consists of the
following Funds having the various investment objectives described below:

Keystone America Hartwell Emerging Growth Fund, Inc. - Seeks
capital appreciation by investment primarily in small and medium-
sized companies in a relatively early stage of development that are
principally traded in the over-the-counter market.

Keystone Balanced Fund II - Seeks current income and capital
appreciation consistent with the preservation of principal.

Keystone Capital Preservation and Income Fund - Seeks high current
income, consistent with low volatility of principal, by investing
in adjustable rate securities issued by the U.S. government, its
agencies or instrumentalities.

Keystone Fund of the Americas - Seeks long-term growth of capital
through investments in equity and debt securities in North America
(the United States and Canada), and Latin America (Mexico and
countries in South and Central America).

Keystone Fund for Total Return - Seeks total return from a
combination of capital growth and income from dividend paying
common stocks, preferred stocks, convertible bonds, other fixed-
income securities and foreign securities (up to 50%).

Keystone Global Opportunities Fund - Seeks long-term capital growth
from foreign and domestic securities.

Keystone Government Securities Fund - Seeks income and capital
preservation from U.S. government securities.

Keystone Intermediate Term Bond Fund - Seeks income, capital
preservation and price appreciation potential from investment grade
corporate bonds.

Keystone Omega Fund - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.

Keystone Strategic Development Fund - Seeks long-term capital
growth by investing primarily in equity securities.

Keystone Small Company Growth Fund II - Seeks long-term capital
growth by investing primarily in equity securities with small
market capitalizations.

Keystone Strategic Income Fund - Seeks high yield and capital
appreciation potential from corporate bonds, discount bonds,
convertible bonds, preferred stock and foreign bonds.

Keystone State Tax Free Fund - A mutual fund consisting of five
separate series of shares investing in different portfolio
securities which seeks the highest possible current income, exempt
from federal income taxes and applicable state taxes.

Keystone State Tax Free Fund - Series II - A mutual fund consisting
of two separate series of shares investing in different portfolio
securities which seeks the highest possible current income, exempt
from federal income taxes and applicable state taxes.

Keystone Tax Free Income Fund - Seeks income exempt from federal
income taxes and capital preservation from the four highest grades
of municipal bonds.

Keystone World Bond Fund - Seeks total return from interest income,
capital gains and losses and currency exchange gains and losses
from investment in debt securities denominated in U.S. and foreign
currencies.

<PAGE>

APPENDIX

COMMON AND PREFERRED STOCK RATINGS

S&P's Earnings and Dividend Rankings for Common Stocks

Because the investment process involves assessment of various factors, such
as product and industry position, corporate resources and financial policy, with
results that make some common stocks more highly esteemed than others, Standard
& Poor's Corporation (S&P) believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
S&P rankings, however, do not reflect all of the factors, tangible or
intangible, that bear on stock quality.

Growth and stability of earnings and dividends are deemed key elements in
establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.

S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's perfor mance under varying economic conditions.
S&P measures growth, stability within the trend line and cyclicity. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.

The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:

A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower

S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.

Moody's Common Stock Rankings

Moody's presents a concise statement of the important characteristics of a
company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and
long-term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long-term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten year comparative
statistical analysis.

This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.

These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:

(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade

Moody's Preferred Stock Ratings

Preferred stock ratings and their definitions are as follows:

1. aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.

2. aa: An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

3. a: An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

4. baa: An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.

5. ba: An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.

6. b: An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

7. caa: An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.

8. ca: An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.

9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.

CORPORATE BOND RATINGS

S&P Corporate Bond Ratings

An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.

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

a. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;

b. Nature of and provisions of the obligation; and

c. Protection afforded by and relative position of the
obligation in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.

PLUS (+) OR MINUS (-): To provide more detailed indications
of credit quality, ratings from "AA" to "A" may be modified by
the addition of a plus or minus sign to show relative standing
within the major rating categories.

Bond ratings are as follows:

1. AAA - Debt rated AAA has the highest rating assigned
by S&P. Capacity to pay interest and repay principal is
extremely strong.

2. AA - Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the higher rated
issues only in small degree.

3. A - Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.

4. BBB - Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.

5. BB, B, CCC, CC and C - Debt rated BB, B, CCC, CC and C
is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

Moody's Corporate Bond Ratings

Moody's ratings are as follows:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

MONEY MARKET INSTRUMENTS

The Fund's investments in commercial paper are limited to those rated A-1
by Standard & Poor's Corporation, Prime-1 by Moody's Investors Service, Inc. or
F-1 by Fitch Investors Service, Inc. These ratings and other money market
instruments are described as follows:

Commercial Paper Ratings

Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash requirements. The
issuer's long-term senior debt is rated "A" or better, although in some cases
"BBB" credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry.

The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.

The rating F-1 is the highest rating assigned by Fitch. Among the factors
considered by Fitch in assigning this rating are: (1) the issuer's liquidity;
(2) its standing in the industry; (3) the size of its debt; (4) its ability to
service its debt; (5) its profitability; (6) its return on equity; (7) its
alternative sources of financing; and (8) its ability to access the capital
markets. Analysis of the relative strength or weakness of these factors and
others determines whether an issuer's commercial paper is rated F-1.

United States Government Securities

Securities issued or guaranteed by the United States Government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.

Securities issued or guaranteed by the United States Government or its
agencies or instrumentalities include direct obligations of the United States
Treasury and securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, The Tennessee Valley
Authority, District of Columbia Armory Board and Federal National Mortgage
Association.

Some obligations of United States Government agencies and
instrumentalities, such as Treasury bills and Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the United States; others, such as securities of Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; still others,
such as bonds issued by the Federal National Mortgage Association, a private
corporation, are supported only by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in the securities issued by
such an instrumentality only when Keystone determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. United States Government securities will not include international
agencies or instrumental-ities in which the United States Government, its
agencies or instrumentalities participate, such as the World Bank, the Asian
Development Bank or the Inter-American Development Bank, or issues insured by
the Federal Deposit Insurance Corporation.

OPTIONS TRANSACTIONS

The Fund is authorized to write (i.e., sell) covered call options and to
purchase call options to close out covered call options previously written. A
call option obligates a writer to sell, and gives a purchaser the right to buy,
the underlying security at the stated exercise price at any time until the
stated expiration date.

The Fund will only write call options which are covered, which means that
the Fund will own the underlying security (or other securities, such as
convertible securities, which are acceptable for escrow) when it writes the call
option and until the Fund's obligation to sell the underlying security is
extinguished by exercise or expiration of the call option or the purchase of a
call option covering the same underlying security and having the same exercise
price and expiration date. The Fund will receive a premium for writing a call
option, but will give up, until the expiration date, the opportunity to profit
from an increase in the underlying security's price above the exercise price.
The Fund will retain the risk of loss from a decrease in the price of the
underlying security. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked options which the Fund will not do) but capable of
enhancing the Fund's total returns.

The premium received by the Fund for writing a covered call option will be
recorded as a liability in the Fund's statement of assets and liabilities. This
liability will be adjusted daily to the option's current market value, which
will be the latest sale price at the time as of which the net asset value per
share of the Fund is computed (the close of the New York Stock Exchange), or, in
the absence of such sale, at the latest bid quotation. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction or delivery of the underlying security upon exercise of
the option.

Many options are traded on registered securities exchanges. Options traded
on such exchanges are issued by the Options Clearing Corporation (OCC),a
clearing corporation which assumes responsibility for the completion of options
transactions.

The Fund will purchase call options only to close out a covered call option
it has written. When it appears that a covered call option written by the Fund
is likely to be exercised, the Fund may consider it appropriate to avoid having
to sell the underlying security. Or, the Fund may wish to extinguish a covered
call option which it has written in order to be free to sell the underlying
security to realize a profit on the previously written call option or to write
another covered call option on the underlying security. In all such instances,
the Fund can close out the previously written call option by purchasing a call
option on the same underlying security with the same exercise price and
expiration date. (The Fund may, under certain circumstances, also be able to
transfer a previously written call option.) The Fund will realize a short-term
capital gain if the amount paid to purchase the call option plus transaction
costs is less than the premium received for writing the covered call option. The
Fund will realize a short-term capital loss if the amount paid to purchase the
call option plus transaction costs is greater than the premium received for
writing the covered call option.

A previously written call option can be closed out by purchasing an
identical call option only in a secondary market for the call option. Although
the Fund will generally write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect a closing transaction in a particular option. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying securities until the option expires or it
delivers the underlying securities upon exercise.

If a substantial number of the call options written by the Fund are
exercised, the Fund's rate of portfolio turnover may exceed historical levels.
This would result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
covered call options and the purchase of call options to close out previously
written options. Such brokerage commissions are normally higher than those
applicable to purchases and sales of portfolio securities.

In the past the Fund has qualified for, and elected to receive, the special
tax treatment afforded regulated investment companies under Subchapter M of the
Internal Revenue Code. Although the Fund intends to continue to qualify for such
tax treatment, in order to do so it must, among other things, derive less than
30% of its gross income from gains from the sale or other disposition of
securities held for less than three months. Because of this, the Fund may be
restricted in the writing of call options where the underlying securities have
been held less than three months, in the writing of covered call options which
expire in less than three months, and in effecting closing purchases with
respect to options which were written less than three months earlier. As a
result, the Fund may elect to forego otherwise favorable investment
opportunities and may elect to avoid or delay effecting closing purchases or
selling portfolio securities, with the risk that a potential loss may be
increased or a potential gain may be reduced or turned into a loss.

Under the Internal Revenue Code of 1954, as amended, gain or loss
attributable to a closing transaction and premiums received by the Fund for
writing a covered call option which is not exercised may constitute short-term
capital gain or loss. Under provisions of the Tax Reform Act of 1986, effective
for taxable years beginning after October 22, 1986, a gain on an option
transaction which qualifies as a "designated hedge" transaction under Treasury
regulations may be offset by realized or unrealized losses on such designated
transaction. The netting of gain against such losses could result in a reduction
in gross income from options transactions for purposes of the 30 percent test.

FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS

The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.

For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.

The Fund intends to engage in options transactions which are related to
currency or other financial futures contracts for the hedging purposes and in
connection with the hedging strategies described above.

Although techniques other than sales and purchases of futures contracts and
related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.

Futures Contracts

Futures contracts are transactions in the commodities markets rather than
in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.

U.S. futures contracts are traded only on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant (Broker) effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission (CFTC) and National Futures Association (NFA).

Interest Rate Futures Contracts

The sale of an interest rate futures contract creates an obligation by the
Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by the Fund, as purchaser,
to accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determination is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.

Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
(GNMA) certificates, 90- day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.

Index Based Futures Contracts

a. Stock Index Futures Contracts

A stock index assigns relative values to the common stocks included in the
index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.

Currently, stock index futures contracts can be purchased or sold on the
Standard and Poor's Corporation (S&P) Index of 500 Stocks, the S&P Index of 100
Stocks, the New York Stock Exchange Composite Index, the Value Line Index and
the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.

The Fund does not believe that differences between existing stock indices
will create any differences in the price movements of the stock index futures
contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.

b. Other Index Based Futures Contracts

It is expected that bond index and other financially based index futures
contracts will be developed in the future. It is anticipated that such index
based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.

The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract.

Subsequent payments, called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.

The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.

Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.

As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs, represents the profit or loss to the Fund.

There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.

Options on Currency and Other Financial Futures

The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency or other financial futures contracts are similar
to options on stocks except that an option on a currency financial futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
currency or other instruments making up a financial futures index, at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.

The Fund intends to use options on currency or other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.

Purchase of Put Options on Futures Contracts

The purchase of protective put options on currency or other financial
futures contracts is analagous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.

Purchase of Call Options on Futures Contracts

The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on futures contracts may be purchased to
hedge against an interest rate increase or a market advance when the Fund is not
fully invested. Use of New Investment Techniques Involving Currency and Other
Financial Futures Contracts or Related Options

The Fund may employ new investment techniques involving currency and other
financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described herein.

Limitations on Purchase and Sale of Futures Contracts and Related
Options on Such Futures Contracts

The Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.

The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.

FOREIGN CURRENCY TRANSACTIONS

As discussed above, the Fund may invest in securities of foreign issuers.
When the Fund invests in foreign securities they usually will be denominated in
foreign currencies and the Fund temporarily may hold funds in foreign
currencies. Thus, the Fund's share value will be affected by changes in exchange
rates.

Forward Currency Contracts

As one way of managing exchange rate risk, the Fund may engage in forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.

Currency Futures Contracts

Currency futures contracts are bilateral agreements under which two parties
agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC) and National Futures Association
(NFA). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to engage in currency futures contracts only for
hedging purposes, and not for speculation. The Fund may enter into currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.

Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc, and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark, French Francs and Swiss
Francs, C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and
1,000,000 for the Peso. In contrast to forward currency exchange contracts which
can be traded at any time, only four value dates per year are available, the
third Wednesday of March, June, September and December.

Foreign Currency Options Transactions

Foreign currency options (as opposed to futures) are traded in a variety of
currencies in both the United States and Europe. On the Philadelphia Stock
Exchange, for example, contracts for half the size of the corresponding futures
contracts on the Chicago Board - Options Exchange are traded with up to nine
months maturity in marks, sterling, yen, Swiss francs, French francs and
Canadian dollars. Options can be exercised at any time during the contract life,
and require a deposit subject to normal margin requirements. Since a futures
contract must be exercised, the Fund must continually make up the margin
balance. As a result, a wrong price move could result in the Fund losing more
than the original investment, as it cannot walk away from the futures contract
as it can an option contract.

The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.

The Fund intends to use foreign currency option transactions in connection
with hedging strategies.

Purchase of Put Options on Foreign Currencies

The purchase of protective put options on a foreign currency is analagous
to the purchase of protective puts on individual stocks, where an absolute level
of protection is sought below which no additional economic loss would be
incurred by the Fund. Put options may be purchased to hedge a portfolio of
foreign stocks or foreign debt instruments or a position in the foreign currency
upon which the put option is based.

Purchase of Call Options on Foreign Currencies

The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments,
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.

The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.

Currency Trading Risks

Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.

Exchange Rate Risk

Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.

Maturity Gaps and Interest Rate Risk

Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.

Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.

Credit Risk

Whenever the Fund enters into a foreign exchange contract, it faces a risk,
however small, that the counterparty will not perform under the contract. As a
result there is a credit risk, although no extension of "credit" is intended. To
limit credit risk, the Fund intends to evaluate the creditworthiness of each
other party. The Fund does not intend to trade more than 5% of its net assets
under foreign exchange contracts with one party.

Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.

Another form of credit risk stems from the time zone difference between the
U.S. and foreign nations. If the Fund sells small sterling it generally must pay
pounds to a counterparty earlier in the day than it will be credited with
dollars in New York. In the intervening hours, the buyer can go into bankruptcy
or can be declared insolvent. Thus, the dollars may never be credited to the
Fund.

Country Risk

At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents, or limits on inflows of investment funds from abroad. Governments
take such measures for example to improve control over the domestic banking
system, or to influence the pattern of receipts and payments between residents
and foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payments interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.

Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.

Other changes in official regulations influence international investment
transactions. If one of the factors affecting the buying or selling of a
currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.

Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years, or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberal-izations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.

Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non- residents. A few countries have established
tiered markets, funneling commercial transactions through one market and
financial transactions through another. Outside the major industrial countries,
relatively free foreign exchange markets are rare and control on foreign
currency transactions are extensive.

Another aspect of country risk has to do with the possibility that the Fund
may be dealing with a foreign trader whose home country is facing a payments
problem. Even though the foreign trader intends to perform on its foreign
exchange contracts, the contracts are tied to other external liabilities the
country has incurred. As a result performance may be delayed, and can result in
unanticipated cost to the Fund. This aspect of country risk is a major element
in the Fund's credit judgment as to with whom it will deal and in what amounts.

ADDITIONAL INFORMATION REGARDING DERIVATIVE INSTRUMENTS

Derivatives have been variously defined to include forwards, futures,
options, mortgage-backed securities, other asset-backed securities and
structured securities, such as interest rate swaps, equity swaps, index swaps,
currency swaps and caps and floors. These basic vehicles can also be combined to
create more complex products, called hybrid derivatives. Options, fututes and
forwards are discussed elsewhere in the Fund's prospectus and statement of
additional information. The following discussion addresses mortgage backed and
other asset-backed securities, structured securities and other instruments.

COLLATERALIZED MORTGAGE OBLIGATIONS

The Fund, if allowed, may also invest in fixed rate and adjustable rate
collateralized mortgage obligations ("CMOs"), including CMOs with rates that
move inversely to market rates that are issued by and guaranteed as to principal
and interest by the U.S. government, its agencies or instrumentalities. The
principal governmental issuer of CMOs is FNMA. In addition, FHLMC issues a
significant number of CMOs. The Fund, if permitted to invest in CMOs, will not
invest in CMOs that are issued by private issuers. CMOs are debt obligations
collateralized by Mortgage Securities in which the payment of the principal and
interest is supported by the credit of, or guaranteed by, the U.S. government or
an agency or instrumentality of the U.S. government. The secondary market for
CMOs is actively traded.

CMOs are structured by redirecting the total payment of principal and
interest on the underlying Mortgage Securities used as collateral to create
classes with different interest rates, maturities and payment schedules. Instead
of interest and principal payments on the underlying Mortgage Securities being
passed through or paid pro rata to each holder (e.g., the Fund), each class of a
CMO is paid from and secured by a separate priority payment of the cash flow
generated by the pledged Mortgage Securities.

Most CMO issues have at least four classes. Classes with an earlier
maturity receive priority on payments to assure the early maturity. After the
first class is redeemed, excess cash flow not necessary to pay interest on the
remaining classes is directed to the repayment of the next maturing class until
that class is fully redeemed. This process continues until all classes of the
CMO issue have been paid in full. Among the CMO classes available are floating
(adjustable) rate classes, which have characteristics similar to ARMS, and
inverse floating rate classes whose coupons vary inversely with the rate of some
market index. The Fund, if allowed to purchase CMOs, may purchase any class of
CMO other than the residual (final) class.

INTEREST-RATE SWAP CONTRACTS

Interest rate swaps are over-the-counter ("OTC") agreements between parties
and counterparties to make periodic payments to each other for a stated time,
generally entered into for the purpose of changing the nature or amount of
interest being received on debt securities held by one or both parties. The
calculation of these payments is based on an agreed-upon amount called the
"notional amount." The notional amount is not typically exchanged in swaps
(except in currency swaps). The periodic payments may be fixed or floating.
Floating payments change (positively or inversely) with fluctuations in interest
or currency rates or equity or commodity prices, depending on the swap
contract's terms.

Swaps may be used to hedge against adverse changes in interest rates, for
instance. Thus, if permitted by its investment policies, the Fund may have a
portfolio of debt instruments (ARM's, for instance) the floating interest rates
of which adjust frequently because they are tied positively to changes in market
interest rates. The Fund would then be exposed to interest rate risk because a
decline in interest rates would reduce the interest receipts on its portfolio.
If the investment adviser believed interest rates would decline, the Fund, if
permitted by its investment policies, could enter into an interest rate swap
with another financial institution to hedge the interest rate risk. In the swap
contract, the Fund would agree to make payments based on a floating interest
rate in exchange for receiving payments based on a fixed interest rate.
Thereafter, if interest rates declined, the Fund's fixed rate receipts on the
swap would offset the reduction in its portfolio receipts. If interest rates
rose, the higher rates the Fund could obtain from new portfolio investments
(assuming sale of existing investments) would offset the higher rates it paid
under the swap agreement.

EQUITY SWAP CONTRACTS

The counterparty to an equity swap contract would typically be a bank,
investment banking firm or broker/dealer. For example, the counterparty would
generally agree to pay the Fund the amount, if any, by which the notional amount
of the equity swap contract would have increased in value if such notional
amount had been invested in the stocks comprising the S&P 500 Index in
proportion to the composition of the Index, plus the dividends that would have
been received on those stocks. The Fund would agree to pay to the counterparty a
floating rate of interest (typically the London Inter Bank Offered Rate) on the
notional amount of the equity swap contract plus the amount, if any, by which
that notional amount would have decreased in value had it been invested in such
index stocks. Therefore, the return to the Fund on any equity swap contract
should be the gain or loss on the notional amount plus dividends on the stocks
comprising the S&P 500 Index less the interest paid by the Fund on the notional
amount. If permitted by its investment policies, the Fund will only enter into
equity swap contracts on a net basis, i.e., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under equity swap contracts may be made at the
conclusion of the contract or periodically during its term.

If permitted by its investment policies, the Fund may also from time to
time enter into the opposite side of equity swap contracts (i.e., where the Fund
is obligated to pay the increase (net of interest) or received the decrease
(plus interest) on the contract) to reduce the amount of the Fund's equity
market exposure consistent with the Fund's investment objective(s) and policies.
These positions are sometimes referred to as "reverse equity swap contracts."

Equity swap contracts will not be used to leverage the Fund. Since the SEC
considers equity swap contracts and reverse equity swap contracts to be illiquid
securities, the Fund will not invest in equity swap contracts or reverse equity
swap contracts if the total value of such investments together with that of all
other illiquid securities that the Fund owns would exceed the Fund's limitations
on investments in illiquid securities.

The Fund does not believe that its obligations under equity swap contracts
or reverse equity swap contracts are senior securities and, accordingly, the
Fund will not treat them as being subject to its borrowing restrictions.
However, the net amount of the excess, if any, of the Fund's obligations over
its respective entitlement with respect to each equity swap contract and each
reverse equity swap contract will be accrued on a daily basis and an amount of
cash, U. S. Government Securities or other liquid high quality debt securities
having an aggregate market value at lease equal to the accrued excess will be
maintained in a segregated account by the Fund's Custodian.

CURRENCY SWAPS, INDEX SWAPS AND CAPS AND FLOORS

A currency swap is an agreement to exchange cash flows on a notional amount
of two or more currencies based on the relative value differential among them.
An index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of reference indices. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds an
agree-upon interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser to receive payments of interest on
a notional principal amount from the party selling such interest rate floor. If
permitted by the Fund's investment policies, the investment adviser expects to
enter into these types of transactions on behalf of the Fund primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date rather than for speculative purposes.
Accordingly, if permitted by the Fund's investment policies, the Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors unless it owns securities or other instruments
providing the income stream the Fund may be obligated to pay. Caps and floors
require segregation of assets with a value equal to the Fund's net obligation,
if any.

SPECIAL RISKS OF SWAPS, CAPS AND FLOORS

As with futures, options, forward contracts, and mortgage backed and other
asset-backed securities, the use of swap, cap and floor contracts exposes the
Fund to additional investment risk and transaction costs. These risks include
operational risk, market risk and credit risk.

Operational risk includes, among others, the risks that the investment
adviser will incorrectly analyze market conditions or will not employ
appropriate strategies and monitoring with respect to these instruments or will
be forced to defer closing out certain hedged positions to avoid adverse tax
consequences.

Market risk includes, among others, the risks of imperfect correlations
between the expected values of the contracts, or their underlying bases, and
movements in the prices of the securities or currencies being hedged, and the
possible absence of a liquid secondary market for any particular instrument at
any time. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively more illiquid. Nevertheless, a secondary market for swaps
is never assured, and caps and floors, which are more recent innovations for
which standardized documentation has not yet been fully developed, are much less
liquid than swaps.

Credit risk is primarily the risk that counterparties may be financially
unable to fulfill their contracts on a timely basis, if at all. If there is a
default by the counterparty to any such contract, the Fund will be limited to
contractual remedies pursuant to the agreements related to the transaction.
There is no assurance that contract counterparties will be able to meet contract
obligations or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed in
or prevented from obtaining payments owed to it pursuant to such contracts. The
Fund will closely monitor the credit of swap counterparties in order to minimize
this risk. The Fund will not enter into any equity swap contract or reverse
equity swap contract unless, at the time of entering into such transaction, the
unsecured senior debt of the counterparty is rated at least A by Moody's or S&P.

EXHIBIT A

GLOSSARY OF TERMS

Class of Options. Options covering the same underlying security.

Clearing Corporation. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.

Closing Purchase Transaction. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)

Closing Sale Transaction. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or seller by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller.)

Covered Call Option Writer. A writer of a call option who, so long as he
remains obligated as a writer, owns the shares of the underlying security holds
on a share for share basis a call on the same security where the exercise price
of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills, or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.

Covered Put Option Writer. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
broker-dealer carrying the writer's position or to the broker-dealer holds on a
share for share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written, or, if less than the exercise price of the put written, the
difference is maintained by the writer in cash, U.S. Treasury bills, or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.

Securities Exchange. A securities exchange on which call and put options
are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange, in the
Netherlands, the European Options Exchange, and in the United Kingdom, the Stock
Exchange (London).

Those issuers whose common stocks have been approved by the Exchanges as
underlying securities for options transactions are published in various
financial publications.

Commodities Exchange. A commodities exchange on which futures contracts are
traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago, Chicago Mercantile Exchange,
International Monetary Market, (a division of the Chicago Mercantile Exchange),
the Kansas City Board of Trade and the New York Futures Exchange.

Exercise Price. The price per unit at which the holder of a call option may
purchase the underlying security upon exercise or the holder of a put option may
sell the underlying security upon exercise.

Expiration Date. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.

Hedging. An action taken by an investor to neutralize an investment risk by
taking an investment position which will move in the opposite direction as the
risk being hedged so that a loss (or gain) on one will tend to be offset by a
gain (or loss) on the other.

Option. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation or
broker the number of shares of the underlying security covered by the option at
the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. A put option gives a holder the right to sell to
a Clearing Corporation the number of shares of the underlying security covered
by the put at the stated exercise price by the filing of an exercise notice
prior to the expiration time of the option. The Fund will sell ("write") and
purchase puts only on U.S. Exchanges.

Option Period. The time during which an option may be exercised, generally
from the date the option is written through its expiration date.

Premium. The price of an option agreed upon between the buyer and writer or
their agents in a transaction on the floor of an Exchange.

Series of Options. Options covering the same underlying security and having
the same exercise price and expiration date.

Stock Index. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the common stocks so included.

Index Based Futures Contract. An index based futures contract is a
bilateral agreement pursuant to which a party agrees to buy or deliver at
settlement an amount of cash equal to $500 times the difference between the
closing value of an index on the expiration date and the price at which the
futures contract is originally struck. Index based futures are traded on
Commodities Exchanges. Currently index based futures contracts can be purchased
or sold with respect to the Standard & Poor's Corporation (S&P) 500 Stock Index
and S&P 100 Stock Index on the Chicago Mercantile Exchange, the New York Stock
Exchange Composite Index on the New York Futures Exchange and the Value Line
Stock Index and Major Market Index on the Kansas City Board of Trade.

Underlying Security. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.

<PAGE>

- -------------------------------------
Keystone Small Company Growth Fund II

SCHEDULE OF INVESTMENTS--May 31, 1996

<TABLE>
<CAPTION>
Number
of Market
Shares Value
- ------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.0%) (a)
AIR TRANSPORTATION (1.3%)
Skywest, Inc. (b) 20,000 $ 380,000
- ------------------------------------------------------------------
AUTOMOTIVE (1.3%)
Masland Corp. (b) 14,600 383,250
- ------------------------------------------------------------------
BUILDING (3.7%)
Amre, Inc. 15,000 401,250
Champion Enterprises, Inc. 8,000 324,000
Oakwood Homes Corp. (b) 7,000 339,500
- ------------------------------------------------------------------
1,064,750
- ------------------------------------------------------------------
BUSINESS SERVICES (10.5%)
Allwaste, Inc. 102,000 433,500
G & K Services (b) 12,000 361,500
Insituform Technologies, Inc. 22,000 210,375
Molten Metal Technology, Inc. 15,000 453,750
Peak Technologies Group, Inc. 15,000 361,875
Thermo Cardiosystems, Inc. 15,000 765,000
US Filter Corp. 13,000 453,375
- ------------------------------------------------------------------
3,039,375
- ------------------------------------------------------------------
CHEMICALS (2.0%)
OM Group, Inc. (b) 15,000 603,750
- ------------------------------------------------------------------
CONSUMER GOODS (4.2%)
Blyth Industries, Inc. 10,000 460,000
DeVry, Inc. Del 10,000 397,500
USA Detergents, Inc. 9,100 360,588
- ------------------------------------------------------------------
1,218,088
- ------------------------------------------------------------------
DRUGS (5.9%)
Cephalon, Inc. 3,000 81,375
Cytotherapeutics 10,000 122,500
Gilead Sciences, Inc. 15,000 521,250
Human Genome Sciences, Inc. 2,400 88,200
Magainin Pharmaceutical, Inc. 20,000 225,000
Neurogen Corp. 12,000 346,500
Sequus Pharmaceuticals, Inc. 16,000 342,000
- ------------------------------------------------------------------
1,726,825
- ------------------------------------------------------------------
ELECTRONICS (2.5%)
Merix Corp. 15,000 $ 467,813
SDL, Inc. 6,000 257,250
- ------------------------------------------------------------------
725,063
- ------------------------------------------------------------------
FINANCE (8.5%)
BISYS Group, Inc. 22,000 804,375
BostonFed Bancorp, Inc. (b) 35,000 428,750
Investors Financial Services Corp. (b) 20,000 450,000
Queens County Bancorp (b) 7,000 334,250
RAC Financial Group, Inc. 15,000 436,875
- ------------------------------------------------------------------
2,454,250
- ------------------------------------------------------------------
HEALTH CARE (8.9%)
Conceptus, Inc. 15,000 270,000
Emeritus Corp. 35,000 708,750
Heartport, Inc. 13,000 503,750
Lifecore Biomedical Inc. 22,500 402,188
NCS Healthcare, Inc. 4,000 120,500
PhyMatrix Corp. 15,000 370,312
Ventritex, Inc. 10,000 199,375
- ------------------------------------------------------------------
2,574,875
- ------------------------------------------------------------------
INSURANCE (4.1%)
Blanch (E.W.) Holdings, Inc. (b) 25,000 531,250
HCC Insurance Holdings, Inc. 30,000 648,750
- ------------------------------------------------------------------
1,180,000
- ------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (4.7%)
Cognex Corp. 25,000 446,875
Natural Microsystems Corp. 12,100 453,750
Trimble Navigation Ltd. 20,000 480,000
- ------------------------------------------------------------------
1,380,625
- ------------------------------------------------------------------
OIL SERVICE (3.4%)
Falcon Drilling, Inc. 18,100 435,531
Newpark Resources, Inc. 15,000 543,750
- ------------------------------------------------------------------
979,281
- ------------------------------------------------------------------
RESTAURANTS (1.3%)
Apple South, Inc. (b) 15,000 375,000
- ------------------------------------------------------------------

</TABLE>

<PAGE>

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

SCHEDULE OF INVESTMENTS--May 31, 1996

<TABLE>
<CAPTION>
Number
of Market
Shares Value
- ------------------------------------------------------------------
<S> <C> <C>
RETAIL (4.4%)
CDW Computer Centers, Inc. 5,000 $ 409,375
Discount Auto Parts, Inc. 13,000 334,750
Sports Authority, Inc. 17,500 520,625
- ------------------------------------------------------------------
1,264,750
- ------------------------------------------------------------------
SOFTWARE SERVICES (14.2%)
Gemstar Group Ltd 10,000 332,500
Desktop Data, Inc. 16,000 532,000
Epic Design Technology, Inc. 17,000 507,875
Geoworks, Inc. 15,000 528,750
INSO Corp. 16,000 896,000
I2 Technologies, Inc. 13,000 520,000
Maxis, Inc. 17,500 406,875
Raptor System, Inc. 13,000 402,187
- ------------------------------------------------------------------
4,126,187
- ------------------------------------------------------------------
TELECOMMUNICATIONS (8.5%)
Brooks Fiber Properties, Inc. 4,800 161,400
Cidco, Inc. 20,000 790,000
Heartland Wireless Communications, Inc. 20,000 533,750
Spectrian Corp. 15,000 290,625
Winstar Communications, Inc. 20,000 625,000
Xylan Corp. 1,000 63,500
- ------------------------------------------------------------------
2,464,275
- ------------------------------------------------------------------
TEXTILES (1.4%)
Nautica Enterprises, Inc. 16,000 400,000
- ------------------------------------------------------------------
TRANSPORTATION (5.2%)
Landstar System, Inc. 17,000 $ 497,250
Railtex, Inc. 15,000 365,625
Swift Transportation Co., Inc. 35,000 643,125
- ------------------------------------------------------------------
1,506,000
- ------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost--$26,549,673) 27,846,344
- ------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost--$26,549,673) (c) 27,846,344
OTHER ASSETS AND LIABILITIES (4.0%) 1,157,414
- ------------------------------------------------------------------
NET ASSETS (100.0%) $29,003,758
- ------------------------------------------------------------------
</TABLE>
(a) All securities unless indicated with a (b) are non-income-producing.
(b) Income-producing security.
(c) The cost of investments for federal income tax purposes is $26,586,004.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at May 31, 1996 are as follows:

Gross unrealized appreciation $1,889,726
Gross unrealized depreciation (629,386)
---------
Net unrealized appreciation $1,260,340
=========
See Notes to Financial Statements.

<PAGE>

- -------------------------------------
Keystone Small Company Growth Fund II

FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
February 21, 1996
(Commencement of
Operations) to
May 31, 1996
==================================================================
<S> <C>
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02)
Net realized and unrealized gain on
investments 1.17
- ------------------------------------------------------------------
Total from investment operations 1.15
- ------------------------------------------------------------------
Net asset value end of period $ 11.15
==================================================================
Total return (b) 11.50%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.10%(a)(c)
Total expenses excluding reimbursement 3.70%(c)
Net investment loss (1.41%)(c)
Portfolio turnover rate 13%
Average commissions rate paid $0.0607
- ------------------------------------------------------------------
Net assets end of period (thousands) $ 8,201
==================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the period ended May
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.95%.
(b) Excluding applicable sales charges.
(c) Annualized.

See Notes to Financial Statements.

<PAGE>

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

FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)

<TABLE>
<CAPTION>
February 21, 1996
(Commencement of
Operations) to
May 31, 1996
==================================================================
<S> <C>
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.03)
Net realized and unrealized gain on
investments 1.15
- ------------------------------------------------------------------
Total from investment operations 1.12
- ------------------------------------------------------------------
Net asset value end of period $ 11.12
==================================================================
Total return (b) 11.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.85%(a)(c)
Total expenses excluding reimbursement 4.45%(c)
Net investment loss (2.16%)(c)
Portfolio turnover rate 13%
Average commissions rate paid $0.0607
- -----------------------------------------------------------------
Net assets end of period (thousands) $12,487
==================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the period ended May
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.70%.
(b) Excluding applicable sales charges.
(c) Annualized.

See Notes to Financial Statements.

<PAGE>

- -------------------------------------
Keystone Small Company Growth Fund II

FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 21, 1996
(Commencement of
Operations) to
May 31, 1996
==================================================================
<S> <C>
Net asset value beginning of period $ 10.00
- ------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02)
Net realized and unrealized gain on
investments 1.14
- ------------------------------------------------------------------
Total from investment operations 1.12
- -----------------------------------------------------------------
Net asset value end of period $ 11.12
==================================================================
Total return (b) 11.20%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.85%(a)(c)
Total expenses excluding reimbursement 4.44%(c)
Net investment loss (2.20%)(c)
Portfolio turnover rate 13%
Average commissions rate paid $0.0607
- ------------------------------------------------------------------
Net assets end of period (thousands) $ 8,315
==================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the period ended May
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 2.70%.
(b) Excluding applicable sales charges.
(c) Annualized.

See Notes to Financial Statements.

<PAGE>

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

STATEMENT OF ASSETS AND LIABILITIES--
May 31, 1996

<TABLE>
<S> <C>
Assets (Notes 1 and 4)
Investments at market value
(identified cost--$26,549,673) $27,846,344
Receivable for:
Investments sold 186,178
Fund shares sold 2,496,607
Dividends 1,730
Deferred organization expenses 23,897
Due from investment adviser 17,482
Prepaid expenses 65,517
- ------------------------------------------------------------------
Total assets 30,637,755
- ------------------------------------------------------------------
Liabilities (Notes 2 and 4)
Payable for:
Investments purchased 366,076
Fund shares redeemed 4,933
Due to custodian 1,101,535
Other accrued expenses 161,453
- ------------------------------------------------------------------
Total liabilities 1,633,997
- ------------------------------------------------------------------
Net assets $29,003,758
==================================================================
Net assets represented by (Note 1)
Paid-in capital $27,888,980
Accumulated net realized loss on investments (181,893)
Net unrealized appreciation on investments 1,296,671
- ------------------------------------------------------------------
Total net assets $29,003,758
==================================================================
Net Asset Value
Class A Shares
Net asset value of $8,201,278 / 735,452 shares
outstanding $11.15
Offering price per share ($11.15 / 0.9425)
(based on a sales charge of 5.75% of the
offering price on May 31, 1996) $11.83
Class B Shares
Net asset value of $12,487,070 / 1,123,065
shares outstanding $11.12
Class C Shares
Net asset value of $8,315,410 / 747,923 shares
outstanding $11.12
==================================================================
</TABLE>

STATEMENT OF OPERATIONS--
February 21, 1996 (Commencement
of Operations) to May 31, 1996

<TABLE>
<CAPTION>
<S> <C> <C>
Investment income (Note 1):
Dividends $ 6,737
Interest 9,342
- ------------------------------------------------------------------
Total Income 16,079
- ------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $ 21,221
Transfer agent fees 17,953
Accounting, auditing and legal 8,200
Custodian fees 22,572
Printing 6,800
Amortization of organization expenses 1,480
Distribution Plan expenses 23,682
Registration fees 25,744
Miscellaneous expenses 506
Reimbursement from investment adviser (48,532)
- ------------------------------------------------------------------
Total expenses 79,626
Less: Expenses paid indirectly
(Note 4) (4,406)
- ------------------------------------------------------------------
Net expenses 75,220
- ------------------------------------------------------------------
Net investment loss (59,141)
- ------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (Notes 1 and 3):
Net realized loss on investments (181,893)
Net change in unrealized appreciation
on investments 1,296,671
- ------------------------------------------------------------------
Net realized and unrealized gain
on investments 1,114,778
- ------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,055,637
=================================================================
</TABLE>
See Notes to Financial Statements.

<PAGE>

- -------------------------------------
Keystone Small Company Growth Fund II

STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
February 21,
1996
(Commencement
of Operations)
to May 31, 1996
=============================================================================
<S> <C>
Operations:
Net investment loss $ (59,141)
Net realized loss on investments (181,893)
Net change in unrealized appreciation on investments 1,296,671
- ---------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,055,637
- ---------------------------------------------------------------------------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A Shares 8,267,986
Class B Shares 12,267,442
Class C Shares 8,667,945
Payment for shares redeemed:
Class A Shares (410,693)
Class B Shares (284,594)
Class C Shares (559,965)
- ---------------------------------------------------------------------------
Net increase in net assets resulting from capital share
transactions 27,948,121
- ---------------------------------------------------------------------------
Total increase in net assets 29,003,758
- ---------------------------------------------------------------------------
Net assets:
Beginning of period 0
- ---------------------------------------------------------------------------
End of period $29,003,758
===========================================================================
</TABLE>
See Notes to Financial Statements.

<PAGE>

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

NOTES TO FINANCIAL STATEMENTS

(1.) Significant Accounting Policies

Keystone Small Company Growth Fund II (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified open-end investment company.
The Fund was organized as a Massachusetts business trust on December 13,
1996. Keystone Investment Management Company ("Keystone") is the Fund's
Investment Adviser. The Fund's investment objective is long-term growth of
capital.

Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation predominately owned by
current and former members of management of Keystone and its affiliates.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the Fund's transfer agent.

The Fund offers Class A, B and C shares. Class A shares are offered at a
public offering price which includes a maximum sales charge of 5.75% payable
at the time of purchase. Class B shares are sold subject to a contingent
deferred sales charge payable upon redemption which varies depending on when
the shares were purchased and how long they have been held. Class C shares
are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase. Class C shares are available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company ("KIDCO"), the Fund's principal
underwriter. KIDCO is a wholly-owned subsidiary of Keystone.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.

A. Investments are usually valued at the closing sales price, or, in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair under the direction of the Board of Trustees:
(a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value
or if no sale occurred.

Short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount) which when combined with accrued interest
approximates market. Short-term investments maturing in more than sixty days
for which market quotations are readily available are valued at current
market value. Short-term investments maturing in more than sixty days when
purchased which are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount) which when combined with accrued interest
approximates market. Short-term investments denominated in a foreign currency
are adjusted daily to reflect changes in exchange rates.

The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set

<PAGE>

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

Keystone Small Company Growth Fund II

price on a future date. Upon entering into a futures contract, the Fund is
required to deposit with a broker an amount ("initial margin") equal to a
certain percentage of the purchase price indicated in the futures contract.
Subsequent payments ("variation margin") are made or received by the Fund
each day, as the value of the underlying instrument or index fluctuates, and
are recorded for book purposes as unrealized gains or losses by the Fund. For
federal tax purposes, any futures contracts which remain open at fiscal
year-end are marked-to-market and the resultant net gain or loss is included
in federal taxable income.

Investments denominated in a foreign currency are adjusted daily to reflect
changes in exhange rates. Those securities traded in foreign currency amounts
are translated into United States dollars as follows: market value of
investments, assets and liabilities at the daily rate of exchange, purchases
and sales of investment, income and expenses at the rate of exchange
prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments. In addition to market risk, the
Fund is subject to the credit risk that the other party will not be able to
complete the obligations of the contract.

B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. All discounts are
amortized for both financial reporting and federal income tax purposes.
Distributions to shareholders are recorded at the close of business on the
ex-dividend date.

C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund is relieved of any federal
income tax liability by distributing all of its net taxable investment income
and net taxable capital gains, if any, to its shareholders. The Fund intends
to avoid any excise tax liability by making the required distributions under
the Internal Revenue Code.

D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of collateral falls below required levels, the
Fund intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks, and the Fund will take
constructive receipt of all

<PAGE>

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

securities underlying repurchase agreements until such agreements expire.

Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.

E. The Fund may enter into forward foreign currency exchange contracts
("contracts") to settle portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain currency assets.
Contracts are recorded at market value and are marked to market daily.
Realized gains and losses arising from such transactions are included in net
realized gain (loss) on foreign currency related transactions. The Fund is
subject to the credit risk that the other party will not complete the
obligations of the contract.

F. The Fund intends to distribute net investment income and net capital
gains, if any, annually. Distributions are determined in accordance with
income tax regulations. Distributions from taxable net investment income and
net capital gains can exceed book basis net income and net capital gains. The
significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are primarily due to a net operating loss and wash sales.

(2.) Capital Share Transactions

The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the Fund were as follows:

<TABLE>
<CAPTION>
Class A Shares
---------------------------------------------
February 21, 1996
to May 31, 1996
---------------------------------------------
<S> <C>
Shares sold 772,993
Redemptions (37,541)
--------------------------------------------
Net increase 735,452
============================================
</TABLE>

<TABLE>
<CAPTION>
Class B Shares
---------------------------------------------
February 21, 1996
to May 31, 1996
---------------------------------------------
<S> <C>
Shares sold 1,149,103
Redemptions (26,038)
---------------------------------------------
Net increase 1,123,065
===============================================
</TABLE>

<TABLE>
<CAPTION>
Class C Shares
----------------------------------------------
February 21, 1996
to May 31, 1996
---------------------------------------------
<S> <C>
Shares sold 797,320
Redemptions (49,397)
---------------------------------------------
Net increase 747,923
=============================================
</TABLE>
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act"). Under its Distribution Plans, the Fund pays KIDCO, amounts
which in total may not exceed each Distribution Plan's maximum.

The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDCO under the Class A Distribution Plan are currently used to
pay others, such as broker-dealers, service fees at an annual rate of

<PAGE>

- -------------------------------------
Keystone Small Company Growth Fund II

up to 0.25% of the average net asset value of shares sold by such recipients
and outstanding on the books of the Fund for specific periods.

The Class B Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of class B shares to pay
expenses of the distribution of Class B shares. Amounts paid by the Fund
under the Class B distribution Plan are currently used to pay others
(broker-dealers) a commission at the time of purchase normally equal to 4.00%
of the value of each Class B share sold plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of Class B shares, the
broker-dealer or other party will receive service fees at an annual rate of
0.25% of the average daily net asset value of such Class B shares maintained
by such others and outstanding on the Fund's books for specified periods. A
contingent deferred sales charge will be imposed, if applicable, on Class B
shares at rates ranging from a maximum of 5.00% of amounts redeemed during
the first 12 months following the date of purchase to 1.00% of amounts
redeemed during the sixth twelve-month period following the date of purchase.
Class B shares that have been outstanding for eight years following the month
of purchase will automatically convert to Class A shares without a front end
sales charge or exchange fee.

The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(broker-dealers) a commission at the time of purchase in the amount of 0.75%
of the price paid for each Class C share sold, plus the first year's service
fee in advance in the amount of 0.25% of the price paid for each Class C
share. Beginning approximately 15 months after purchase, the broker-dealer or
other party will receive a commission at an annual rate of 0.75% (subject to
applicable limitations imposed by the rules of the National Association of
Securities Dealers, Inc.) ("NASD") plus service fees at the annual rate of
0.25%, respectively, of the average net asset value of such Class C shares
maintained by the recipient and outstanding on the Fund's books for specified
periods.

Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDCO may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.

KIDCO intends, but is not obligated, to continue to pay or accrue
distribution costs and service fees which exceed annual maximum payments
permitted to be received by KIDCO from the Fund. KIDCO intends to seek full
payment of such amounts from the Fund (together with annual interest thereon
at the prime rate plus 1.0%) at such time in the future as, and to the extent
that, payment thereof by the Fund would be within permitted limits.

For the period ended May 31, 1996, the Fund paid KIDCO $2,211 under its
Class A Distribution Plan; $2,722 for Class B shares originally sold prior to
June 1, 1995 and exchanged into the Fund, and $10,641 for all new shares sold
under its Class B Distribution Plan; and $8,108 under its Class C
Distribution Plan.

Under the NASD Rule, the maximum uncollected amount for which KIDCO may seek
payment from

<PAGE>

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

the Fund under its Class B and C Distribution Plans were $23,574, and $17,858
as of May 31, 1996, respectively.

Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.

(3.) Securities Transactions

Cost of purchases and proceeds from sales of investment securities excluding
short-term securities during the period ended May 31, 1996 were $27,942,610
and $1,211,052, respectively.

(4.) Investment Management Agreement and Transactions With Affiliates

The Fund pays Keystone a fee calculated by applying percentage rates starting
at 0.70% and declining as net assets increase, to 0.35% per annum, to the net
asset value of the Fund. During the period ended May 31, 1996, the Fund paid
or accrued to Keystone investment management and administrative services fees
of $21,221, which represented 0.70% of the Fund's average daily net asset
value on an annualized basis.

During the period ended May 31, 1996, the Fund paid or accrued to KIRC
$17,953 for transfer agent fees.

Keystone for a period of time has voluntarily agreed to limit expenses of
Class A Shares of the Fund to 1.95% of average daily net assets and to limit
expenses of Class B shares and Class C shares to 2.70% of the average daily
net assets of the respective class. Keystone will not be required to
reimburse a Fund to the extent it would result in a Fund's inability to
qualify as a regulated investment company under the provisions of the
Internal Revenue Code. In accordance with these expense limitations, Keystone
reimbursed the Fund $48,532 for the period ended May 31, 1996. Keystone does
not intend to seek repayment of these amounts.

The Fund has entered into an expense offset arrangement with its custodian.
For the period ended May 31, 1996, the Fund paid or accrued total custody
fees in the amount of $22,572 and received a credit of $4,406 pursuant to the
expense offset arrangement, resulting in a net custody expense of $18,166.
The assets deposited with the custodian under the expense offset arrangement
could have been invested in income-producing assets.

<PAGE>

- -------------------------------------
Keystone Small Company Growth Fund II

INDEPENDENT AUDITORS' REPORT

The Trustees and Shareholders
Keystone Small Company Growth Fund II

We have audited the accompanying statement of assets and liabilities of
Keystone Small Company Growth Fund II including the schedule of investments
as of May 31, 1996, and the related statements of operations and changes in
net assets, and financial highlights for the period from February 21, 1996
(Commencement of Operations) to May 31, 1996. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Small Company Growth Fund II as of May 31, 1996, the results of its
operations, changes in its net assets and financial highlights for the period
from February 21, 1996 to May 31, 1996, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP
Boston, Massachusetts
June 28, 1996

<PAGE>

KEYSTONE SMALL COMPANY GROWTH FUND II

PART C

OTHER INFORMATION

Item 24. Financial Statements and Exhibits

Item 24(a). Financial Statements:

Schedule of Investments May 31, 1996

Financial Highlights February 21, 1996
(commencement of
operations) to May 31, 1996

Statement of Assets and Liabilities May 31, 1996

Statement of Operations February 21, 1996
(commencement of
operations) to May 31, 1996

Statement of Change in Net Assets February 21, 1996
(commencement of
operations) to May 31, 1996

Notes to Financial Statements February 21, 1996
(commencement of
operations) to May 31, 1996

Independent Auditors' Report June 28, 1996

SUPPORTING SCHEDULES

All schedules are omitted as the required information is
inapplicable.

(24)(b) Exhibits

(1) A copy of the Registrant's Declaration of Trust was filed with
Pre-Effective Amendment No. 1 to Registration Statement No.
33-65169/811-07457 ("Pre-Effective Amendment No.1") as Exhibit
24(b)(1) and is incoporated by reference herein.

(2) A copy of the Registrant's By-Laws was filed with Pre-
Effective Amendment No. 1 and is incorporated by reference
herein.

(3) Not applicable.

(4) (A) Registrant's Declaration of Trust, Articles III, V, VI,
and VIII were filed with Pre-Effective Amendment No. 1 as
Exhibit 24(b)(1) and are incorporated by reference herein.

(B) Registrant's By-laws, Article 2 was filed with Pre-
Effective Amendment No. 1 as Exhibit 24(b)(2) and is
incorported by reference herein.

(5) A copy of the form of Investment Advisory and Management
Agreement between Registrant and Keystone Investment
Management Company was filed with Pre-Effective Amendment No.
1 as Exhibit 24(b)(5) and is incorporated by reference herein.

(6) (A) Copies of the forms of Principal Underwriting Agreements
between Registrant and Keystone Investment Distributors
Company were filed with Pre-Effective Amendment No. 1 as
Exhibit 24(b)(6)(A) and are incorporated by reference herein.

(B) Copies of the forms of Dealer Agreements for Class A, B,
and C shares were filed with Pre-Effective Amendment No. 1 as
Exhibit 24(b)(6)(B) and are incorporated by reference herein.

(7) Not applicable.

(8) A copy of the form of Custodian, Fund Accounting and
Recordkeeping Agreement between Registrant and State Street
Bank and Fund Company was filed with Pre-Effective Amendment
No. 1 as Exhibit 24(b)(8) and is incorporated by reference
herein.

(9) Not applicable.

(10) Opinion of counsel as to the legality of the shares registered
was filed with Registrnat's Rule 24f-2 Notice on July 26, 1996
and is incorporated by reference herein.

(11) Consent as to use of report of Registrant's independent
auditors is herewith as Exhibit 24(b)(11).

(12) Not applicable

(13) A copy of the Subscription Agreement between Registrant and
Keystone Investment Management Company was filed with Pre-
Effective Amendment No. 1 as Exhibit 24(b)(13) and is
incorporated by reference herein.

(14) Not applicable.

(15) Copies of the forms of Registrant's Distribution Plans for its
Class A, Class B, and Class C shares were filed with Pre-
Effective Amendment No. 1 as Exhibit 24(b)(15) and are
incorporated by reference herein.

(16) Schedules of computation of total return are filed herewith as
Exhibit 24(b)(16).

(17) Financial data schedules are filed herewith as Exhibit
24(b)(17).

(18) A copy of the form of Registrant's Multiple Class Plan was
filed with Pre-Effective Amendment No. 1 as Exhibit 24(b)(18)
and is incorporated by reference herein.

(19) Powers of Attorney are filed herewith as Exhibit 24(b)(19).

Item 25. Persons Controlled by or Under Common Control With
Registrant

Not applicable.

Item 26. Number of Holders of Securities

Number of Record Holders
Title of Class as of July 31, 1996

Shares of Beneficial Class A - 873
Interest Class B - 1,107
Class C - 300

Item 27. Indemnification

Provisions for the indemnification of the Registrant's
Trustees and officers are contained in Article VIII of Registrant's
Declaration of trust, a copy of the form of which was filed with
Pre-Effective Amendment No. 1 as Exhibit 24(b)(1) and is
incorporated by reference herein.

Provisions for the indemnification of Keystone Investment
Distributors Company, the Registrant's Principal Underwriter, are
contained in Section 9 of the Principal Underwriting Agreements
between the Registrant and Keystone Investment Distributors
Company, copies of the forms of which were filed with Pre-Effective
Amendment No. 1 as Exhibit 24(b)(6) and are incorporated by
reference herein.

Provisions for the indemnification of Keystone Investment
Management Company, Registrant's investment adviser, are contained
in Section 6 of the Investment Advisory and Management Agreement
between Registrant and Keystone Investment Management Company, a
copy of the form of which was filed with Pre-Effective Amendment
No. 1 as Exhibit 24(b)(5) and is incorporated by reference herein.

Item 28. Businesses and Other Connections of Investment Adviser

The following table lists the names of the various
officers and directors of Keystone Investment Management
Company, the Registrant's investment adviser, and their
respective positions. For each named individual, the
table lists, for at least the past two fiscal years, (i)
any other organizations (excluding investment advisory
clients) with which the officer and/or director has had
or has substantial involvement; and (ii) positions held
with such organizations.

<PAGE>

LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY

Position with
Keystone Other
Investment Business
Name Management Company Affiliations
- ---- ------------------ ------------
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Executive President and Director:
Officer,and Keystone Investments, Inc.
Director Keystone Management, Inc.
Keystone Software, Inc.
Keystone Asset Corporation
Keystone Capital Corporation
Chairman of the Board and
Director:
Keystone Fixed Income
Advisers, Inc.
Keystone Institutional
Company, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Keystone Investor
Resource Center, Inc.
Boston Children's
Services Associates
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.

Philip M. Byrne Director President and Director:
Keystone Institutional
Company, Inc.
Senior Vice President:
Keystone Investments, Inc.

Herbert L. Senior Vice None
Bishop, Jr. President

Donald C. Dates Senior Vice None
President

Gilman Gunn Senior Vice None
President

Edward F. Director, Director, Senior Vice
Godfrey Senior Vice President
President, Chief Financial Officer and
Treasurer and Treasurer:
Chief Financial Keystone Investments, Inc.
Officer Keystone Investment
Distributors Company
Treasurer:
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Former Treasurer and
Director:
Hartwell Keystone
Advisers, Inc.

James R. McCall Director and None
President

Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment
Distributors Company
Senior Vice President and
Director:
Keystone Investments, Inc.
Chairman and Director:
Keystone Investor
Resource Center, Inc.
Keystone Management, Inc.
Formerly President:
Keystone Management, Inc.
Formerly Treasurer:
Keystone Investments, Inc.
Keystone Investment
Management Company

Rosemary D. Senior Vice General Counsel, Senior
Van Antwerp President, Vice President and
General Counsel Secretary:
and Secretary Keystone Investments, Inc.
Senior Vice President and
General Counsel:
Keystone Institutional
Company, Inc.
Senior Vice President,
General Counsel and
Director:
Keystone Investor
Resource Center, Inc.
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Senior Vice President,
General Counsel, Director
and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Former Senior Vice
President and Secretary:
Hartwell Keystone
Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income
Advisers, Inc.

J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Institutional
Company, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Formerly Controller:
Keystone Investments, Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.

John D. Rogol Vice President Vice President and
and Controller Controller:
Keystone Investments, Inc.
Keystone Invesmtent
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.

John D. Rogol (con't) Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Controller:
Keystone Asset Corporation
Keystone Capital Corporation

Robert K. Vice President None
Baumback

Betsy A. Blacher Senior Vice None
President

Francis X. Claro Vice President None

Kristine R. Vice President None
Cloyes

Christopher P. Senior Vice None
Conkey President

Richard Cryan Senior Vice None
President

Maureen E. Senior Vice None
Cullinane President

George E. Dlugos Vice President None

Antonio T. Docal Vice President None

Sami J. Karam Vice President None

George J. Kimball Vice President None

JoAnn L. Lyndon Vice President None

John C. Vice President None
Madden, Jr.

Stephen A. Marks Vice President None

Eleanor H. Marsh Vice President None

Walter T. Senior Vice None
McCormick President

Barbara McCue Vice President None

Stanley M. Niksa Vice President None

Robert E. O'Brien Vice President None

Margery C. Parker Vice President None

William H. Vice President None
Parsons

Daniel A. Rabasco Vice President None

Kathy K. Wang Vice President None

Judith A. Warners Vice President None

Joseph J. Asst. Vice None
Decristofaro President

<PAGE>

Item 29. Principal Underwriter

(a) Keystone Investment Distributors Company which acts as
Registrant's principal underwriter, also acts as
principal underwriter for the following entities:

Keystone Balanced Fund II
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Quality Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone Omega Fund
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone World Bond Fund
Keystone Fund of the Americas
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Precious Metals Holdings, Inc.
Keystone Strategic Development Fund
Keystone Tax Free Fund
Master Reserves Trust

(b) For information with respect to each director and officer
of Registrant's acting principal underwriter see the
following pages.

Item 29(c). - Not applicable

<PAGE>

Item 29(b) (continued).

Name and Position and Offices with Position and
Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ---------------- ------------------------- ------------
Ralph J. Spuehler* Director, President None

Edward F. Godfrey* Director, Senior Vice Senior Vice
President, Treasurer President
and Chief Financial
Officer

Rosemary D. Van Antwerp* Director, Senior Vice Senior Vice
President, General Counsel President and
Secretary

Albert H. Elfner, III* Director President

Charles W. Carr* Senior Vice President None

Peter M. Delehanty* Senior Vice President None

J. Kevin Kenely* Vice President Treasurer

John D. Rogol* Vice President and None
Controller

Gregg A. Mahalich Divisional Vice None
14952 Richards Drive W. President
Minnetonka, MN 55345

C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londenderry, NH 03053

William L. Carey, Jr. Regional Manager and None
4 Treble Lane Vice President
Malvern, PA 19355

John W. Crites Regional Manager and None
2769 Oakland Circle W. Vice President
Aurora, CO 80014

Richard J. Fish Regional Manager and None
309 West 90th Street Vice President
New York, NY 10024

Michael E. Gathings Regional Manager and None
245 Wicklawn Way Vice President
Roswell, GA 30076

Paul D. Graffy Regional Manager and None
15509 Janas Drive Vice President
Lockport, IL 60441

Robert G. Holz, Jr. Regional Manager and None
313 Meadowcrest Drive Vice President
Richardson, Texas 75080

Todd L. Kobrin Regional Manager and None
20 Iron Gate Vice President
Metuchen, NJ 08840

Ralph H. Johnson Regional Manager and None
345 Masters Court, #2 Vice President
Walnut Creek, CA 94598

Robert P. Matson Regional Manager and None
4557 N. O'Connor Blvd. Vice President
No. 1286
Irving, TX 75062

Paul J. McIntyre Regional Manager and None
118 Main Centre, #203 Vice President
Northville, MI 48167

Thomas O. Meloy Regional Manager and None
2808 McKinney Ave. Vice President
No. 141
Dallas, TX 75204

Alan V. Niemi Regional Manager and None
3511 Grant Street and Vice President
Lee's Summit, MO 64064

Ronald L. Noble Regional Manager and None
428 N. Adventure Trail and Vice President
Virginia Beach, VA 23454

Juliana Perkins Regional Manager and None
2348 West Adrian Street Vice President
Newbury Park, CA 91320

Matthew D. Twomey Regional Manager and None
9627 Sparrow Court Vice President
Ellicott City, MD 21042

Mitchell I. Weiser Regional Manager and None
7031 Ventura Court Vice President
Parkland, FL 33067

L. Welden Evans Regional Banking Officer None
490 Huntcliff Green and Vice President
Atlanta, GA 30350

Raymond P. Ajemian* Manager and Vice President None

Jonathan I. Cohen* Vice President None

Michael S. Festa* Vice President None

Russell A. Haskell* Vice President None

Robert J. Matson* Vice President None

John M. McAllister* Vice President None

Mark Minnucci* Vice President None

Ashley M.Norwood* Assistant Vice President None

Burton Robbins Vice President None
1586 Folkstone Terrace
Westlake Village, CA 91361

Julie A. Robinson* Vice President None

Thomas E. Ryan, III* Vice President None

Joan M. Balchunas* Assistant Vice President None

Thomas J. Gainey* Assistant Vice President None

Lyman Jackson* Assistant Vice President None

Eric S. Jeppson* Assistant Vice President None

Peter M. Sullivan Assistant Vice President None
21445 Southeast 35th Way
Issaquah, WA 98027

Jean S. Loewenberg* Assistant Secretary Assistant
Secretary

Colleen L. Mette* Assistant Secretary Assistant
Secretary

Dorothy E. Bourassa* Assistant Secretary Assistant
Secretary

* Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034

Item 29(c). Not applicable

<PAGE>

Item 30. Location of Accounts and Records

200 Berkeley Street
Boston, Massachusetts 02116-5034

Keystone Investor Resource Center, Inc.
101 Main Street
Cambridge, Massachusetts 02142

State Street Bank and Fund Company
1776 Heritage Drive
Quincy, Massachusetts 02171

Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02777

Item 31. Management Services

Not applicable.

Item 32. Undertakings

Upon request and without charge, the Registrant hereby
undertakes to furnish each person to whom a copy of the
Registrant's prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it
has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of Boston in The Commonwealth of Massachusetts, on the 30th day of
August, 1996.

KEYSTONE SMALL COMPANY GROWTH
FUND II

By:/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp*
Senior Vice President and
Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities indicated on the 30th day of August,
1996.

SIGNATURES TITLE

/s/George S. Bissell Chairman of the Board and Trustee
George S. Bissell*

/s/Albert H. Elfner,III Chief Executive Officer, President,
Albert H. Elfner, III* and Trustee

/s/J. Kevin Kenely Treasurer (Principal Financial
J. Kevin Kenely* and Accounting Officer)

*By:/s/ James M. Wall
James M. Wall**
Attorney-in-Fact

<PAGE>

SIGNATURES TITLE

/s/ Frederick Amling Trustee
Frederick Amling*

/s/ Charles A. Austin, III Trustee
Charles A. Austin, III*

/s/ Edwin D. Campbell Trustee
Edwin D. Campbell*

/s/ Charles F. Chapin Trustee
Charles F. Chapin*

/s/ K. Dun Gifford Trustee
K. Dun Gifford*

/s/ Leroy Keith, Jr. Trustee
Leroy Keith, Jr.*

/s/ F. Ray Keyser, Jr. Trustee
F. Ray Keyser, Jr.*

/s/ David M. Richardson Trustee
David M. Richardson*

/s/ Richard J. Shima Trustee
Richard J. Shima*

/s/ Andrew J. Simons Trustee
Andrew J. Simons*

*By:/s/ James M. Wall
James M. Wall**
Attorney-in-Fact

** James M. Wall, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant
to powers of attorney duly executed by such persons and attached
hereto as Exhibit 24(b)(19).
<PAGE>

INDEX TO EXHIBITS

Page Number
in Sequential
Exhibit Number Exhibit Numbering System

1 Declaration of Trust (1)

2 By-Laws (1)

5 Form of Investment Advisory
and Management Agreement (1)

6 (A) Forms of Principal Underwriting
Agreements (1)
(B) Forms of Dealer Agreements (1)

8 Form of Custodian, Fund Accounting
and Recordkeeping Agreement (1)

10 Opinion and Consent of Counsel (2)

11 Consent as to use of Report of
Registrant's independent auditors (3)

13 Subscription Agreement (1)

15 Forms of Distributions Plans
for Class A, Class B and
Class C shares (1)

16 Performance Data Schedules (3)

17 Financial Data Schedules (filed as Exhibit 27) (3)

18 Form of Multiple Class Plan (1)

19 Powers of Attorney (3)

(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement No. 33-65169/811-07457.

(2) Incorporated herein by reference to Registrant's 24f-2 Notice
dated July 26, 1996.

(3) Filed herewith.

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

The Trustees and Shareholders
Keystone Small Company Growth Fund II

We consent to the use of our report dated June 28, 1996
included herein.

KPMG PEAT MARWICK LLP

/s/ KPMG Peat Marwick LLP

Boston, Massachusetts
August 30, 1996

<PAGE>

KSCGF II- A MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED

<S> <C> <C> <C> <C> <C> <C> <C>
5.75% LOAD -10.09% -10.09% -10.09% -96.92% -10.09% -2.10%
no load -10.92% -4.60% -4.60% -4.60% -78.59% -4.60% -0.94%

Beg dates 28-Jun-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96
Beg Value (LOAD) 11,363 10,610 10,610 10,610 10,610 10,610 10,610
Beg Value (no load) 10,710 10,000 10,000 10,000 10,000 10,000 10,000
End Value 9,540 9,540 9,540 9,540 9,540 9,540 9,540

TIME 0.03056 5

INCEPTION DATE 20-Feb-96

KSCGF II- A
31-Jul-96

TEN YEAR TEN YEAR
KSCGF II- A TOTAL RETURN COMPOUNDED
31-Jul-96
<S> <C> <C>
5.75% LOAD -10.09% -1.06%
no load -4.60% -0.47%

Beg dates 20-Feb-96 20-Feb-96
Beg Value (LOAD) 10,610 10,610
Beg Value (no load) 10,000 10,000
End Value 9,540 9,540

TIME
10
INCEPTION DATE 20-Feb-96

KASCGF II - B MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C> <C> <C>
with cdsc N/A -9.66% -8.70% NA NA NA NA
W/O CDSC -10.96% -4.90% -4.90% NA NA NA NA

Beg dates 28-Jun-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96
Beg Value (no load) 10,680 10,000 10,000 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 9,510 9,510 9,510 9,510 9,510 9,510 9,510
End Value (with cdsc) 9,035 9,130 9,225 9,225 9,415 9,414.9
beg nav 10.68 10.00 10.00 10.00 10 10.00 10
end nav 9.51 9.51 9.51 9.51 9.51 9.51 9.51
shares originally 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
purchased
5% cdsc thru date = 31-Jul-94
TIME 4% cdsc thru date = 31-Jul-95 0.44722 0.4472222222
INCEPTION DATE 20-Feb-96 3% cdsc effect. date = 31-Jul-97 31-Dec-96

KASCGF II - B TEN YEAR TEN YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED
<S> <C> <C>
with cdsc NA NA
W/O CDSC NA NA

Beg dates 20-Feb-96 20-Feb-96
Beg Value (no load) 10,000 10,000
End Value (W/O CDSC) 9,510 9,510
End Value (with cdsc) 9,510 9,510
beg nav 10.00 10
end nav 9.51 9.51
shares originally 1,000.00 1,000.00
purchased

TIME 0.4472222222
INCEPTION DATE

KSCGF II - C MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED

with cdsc N/A -5.85% -4.90% -4.90% -10.63% -4.90% -10.63%
W/O CDSC -10.96% -4.90% -4.90% -4.90% -10.63% -4.90% -10.63%

Beg dates 28-Jun-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96 20-Feb-96
Beg Value (no load) 10,680 10,000 10,000 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 9,510 9,510 9,510 9,510 9,510 9,510 9,510
End Value (with cdsc) 9,415 9,510 9,510 9,510 9,510 9,510
beg nav 10.68 10.00 10.00 10.00 10 10.00 10
end nav 9.51 9.51 9.51 9.51 9.51 9.51 9.51
shares originally 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
purchased

TIME 0.4472 0.4472
INCEPTION DATE 20-Feb-96 1% cdsc effect. date = 01-Jan-96 31-Dec-96

KSCGF II - C TEN YEAR TEN YEAR
31-Jul-96 TOTAL RETURN COMPOUNDED
<S> <C> <C>
with cdsc NA NA
W/O CDSC NA NA

Beg dates 20-Feb-96 20-Feb-96
Beg Value (no load) 10,000 10,000
End Value (W/O CDSC) 9,510 9,510
End Value (with cdsc 9,510 9,510
beg nav 10.00 10
end nav 9.51 9.51
shares originally 1,000.00 1,000.00
purchased

TIME 0.4472222222
INCEPTION DATE

</TABLE>

<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.

/s/ George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.

/s/ Albert H. Elfner, III
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Rosemary D. Van Antwerp, Jean S.
Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of
them singly, my true and lawful attorneys, with full power to them and each of
them to sign for me and in my name in the capacity indicated below any and all
registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5,
N-1 and N-1A, as amended from time to time, and any and all amendments thereto
to be filed with the Securities and Exchange Commission for the purpose of
registering from time to time all investment companies of which I am now or
hereafter a Director, Trustee or officer and for which Keystone Investment
Management Company serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and in my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ J. Kevin Kenely
J. Kevin Kenely
Treasurer

Dated: December 15, 1995
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Frederick Amling
Frederick Amling
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ F. Ray Keyser,Jr.
F. Ray Keyser, Jr.
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ David M. Richardson
David M. Richardson
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Richard J. Shima
Richard J. Shima
Director/Trustee

Dated: December 14, 1994
<PAGE>

POWER OF ATTORNEY

I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.

/s/ Andrew J. Simons
Andrew J. Simons
Director/Trustee

Dated: December 14, 1994

<PAGE>

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE SMALL COMPANY GROWTH FUND II CLASS A

<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> FEB-21-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 26,549,673
<INVESTMENTS-AT-VALUE> 27,846,344
<RECEIVABLES> 2,701,997
<ASSETS-OTHER> 89,414
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,637,755
<PAYABLE-FOR-SECURITIES> 366,076
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,267,921
<TOTAL-LIABILITIES> 1,633,997
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,844,834
<SHARES-COMMON-STOCK> 735,452
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (53,092)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 409,536
<NET-ASSETS> 8,201,278
<DIVIDEND-INCOME> 2,042
<INTEREST-INCOME> 2,744
<OTHER-INCOME> 0
<EXPENSES-NET> (17,246)
<NET-INVESTMENT-INCOME> (12,460)
<REALIZED-GAINS-CURRENT> (53,092)
<APPREC-INCREASE-CURRENT> 409,536
<NET-CHANGE-FROM-OPS> 343,984
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 772,993
<NUMBER-OF-SHARES-REDEEMED> (37,541)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,201,277
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (6,191)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (32,689)
<AVERAGE-NET-ASSETS> 3,142,534
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 1.17
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.15
<EXPENSE-RATIO> 1.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

<PAGE>

</TABLE>

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> KEYSTONE SMALL COMPANY GROWTH FUND II CLASS B

<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> FEB-21-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 26,549,673
<INVESTMENTS-AT-VALUE> 27,846,344
<RECEIVABLES> 2,701,997
<ASSETS-OTHER> 89,414
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,637,755
<PAYABLE-FOR-SECURITIES> 366,076
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,267,921
<TOTAL-LIABILITIES> 1,633,997
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,953,965
<SHARES-COMMON-STOCK> 1,123,065
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (79,772)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 612,877
<NET-ASSETS> 12,487,070
<DIVIDEND-INCOME> 3,044
<INTEREST-INCOME> 4,157
<OTHER-INCOME> 0
<EXPENSES-NET> (36,084)
<NET-INVESTMENT-INCOME> (28,883)
<REALIZED-GAINS-CURRENT> (79,772)
<APPREC-INCREASE-CURRENT> 612,877
<NET-CHANGE-FROM-OPS> 504,222
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,149,103
<NUMBER-OF-SHARES-REDEEMED> (26,038)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 12,487,070
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (9,381)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (59,448)
<AVERAGE-NET-ASSETS> 4,748,996
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 1.15
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.12
<EXPENSE-RATIO> 2.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

<PAGE>

</TABLE>

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 103
<NAME> KEYSTONE SMALL COMPANY GROWTH FUND II CLASS C

<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> FEB-21-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 26,549,673
<INVESTMENTS-AT-VALUE> 27,846,344
<RECEIVABLES> 2,701,997
<ASSETS-OTHER> 89,414
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,637,755
<PAYABLE-FOR-SECURITIES> 366,076
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,267,921
<TOTAL-LIABILITIES> 1,633,997
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,090,181
<SHARES-COMMON-STOCK> 747,923
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (49,029)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 274,258
<NET-ASSETS> 8,315,410
<DIVIDEND-INCOME> 1,651
<INTEREST-INCOME> 2,441
<OTHER-INCOME> 0
<EXPENSES-NET> (21,890)
<NET-INVESTMENT-INCOME> (17,798)
<REALIZED-GAINS-CURRENT> (49,029)
<APPREC-INCREASE-CURRENT> 274,258
<NET-CHANGE-FROM-OPS> 207,431
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 797,320
<NUMBER-OF-SHARES-REDEEMED> (49,397)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,315,411
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (5,649)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (36,021)
<AVERAGE-NET-ASSETS> 2,880,888
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 1.14
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.12
<EXPENSE-RATIO> 2.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

<PAGE>

</TABLE>