KEYSTONE HIGH INCOME BOND FUND B-4, 485B24E, 1996-11-25

KEYSTONE HIGH INCOME BOND FUND B-4
485B24E, 1996-11-25

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<PAGE>

AS FILED WITH THE SECURITIES & EXCHANGE COMMISSION ON NOVEMBER 25, 1996.

File No. 2-10526
811-95

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. 102 X
--- ---
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30 X
--- ---

KEYSTONE HIGH INCOME BOND FUND (B-4)
-------------------------------------------------
(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:

immediately upon filing pursuant to paragraph (b)
- ----
X on November 29, 1996 pursuant to paragraph (b)
- ----
60 days after filing pursuant to paragraph (a)(1)
- ----
on (date) pursuant to paragraph (a)(1)
- ----
75 days after filing pursuant to paragraph (a)(2)
- ----
on (date) pursuant to paragraph (a)(2) of Rule 485.
- ----

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has elected to register an indefinite number of its securities under the
Securities Act of 1933. A Rule 24f-2 Notice for Registrant's most recent fiscal
year ended July 31, 1996 was filed on September 25, 1996.

<PAGE>

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Offering Registration
Registered Registered Per Unit* Price ** Fee
- -------------------------------------------------------------------------
Shares of
$1.00 Par 75,051,610 $4.19 $289,998 $100
Value
- -------------------------------------------------------------------------
*Computed under Rule 457(d) on the basis of the offering price per share at the
close of business on November 11, 1996.

** The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 74,982,398 shares of the
Fund were redeemed during its fiscal year ended July 31, 1996. Of such shares,
none were used for a reduction pursuant to Rule 24f-2(c).

<PAGE>

KEYSTONE HIGH INCOME BOND FUND (B-4)

CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 102
to
REGISTRATION STATEMENT

This Post-Effective Amendment No. 102 to Registrant's Registration Statement
No. 2-10526/811-95 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 24(b)

Financial Statements

Independent Auditors' Report

Listing of Exhibits

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 HIGH INCOME BOND FUND (B-4)

Cross-Reference Sheet pursuant to Rules 404 and 495 under the Securities Act of
1933.

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

2 Fee Table

3 Financial Highlights

4 Cover Page
Fund Description
Fund Objective and Policies
Investment Restrictions
Risk Factors
Additional Investment Information

5 Fund Management and Expenses
Additional Information

5A Not applicable

6 Fund Description
Dividends and Taxes
Fund Shares
Shareholder Services

7 How to Buy Shares
Distribution Plan
Shareholder Services
Pricing Shares

8 How to Redeem Shares

9 Not applicable

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

11 Table of Contents

12 Investment Objective and Policies

13 Investment Objective and Policies
Investment Restrictions
Brokerage
Appendix

14 The Trust Agreement
Trustees and Officers

15 Additional Information

16 Distribution Plan
Investment Manager and Investment Adviser
Principal Underwriter
Additional Information

17 Brokerage

18 The Trust Agreement

19 Valuation of Securities
Distribution Plan
Sales Charges

20 Distributions and Taxes

21 Principal Underwriter

22 Standardized Total Return and Yield
Quotations

23 Financial Statements

<PAGE>

KEYSTONE HIGH INCOME BOND FUND (B-4)

PART A

PROSPECTUS

<PAGE>

- ------------------------------------------------------------------------------
PROSPECTUS NOVEMBER 29, 1996
- ------------------------------------------------------------------------------

KEYSTONE HIGH INCOME BOND FUND (B-4)

200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
- ------------------------------------------------------------------------------

Keystone High Income Bond Fund (B-4) (the "Fund") is a mutual fund whose
investment objective is generous income. The generous income sought by the Fund
is ordinarily associated with high yield, high risk bonds and similar securities
in the lower rating categories of the recognized rating agencies or with
securities that are unrated.

Your purchase payment is fully invested. There is no sales charge when you buy
the Fund's shares. The Fund may impose a deferred sales charge, which declines
from 4% to 1%, if you redeem your shares within four years of purchase.

The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act") under which it bears some of the
costs of selling its shares to the public.

This prospectus sets forth concisely the 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 November 29, 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 listed above.

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>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------------
Page Page
<S> <C> <C> <C>
Fee Table ........................................ 2 How to Buy Shares ............................ 12
Financial Highlights ............................. 3 Distribution Plan ............................ 13
Fund Description ................................. 4 How to Redeem Shares ......................... 15
Fund Objective and Policies ...................... 4 Shareholder Services ......................... 16
Investment Restrictions .......................... 5 Performance Data ............................. 18
Risk Factors ..................................... 6 Fund Shares .................................. 18
Pricing Shares ................................... 9 Additional Information ....................... 18
Dividends and Taxes .............................. 9 Additional Investment Information ............ (i)
Fund Management and Expenses ..................... 10
</TABLE>

- --------------------------------------------------------------------------------
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 HIGH INCOME BOND FUND (B-4)

The purpose of the fee table is to assist investors in understanding the
costs and expenses that an investor in 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"; "Distribution Plan"; and "Shareholder Services."

SHAREHOLDER TRANSACTION EXPENSES
Deferred Sales Load(1) ............................... 4.00%
(as a percentage of the lesser of original purchase
price or redemption proceeds, as applicable)
Exchange Fee(2) ...................................... $10.00
(per exchange)

ANNUAL FUND OPERATING EXPENSES(3)
(as a percentage of average net assets)
Management Fees ...................................... 0.56%
12b-1 Fees(4) ........................................ 1.00%
Other Expenses ....................................... 0.38%
----
Total Fund Operating Expenses ........................ 1.94%
====

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXAMPLE(5)
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: ............................ $60 $81 $105 $226

You would pay the following expenses on the
same investment, assuming no redemption: $20 $61 $105 $226

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.

- ----------
(1) The deferred sales load declines from 4% to 1% of amounts redeemed within
four calendar years after purchase. No deferred sales charge is imposed
thereafter.
(2) There is no fee for exchange orders received by the Fund over the Keystone
Automated Response Line ("KARL") from an individual shareholder. (For a
description of KARL, see "Shareholder Services.")
(3) Expense ratios are for the Fund's fiscal year ended July 31, 1996. Total
Fund Operating Expenses include indirectly paid expenses.
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the National
Association of Securities Dealers, Inc. ("NASD").
(5) 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%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE HIGH INCOME BOND FUND (B-4)
(For a share outstanding throughout each year)

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 incorporated by reference into 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.

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR $ 4.42 $ 4.68 $ 5.13 $ 4.74 $ 4.19 $ 5.02 $ 6.38 $ 6.91 $ 7.66 $ 8.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income ........... 0.32 0.38 0.38 0.45 0.49 0.61 0.68 0.83 0.80 0.81
Net realized and
unrealized gain
(loss) on
investments ...... (0.27) (0.15) (0.38) 0.44 0.58 (0.72) (1.18) (0.51) (0.71) (0.26)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ....... 0.05 0.23 0 0.89 1.07 (0.11) (0.50) 0.32 0.09 0.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment
income ........... (0.31) (0.37) (0.38) (0.45) (0.50) (0.72) (0.78) (0.85) (0.84) (0.90)
In excess of net
investment income (0.06) (0.02) (0.07) (0.05) (0.02) 0 (0.08) 0 0 0
Tax basis return of
capital .......... 0 (0.10) 0 0 0 0 0 0 0 0
Net realized gain
on investments ... 0 0 0 0 0 0 0 0 0 (0.07)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.37) (0.49) (0.45) (0.50) (0.52) (0.72) (0.86) (0.85) (0.84) (0.97)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE END
OF YEAR .......... $ 4.10 $ 4.42 $ 4.68 $ 5.13 $ 4.74 $ 4.19 $ 5.02 $ 6.38 $ 6.91 $ 7.66
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (a) .. 1.38% 5.66% (0.41%) 20.28% 27.25% 0.03% (7.84%) 4.95% 1.66% 7.15%
RATIOS/SUPPLEMENTAL
DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses ... 1.94%(b) 2.03% 1.84% 2.06% 2.17% 2.34% 2.06% 1.97% 1.82% 1.65%
Net investment
income ........... 7.92% 8.64% 7.57% 9.30% 10.86% 14.64% 12.77% 12.36% 11.29% 10.26%
Portfolio turnover
rate ............. 116% 82% 110% 125% 94% 78% 45% 75% 81% 135%
NET ASSETS END OF
YEAR (THOUSANDS) . $593,681 $764,965 $766,283 $972,164 $841,757 $710,590 $820,940 $1,188,660 $1,274,673 $1,464,891
<FN>
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended July 31, 1996. Excluding indirectly paid expenses,
the expense ratio would have been 1.93%.
</FN>
</TABLE>

<PAGE>
- ------------------------------------------------------------------------------
FUND DESCRIPTION
- ------------------------------------------------------------------------------

The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was created under Pennsylvania law as a
common law trust and has been offering its shares continuously since September
11, 1935. The Fund is one of approximately twenty funds managed by Keystone
Management, Inc. ("Keystone Management"), the Fund's investment manager, and
is one of over thirty funds managed by Keystone Investment Management Company
("Keystone"), the Fund's investment adviser. Keystone and Keystone Management
are, from time to time, collectively referred to as "Keystone."

- ------------------------------------------------------------------------------
FUND OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------

INVESTMENT OBJECTIVE
The Fund's investment objective is to provide shareholders with generous
income.

The Fund's investment objective is fundamental and cannot be changed without
the approval of a majority of the Fund's outstanding shares (as defined in 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 (a "1940 Act Majority")).

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

PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund will invest at least 65% of its total
assets in bonds, debentures, and other income obligations. The Fund's
portfolio ordinarily includes a substantial number of bonds, debentures, and
other income obligations that are rated by Standard & Poor's Corporation
("S&P") or Moody's Investors Service ("Moody's") as below investment grade,
i.e., S&P rating below BBB and Moody's rating below Baa.

While growth of capital is not a Fund objective, the Fund may purchase
securities that offer the possibility of capital appreciation in addition to
income, provided the acquisition of such a security does not conflict with the
Fund's objective of generous income.

The Fund may purchase securities with any rating or may purchase unrated
securities, which are not necessarily of lower quality than rated securities,
but may not be as attractive to as many buyers. While Keystone performs its
own credit analyses of the Fund's investments and does not rely on ratings
assigned by rating services, bonds rated below-investment grade generally
involve greater volatility of price and risk of principal and income than
bonds in the higher rating categories and are, on balance, considered
predominantly speculative.

In addition to its other investment options, the Fund may invest in limited
partnerships, including master limited partnerships, and may invest up to 25%
of its assets in foreign securities. The Fund may also invest in
participations in bank loans.

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
assets of at least $1 billion, including U.S. branches of foreign banks and
foreign branches of U.S. banks; prime commercial paper, including master
demand notes; and repurchase agreements secured by U.S. government securities.
When the Fund invests for defensive purposes, it seeks to limit the loss of
principal and is not pursuing its investment objective.

The Fund's investments may include fixed and adjustable rate or stripped
bonds, including zero coupon bonds and payment-in-kind securities ("PIKs"),
debentures, notes, equipment trust certificates, U.S. government securities,
and debt securities convertible into or exchangeable for preferred or common
stock. The Fund may continue to hold preferred or common stock received in
connection with convertible or exchangeable securities. The Fund may also
invest in units consisting of debt securities with stock or warrants to buy
stock attached.

The Fund may also invest in preferred stock, including convertible preferred
stock and adjustable rate preferred stock; warrants, which may be used to
create other permissible investments; and common stock of issuers that are
objects of acquisition attempts, are undergoing reorganization through
bankruptcy or otherwise, or are in the process of refinancing. Investments in
common stocks of such issuers are expected to provide the Fund with the
opportunity to receive high-yielding, fixed-income securities. Investments in
common stocks will be limited to those stocks that Keystone believes will
assist the Fund in achieving 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 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 the liquidity of the
Fund's Rule 144A securities is determined by Keystone, and the Board of
Trustees 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 (i) write covered call and put options; (ii) purchase call and
put options, including call and put options to close out existing positions;
and (iii) employ new investment techniques with respect to such options. The
Fund currently does not intend to invest more than 5% of its assets in options
transactions.

The Fund may enter into reverse repurchase agreements and firm commitment
and when-issued transactions for securities and currencies. In addition, the
Fund may enter into currency and other financial futures contracts and related
options transactions for hedging purposes and not for speculation. The Fund
may also employ new investment techniques with respect to such futures
contracts and related options transactions.

In addition to the options, futures contracts, and forwards mentioned above,
the Fund may also invest in certain other types of derivative instruments,
including collateralized mortgage obligations, structured notes, interest rate
swaps, index swaps, currency swaps, and caps and floors. These basic vehicles
can also be combined to create more complex products called hybrid derivatives
or structured securities.

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

- ------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------

The Fund has adopted the fundamental restrictions summarized below, which
may not be changed without the approval of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in detail in the statement of
additional information.

The Fund may not do the following: (1) invest more than 5% of its total
assets, computed at market value at the time of purchase, in the securities of
any one issuer (other than U.S. government securities) except that up to 25%
of the Fund's total assets may be invested without regard to this limit; (2)
invest in more than 10% of the outstanding voting securities of any one issuer
(other than U.S. government securities), except that up to 25% of the Fund's
total assets may be invested without regard to this limit; and (3) borrow
money, except that the Fund may borrow money from banks for temporary or
emergency purposes in aggregate amounts up to 10% of the value of the Fund's
net assets (computed at cost), or enter into reverse repurchase agreements
(bank borrowings and reverse repurchase agreements, in aggregate, shall not
exceed 10% of the value of the Fund's net assets).

In addition, the Fund may, notwithstanding any other investment policy or
restriction, 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. The Fund does
not currently intend to implement this policy and would do so only if the
Trustees were to determine such action to be in the best interest of the Fund
and its shareholders. In the event of such implementation, the Fund will
comply with such requirements as to written notice to shareholders as are then
in effect.

- ------------------------------------------------------------------------------
RISK FACTORS
- ------------------------------------------------------------------------------

Like any investment, your investment in the Fund involves an element 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.

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

By itself, the Fund does not constitute a balanced investment plan. The Fund
seeks generous income ordinarily from high yield, high risk bonds, commonly
known as "junk bonds." This investment approach involves risks greater than a
more conservative approach. You should take into account your own investment
objectives as well as your other investments when considering an investment in
the Fund.

Should the Fund need to raise cash to meet a large number of redemptions, it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.

BELOW-INVESTMENT GRADE BONDS
Since 1935, the Fund has had continuous experience investing in bonds
selling at a substantial discount from par, convertible bonds, below-
investment grade bonds, and other securities that as a class may be considered
high yield, high risk securities.

Prior to the 1980's, corporate bonds were primarily issued to finance growth
and development. Below-investment grade bonds were predominantly bonds that
often traded at discounts from par because the company's credit ratings had
been downgraded. The rapid growth of the below-investment grade sector of the
bond market during the 1980's was largely attributable to the issuance of such
bonds to finance corporate reorganizations. An economic downturn could
severely disrupt the market for high yield, high risk bonds and adversely
affect the value of outstanding bonds and the ability of issuers to repay
principal and interest.

Although the change in the size and characteristics of the market may result
in higher risks associated with individual bonds, Keystone believes that an
effective program of broad diversification can, over time, enable the Fund to
successfully achieve its investment objective while reducing the risk of
investing in individual below-investment grade bonds.

The generous income sought by the Fund is ordinarily associated with
securities in the lower rating categories of the recognized rating agencies or
with securities that are unrated. Such securities are generally rated BB or
lower by S&P or BA or lower by Moody's. The Fund may invest in securities that
are rated as low as D by S&P and C- by Moody's. It is possible for securities
rated D or C-, respectively, to have defaulted on payments of principal and/or
interest at the time of investment. The section of this prospectus entitled
"Additional Investment Information" describes these rating categories. The
Fund intends to invest in D rated debt only in cases when, in Keystone's
judgment, there is a distinct prospect of improvement in the issuer's
financial position as a result of the completion of reorganization or
otherwise. The Fund may also invest in unrated securities that, in Keystone's
judgment, offer comparable yields and risks to those of securities that are
rated, as well as in below-investment quality zero coupon bonds or PIKs.

Keystone considers the ratings of Moody's and S&P assigned to various
securities, but does not rely solely on those ratings because (1) Moody's and
S&P assigned ratings are based largely on historical financial data and may not
accurately reflect the current financial outlook of companies, and (2) there can
be large differences among the current financial conditions of issuers within
the same rating category.

While an investment in the Fund provides opportunities to maximize return
over time, investors should be aware of the following risks associated with
below-investment grade bonds:

(1) Securities rated BB or lower by S&P or Ba or lower by Moody's are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments.

(2) The lower ratings of certain securities held by the Fund reflect a
greater possibility that adverse changes in the financial condition of the
issuer or in general economic conditions, or both, or an unanticipated rise in
interest rates may impair the ability of the issuer to make payments of
interest and principal, especially if the issuer is highly leveraged. Such
issuer's ability to meet its debt obligations may also be adversely affected
by specific corporate developments, the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Also, an economic downturn or an increase in interest rates may increase the
potential for default by the issuers of these securities.

(3) Their values are more sensitive to real or perceived adverse economic,
company or industry conditions and publicity than is the case for higher
quality securities.

(4) Their value, like those of other fixed income securities, fluctuates in
response to changes in interest rates; generally rising when interest rates
decline and falling when interest rates rise. For example, if interest rates
increase after a fixed-income security is purchased, the security, if sold
prior to maturity, may return less than its cost. The prices of below-
investment grade bonds, however, are generally less sensitive to interest rate
changes than the prices of higher-rated bonds.

(5) The secondary market for certain securities held by the Fund may be less
liquid at certain times than the secondary market for higher quality debt
securities, which may adversely effect (i) the market price of the security,
(ii) the Fund's ability to dispose of particular issues and (iii) the Fund's
ability to obtain accurate market quotations for purposes of valuing its
assets.

(6) Zero coupon bonds and PIKs involve additional special considerations.
Zero coupon bonds do not require the periodic payment of interest. PIK bonds
are debt obligations that provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments may experience greater fluctuation in value due to changes in
interest rates than debt obligations that pay interest currently. Even though
these investments do not pay current interest in cash, the Fund is nonetheless
required by tax laws to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Fund
could be required at times to liquidate investments in order to fulfill its
intention to distribute substantially all of its net income as dividends.

The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month during the last fiscal year in
securities assigned to the various rating categories by S&P and in unrated
securities determined by Keystone to be of comparable quality. Since the
percentages in this table are based on month-end averages throughout the
Fund's fiscal year, they do not reflect the Fund's holdings at any one point
in time. The percentages in each category may be higher or lower on any day
than those shown in the table.

*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ---- ----------------- -------------------
AAA 0.00% 0.00%
AA 0.00% 0.00%
A 0.00% 0.00%
BBB 1.37% 0.00%
BB 29.33% 0.30%
B 46.49% 5.95%
CCC 1.51% 4.00%
CC 0.00% 0.00%
C 0.00% 0.00%
D 0.00% 0.19%
Unrated* 10.44%
U.S. governments,
cash, equities
and others 10.86%
-------
TOTAL 100.00%
-------

Since the Fund takes an aggressive approach to investing, Keystone attempts
to maximize the return by controlling risk through diversification, credit
analysis, review of sector and industry trends, interest rate forecasts, and
economic analysis. Keystone's analysis of securities focuses on values based
on factors such as interest or dividend coverage, asset values, earnings
prospects, and the quality of management of the company. In making investment
recommendations, Keystone also considers current income, potential for capital
appreciation, maturity structure, quality guidelines, coupon structure,
average yield, percentage of zeros and PIKs, percentage of non-accruing items,
and yield to maturity.

Income and yields on high yield, high risk securities, as on all securities,
will fluctuate over time.

FOREIGN RISK
The Fund may invest up to 25% of its assets in securities that are
principally traded in securities markets outside the U.S. While investing in
foreign securities is intended to reduce risk by providing further
diversification, such investments do involve the following risks: publicly
available information on issuers and securities may be scarce; many foreign
countries do not follow the same accounting, auditing, and financial reporting
standards as are used in the U.S.; market trading volumes may be smaller,
resulting in less liquidity and more price volatility compared to U.S.
securities of comparable quality; there may be less regulation of securities
trading and its participants; the possibility may exist for expropriation,
confiscatory taxation, nationalization, establishment of exchange controls,
political or social instability or negative diplomatic developments; and
dividend or interest withholding may be imposed at the source.

Fluctuations in foreign exchange rates impose an additional level of risk,
possibly affecting the value of the Fund's foreign investments and earnings,
as well as gains and losses realized through trades, and the unrealized
appreciation or depreciation of investments. The Fund may also incur costs
when it shifts assets from one country to another.

DERIVATIVE SECURITIES

With respect to derivative or structured securities, the market value of
such securities may vary depending on the manner in which such securities have
been structured. As a result, the value of such investments may change at a
more rapid rate than that of traditional fixed income securities.

For more detailed information on derivatives, see "Additional Investment
Information" and the statement of additional information.

- ------------------------------------------------------------------------------
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 the purpose of pricing Fund
shares), except on days when changes in the value of the Fund's securities do
not affect the current net asset value of its shares. The Exchange is
currently 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 is arrived at by determining the value of
all of the Fund's assets, subtracting all liabilities and dividing the result
by the number of shares outstanding.

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

(1) short-term investments with remaining maturities of 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;

(2) short-term investments with greater than sixty days to maturity are
valued at market value; and

(3) all other investments are valued at market value or, when market
quotations are not readily available, at fair value, as determined in good
faith by the Board of Trustees.

The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing certain fixed income securities. As a
result, it is likely that most of the valuations for such securities will be
based upon their fair value determined under procedures that have been
approved by the Board of Trustees. The Board of Trustees has authorized the
use of a pricing service to determine the fair value of the Fund's fixed
income securities and certain other securities.

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

The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (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 when 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.

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.

The Fund will distribute its net investment income on or about the 5th day
of each month and net capital gains, if any, at least annually. Shareholders
receive Fund distributions in the form of additional shares of the Fund or, at
the shareholder's election (which must be made before the record date for the
distribution), in cash. Fund distributions in the form of additional shares
are made at net asset value without the imposition of a sales charge.

Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains distributions are taxable
as ordinary income. Net long-term gains distributions 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. Any taxable dividend declared in
October, November, or December to shareholders of record in such 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 the dividend
was declared. Dividends and distributions also may be subject to state and
local taxes.

The Fund advises its shareholders annually as to the federal tax status of
all distributions made during the year.

- ------------------------------------------------------------------------------
FUND MANAGEMENT AND EXPENSES
- ------------------------------------------------------------------------------

FUND MANAGEMENT
Subject to the general supervision of the Fund's Board of Trustees, Keystone
Management, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
is responsible for the overall management of the Fund's business and affairs.

INVESTMENT MANAGER
Keystone Management, organized in 1989, is a wholly-owned subsidiary of
Keystone. Its directors and principal executive officers have been affiliated
with Keystone, a seasoned investment adviser, for a number of years. Keystone
Management also serves as investment manager to each of the other funds in the
Keystone Fund Family and to certain other funds in the Keystone Investments
Family of Funds.

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

ANNUAL AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE INCOME OF THE FUND
- ------------------------------------------------------------------------------
2% of
Gross Dividend and
Interest Income
Plus
0.50% of the first $100,000,000 plus
0.45% of the next $100,000,000 plus
0.40% of the next $100,000,000 plus
0.35% of the next $100,000,000 plus
0.30% of the next $100,000,000 plus
0.25% of amounts over $500,000,000;

computed as of the close of business each business day and payable daily.

Pursuant to its Investment Management Agreement with the Fund (the
"Management Agreement"), Keystone Management has delegated its investment
management functions, except for certain administrative and management
services, to Keystone and has entered into an Investment Advisory Agreement
with Keystone (the "Advisory Agreement"), under which Keystone provides
investment advisory and management services to the Fund.

Services performed by Keystone Management include (1) performing research
and planning with respect to (a) the Fund's qualification as a regulated
investment company under Subchapter M of the Code, (b) tax treatment of the
Fund's portfolio investments, (c) tax treatment of special corporate actions
(such as reorganizations), (d) state tax matters affecting the Fund, and (e)
the Fund's distributions of income and capital gains; (2) preparing the Fund's
federal and state tax returns; and (3) providing services to the Fund's
shareholders in connection with federal and state taxation and distributions
of income and capital gains.

INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 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 Management, Keystone,
their affiliates, and the Keystone Investments Family of Funds.

Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee equal to 85% of the management fee received by Keystone Management
under the Management Agreement.

During the year ended July 31, 1996, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of
$3,788,171, which represented 0.56% of the Fund's average daily net assets. Of
such amount paid to Keystone Management, $3,219,945 was paid to Keystone for
investment advisory services to the Fund.

Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant
to which Keystone Investments is to be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC") (the
"Merger"). The surviving corporation will assume the name "Keystone
Investments, Inc." Subject to a number of conditions being met, it is
currently anticipated that the Merger will take place on or around December
11, 1996. Thereafter, Keystone Investments, Inc. would be a subsidiary of
FUNB-NC.

If consummated, the proposed Merger will be deemed to cause an assignment,
within the meaning of the 1940 Act, of the Advisory Agreement and the
Management Agreement. Consequently, the completion of the transaction is
contingent upon, among other things, the approval of the Fund's shareholders
of a new investment advisory and management agreement between the Fund and
Keystone (the "New Advisory Agreement"). The Fund's Trustees have approved the
terms of the New Advisory Agreement, subject to the approval of shareholders
and the completion of the Merger, and have called a special meeting of
shareholders to obtain their approval of, among other things, the New Advisory
Agreement. The meeting is expected to be held in December 1996. The proposed
New Advisory Agreement has terms, including the fees payable thereunder, that
are substantively identical to those in the current agreements.

In addition to an assignment of the Fund's Management Agreement and Advisory
Agreement, the Merger, if consummated, will also be deemed to cause an
assignment, as defined by the 1940 Act, of the Principal Underwriting
Agreement between the Fund and Keystone Investment Distributors Company, the
Fund's principal underwriter (the "Principal Underwriter"). As a result, the
Fund's Trustees have approved the following agreements, subject to the
Merger's completion: (i) a principal underwriting agreement between Evergreen
Funds Distributor, Inc. ("EFD") and the Fund; (ii) a marketing services
agreement between the Principal Underwriter and EFD with respect to the Fund;
and (iii) a subadministration agreement between Keystone and EFD with respect
to the Fund. EFD is a wholly-owned subsidiary of Furman Selz LLC. It is
currently anticipated that on or about January 2, 1997, Furman Selz LLC will
transfer EFD, and Furman Selz's related services, to BISYS Group, Inc.
("BISYS") (the "Transfer"). The Fund's Trustees have also approved, subject to
completion of the Transfer, (i) a new principal underwriting agreement between
EFD and the Fund; (ii) a new marketing services agreement between the
Principal Underwriter and EFD with respect to the Fund; and (iii) a
subadministration agreement between Keystone and BISYS with respect to the
Fund. The terms of such agreements will be substantively identical to the
terms of the agreements to be executed upon completion of the Merger.

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

FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
advisory and management fees discussed above, the principal expenses that the
Fund is expected to pay include, but are not limited to, expenses of its
transfer agent, its custodian, its independent auditors; expenses of legal
counsel for the Fund and for its Trustees in connection with legal matters
relating to the Fund; expenses under its Distribution Plan; fees of its
Independent Trustees (Trustees who are not interested persons, as defined in
the 1940 Act, and who have no direct or indirect financial interest in the
Fund's Distribution Plan or any agreement related thereto); expenses of
shareholders' and Trustees' meetings; fees payable to government agencies,
including registration and qualification fees of the Fund and its shares under
federal and state securities laws; expenses of preparing, printing and mailing
Fund prospectuses, notices, reports, and proxy material; and certain
extraordinary expenses. In addition to such expenses, the Fund pays its
brokerage commissions, interest charges, and taxes. For the fiscal year ended
July 31, 1996, the Fund paid 1.94% of its average net assets in expenses.

During the fiscal year ended July 31, 1996, the Fund paid or accrued $18,334
to Keystone Investments for certain accounting services and $1,927,228 to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, for transfer agent services. KIRC, a wholly-owned
subsidiary of Keystone, is located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.

PORTFOLIO MANAGER
Richard M. Cryan has been the Fund's portfolio manager since January, 1996.
Mr. Cryan is a Keystone Senior Vice President and has more than 14 years of
experience in fixed income investing.

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 the number of shares of the Fund sold by such
broker-dealers. In addition, broker-dealers executing portfolio transactions
may, from time to time, be affiliated with the Fund, Keystone Management,
Keystone, the Fund's principal underwriter, or their affiliates. The Fund may
pay higher commissions to broker-dealers that provide research and 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 rates for the fiscal years ended July 31, 1995
and 1996 were 82% and 116%, respectively. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs,
which would be borne directly by the Fund, as well as additional realized
gains and/or losses to shareholders.

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

The Fund's shares are sold at the net asset value per share next computed
after the Fund receives the purchase order. The initial purchase must be at
least $1,000, except for purchases by participants in certain retirement plans
for which the minimum is waived. There is no minimum for subsequent purchases.
Purchase payments are fully invested at net asset value. There are no sales
charges on purchases of Fund shares at the time of purchase.

CONTINGENT DEFERRED SALES CHARGE
With certain exceptions, when Fund shares are redeemed within four calendar
years after their purchase, a contingent deferred sales charge may be imposed
at rates ranging from a maximum of 4% of amounts redeemed during the same
calendar year of purchase to 1% of amounts redeemed during the third calendar
year after the year of purchase. No contingent deferred sales charge is
imposed on amounts redeemed thereafter or on shares purchased through
reinvestment of dividends. If imposed, the contingent deferred sales charge is
deducted from the redemption proceeds otherwise payable to you. Deferred sales
charges are, to the extent permitted by the NASD, paid to the Principal
Underwriter.

The contingent deferred sales charge is a declining percentage of the lesser
of (1) the net asset value of the shares redeemed or (2) the total cost of
such shares. No deferred sales charge is imposed when a shareholder redeems
amounts derived from (1) increases in the value of his account above the total
cost of such shares due to increases in the net asset value per share of the
Fund; (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; or (3) shares held in all or
part of more than four consecutive calendar years.

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. No deferred sales charge is payable on permitted
exchanges of shares between the funds in the Keystone Fund Family that have
adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act. For
purposes 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 DEFERRED SALES CHARGE
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 a Systematic
Income Plan of up to 1% 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.

Shares also may be sold, to the extent permitted by applicable law, at net
asset value without the payment of commissions or the imposition of a
contingent deferred sales charge to (1) certain Directors, Trustees, officers,
and employees of the Fund, Keystone Management, Keystone, and certain of their
affiliates; (2) registered representatives of firms with dealer agreements
with the Principal Underwriter; and (3) a bank or trust company acting as a
trustee for a single account. For more details, see the statement of
additional information.

- ------------------------------------------------------------------------------
DISTRIBUTION PLAN
- ------------------------------------------------------------------------------

The Fund bears some of the costs of selling its shares under the
Distribution Plan. The Fund's Distribution Plan provides that the Fund may
expend up to 0.3125% quarterly (approximately 1.25% annually) of the average
daily net asset value of its shares to pay distribution costs for sales of its
shares and to pay shareholder service fees. The NASD currently limits such
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 Fund's Distribution Plan, plus
interest at the prime rate plus 1% on such amounts (less any contingent
deferred sales charges paid by shareholders to the Principal Underwriter)
remaining unpaid from time to time.

The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4% of the price paid for each Fund share sold. In
addition, the Principal Underwriter generally reallows to broker-dealers or
others a shareholder service fee at a rate of 0.25% per annum of the net asset
value of shares maintained by such recipients and outstanding on the books of
the Fund for specified periods. See also "Arrangements with Broker-Dealers and
Others" below.

If the Fund is unable to pay the Principal Underwriter a commission on a
new sale because the annual maximum (0.75% of average daily net assets) has
been reached, the Principal Underwriter intends, but is not obligated, to
continue to accept new orders for the purchase of Fund shares and to pay or
accrue commissions and service fees to broker-dealers in excess of the amount
it currently receives from the Fund ("Advances"). While the Fund is under no
contractual obligation to reimburse the Principal Underwriter for Advances
that exceed the Distribution Plan limitation, the Principal Underwriter
intends to seek full payment of such Advances from the Fund (together with
interest at the rate of prime plus 1%) at such time in the future as, and to
the extent that, payment thereof by the Fund would be within permitted limits.
The Principal Underwriter currently intends to seek payment of interest only
on such Advances paid or accrued by the Principal Underwriter subsequent to
July 7, 1992. If the Fund's Independent Trustees authorize such payments, the
effect will be to extend the period of time during which the Fund incurs the
maximum amount of costs allowed by the Distribution Plan.

As of July 31, 1996, the maximum uncollected amounts for which the Principal
Underwriter may seek payment from the Fund under its Distribution Plan is
$5,597,863 (0.94% of the Fund's net asset value).

The amounts and purposes of expenditures under the Distribution Plan must
be reported to the Independent Trustees quarterly. The Independent Trustees
may require or approve changes in the operation of the Distribution Plan and
may require that total expenditures by the Fund under the Distribution Plan
be kept within limits lower than the maximum amount permitted by the
Distribution Plan as stated above. If such costs are not limited by the
Independent Trustees, such costs could, for some period of time, be higher
than such costs permitted by most other plans presently adopted by other
investment companies.

The Distribution Plan 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 Fund. If the 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 Advances.

Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan
requires shareholder approval. Otherwise, the Distribution Plan may be amended
by votes of the majority of both (1) the Fund's Trustees and (2) the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.

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

ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
Upon written notice to broker-dealers, the Principal Underwriter may, at its
own expense, periodically sponsor programs that offer additional compensation
in connection with sales of Fund shares. Participation in such programs may be
available to all broker-dealers or to selected broker-dealers who have sold or
are expected to sell significant amounts of shares. Additional compensation
may also include financial assistance to broker-dealers in connection with
preapproved 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.

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 depending on the
broker-dealer's satisfaction of the required conditions, may be periodic and
may be up to 0.25% of the value of shares sold by such broker-dealer.

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

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 Fund's 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 broker-dealers pursuant to state
law.

- ------------------------------------------------------------------------------
HOW TO REDEEM SHARES
- ------------------------------------------------------------------------------

You may redeem Fund shares for cash at the redemption value by writing to
the Fund, c/o Keystone Investor Resource Center, Inc., Box 2121, Boston,
Massachusetts 02106-2121, and presenting to the Fund 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.

You may also redeem your shares through your broker-dealer. 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 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. The
Fund may impose a deferred sales charge at the time of redemption of certain
shares as explained in "How to Buy Shares." If imposed, the Fund deducts the
deferred sales charge from the redemption proceeds otherwise payable to the
shareholder.

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 up to
15 days or more. Any delay may be avoided by purchasing shares either with a
certified check, by Federal Reserve or bank wire of funds, by direct deposit,
or by EFT. Although the mailing of a redemption check 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 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 and KIRC may
waive this requirement or require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less where 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 or repurchase 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 calling toll free 1-800-343-2898. You must complete the Telephone
Redemption 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-dealer as set forth above.

SMALL ACCOUNTS
Because of 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
contingent deferred sales charges are applied to such redemptions.

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) the Fund cannot dispose of its
investments or fairly determine their value; or (4) the Securities and
Exchange Commission so orders.

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SHAREHOLDER SERVICES
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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 shareholders specific fund account information and price and
yield quotations as well as the ability to effect account transactions,
including investments, exchanges, and redemptions. Shareholders 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 any of the other funds in the Keystone Fund
Family, on the basis of their respective net asset values, by calling toll
free 1-800-343-2898 or by writing to KIRC at P.O. Box 2121, Boston,
Massachusetts 02106-2121. (See "How to Redeem Shares" for additional
information with respect to telephone transactions.)

Fund shares purchased by check may be exchanged for shares of any of the
funds in the Keystone Fund Family, other than Keystone Precious Metals
Holdings, Inc. ("KPMH"). In order to exchange Fund shares for shares of KPMH,
a shareholder must have held Fund shares for a period of at least six months.
There is no exchange fee for exchanges initiated by an individual investor
through KARL; other exchanges made by phone are subject to a $10 exchange fee.
If the shares being tendered for exchange have been held for less than four
years and 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 service charge for any exchange.

Orders to exchange shares of the Fund for shares of Keystone Liquid Trust
("KLT") will be executed by redeeming the shares of the Fund and purchasing
shares of KLT at the net asset value of KLT shares 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 business day will be
executed at the respective net asset values determined as of the close of the
next business 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. Exchanges are subject to the minimum initial purchase requirements
of the fund being acquired. 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.

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 (TSAs); 403(b)(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-
Sharing Plans; and Money Purchase Pension Plans. For details, including fees
and application forms, call KIRC toll free at 1-800-247-4075 or write to KIRC
at P.O. Box 2121, Boston, Massachusetts 02106-2121.

AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer 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
KIRC. Please include your account numbers. Termination of an Automatic
Investment Plan may take up to 30 days.

SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, shareholders may arrange for regular monthly
or quarterly fixed withdrawal payments. Each payment must be at least $100 and
may be as much as 1% per month or 3% per quarter of the total net asset value
of the Fund shares in the shareholder's 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 a
shareholder's account.

OTHER SERVICES
Under certain circumstances shareholders may, within 30 days after a
redemption, reinstate their accounts at current net asset value.

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PERFORMANCE DATA
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From time to time, the Fund may advertise "total return" and "current
yield." BOTH FIGURES ARE BASED ON HISTORICAL EARNINGS. PAST PERFORMANCE SHOULD
NOT BE CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME.
Total return refers to the Fund's average annual compounded rates of return
over specified periods determined by comparing the initial amount invested to
the ending redeemable value of that amount. The resulting equation assumes
reinvestment of all dividends and distributions and deduction of all recurring
charges, if any, applicable to all shareholder accounts. The deduction of the
contingent deferred sales charge is reflected in the applicable years. 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 Fund may include comparative performance information 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.

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FUND SHARES
- ------------------------------------------------------------------------------

The Fund currently issues one class of shares, which participate equally in
dividends and distributions and have equal voting, liquidation and other
rights. 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. Shareholders are entitled to one vote for each
full share owned and fractional votes for fractional shares. Shares are
redeemable, transferable, and freely assignable as collateral. There are no
sinking fund provisions. The Fund may establish additional classes or series
of shares.

The Fund does not have annual meetings. The Fund will have special meetings
from time to time as required under its Restatement of Trust Agreement (the
"Trust Agreement") and under the 1940 Act. As provided in the Fund's Trust
Agreement, 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.

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ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------

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 written notice to those shareholders, the Fund intends,
when an annual report or 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>
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ADDITIONAL INVESTMENT INFORMATION
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DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS
AND INVESTMENT TECHNIQUES AVAILABLE TO THE FUND

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

CORPORATE BOND RATINGS
Higher yields are usually available on securities that are lower rated or
that are unrated. Bonds rated Baa by Moody's are considered as medium grade
obligations, which are neither highly protected nor poorly secured. Debt
rated BBB by S&P is regarded as having an adequate capacity to pay interest
and repay principal, although adverse economic conditions 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. Lower rated securities are
usually defined as Baa or lower by Moody's or BBB or lower by S&P. The Fund
may purchase unrated securities, which are not necessarily of lower quality
than rated securities but may not be attractive to as many buyers. Debt rated
BB, B, CCC, CC and C by S&P 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. Debt
rated CI by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/or repayment of
principal is in arrears. The Fund intends to invest in D-rated debt only in
cases where, in Keystone's judgment, there is a distinct prospect of
improvement in the issuer's financial position as a result of the completion
of reorganization or otherwise. Bonds that are rated Caa by Moody's are of
poor standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest. Bonds that are rated Ca by
Moody's represent obligations that are speculative in a high degree. Such
issues are often in default or have other market shortcomings. Bonds that are
rated C by Moody's are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.

ZERO COUPON BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and
bonds, including coupons relating to such notes and bonds. The interest and
principal payments are direct obligations of the issuer. Coupon zero coupon
bonds of any series mature periodically from the date of issue of such series
through the maturity date of the securities related to such series. Principal
zero coupon bonds mature on the date specified therein, which is the final
maturity date of the related securities. Each zero coupon bond entitles the
holder to receive a single payment at maturity. There are no periodic interest
payments on a zero coupon bond. Zero coupon bonds are offered at discounts
from their face amounts.

In general, owners of zero coupon bonds have substantially all the rights
and privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individually against the issuer and are not required to act in concert with
other holders of zero coupon bonds.

For federal income tax purposes, a purchaser of principal zero coupon bonds
or coupon zero coupon bonds (either initially or in the secondary market) is
treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the
amount payable at maturity over the purchase price. The purchaser is required
to take into income each year as ordinary income an allocable portion of such
discounts determined on a "constant yield" method. Any such income increases
the holder's tax basis for the zero coupon bond, and any gain or loss on a
sale of the zero coupon bonds relative to the holder's basis, as so adjusted,
is a capital gain or loss. If the holder owns both principal zero coupon bonds
and coupon zero coupon bonds representing interest in the same underlying
issue of securities, a special basis allocation rule (requiring the aggregate
basis to be allocated among the items sold and retained based on their
relative fair market value at the time of sale) may apply to determine the
gain or loss on a sale of any such zero coupon bonds.

PAYMENT-IN-KIND SECURITIES
Payment-in-kind securities pay interest in either cash or additional
securities, at the issuer's option, for a specified period. The issuer's
option to pay in additional securities typically ranges from one to six years,
compared to an average maturity for all PIK securities of eleven years. Call
protection and sinking fund features are comparable to those offered on
traditional debt issues.

PIKs, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. Several PIKs are senior debt. In other cases, where PIKs
are subordinated, most senior lenders view them as equity equivalents.

An advantage of PIKs for the issuer -- as with zero coupon securities -- is
that interest payments are automatically compounded (reinvested) at the stated
coupon rate, which is not the case with cash-paying securities. However, PIKs
are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a
discount.

As a group, PIK bonds trade flat (i.e., without accrued interest). Their
price is expected to reflect an amount representing accreted interest since
the last payment. PIKs generally trade at higher yields than comparable cash-
paying securities of the same issuer. Their premium yield is the result of the
lesser desirability of non-cash interest, the more limited audience for non-
cash paying securities, and the fact that many PIKs have been issued to equity
investors who do not normally own or hold such securities.

Calculating the true yield on a PIK security requires a discounted cash flow
analysis if the security (ex interest) is trading at a premium or a discount
because the realizable value of additional payments is equal to the current
market value of the underlying security, not par.

Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their
most costly form of capital.

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 amount borrowed. The Fund has the right to increase the
amount 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). 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 the
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 an investment the
issuer meets the criteria established for commercial paper discussed in the
statement of additional information (which limit such investments to
commercial paper rated A-1 by S&P, Prime-1 by Moody's or F-1 by Fitch
Investors Service, Inc.).

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
only intends 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 the Fund is obligated to repurchase may decline
below the repurchase price.

"WHEN ISSUED" AND "FORWARD COMMITMENT" TRANSACTIONS
The Fund may also purchase securities on a when issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. When
issued and delayed delivery transactions arise when securities are purchased
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 purchase. A forward commitment transaction is an agreement by the
Fund to purchase or sell securities at a specified future date. The Fund may
also enter into foreign currency forward contracts which are described in more
detail in the section of this Exhibit entitled "Foreign Currency
Transactions." When the Fund engages in these 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, delayed delivery and forward
commitment transactions may be expected to occur a month or more before
delivery is due. However, no payment or delivery is made by the Fund until it
receives payment or delivery from the other party to the transaction. The
Securities and Exchange Commission has established certain requirements to
assure that a Fund is able to meet its obligations under these contracts, for
example a separate account of liquid assets equal to the value of such
purchase commitments may be maintained until payment is made. When issued,
delayed delivery and firm commitment transactions 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 any of these transactions, it will
do so for the purpose of acquiring portfolio securities or currencies
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. The use of derivatives for non-hedging
purposes entails greater risks than if derivatives were used solely for
hedging purposes. The Fund uses futures contracts and related options as well
as forwards 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 judgment, 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, forwards, and
swaps, is provided later in this section and is provided in the Fund's
statement of additional information.

Debt instruments that incorporate one or more of these building blocks for
the purpose of determining the principal amount of and/or rate of interest
payable on the debt instruments are often referred to as "structured
securities." An example of this type of structured security is indexed
commercial paper. The term is also used to describe certain securities issued
in connection with the restructuring of certain foreign obligations. See
"Indexed Commercial Paper" and "Structured Securities" below. The term
"derivative" is also sometimes used to describe securities involving rights to
a portion of the cash flows from an underlying pool of mortgages or other
assets from which payments are passed through to the owner of, or that
collateralize, the securities. See "Mortgage Related Securities,"
"Collateralized Mortgage Obligations," "Adjustable Rate Mortgage Securities,"
"Stripped Mortgage Securities," "Mortgage Securities - Special
Considerations," and "Other Asset-Backed Securities" and the Fund's statement
of additional information.

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 the 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 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 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 predict accurately
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.

INTEREST RATE TRANSACTIONS (SWAPS, CAPS, AND FLOORS). If the Fund enters into
interest rate swap, cap or floor transactions, it expects to do so primarily
for hedging purposes, which may include preserving a return or spread on a
particular investment or portion of its portfolio or protecting against an
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund does not currently intend to use these transactions in a
speculative manner.

Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). Interest rate caps and floors
are similar to options in that the purchase of an interest rate cap or floor
entitles the purchaser, to the extent that a specified index exceeds (in the
case of a cap) or falls below (in the case of a floor) a predetermined
interest rate, to receive payments of interest on a contractually-based
principal ("notional") amount from the party selling the interest rate cap or
floor. The Fund may enter into interest rate swaps, caps, and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or liabilities, and will usually enter into interest rate swaps on
a net basis (i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments).

The swap market has grown substantially in recent years, with a large number
of banks and investment banking firms acting as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become more established and relatively liquid. Caps and floors are less liquid
than swaps. These transactions also involve the delivery of securities or
other underlying assets and principal. Accordingly, the risk of loss to the
Fund from interest rate transactions is limited to the net amount of interest
payments that the Fund is contractually obligated to make.

INDEXED COMMERCIAL PAPER. Indexed commercial paper may have its principal
linked to changes in foreign currency exchange rates whereby its principal
amount is adjusted upwards or downwards (but not below zero) at maturity to
reflect changes in the referenced exchange rate. If permitted by its
investment policies, the Fund will purchase such commercial paper with the
currency in which it is denominated and, at maturity, will receive interest
and principal payments thereon in that currency, but the amount of principal
payable by the issuer at maturity will change in proportion to the change (if
any) in the exchange rate between the two specified currencies between the
date the instrument is issued and the date the instrument matures. While such
commercial paper entails the risk of loss of principal, the potential for
realizing gains as a result of changes in foreign currency exchange rates
enables the Fund to hedge (or cross-hedge) against a decline in the U.S.
dollar value of investments denominated in foreign currencies while providing
an attractive money market rate of return.

MORTGAGE-RELATED SECURITIES. The mortgage-related securities in which the Fund
may invest typically are securities representing interests in pools of
mortgage loans made to home owners. Mortgage-related securities bear interest
at either a fixed rate or an adjustable rate determined by reference to an
index rate. The mortgage loan pools may be assembled for sale to investors
(such as the Fund) by governmental or private organizations. Mortgage-related
securities issued by the Government National Mortgage Association ("GNMA") are
backed by the full faith and credit of the U.S. government; those issued by
Federal National Mortgage Associated ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") are not so backed.

Securities representing interests in pools created by private issuers
generally offer a higher rate of interest than securities representing
interests in pools created by governmental issuers because there are no direct
or indirect governmental guarantees of the underlying mortgage payments.
However, private issuers sometimes obtain committed loan facilities, lines of
credit, letters of credit, surety bonds or other forms of liquidity and credit
enhancement to support the timely payment of interest and principal with
respect to their securities if the borrowers on the underlying mortgages fail
to make their mortgage payments. The ratings of such non-governmental
securities are generally dependent upon the ratings of the providers of such
liquidity and credit support and would be adversely affected if the rating of
such an enhancer were downgraded. The Fund may buy mortgage-related
securities without credit enhancement if the securities meet the Fund's
investment standards. Although the market for mortgage-related securities is
becoming increasingly liquid, those of certain private organizations may not
be readily marketable.

One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an undivided beneficial
interest in the underlying pool of mortgage loans and receives a pro rata
share of the monthly payments made by the borrowers on their mortgage loans,
net of any fees paid to the issuer or guarantor of the securities. Prepayments
of mortgages resulting from the sale, refinancing or foreclosure of the
underlying properties are also paid to the holders of these securities. Some
mortgage-related securities, such as securities issued by GNMA, are referred
to as "modified pass-through" securities. The holders of these securities are
entitled to the full and timely payment of principal and interest, net of
certain fees, regardless of whether payments are actually made on the
underlying mortgages. Another form of mortgage-related security is a "pay-
through" security, which is a debt obligation of the issuer secured by a pool
of mortgage loans pledged as collateral that is legally required to be paid by
the issuer regardless of whether payments are actually made on the underlying
mortgages.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). CMOs are the predominant type
of "pay-through" mortgage-related security. CMOs are designed to reduce the
risk of prepayment for investors by issuing multiple classes of securities,
each having different maturities, interest rates and payment schedules, and
with the principal and interest on the underlying mortgages allocated among
the several classes in various ways. The collateral securing the CMOs may
consist of a pool of mortgages, but may also consist of mortgage-backed bonds
or pass-through securities. CMOs may be issued by a U.S. government
instrumentality or agency, or by a private issuer. Although payment of the
principal of, and interest on, the underlying collateral securing privately
issued CMOs may be guaranteed by GNMA, FNMA or FHLMC, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
GNMA, FNMA, FHLMC, any other governmental agency, or any other person or
entity.

INVERSE FLOATING RATE COLLATERALIZED MORTGAGE OBLIGATIONS. In addition to
investing in fixed rate and adjustable rate CMOs, the Fund may also invest in
CMOs with rates that move inversely to market rates ("inverse floaters").

An inverse floater bears an interst rate that resets in the opposite
direction of the change in a specified interest rate index. As market interest
rates rise, the interest rate on the inverse floater goes down, and vice
versa. Inverse floaters tend to exhibit greater price volatility than fixed-
rate bonds of similar maturity and credit quality. The interest rates on
inverse floaters may be significantly reduced, even to zero, if interest rates
rise. Moreover, the secondary market for inverse floaters may be limited in
rising interest rate environments.

ADJUSTABLE RATE MORTGAGE SECURITIES. Another type of mortgage-related
security, known as adjustable-rate mortgage securities ("ARMS"), bears
interest at a rate determined by reference to a predetermined interest rate or
index. There are two main categories of rates or indices: (1) rates based on
the yield on U.S. Treasury securities and (2) indices derived from a
calculated measure such as a cost of funds index or a moving average of
mortgage rates. Some rates and indices closely mirror changes in market
interest rate levels, while others tend to lag changes in market rate levels
and tend to be somewhat less volatile.

ARMS may be secured by adjustable-rate mortgages or fixed-rate mortgages.
ARMS secured by fixed-rate mortgages generally have lifetime caps on the
coupon rates of the securities. To the extent that general interest rates
increase faster than the interest rates on the ARMS, these ARMS will decline
in value. The adjustable-rate mortgages that secure ARMS will frequently have
caps that limit the maximum amount by which the interest rate or the monthly
principal and interest payments on the mortgages may increase. These payment
caps can result in negative amortization (i.e., an increase in the balance of
the mortgage loan). Furthermore, since many adjustable-rate mortgages only
reset on an annual basis, the values of ARMS tend to fluctuate to the extent
that changes in prevailing interest rates are not immediately reflected in the
interest rates payable on the underlying adjustable-rate mortgages.

STRIPPED MORTGAGE SECURITIES. Stripped mortgage-related securities ("SMRS")
are mortgage-related securities that are usually structured with two classes
of securities collateralized by a pool of mortgages or a pool of mortgaged-
backed bonds or pass-through securities, with each class receiving different
proportions of the principal and interest payments from the underlying assets.
A common type of SMRS has one class of interest-only securities ("IOs")
receiving all of the interest payments from the underlying assets, while the
other class of securities, principal-only securities ("POs"), receives all of
the principal payments from the underlying assets. IOs and POs are extremely
sensitive to interest rate changes and are more volatile than mortgage-related
securities that are not stripped. IOs tend to decrease in value as interest
rates decrease, while POs generally increase in value as interest rates
decrease. If prepayments of the underlying mortgages are greater than
anticipated, the amount of interest earned on the overall pool will decrease
due to the decreasing principal balance of the assets. Changes in the values
of IOs and POs can be substantial and occur quickly, such as occurred in the
first half of 1994 when the value of many POs dropped precipitously due to an
increase in interest rates. For this reason, the Fund does not rely on IOs and
POs as the principal means of furthering its investment objective.

MORTGAGE-RELATED SECURITIES -- SPECIAL CONSIDERATIONS. The value of mortgage-
related securities is affected by a number of factors. Unlike traditional
debt securities, which have fixed maturity dates, mortgage-related securities
may be paid earlier than expected as a result of prepayment of the underlying
mortgages. If property owners make unscheduled prepayments of their mortgage
loans, these prepayments will result in the early payment of the applicable
mortgage-related securities. In that event, the Fund may be unable to invest
the proceeds from the early payment of the mortgage-related securities in an
investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities causes
these securities to experience significantly greater price and yield
volatility than experienced by traditional fixed-income securities. The
occurrence of mortgage prepayments is affected by the level of general
interest rates, general economic conditions, and other social and demographic
factors. During periods of falling interest rates, the rate of mortgage
prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate
of mortgage prepayments usually decreases, thereby tending to increase the
life of mortgage-related securities. If the life of a mortgage-related
security is inaccurately predicted, the Fund may not be able to realize the
rate of return it expected.

As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest
rates relative to the yield provided by such securities. Such adverse effect
is especially possible with fixed-rate mortgage securities. If the yield
available on other investments rises above the yield of the fixed-rate
mortgage securities as a result of general increases in interest rate levels,
the value of the mortgage-related securities will decline. Although the
negative effect could be lessened if the mortgage-related securities were to
be paid earlier (thus permitting the Fund to reinvest the prepayment proceeds
in investments yielding the higher current interest rate), as described above
the rate of mortgage prepayments and earlier payment of mortgage-related
securities generally tends to decline during a period of rising interest
rates.

Although the value of ARMS may not be affected by rising interest rates as
much as the value of fixed-rate mortgage securities is affected by rising
interest rates, ARMS may still decline in value as a result of rising interest
rates. Although, as described above, the yield on ARMS varies with changes in
the applicable interest rate or index, there is often a lag between increases
in general interest rates and increases in the yield on ARMS as a result of
relatively infrequent interest rate reset dates. In addition, adjustable-rate
mortgages and ARMS often have interest rate or payment caps that limit the
ability of the adjustable-rate mortgages or ARMS to fully reflect increases in
the general level of interest rates.

OTHER ASSET-BACKED SECURITIES. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card
receivables, home equity loans, equipment leases, and trade receivables, are
being securitized in structures similar to the structures used in mortgage
securitizations. These asset-backed securities are subject to risks associated
with changes in interest rates and prepayment of underlying obligations
similar to the risks of investment in mortgage-related securities discussed
above.

Each type of asset-backed security also entails unique risks depending on
the type of assets involved and the legal structure used. For example, credit
card receivables are generally unsecured obligations of the credit card holder
and the debtors are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such debtors the right to set
off certain amounts owed on the credit cards, thereby reducing the balance
due. There have also been proposals to cap the interest rate that a credit
card issuer may charge. In some transactions, the value of the asset-backed
security is dependent on the performance of a third party acting as credit
enhancer or servicer. Furthermore, in some transactions (such as those
involving the securitization of vehicle loans or leases) it may be
administratively burdensome to perfect the interest of the security issuer in
the underlying collateral and the underlying collateral may become damaged or
stolen.

VARIABLE, FLOATING, AND LEVERAGED INVERSE FLOATING RATE INSTRUMENTS. Fixed-
income securities may have fixed, variable or floating rates of interest.
Variable and floating rate securities pay interest at rates that are adjusted
periodically, according to a specified formula. A "variable" interest rate
adjusts at predetermined intervals (e.g., daily, weekly or monthly), while a
"floating" interest rate adjusts whenever a specified benchmark rate (such as
the bank prime lending rate) changes.

The Fund may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of
time if short-term interest rates rise above a predetermined level or "cap."
The amount of such an additional interest payment typically is calculated
under a formula based on a short-term interest rate index multiplied by a
designated factor.

An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in market value.

STRUCTURED SECURITIES. Structured securities represent interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations or foreign government
securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such
as commercial bank loans or Brady Bonds) and the issuance by that entity of
one or more classes of structured securities backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued structured securities to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to structured securities is dependent on the
extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments. Structured
securities of a given class may be either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured securities
typically have higher yields and present greater risks than unsubordinated
structured securities.

BRADY BONDS. Brady Bonds are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructurings under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been
issued only recently, and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various
currencies (although most are U.S. dollar-denominated) and they are actively
traded in the over-the-counter secondary market.

U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
that have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of
rolling interest payments based on the applicable interest rate at that time
and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments, but generally are not
collateralized. Brady Bonds are often viewed as having up to four valuation
components: (1) collateralized repayment of principal at final maturity, (2)
collateralized interest payments, (3) uncollateralized interest payments, and
(4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments that would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.

<PAGE>

--------------------------------------
KEYSTONE
FUND FAMILY

Quality Bond Fund (B-1)
Diversified Bond Fund (B-2)
High Income Bond Fund (B-4)
Balanced Fund (K-1)
Strategic Growth Fund (K-2)
Growth and Income Fund (S-1)
Mid-Cap Growth Fund (S-3)
Small Company Growth Fund (S-4)
International Fund
Precious Metals Holdings
Tax Free Fund
Liquid Trust
--------------------------------------

[Logo] KEYSTONE
INVESTMENTS

Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[Recycle Logo]
B4-P 11/96
15M

--------------------------------------
KEYSTONE
--------------------------------

[Graphic Omitted]

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

HIGH INCOME
BOND FUND (B-4)
--------------------------------------

[Logo]

PROSPECTUS AND
APPLICATION

<PAGE>

KEYSTONE HIGH INCOME BOND FUND (B-4)

PART B

STATEMENT OF ADDITIONAL INFORMATION

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

KEYSTONE HIGH INCOME BOND FUND (B-4)

November 29, 1996

This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone High
Income Bond Fund (B-4)(the "Fund") dated November 29, 1996. A copy of the
prospectus may be obtained from the Fund's principal underwriter, Keystone
Investment Distributors Company (the "Principal Underwriter"), or your broker-
dealer. The Principal Underwriter is located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.

TABLE OF CONTENTS

Page

Investment Objective and Policies 2
Investment Restrictions 2
Valuation of Securities 4
Distributions and Taxes 5
Sales Charges 6
Distribution Plan 7
The Trust Agreement 9
Investment Manager and
Investment Adviser 11
Trustees and Officers 14
Principal Underwriter 18
Brokerage 20
Standardized Total Return
and Yield Quotations 22
Financial Statements 22
Additional Information 23
Appendix A-1

INVESTMENT OBJECTIVE AND POLICIES

The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund's investment objective is to provide
shareholders with generous income. To achieve this objective, the Fund invests
primarily in corporate bonds, and its portfolio ordinarily includes a
substantial number of bonds that are rated by Standard & Poor's Corporation
("S&P") or Moody's Investors Service ("Moody's") as below investment grade,
i.e., S&P rating below BBB or Moody's rating below Baa. While Keystone
Management, Inc. ("Keystone Management") and Keystone Investment Management
Company ("Keystone"), the Fund's investment manager and adviser, respectively,
perform their own credit analyses of the Fund's investments and do not rely on
ratings assigned by rating services, bonds rated below investment grade are, on
balance, considered predominantly speculative.

Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.

INVESTMENT RESTRICTIONS

Fundamental Investment Restrictions

The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without a vote of the 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 any of 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) invest more than 5% of the value of its total assets in companies which
have been in operation for less than three years;

(3) borrow money, except that the Fund may (a) borrow money from banks for
temporary or emergency purposes in aggregate amounts up to 10% of the value of
the Fund's net assets (computed at cost); or (b) enter into reverse repurchase
agreements (bank borrowings and reverse repurchase agreements, in aggregate,
shall not exceed 10% of the value of the Fund's net assets);

(4) underwrite securities, except that the Fund may purchase securities
from issuers thereof or others and dispose of such securities in a manner
consistent with its other investment policies; in the disposition of restricted
securities the Fund may be deemed to be an underwriter, as defined in the
Securities Act of 1933;

(5) purchase or sell real estate or interests in real estate, except that
it may purchase and sell securities secured by real estate and securities of
companies which invest in real estate, and will not purchase or sell commodities
or commodity contracts, except that the Fund may engage in currency or other
financial futures contracts and related options transactions;

(6) invest for the primary purpose of exercising control over or management
of any issuer;

(7) make margin purchases or short sales of securities;

(8) make loans, except that the Fund may make, purchase or hold debt
securities and other debt investments, including loans, consistent with its
investment objective, lend portfolio securities valued at not more than 15% of
its total assets to broker-dealers, and enter into repurchase agreements;

(9) invest more than 25% of its assets in the securities of issuers in any
single industry, other than securities issued by banks and savings and loan
associations or securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities; and

(10) purchase the securities of any other investment company except in the
open market and at customary brokerage rates and in no event more than 3% of the
voting securities of any investment company.

Non-Fundamental Investment Restrictions

If a percentage limit is satisfied at the time of investment or borrowing,
a later increase or decrease resulting from a change in asset value of a
security or a decrease in Fund assets is not a violation of the limit.

VALUATION OF SECURITIES

Current values for the Fund's portfolio securities are determined in the
following manner:

(1) securities traded on an established exchange are valued on the basis of
the last sales price on the exchange where primarily traded prior to the time of
the valuation;

(2) securities traded in the over-the-counter market, for which complete
quotations are readily available, are valued at the mean of the bid and asked
prices at the time of valuation, unless otherwise specified by the Fund's Board
of Trustees;

(3) short-term investments with initial or remaining maturities of 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;

(4) short-term investments with greater than sixty days to maturity are
valued at market value;

(5) securities, including restricted securities, for which complete
quotations are not readily available, and other assets are valued at prices
deemed in good faith to be fair under procedures established by the Board of
Trustees; and

(6) securities for which market quotations are readily available are valued
on a consistent basis at the price quoted that, in the opinion of the Board of
Trustees or the person designated by the Board of Trustees to make the
determination, most nearly represents the market value of the particular
security.

The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing fixed income securities. As a result,
depending on the particular securities owned by the Fund, it is likely that most
of the valuations for such securities will be based upon fair value determined
under the procedures that have been approved by the Board of Trustees. The Board
of Trustees has authorized the use of a pricing service to determine the fair
value of the Fund's fixed income securities and certain other securities.

DISTRIBUTIONS AND TAXES

The Fund will make distributions from its net investment income on or about
the 5th day of each month and net capital gains, if any, at least annually in
shares or, at the option of the shareholder, in cash. 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 ex- dividend date after
adjustment for the distribution. Net asset value is used in computing the number
of shares in both gains and income distribution reinvestments. 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 capital gains and income distributions in shares. Instructions continue
in effect until changed in writing.

The Fund's income distributions are largely derived from interest on bonds
and thus are not to any significant degree eligible, in whole or in part, for
the corporate 70% dividends received deduction. 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. However, if such shares are held
less than six months and redeemed at a loss, 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 its 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.

SALES CHARGES

In order to reimburse the Fund for certain expenses relating to the sale of
its shares (see "Distribution Plan"), a contingent deferred sales charge
("CDSC") may be imposed at the time of redemption of certain Fund shares within
four calendar years after their purchase. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to the shareholder. For the fiscal
year ended July 31, 1996, the Principal Underwriter received $862,707 in CDSCs.

The CDSC is a declining percentage of the lesser of (1) the net asset value
of the shares redeemed, or (2) the total cost of such shares. No CDSC is imposed
when the shareholder redeems amounts derived from (1) increases in the value of
his account above the total cost of such shares due to increases in the net
asset value per share of the Fund; (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; or (3) shares
held in all or part of more than four consecutive calendar years.

Subject to the limitations stated above, the CDSC is imposed according to
the following schedule: 4.00% of amounts redeemed during the calendar year of
purchase; 3.00% of amounts redeemed during the calendar year after the year of
purchase; 2.00% of amounts redeemed during the second calendar year after the
year of purchase; and 1.00% of amounts redeemed during the third calendar year
after the year of purchase. No CDSC is imposed on amounts redeemed thereafter.

The following example illustrates the operation of the CDSC. Assume that an
investor makes a purchase payment of $10,000 during the calendar year 1996 and
on a given date in 1997 the value of the investor's account has grown through
investment performance and reinvestment of distributions to $12,000. On such
date in 1997, the investor could redeem up to $2,000 ($12,000 minus $10,000)
without incurring a CDSC. If, on such date, the investor should redeem $3,000, a
CDSC would be imposed on $1,000 of the redemption proceeds (the amount by which
the investor's account was reduced by the redemption below the amount of the
initial purchase payment). The CDSC would be imposed at the rate of 3.00%
(because the redemption is made during the calendar year after the calendar year
of purchase) and would total $30.

Upon request for redemption, shares not subject to the CDSC will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed. There is no CDSC on permitted exchanges of shares between funds in the
Keystone Fund Family that have adopted distribution plans pursuant to Rule 12b-1
under the 1940 Act. For purposes of any future CDSC, when shares of one such
fund have been exchanged for shares of another such fund, the calendar year of
purchase is deemed to be the year shares tendered for exchange were originally
purchased.

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

No CDSC is imposed on a redemption of Fund shares purchased 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, any other fund in the
Keystone Fund Family, and/or any Keystone America Fund is at least $500,000 and
any commission paid by the Fund and such other funds at the time of such
purchase is not more than 1.00% of the amount invested.

The Fund's prospectus enumerates certain additional CDSC waivers.

DISTRIBUTION PLAN

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

The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The National Association of Securities Dealers, Inc.
("NASD") limits such annual expenditures to 1.00%, 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
Fund's Distribution Plan plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any CDSCs paid by shareholders to the Principal
Underwriter).

Payments under the 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 Fund shares sold; and (2) as shareholder service fees in
respect of shares maintained by the recipients and outstanding on the Fund's
books for specific periods. Amounts paid or accrued to the Principal Underwriter
under (1) and (2) in the aggregate may not exceed the limitation referred to
above. The Principal Underwriter generally reallows to broker-dealers or others
a commission equal to 4.00% of the price paid for each Fund share sold. In
addition, the Principal Underwriter generally reallows to broker-dealers or
others a shareholder service fee at a rate of 0.25% per annum of the net asset
value of shares maintained by such recipients and outstanding on the books of
the Fund for specified periods.

If the Fund is unable to pay the Principal Underwriter a commission on a
new sale because the annual maximum (0.75% of average daily net assets) has been
reached, the Principal Underwriter intends, but is not obligated, to continue to
accept new orders for the purchase of Fund shares and to pay commissions and
service fees to broker-dealers in excess of the amount it currently receives
from the Fund ("Advances"). While the Fund is under no contractual obligation to
pay such Advances, the Principal Underwriter intends to seek full payment of
such Advances from the Fund (together with interest at the rate of prime plus
1%) at such time in the future as, and to the extent that, payment thereof by
the Fund would be within permitted limits. If the Fund's Independent Trustees
(Trustees who are not interested persons, as defined in the 1940 Act, of the
Fund and who have no direct or indirect financial interest in the Fund's
Distribution Plan or any agreement related thereto) authorize such Advances, the
effect will be to extend the period of time during which the Fund incurs the
maximum amount of costs allowed by the Distribution Plan.

The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limit specified above, and the amounts and
purposes of expenditures under the Distribution Plan must be reported to the
Fund's Independent Trustees quarterly. The Fund's Independent Trustees may
require or approve changes in the implementation or operation of the
Distribution Plan and may require that total expenditures by the Fund under the
Distribution Plan be kept within limits lower than the maximum amount permitted
by the Distribution Plan as stated above. If such costs are not limited by the
Independent Trustees, such costs could, for some period of time, be higher than
such costs permitted by most other plans presently adopted by other investment
companies.

The Distribution Plan may be terminated at any time by vote of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of the Fund. If the 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 Advances.

Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on such amendment.

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

For the fiscal year ended July 31, 1996, the Fund paid the Principal
Underwriter $6,747,276 under the Distribution Plan, of which amount the
Principal Underwriter received $3,208,491 after payment of commissions and
service fees to others of $3,538785.

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

THE TRUST AGREEMENT

The Fund is a Pennsylvania common law trust established under a Trust
Agreement dated July 15, 1935, as restated and amended (the "Trust Agreement").
The Trust Agreement provides for a Board of Trustees and enables the Fund to
enter into an agreement with an investment manager and/or adviser to provide the
Fund with investment advisory, management, and administrative services. A copy
of the Trust Agreement is on file as an exhibit to the Fund's Registration
Statement, of which this statement of additional information is a part. This
summary is qualified in its entirety by reference to the Trust Agreement.

Description of Shares

The Trust Agreement authorizes the issuance of an unlimited number of
shares of beneficial interest and the creation of additional series and/or
classes of series of Fund shares. Each share represents an equal proportionate
interest in the Fund with each other share of that class. Upon liquidation,
shares are entitled to a pro rata share in the net assets of their class of Fund
shares. Shareholders shall have no preemptive or conversion rights. Shares are
transferable. The Fund currently intends to issue only one class of shares.

Shareholder Liability

Pursuant to court decisions or other theories of law, shareholders of a
Pennsylvania common law trust could possibly be held personally liable for the
obligations of the trust. The possibility of Fund shareholders incurring
financial loss under such circumstances appears to be remote, however, because
the Trust Agreement (1) contains an express disclaimer of shareholder liability
for obligations of the Fund; (2) 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 (3) provides for indemnification out of Fund
property for any shareholder held personally liable for the obligations of the
Fund.

Voting Rights

Under the terms of the Trust Agreement, 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. No amendment may be made to the Trust
Agreement that adversely affects any class of shares without the approval of a
majority of the shares of that class. There shall be no cumulative voting in the
election of Trustees.

After a meeting as described above, no further meetings of shareholders for
the purpose of electing Trustees will be held, unless required by law, or 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 cease to hold office or may be removed from office (as
the case may be) (1) at any time by a 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 outstanding shares.
Any Trustee may voluntarily resign from office.

Limitation of Trustees' Liability

The Trust Agreement provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees, or investment advisers, shall not be liable for
any neglect or wrongdoing of any such person; provided, however, that nothing in
the Trust Agreement shall protect a Trustee against any liability for his
willful misfeasance, bad faith, gross negligence, or reckless disregard of his
duties.

The Trustees have absolute and exclusive control over the management and
disposition of all assets of the Fund and may perform such acts as in their sole
judgment and discretion are necessary and proper for conducting the business and
affairs of the Fund or promoting the interests of the Fund and the shareholders.

INVESTMENT MANAGER AND INVESTMENT ADVISER

Investment Manager

Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is responsible for the overall management of the Fund's business and
affairs. Keystone Management, organized in 1989, is a wholly-owned subsidiary of
Keystone. Its directors and principal executive officers have been affiliated
with Keystone, a seasoned investment adviser, for a number of years. Keystone
Management also serves as investment manager to each of the other funds in the
Keystone Fund Family and to certain other funds in the Keystone Investments
Family of Funds.

Except as otherwise noted below, pursuant to an Investment Management
Agreement with the Fund (the "Management Agreement"), Keystone Management
manages and administers the operation of the Fund and manages the investment and
reinvestment of the Fund's assets in conformity with the Fund's investment
objectives and restrictions. The Management Agreement stipulates that Keystone
Management shall provide office space and all necessary office facilities,
equipment, and personnel in connection with its services under the Management
Agreement. The Management Agreement also stipulates that Keystone Management
will pay or reimburse the Fund for the compensation of Fund officers and
Trustees who are affiliated with the investment manager as well as pay all
expenses of Keystone Management incurred in connection with the provision of its
services. All charges and expenses, other than those specifically referred to as
being borne by Keystone Management, 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 Plan; 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 Securities
and Exchange Commission (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 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.

Services performed by Keystone Management include (1) performing research
and planning with respect to (a) the Fund's qualification as a regulated
investment company under Subchapter M of the Internal Revenue Code, (b) tax
treatment of the Fund's portfolio investments, (c) tax treatment of special
corporate actions (such as reorganizations), (d) state tax matters affecting the
Fund, and (e) the Fund's distributions of income and capital gains; (2)
preparing the Fund's federal and state tax returns; and (3) providing services
to the Fund's shareholders in connection with federal and state taxation and
distributions of income and capital gains.

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

Annual Aggregate Net Asset Value
Management of the Shares
Fee Income of the Fund
2% of Gross Dividend and
Interest Income Plus

0.50% of the first $ 100,000,000 plus
0.45% of the next $ 100,000,000 plus
0.40% of the next $ 100,000,000 plus
0.35% of the next $ 100,000,000 plus
0.30% of the next $ 100,000,000 plus
0.25% of amounts over $ 500,000,000;

computed as of the close of business on each business day and payable daily.

The Management Agreement continues in effect only if approved at least
annually (i) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding shares and (ii) 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 Management 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 Management Agreement will terminate automatically
upon its "assignment," as that term is defined in the 1940 Act.

The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, under which Keystone or
such other investment adviser, as investment adviser, will provide substantially
all the services to be provided by Keystone Management under the Management
Agreement. The Management Agreement also permits Keystone Management to delegate
to Keystone or another investment adviser substantially all of its rights,
duties, and obligations under the Management Agreement.

Investment Adviser

Pursuant to the Management Agreement, Keystone Management has entered into
an Investment Advisory Agreement with Keystone (the "Advisory Agreement"), under
which Keystone Management has delegated all of its investment management
functions, except for certain administrative and management services, to
Keystone. As a result, subject to the supervision of the Fund's Board of
Trustees, Keystone performs services on behalf of the Fund that are
substantially similar to those described above with respect to Keystone
Management.

Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of 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 Management, Keystone,
their affiliates, and the Keystone Investments Family of Funds.

Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee equal to 85% of the management fee received by Keystone Management
under the Management Agreement.

For the fiscal year ended July 31, 1994, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$4,829,247, representing 0.52% of the Fund's average net assets. Of such amount
paid to Keystone Management, $4,104,859 was paid to Keystone for its services to
the Fund.

For the fiscal year ended July 31, 1995, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$4,040,007, representing 0.57% of the Fund's average net assets. Of such amount
paid to Keystone Management, $3,434,006 was paid to Keystone for its services to
the Fund.

For the fiscal year ended July 31, 1996, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$3,788,171, representing 0.56% of the Fund's average net assets. Of such amount
paid to Keystone Management, $3,219,945 was paid to Keystone for its services to
the Fund.

Keystone Investments has recently entered into an Agreement and Plan of
Acquisition and Merger with First Union Corporation ("First Union"), pursuant to
which Keystone Investments will be merged with and into a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB-NC")(the
"Merger"). The surviving corporation will assume the name "Keystone Investments,
Inc." Subject to a number of conditions being met, it is currently anticipated
that the Merger will take place on or around December 11, 1996. Thereafter,
Keystone Investments, Inc. would be a subsidiary of FUNB-NC.

If consummated, the proposed Merger will be deemed to cause an assignment,
within the meaning of the 1940 Act, of both the Management Agreement and the
Advisory Agreement. Consequently, the completion of the Merger is contingent
upon, among other things, the approval of the Fund's shareholders of a new
investment advisory and management agreement between the Fund and Keystone (the
"New Advisory Agreement"). The Fund's Trustees have approved the terms of the
New Advisory Agreement, subject to the approval of shareholders and the
completion of the Merger, and have called a special meeting of shareholders to
obtain their approval of, among other things, the New Advisory Agreement. The
meeting is expected to be held in December 1996. The proposed New Advisory
Agreement has terms, including fees payable thereunder, that are substantively
identical to those in the current agreements.

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 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, Keystone Investor
Resource Center, Inc. ("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); and former Member, Board of Advisers, Credito
Emilano (banking).

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.; and former Managing Director, Seaward
Management Corporation (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; Principal, Padanaram
Associates, Inc.; and former Executive Director, Coalition of Essential
Schools, Brown University.

CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; 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; Trustee, Treasurer, and
Chairman of the Finance Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chairman and
President, Oldways Preservation and Exchange Trust (education); Former
Chairman of the Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner, Roscommon Capital
Corp.; former Chief Executive Officer, Gifford Gifts of Fine Foods;
former Chairman, Gifford, Drescher & Associates (environmental
consulting); 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; Chairman of the Board and
Chief Executive Officer, Carson Products Company; 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; Chairman and Of
Counsel, Keyser, Crowley, Meub, Layden, Kulig & Sullivan P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Di rector, Vermont Yankee Nuclear Power Corporation,
Grand Trunk Corporation, Grand Trunk Western Railroad, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.,
and the Investment Company Institute; former Director and President,
Associated Industries of Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow Financial Corp.; and
former Director and Chairman of the Board, Hitchcock Clinic, Proctor
Bank, and Green Mountain Bank.

DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Vice Chair and
former Executive Vice President, DHR Interna tional, Inc. (executive
recruitment); former Senior Vice President, Boyden International 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. (insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of Connecticut Natural
Gas Corpora tion, Hartford Hospital, Old State House Association,
Middlesex Mutual Assurance Company, and Enhance Financial Services,
Inc.; Chairman, Board of Trustees, Hartford Graduate Center; Trustee,
Greater Hartford YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corpora tion; former Trustee,
Kingswood-Oxford School; and former Managing Director and Consultant,
Russell Miller, Inc.

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

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.

GILMAN C. GUNN, III: Vice President of the Fund; Vice President of certain
other funds in the Keystone Investments Family of Funds; and Senior
Vice President of Keystone.

RICHARD M. CRYAN: Vice President of the Fund; Vice President of a certain other
fund in the Keystone Investments Family of Funds; Vice President of
KFIA; and Senior Vice President of Keystone.

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

Mr. Elfner and Mr. Bissell are "interested persons" of the Fund by virtue
of their positions as officers and/or Directors of Keystone Investments and
several of its affiliates including Keystone, Keystone Management, the Principal
Underwriter, and KIRC. Mr. Elfner and Mr. Bissell both 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.

For the fiscal year ended July 31, 1996, the Independent Trustees received
$42,995 as a group from the Fund in annual retainers and meeting fees. For the
calendar year ended December 31, 1995, annual retainers and meeting fees paid by
all funds in the Keystone Investments Family of Funds (which includes over 30
mutual funds) totaled approximately $450,716. As of October 31, 1996, the
Trustees and officers of Keystone beneficially owned less than 0.01% of the
Fund's then outstanding shares.

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

PRINCIPAL UNDERWRITER

The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with Keystone Investment Distributors Company, the
Principal Underwriter. The Principal Underwriter is a Delaware corporation and
is wholly-owned by Keystone.

The Principal Underwriter, as agent, has agreed to use its best efforts to
find purchasers for the Fund's shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers and others, acting as principals, for sales of shares
to them. The Underwriting Agreement provides that the Principal Underwriter will
bear the expense of preparing, printing, and distributing advertising and sales
literature and prospectuses used by it. In its capacity as principal
underwriter, the Principal Underwriter may receive payments from the Fund
pursuant to the Fund's Distribution Plan.

The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually (i) by a vote of a majority
of the Fund's Independent Trustees cast in person at a meeting called for that
purpose, and (ii) by vote of a majority of Trustees or by vote of a majority of
the outstanding shares.

The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its "assignment," as that term is defined in the 1940 Act.

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 broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.

During the fiscal year ended July 31, 1996, the Fund paid the Principal
Underwriter $6,747,276 under the Distribution Plan, of which amount the
Principal Underwriter received $3,208,491 after payments of commission on new
sales and service fees to broker- dealers and others of $3,538,785. During the
same year, the Principal Underwriter also received $862,707 in CDSCs.

During the fiscal year ended July 31, 1995, the Fund paid the Principal
Underwriter $7,116,706 under the Distribution Plan, of which amount the
Principal Underwriter received $4,444,407 after payments of commission on new
sales and service fees to broker- dealers and others of $3,857,337. During the
same year, the Principal Underwriter also received $771,318 in CDSCs.

During the fiscal year ended July 31, 1994, the Fund paid the Principal
Underwriter $9,079,585 under the Distribution Plan, of which amount the
Principal Underwriter received $4,485,981 after payments of commission on new
sales and service fees to broker- dealers and others of $6,745,355. During the
same year, the Principal Underwriter also received $1,014,043 in CDSCs.

In addition to an assignment of the Fund's Management Agreement and
Advisory Agreement, the Merger, if consummated, will also be deemed to cause an
assignment, as defined by the 1940 Act, of the Underwriting Agreement. As a
result, the Fund's Trustees have approved the following agreements, subject to
the Merger's completion: (i) a principal underwriting agreement between
Evergreen Funds Distributor, Inc. ("EFD") and the Fund; (ii) a marketing
services agreement between the Principal Underwriter and EFD with respect to the
Fund; and (iii) a subadministration agreement between Keystone and EFD with
respect to the Fund. EFD is a wholly-owned subsidiary of Furman Selz LLC. It is
currently anticipated that on or about January 2, 1997, Furman Selz LLC will
transfer EFD, and Furman Selz's related services, to BISYS Group, Inc. ("BISYS")
(the "Transfer"). The Fund's Trustees have also approved, subject to completion
of the Transfer, (i) a new principal underwriting agreement between EFD and the
Fund; (ii) a new marketing services agreement between the Principal Underwriter
and EFD with respect to the Fund; and (iii) a subadministration agreement
between Keystone and BISYS with respect to the Fund. The terms of such
agreements will be substantively identical to the terms of the agreements to be
executed upon completion of the Merger.

BROKERAGE

It is Keystone's policy, 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, Keystone Management, or Keystone is
considered to be in addition to, and not in lieu of, services required to be
performed by Keystone Management under the Management Agreement or Keystone
under 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 Management or 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 Management Agreement and the Advisory
Agreement, Keystone Management and Keystone are 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
Management and Keystone do follow such a practice, they will do so on a basis
that is fair and equitable to the Fund.

The Fund expects that purchases and sales of bonds and money market
instruments usually will be principal transactions. Bonds and money market
instruments are normally purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually will be no
brokerage commissions paid by the Fund for such purchases. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from broker-dealers serving as market makers will include the 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's portfolio
thereby taking advantage of the lower purchase price available to members of
such a group. Neither Keystone Management, Keystone, nor the Fund intend to
place securities transactions with any particular broker-dealer or group
thereof. The Fund's Board of Trustees, however, has determined that the Fund may
consider sales of shares as a factor in the selection of broker-dealers to
execute portfolio transactions, subject to the requirements of best execution,
including best price, 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
Management or Keystone from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop 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. Although, in some cases, this system could
have a detrimental effect on the price or volume of the Fund's securities, the
Fund believes that, in other cases, its ability to participate in volume
transactions will produce better executions.

For the fiscal years ended July 31, 1994, 1995, and 1996 the Fund paid no
brokerage commissions.

Portfolio securities are not purchased from or sold to Keystone Management,
Keystone, the Principal Underwriter, or any of their affiliated persons, as
defined in the 1940 Act.

STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS

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

The cumulative total returns of the Fund for the one, five, and ten year
periods ending July 31, 1996 were -1.41% (including CDSCs), 63.28%, and 72.07%,
respectively. The compounded average rates of return for the one, five, and ten
year periods ended July 31, 1996 were -1.41% (including CDSCs), 10.30%, and
5.58%, 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's current yield for
the 30-day period ended July 31, 1996 was 8.18%.

FINANCIAL STATEMENTS

The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission:

Schedule of Investments as of July 31, 1996;

Financial Highlights for each of the years in the ten-year
period ended July 31, 1996;

Statement of Assets and Liabilities as of July 31, 1996;

Statement of Operations for the year ended July 31, 1996;

Statements of Changes in Net Assets for each of the years in
the two-year period ended July 31, 1996;

Notes to Financial Statements; and

Independent Auditors' Report dated September 6, 1996.

A copy of the Fund's Annual report will be furnished upon request and
without charge. Requests may be made in writing to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-5034, or by calling KIRC toll free at 1-800-343-2898.

ADDITIONAL INFORMATION

State Street Bank and Trust Company, located at 225 Franklin Street,
Boston, Massachusetts 02110, is custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian may hold securities of some foreign issuers
outside the U.S. 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, located at 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, are the Fund's independent auditors.

KIRC, located at 200 Berkeley Street, Boston, Massachusetts, 02116-5034, is
a wholly-owned subsidiary of Keystone is the Fund's transfer agent and dividend
disbursing agent.

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, this
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.

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 in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share. Shareholders receiving such securities would incur brokerage costs when
these securities are sold.

The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.

On October 31, 1996, Merrill Lynch, Pierce, Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive E 3rd Floor, Jacksonville, FL 32246-6484 owned of
record 10.50% of the Fund's shares.

<PAGE>

APPENDIX

CORPORATE BOND RATINGS

A. S&P Corporate Bond Ratings

A S&P corporate bond rating is a current assessment of the creditworthiness
of an obligor, including obligors outside the U.S., 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 BBB 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.

6. CI - The rating CI is reserved for income bonds on which no interest is
being paid.

7. D - Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.

B. Moody's Corporate Bond Ratings

Moody's ratings are as follows:

1. Aaa - Bonds that 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 that 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 that
make the long term risks appear somewhat larger than in Aaa securities.

3. A - Bonds that 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 that suggest a susceptibility to impairment sometime in the future.

4. Baa - Bonds that 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 that 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 that 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.

7. Caa - Bonds that are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.

8. Ca - Bonds that are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.

9. C - Bonds that are rated as C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

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.

ZERO COUPON "STRIPPED" BONDS

A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Coupon zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond. Zero coupon bonds are offered at discounts from their face amounts.

For federal income tax purposes, a purchaser of principal zero coupon bonds
or coupon zero coupon bonds (either initially or in the secondary market) is
treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
coupon bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market values at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds items.

PAYMENT-IN-KIND SECURITIES

Payment-in-kind ("PIK") securities pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
issuer's option to pay in additional securities typically ranges from one to six
years, compared to an average maturity for all PIK securities of eleven years.
Call protection and sinking fund features are comparable to those offered on
traditional debt issues.

PIKs, like zero coupon bonds, are designated to give an issuer flexibility
in managing cash flow. Several PIKs are senior debt. In other cases, where PIKs
are subordinated, most senior lenders view them as equity equivalents.

An advantage of PIKs for the issuer - as with zero coupon securities - is
that interest payments are automatically compounded (reinvested) at the stated
coupon rate, which is not the case with cash-paying securities. However, PIKs
are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.

As a group, PIK bonds trade flat (i.e., without accrued interest). Their
price is expected to reflect an amount representing accreted interest since the
last payment. PIKs generally trade at higher yields than comparable cash-paying
securities of the same issuer. Their premium yield is the result of the lesser
desirability of non-cash interest, the more limited audience for non-cash paying
securities, and the fact that many PIKs have been issued to equity investors who
do not normally own or hold such securities.

Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount, because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.

Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital. Sixty-eight percent of the PIK debentures issued prior
to 1987 have already been redeemed, and approximately 35% of the over $10
billion PIK debentures issued through year-end 1988 have been retired.

EQUIPMENT TRUST CERTIFICATES

Equipment Trust Certificates are a mechanism for financing the purchase of
transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.

Under an equipment trust certificate, the equipment is used as the security
for the debt and title to the equipment is vested in a trustee. The trustee
leases the equipment to the user, i.e., the railroad, airline, trucking or oil
company. At the same time equipment trust certificates in an aggregate amount
equal to a certain percentage of the equipment's purchase price are sold to
lenders. The trustee pays the proceeds from the sale of certificates to the
manufacturer. In addition, the company using the equipment makes an initial
payment of rent equal to their balance of the purchase price to the trustee,
which the trustee then pays to the manufacturer. The trustee collects lease
payments from the company and uses the payments to pay interest and principal on
the certificates. At maturity, the certificates are redeemed and paid, the
equipment is sold to the company and the lease is terminated.

Generally, these certificates are regarded as obligations of the company
that is leasing the equipment and are shown as liabilities on its balance sheet.
However, the company does not own the equipment until all the certificates are
redeemed and paid. In the event the company defaults under its lease, the
trustee terminates the lease. If another lessee is available, the trustee leases
the equipment to another user and makes payments on the certificates from new
lease rentals.

LIMITED PARTNERSHIPS

The Fund may invest in limited and master limited partnerships. A limited
partnership is a partnership consisting of one or more general partners, jointly
and severally responsible as ordinary partners, and by whom the business is
conducted, and one or more limited partners who contribute cash as capital to
the partnership and who generally are not liable for the debts of the
partnership beyond the amounts contributed. Limited partners are not involved in
the day-to-day management of the partnership. They receive income, capital gains
and other tax benefits associated with the partnership project in accordance
with terms established in the partnership agreement. Typical limited
partnerships are in real estate, oil and gas and equipment leasing, but they
also finance movies, research and development and other projects.

For an organization classified as a partnership under the Internal Revenue
Code, each item of income, gain, loss, deduction and credit is not taxed at the
partnership level but flows through to the holder of the partnership unit. This
allows the partnership to avoid taxation and to pass through income to the
holder of the partnership unit at lower individual rates.

A master limited partnership is a publicly traded limited partnership. The
partnership units are registered with the Securities and Exchange Commission and
are freely exchanged on a securities exchange or in the over-the-counter market.

MOODY'S PREFERRED STOCK RATINGS

Preferred stock ratings and their definitions are as follows:

1. aaa: An issue that 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 that 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 that 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 that 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 that 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.

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.

MONEY MARKET INSTRUMENTS

The Fund's investments in commercial paper are limited to those rated A-1
by S&P, Prime-1 by Moody's or F-1 by Fitch Investors Service, Inc. (Fitch).
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 instrumentalities in which the United States Government, its
agencies or instrumentalities participate, such as the World Bank, the Asian
Development Bank or the InterAmerican Development Bank, or issues insured by the
Federal Deposit Insurance Corporation.

Certificates of Deposit

Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.

Certificates of deposit will be limited to U.S. dollar- denominated
certificates of United States banks, including their branches abroad, and of
U.S. branches of foreign banks which are members of the Federal Reserve System
or the Federal Deposit Insurance Corporation and have at least $1 billion in
deposits as of the date of their most recently published financial statements.

The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.

Bankers' Acceptances

Bankers' acceptances typically arise from short term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.

OPTIONS TRANSACTIONS

Writing Covered Options

The Fund writes only covered options. Options written by the Fund will
normally have expiration dates of not more than nine months from the date
written. The exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the times the options are
written.

Unless the option has been exercised, the Fund may close out an option it
has written by effecting a closing purchase transaction, whereby it purchases an
option covering the same underlying security and having the same exercise price
and expiration date ("of the same series") as the one it has written. If the
Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.

An option position may be closed out only in a secondary market for an
option of the same series. 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.

Because the Fund intends to qualify as a regulated investment company under
the Internal Revenue Code, the extent to which the Fund may write covered call
options and enter into so-called "straddle" transactions involving put and call
options may be limited.

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.

Purchasing Put and Call Options

The Fund can close out a put or call option it has written by effecting a
closing purchase transaction; for example, the Fund may close out a put or call
option it has written by buying an option identical to the one it has written.
If, however, a secondary market does not exist at a time the Fund wishes to
effect a closing sale transaction, the Fund will have to exercise the option to
realize any profit. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying securities until the option expires
or is exercised. In addition, in a transaction in which the Fund does not own
the security underlying a put option it has purchased, the Fund would be
required, in the absence of a secondary market, to purchase the underlying
security before it could exercise the option, thereby incurring additional
transaction costs.

The Fund will not purchase a put option if, as a result of such purchase,
more than 10% of its total assets would be invested in premiums for such
options. The Fund's ability to purchase put and call options may be limited by
the Internal Revenue Code's requirements for qualification as a regulated
investment company.

Option Writing and Related Risks

The Fund may write covered call and put options. A call option gives the
purchaser of the option the right to buy, and the writer the obligation to sell,
the underlying security at the exercise price during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price during the
option period.

So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
(Exchanges), to secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is required to deposit in escrow
the underlying security or other assets in accordance with the rules of the OCC,
an institution created to interpose itself between buyers and sellers of
options. Technically, the OCC assumes the order side of every purchase and sale
transaction on an Exchange and by doing so, gives its guarantee to the
transaction.

The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. In return for the premium, the
covered call option writer has given up the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.

Because the Fund can write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio holdings
to obtain new debt securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.

To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss on the transaction.

Options Trading Markets

Options which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded are the Chicago Board
Options Exchange and the American, New York, 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 would 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 the prospectus and the statement of additional
information.

The staff of the Commission is of the view that the premiums which 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 fundamental investment restriction prohibiting it from
investing more than 10% of its total assets (taken at current value) in any
combination of illiquid assets and securities. The Fund intends to request that
the Commission staff reconsider its view. It is the intention of the Fund to
comply with the staff's current position and the outcome of such
reconsideration.

Special Considerations Applicable to Options

On Treasury Bonds and Notes. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.

On Treasury Bills. Because the deliverable U.S. Treasury bill changes from
week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with its Custodian liquid assets maturing no
later than those which would be deliverable in the event of an assignment of an
exercise notice to ensure that it can meet its open option obligations.

On GNMA Certificates. Options on GNMA certificates are not currently traded
on any Exchange. However, the Fund may purchase and write such options in the
over-the-counter market or, should they commence trading, on any Exchange.

Since the remaining principal balance of GNMA certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA certificates as "cover" to satisfy its delivery obligation in
the event of assignment of an exercise notice, may find that its GNMA
certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.

A GNMA certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to present cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.

Risks Pertaining to the Secondary Market. An option position may be closed
out only in a secondary market for an option of the same series. Although the
Fund will generally purchase or 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 closing transactions in particular options, with the result that the
Fund would have to exercise its options in order to realize any profit and might
incur transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.

Reasons for the absence of a liquid secondary market include the following:
(i) insufficient trading interest in certain options; (ii) restrictions imposed
on transactions; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an Exchange or by a
broker; (v) inadequacy of the facilities of an Exchange, the OCC or a broker
handle current trading volume; or (vi) a decision by one or more Exchanges or a
broker to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market in that class or series of options
would cease to exist, although outstanding options that had been issued as a
result of trades would generally continue to be exercisable in accordance with
their terms.

The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

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 so doing, 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
commodity futures contracts for 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 indices 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

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.

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
indices 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 a specified dollar amount times
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 and other financial futures contracts are similar
to options on stocks except that an option on a currency or other 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 stock, currency or other financial instruments 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 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 and 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 commodity futures contracts is
analogous 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, the 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 currency or other financial 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 above.

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.

In instances involving the purchase of futures contracts by the Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.

Federal Income Tax Treatment

For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.

In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.

Risks of Futures Contracts

Currency and other financial futures contracts prices are volatile and are
influenced, among other things, by changes in stock prices, market conditions,
prevailing interest rates and anticipation of future stock prices, market
movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.

At best, the correlation between changes in prices of futures contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indices underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. A decision of
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.

Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.

Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.

Risks of Options on Futures Contracts

In addition to the risks described above for currency and other financial
futures contracts, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions on such
options will be subject to 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. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.

FOREIGN CURRENCY TRANSACTIONS

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 rate 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 CFTC and 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 and Swiss and French
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 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, the
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 differences between
the U.S. and foreign nations. If the Fund sells 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
payment 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 liberalizations 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 controls 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.

<PAGE>

KEYSTONE HIGH INCOME BOND FUND (B-4)

PART C

OTHER INFORMATION

Item 24. Financial Statements and Exhibits

Item 24 (a). FINANCIAL STATEMENTS

The following financial statements are hereby incorporated by reference from
Registrant's Annual Report, as filed with the Securities and Exchange
Commission.

Schedule of Investments July 31, 1996

Financial Highlights For each of the years
in the ten-year period
ended July 31, 1996

Statement of Assets and Liabilities July 31, 1996

Statement of Operations Year ended
July 31, 1996

Statements of Changes in Net Assets For each of the years in
the two-year period ended
July 31, 1996

Notes to Financial Statements July 31, 1996

Independent Auditors' Report September 6, 1996

<PAGE>

Item 24(b). Exhibits

(1) (A) Registrant's Restatement of Trust Agreement. (1)

(B) First Amendment to Restatement of Trust Agreement dated March 15,
1995. (2)

(2) (A) Registrant's By-Laws. (1)

(B) Amendment to Registrant's By-Laws dated September 13, 1996. (2)

(3) Not applicable.

(4) (A) A specimen of the security issued by the Fund. (3)

(B) Articles III, V, VI and VIII to Restatement of Trust Agreement. (1)

(5) (A) Investment Management Agreement between Registrant and Keystone
Management, Inc. (the "Management Agreement"). (1)

(B) Investment Advisory Agreement between Keystone Management, Inc. and
Keystone Investment Management Company (the "Advisory Agreement"). (1)

(6) (A) A copy of the Principal Underwriting Agreement between Registrant and
Keystone Investment Distributors Company (the "Principal Underwriting
Agreement"). (1)

(B) Form of Dealer Agreement used by Keystone Investment Distributors
Company. (1)

(C) Registrant's respective Underwriting Agreements with Kokusai Securities
Co., Ltd. and Nomura Securities Co., Ltd. (1)

(7) Not applicable.

(8) Custodian, Fund Accounting and Recordkeeping Agreement, as amended, between
Registrant and State Street Bank and Trust Company. (1)

(9) Not applicable.

(10) Opinion and consent of counsel with respect to the registration of
75,051,610 additional shareas of the Fund pursuant to Section 24(e)(1) of
the 1940 act. (2)

(11) Consent as to use of opinion of Registrant's Independent Auditors
Report. (2)

(12) Not applicable.

(13) Not applicable.

(14) Copies of forms of model plans used in the establishment of retirement
plans in connection with which Registrant offers its securities. (4)

(15) Registrant's Distribution Plan adopted pursuant to Rule 12b-1. (1)

(16) Schedules for computation of performance quotations. (2)

(17) Financial Data Schedule. (2)

(18) Not applicable.

(19) Powers of Attorney. (2)
___________________________

(1) Filed with Post-Effective Amendment No. 101 ("Post-Effective Amendment
No. 101") to Registration Statement 2-10526/811-95 (the "Registration
Statment") and incorporated by reference herein.

(2) Filed herewith.

(3) Filed with Post-Effective Amendment No. 33 to the Registration Statement
and incorporated by reference herein.

(4) Filed with Post-Effective Amendment No. 66 to the Registration Statement
No. 2-10527/811-96 of Keystone Balanced Income Fund (K-1) as Exhibit
24(b)(14) and incorporated by reference herein.
<PAGE>

Item 25. Persons Controlled by or under Common Control with Registrant

Not applicable.

Item 26. Number of Holders of Securities

Number of Record
Title of Class Holders as of October 31, 1996
-------------- --------------------------------

Shares of $1.00 39,621
Par Value

Item 27. Indemnification

Provisions for the indemnification of the Registrant's Trustees and
officers are contained in Article VIII of the Restatement of Trust, a copy of
which was filed with Post-Effective Amendment No. 101 and is incorporated by
reference herein.

Provisions for the indemnification of Kokusai Securities Co., Ltd. and
Nomura Securities Co., Ltd., underwriters for the sale of Registrant's
securities in Japan, are contained in Section 11 of Registrant's respective
Underwriting Agreements with said entities, copies of which were filed with
Post-Effective Amendment No. 101 and are incorporated by reference herein.

Provisions for the indemnification of Keystone Investment Distributors
Company, Registrant's principal Underwriter, are contained in Section 9 of the
Principal Underwriting Agreement, a copy of which was filed with Post-Effective
Amendment No. 101 and is incorporated by reference herein.

Provisions for the indemnification of Keystone Management, Inc. and
Keystone Investment Management Company, Registrant's investment manager and
investment adviser, are contained in Section 6 of the Management Agreement and
Section 5 of the Advisory Agreement, respectively, copies of which were filed
with Post-Effective Amendment No. 101 and are incorporated by reference herein.

Item 28. Business and other Connections of Investment Adviser

The following tables list the names of the various officers and directors of
Keystone Management, Inc. and Keystone Investment Management Company,
Registrant's investment manager and investment adviser, respectively, and their
respective positions. For each named individual, the tables list, for at least
the past two fiscal years, (i) any other organizations (for Keystone Investment
Management Company, 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 MANAGEMENT, INC.

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

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

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

Rosemary D. Van Senior Vice General Counsel, Senior
Antwerp President, Vice President and Secretary:
General Counsel Keystone Investments, Inc.
and Secretary 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.
Formerly 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 Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Fiduciary Investment Company, Inc.
Keystone Software, Inc.
Formerly Vice President and Controller:
Hartwell Keystone Advisers, Inc.

John D. Rogol Vice President Vice President and Controller:
and Controller Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Comptroller:
Keystone Asset Corporation
Keystone Capital Corporation
Vice President and Treasurer:
Keystone Investor Resource Center, Inc.

Michael A. Thomas Vice President Vice President:
Keystone Investments, Inc.
</TABLE>

<PAGE>

LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY

<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
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 President
Godfrey Senior Vice President, President, Chief Financial Officer and Treasurer:
Treasurer and Keystone Investments, Inc.
Chief Financial Officer Keystone Investment Distributors Company
Treasurer and Director:
Keystone Management, Inc.
Treasurer:
Keystone Institutional Company, 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
Keystone America Hartwell Growth Fund, Inc.
<PAGE>

Rosemary D. Senior Vice General Counsel, Senior Vice President and Secretary:
Van Antwerp President, Keystone Investments, Inc.
General Counsel Senior Vice President and General Counsel:
and Secretary 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
Controller:
Keystone Investments, Inc.
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.

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

J. Gary Craven Senior Vice None
President

Richard Cryan Senior Vice None
President

Maureen E. Senior Vice None
Cullinane President

Walter T. Senior Vice None
McCormick President

George F. Wilkins Senior Vice None
President

John F. Addeo Vice President None

Andrew G. Baldassare Vice President None

David S. Benhaim Vice President None

Donald M. Bisson Vice President None

George E. Dlugos Vice President None

Antonio T. Docal Vice President None

Dana E. Erikson 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.

Eleanor H. Marsh Vice President None

James D. Medredeff Vice President None

Stanley M. Niksa Vice President None

Jonathan A. Noonan Vice President None

Robert E. O'Brien Vice President None

Margery C. Parker Vice President None

William H. Vice President None
Parsons

Joyce W. Petkovich Vice President None

Daniel A. Rabasco Vice President None

Harlen R. Sanderling Vice President None

Kathy K. Wang Vice President None

Judith A. Warners Vice President None

Mary J. Willis Vice President None

Peter Willis Vice President None

Richard A. Wisentaner Vice President None

Cheryle E. Wanble Vice President None

Walter Zagrobski Vice President None

Joseph J. Asst. Vice President None
Decristofaro
</TABLE>

<PAGE>

Item 29. Principal Underwriter

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

Keystone Quality Fund (B-1)
Keystone Diversified Bond Fund (B-2)
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 Balanced Fund II
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Capital Preservation and Income Fund
Keystone Emerging Markets Fund
Keystone Fund of the Americas
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Global Resources and Development Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Omega Fund
Keystone Precious Metals Holdings, Inc.
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone Tax Free Fund
Keystone World Bond Fund

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

Positions with
Keystone Investment Positions with
Name Distributors Company Registrant
- ---- -------------------- --------------

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 President
Counsel and Secretary 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 None

John D. Rogol* Vice President and None
Controller

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 Vice None
245 Wicklawn Way 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 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

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

Robert P. Muligan* Regional Manager and None
Vice President

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

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

Raymond P. Ajemian* Manager and None
Vice President

Jonathan I. Cohen* Vice President None

Michael S. Festa* Vice President None

Russell A. Haskell* Vice President None

Jeffrey M. Landes Vice President None

Joan M. Balchunas* Assistant Vice None
President

Julie A. Robinson Vice President None

John M. McAllister* Vice President None

Thomas J. Gainey* Assistant Vice None
President

Lyman Jackson* Assistant Vice None
President

Eric S. Jeppson* Assistant Vice None
President

Mark Minnucci* Assistant Vice None
President

Ashley M. Norwood* Assistant Vice None
President

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

Item 29(c). - Not applicable

<PAGE>

Item 30. Location of Accounts and Records

Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034

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

Iron Mountain
3431 Sharpslot Road
Swansea, Massachusetts 02777

Item 31. Management Services

Not applicable.

Item 32. Undertakings

Upon request and without charge, 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 meets all of the
requirements for effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of Boston, and The
Commonwealth of Massachusetts, on the 25th day of November 1996.

KEYSTONE HIGH INCOME BOND
FUND (B-4)

By: /s/ Rosemary D. Van Antwerp
---------------------------
Rosemary D. Van Antwerp
General Counsel

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 25th day of November 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 and Trustee
Albert H. Elfner, III*

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

*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
Numbering
Exhibit Number Exhibit System
- ------------- ------- ------------

1 (A) Restatement of Trust (1)
(B) First Amendment to Restatement of Trust (2)

2 (A) By-Laws (1)
(B) Amendment to By-Laws (2)

4 Specimen Stock Certificate (3)

5 (A) Investment Management Agreement (1)
(B) Investment Advisory Agreement (1)

6 (A) Principal Underwriting Agreement (1)
(B) Dealer Agreement (1)
(C) Additional Underwriting Agreements (1)

8 Custodian, Fund Accounting
and Recordkeeping Agreement, as amended (1)

10 Opinion and Consent of Counsel (2)

11 Consent of Independent Auditors (2)

14 Model Retirement Plans (4)

15 Distribution Plan (1)

16 Performance Data Schedules (2)

17 Financial Data Schedule (2)
(filed as Exhibit 27)

19 Powers of Attorney (2)

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

(1) Filed with Post-Effective Amendment No. 101 to Registration Statement
No. 2-10526/811-95

(2) Filed herewith.

(3) Incorporated herein by reference to Post-Effective Amendment No. 33 to
Registration Statement No. 2-10526/811-95.

(4) Incorporated herein by reference to Post-Effective Amendment No. 66 to
Registration Statement No. 2-10527/811-96.

KEYSTONE CUSTODIAN FUND, SERIES B-4

FIRST AMENDMENT

RESTATEMENT OF TRUST AGREEMENT

Effective May 1, 1995

FIRST AMENDMENT dated March 15, 1995 made by George S. Bissell, Albert H.
Elfner, III, Frederick Amling, Charles A. Austin, III, Edwin D. Campbell,
Charles F. Chapin, K. Dun Gifford, Leroy Keith, Jr., F. Ray Keyser, Jr., David
M. Richardson, Richard J. Shima and Andrew J. Simons (hereinafter with their
successors referred to as the "Trustees") to RESTATEMENT OF TRUST AGREEMENT,
dated December 19, 1989.

WHEREAS, the Trustees have determined to change the name of the Trust and
to change the designation of its principal office to 200 Berkeley Street Boston
Massachusetts 02116.

NOW, THEREFORE, the Trustees hereby declare that they will amend the
Restatement of Trust Agreement as hereinafter set forth:

ARTICLE I, Name and Definitions, Section 1. Name., is hereby amended to
read as follows:

"This Trust shall be known as the "Keystone High Income Fund (B-4)" and the
Trustees shall conduct the business of this Trust under that name or any
other name as they may from time to time determine."

This Amendment shall become effective as of May 1, 1995.

All other provisions of the Restatement of Trust Agreement shall continue
as originally stated.

IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the
Trust, have caused this First Amendment to Restatement of Trust Agreement to be
executed on the 15th day of March, 1995.

/s/ George S. Bissell
- -------------------------------
George S. Bissell, Trustee

/s/ Albert H. Elfner, III
- -------------------------------
Albert H. Elfner, III, Trustee

/s/ Frederick Amling
- -------------------------------
Frederick Amling, Trustee

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

/s/ Edwin D. Campbell
- -------------------------------
Edwin D. Campbell, Trustee

/s/ Charles F. Chapin
- -------------------------------
Charles F. Chapin, Trustee

/s/ K. Dun Gifford
- -------------------------------
K. Dun Gifford, Trustee

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

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

/s/ David M. Richardson
- -------------------------------
David M. Richardson, Trustee

/s/ Richard J. Shima
- -------------------------------
Richard J. Shima, Trustee

/s/ Andrew J. Simons
- -------------------------------
Andrew J. Simons, Trustee

KEYSTONE HIGH INCOME BOND FUND (B-4)

Revised Article 4, Section 4.1 of the By-Laws as adopted by the Board of
Trustees on June 19, 1996:

4.1 Term. A Trustee shall serve until his or her death, retirement,
resignation or removal from office or until his or her successor is elected and
qualifies. A Trustee holding office shall automatically retire on December 31 of
the year in which he or she reaches the age of seventy-five.

Dated: September 13, 1996

November 25, 1996

Keystone High Income Bond Fund (B-4)
200 Berkeley Street
Boston, Massachusetts 02116-5034

Ladies and Gentlemen:

I am a Senior Vice President of and General Counsel to Keystone Investment
Management Company, investment adviser to Keystone High Income Bond Fund (B-4)
(the "Fund"). You have asked for my opinion with respect to the proposed
issuance of 75,051,610 additional shares of the Fund.

To my knowledge, a Prospectus is on file with the Securities and Exchange
Commission (the "Commission") as part of Post-Effective Amendment No. 102 to the
Fund's Registration Statement, which covers the public offering and sale of the
Fund shares currently registered with the Commission.

In my opinion, such additional shares, if issued and sold in accordance
with the Fund's Restatement of Trust Agreement, as amended ("Restatement of
Trust"), and offering Prospectus, will be legally issued, fully paid, and
nonassessable by the Fund, entitling the holders thereof to the rights set forth
in the Restatement of Trust and subject to the limitations set forth therein.

My opinion is based upon my examination of the Fund's Restatement of Trust
and By-Laws, as amended; a review of the minutes of the Fund's Board of Trustees
authorizing the issuance of such additional shares; and the Fund's Prospectus.
In my examination of such documents, I have assumed the genuineness of all
signatures and the conformity of copies to originals.

I hereby consent to the use of this opinion in connection with
Post-Effective Amendment No. 102 to the Fund's Registration Statement, which
covers the registration of such additional shares.

Very truly yours,

/s/ Rosemary D. Van Antwerp

Rosemary D. Van Antwerp
Senior Vice President and
General Counsel

CONSENT OF INDEPENDENT AUDITORS

The Trustees and Shareholders
Keystone High Income Bond Fund (B-4)

We consent to the use of our report dated September 6, 1996, incorporated
by reference herein, and to the reference to our firm under the caption
"FINANCIAL HIGHLIGHTS" in the Prospectus.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

Boston, Massachusetts
November 25, 1996

FUND #: 4203 SEC STANDARDIZED ADVERTISING YIELD

FUND NAME: KEYSTONE HIGH INCOME BOND FUND

PRICING DATE: 25-Jul-96 TOTAL INCOME FOR PERIOD 4,901,747.42
TOTAL EXPENSES FOR PERIOD 865,136.20
30 DAY YTM: 8.17637% AVERAGE SHARES OUTSTANDING 146,937,534.313
LAST PRICE DURING PERIOD 4.10
<TABLE>
<CAPTION>

- ------ --------- --------- ----------- -------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE
PRICE EQUITY ZERO COUPON PIK GAIN/LOSS ST FIXED BACK LONG TERM TOTAL
DATE INCOME INCOME INCOME ADJ INCOME INCOME INCOME INCOME
TOTALS 0 511,250 14,335 0 59,098 0 4,317,064 4,901,747
-0.00000% 1.05071% 0.02952% -0.00000% 0.12168% -0.00000% 8.73435%
- ------ --------- --------- ----------- -------- --------- -------- --------- ---------- ----------
- -1 24-Jun-96 0.00 18,750.32 0.00 2,491.87 0.00 143,124.08 164,366.27
0 25-Jun-96 0.00 18,762.04 0.00 2,198.44 0.00 143,111.36 164,071.84
1 26-Jun-96 0.00 18,751.23 0.00 2,275.14 0.00 142,512.53 163,538.90
2 27-Jun-96 0.00 16,067.07 0.00 4,147.61 0.00 142,647.22 162,861.90
3 28-Jun-96 0.00 16,825.42 0.00 4,387.49 0.00 141,281.23 162,494.14
4 29-Jun-96 0.00 16,825.42 0.00 4,387.49 0.00 141,281.23 162,494.14
5 30-Jun-96 0.00 16,825.42 0.00 4,387.49 0.00 141,281.23 162,494.14
6 01-Jul-96 0.00 16,836.88 0.00 4,043.39 0.00 141,668.49 162,548.76
7 02-Jul-96 0.00 16,843.81 0.00 2,522.72 0.00 144,526.32 163,892.85
8 03-Jul-96 0.00 16,827.81 0.00 2,160.37 0.00 144,472.41 163,460.59
9 04-Jul-96 0.00 16,827.81 0.00 2,160.37 0.00 144,472.41 163,460.59
10 05-Jul-96 0.00 17,041.03 0.00 1,627.79 0.00 146,141.24 164,810.06
11 06-Jul-96 0.00 17,041.03 0.00 1,627.79 0.00 146,141.24 164,810.06
12 07-Jul-96 0.00 17,041.03 0.00 1,627.79 0.00 146,141.24 164,810.06
13 08-Jul-96 0.00 17,170.77 0.00 1,192.51 0.00 146,084.91 164,448.19
14 09-Jul-96 0.00 17,137.60 0.00 1,001.56 0.00 145,586.29 163,725.45
15 10-Jul-96 0.00 17,084.45 0.00 1,237.57 0.00 145,399.19 163,721.21
16 11-Jul-96 0.00 17,086.86 0.00 1,213.49 0.00 145,373.26 163,673.61
17 12-Jul-96 0.00 17,077.88 0.00 908.76 0.00 145,284.21 163,270.85
18 13-Jul-96 0.00 17,077.88 0.00 908.76 0.00 145,284.21 163,270.85
19 14-Jul-96 0.00 17,077.88 0.00 908.76 0.00 145,284.21 163,270.85
20 15-Jul-96 0.00 17,107.53 0.00 2,413.12 0.00 143,053.78 162,574.43
21 16-Jul-96 0.00 17,127.86 0.00 1,640.78 0.00 144,574.17 163,342.81
22 17-Jul-96 0.00 17,123.78 1,592.80 1,330.47 0.00 143,903.71 163,950.76
23 18-Jul-96 0.00 17,068.05 1,592.80 1,359.34 0.00 143,831.82 163,852.01
24 19-Jul-96 0.00 17,074.16 1,592.80 1,893.73 0.00 142,167.89 162,728.58
25 20-Jul-96 0.00 17,074.16 1,592.80 1,893.73 0.00 142,167.89 162,728.58
26 21-Jul-96 0.00 17,074.16 1,592.80 1,893.73 0.00 142,167.89 162,728.58
27 22-Jul-96 0.00 17,054.66 1,592.80 1,183.39 0.00 143,250.87 163,081.72
28 23-Jul-96 0.00 17,049.30 1,592.80 1,297.61 0.00 143,851.33 163,791.04
29 24-Jul-96 0.00 17,033.65 1,592.80 480.60 0.00 143,895.87 163,002.92
30 25-Jul-96 0.00 16,995.08 1,592.80 984.75 0.00 143,336.16 162,908.79

</TABLE>

- ------ -------------- ---- --------- --------------- ----- || 30 DAY 30 DAY 30 DAY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12B-1/SERV.FEE DAILY DAILY DAILY || ACCUMULATED ACCUMULATED ACCUMULATED
EXPENSES CDSC EXPENSES SHARES PRICE || INCOME EXPENSES SHARES
TOTALS 494,840 0 865,136 146,937,534.313
-1.02121%
- ------ -------------- ---- --------- --------------- -----
- -1 16,782.79 0.00 35,798.81 149,025,380.426 4.12 0.00 0.00 0.00
0 16,770.48 0.00 29,155.59 148,533,574.519 4.12 0.00 0.00 0.00
1 16,724.99 0.00 29,093.25 148,486,171.637 4.10 163,538.90 29,093.25 148,486,171.64
2 16,615.93 0.00 29,168.45 149,146,646.718 4.10 326,400.80 58,261.70 297,632,818.36
3 50,105.55 0.00 26,843.31 148,244,129.793 4.10 488,894.94 85,105.01 445,876,948.15
4 0.00 0.00 26,843.31 148,244,129.793 4.10 651,389.08 111,948.32 594,121,077.94
5 0.00 0.00 26,843.31 148,244,129.793 4.10 813,883.22 138,791.63 742,365,207.73
6 16,624.00 0.00 35,485.14 148,555,133.335 4.11 976,431.98 174,276.77 890,920,341.07
7 16,667.92 0.00 28,995.33 148,066,718.324 4.11 1,140,324.83 203,272.10 1,038,987,059.39
8 33,235.34 0.00 27,308.41 148,125,765.329 4.11 1,303,785.42 230,580.51 1,187,112,824.72
9 0.00 0.00 27,308.41 148,125,765.329 4.11 1,467,246.01 257,888.92 1,335,238,590.05
10 49,932.60 0.00 27,887.35 147,806,719.434 4.08 1,632,056.07 285,776.27 1,483,045,309.49
11 0.00 0.00 27,887.35 147,806,719.434 4.08 1,796,866.13 313,663.62 1,630,852,028.92
12 0.00 0.00 27,887.35 147,806,719.434 4.08 1,961,676.19 341,550.97 1,778,658,748.35
13 16,900.00 0.00 35,935.30 147,422,928.142 4.08 2,126,124.38 377,486.27 1,926,081,676.50
14 15,989.60 0.00 28,115.78 146,975,274.051 4.08 2,289,849.83 405,602.05 2,073,056,950.55
15 16,392.33 0.00 28,645.90 146,713,566.085 4.09 2,453,571.04 434,247.95 2,219,770,516.63
16 16,399.41 0.00 28,672.55 146,715,465.172 4.09 2,617,244.65 462,920.50 2,366,485,981.80
17 49,198.23 0.00 28,672.55 146,548,650.035 4.10 2,780,515.50 491,593.05 2,513,034,631.84
18 0.00 0.00 28,672.55 146,548,650.035 4.10 2,943,786.35 520,265.60 2,659,583,281.87
19 0.00 0.00 28,672.55 146,548,650.035 4.10 3,107,057.20 548,938.15 2,806,131,931.91
20 16,449.15 0.00 28,683.39 146,691,509.898 4.10 3,269,631.63 577,621.54 2,952,823,441.81
21 16,428.68 0.00 28,690.12 146,453,332.403 4.09 3,432,974.44 606,311.66 3,099,276,774.21
22 16,383.32 0.00 28,656.99 146,285,122.604 4.09 3,596,925.20 634,968.65 3,245,561,896.81
23 16,347.59 0.00 29,887.60 145,620,380.777 4.11 3,760,777.21 664,856.25 3,391,182,277.59
24 49,200.00 0.00 26,468.63 145,662,064.295 4.11 3,923,505.79 691,324.88 3,536,844,341.89
25 0.00 0.00 26,468.63 145,662,064.295 4.11 4,086,234.37 717,793.51 3,682,506,406.18
26 0.00 0.00 26,468.63 145,662,064.295 4.11 4,248,962.95 744,262.14 3,828,168,470.48
27 16,199.24 0.00 32,864.29 145,509,988.680 4.12 4,412,044.67 777,126.43 3,973,678,459.16
28 16,411.17 0.00 30,859.31 144,905,800.959 4.12 4,575,835.71 807,985.74 4,118,584,260.11
29 16,320.03 0.00 28,586.36 144,869,246.158 4.12 4,738,838.63 836,572.10 4,263,453,506.27
30 16,315.13 0.00 28,564.10 144,672,523.110 4.10 4,901,747.42 865,136.20 4,408,126,029.38

</TABLE>

B-4 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 0.25% -1.41% 5.88% 1.92% 63.28% 10.30%
W/O CDSC 0.68% 3.19% 1.38% 6.68% 2.18% 63.28% 10.30%

Beg dates 28-Jun-96 29-Dec-95 31-Jul-95 30-Jul-93 30-Jul-93 31-Jul-91 31-Jul-91
Beg Value (no load) 36,632 35,741 36,382 34,572 34,572 22,588 22,588
End Value (W/O CDSC) 36,882 36,882 36,882 36,882 36,882 36,882 36,882
End Value (with cdsc) 35,831 35,870 36,606 36,606 36,882 36,882
beg nav 4.10 4.18 4.42 5.13 5.13 4.19 4.19
end nav 4.10 4.10 4.1 4.1 4.1 4.1 4.1
shares originally purhased 8,934.70 8,550.55 8,231.13 6,739.25 6,739.25 5,390.96 5,390.96

3 5

TEN YEAR TEN YEAR
TOTAL RETURN COMPOUNDED

72.07% 5.58%
72.07% 5.58%

31-Jul-86 31-Jul-86
21,435 21,435
36,882 36,882
36,882 36,882
8.08 8.08
4.1 4.1
2,652.80 2,652.80

INCEPTION DATE 31-Mar-81

</TABLE>

<PAGE>
Exhibit 99.19

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 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/ 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

<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 HIGH INCOME BOND FUND (B-4) CLASS A

<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 608,728,069
<INVESTMENTS-AT-VALUE> 574,553,431
<RECEIVABLES> 22,551,119
<ASSETS-OTHER> 2,086,944
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 599,191,494
<PAYABLE-FOR-SECURITIES> 2,989,677
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,521,071
<TOTAL-LIABILITIES> 5,510,748
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,134,809,513
<SHARES-COMMON-STOCK> 144,797,055
<SHARES-COMMON-PRIOR> 173,052,313
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,700,454)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (505,253,675)
<ACCUM-APPREC-OR-DEPREC> (34,174,638)
<NET-ASSETS> 593,680,746
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 66,346,925
<OTHER-INCOME> 0
<EXPENSES-NET> (12,999,001)
<NET-INVESTMENT-INCOME> 53,347,924
<REALIZED-GAINS-CURRENT> 12,528,472
<APPREC-INCREASE-CURRENT> (59,100,847)
<NET-CHANGE-FROM-OPS> 6,775,549
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (59,290,408)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 38,767,387
<NUMBER-OF-SHARES-REDEEMED> (74,982,398)
<SHARES-REINVESTED> 7,959,753
<NET-CHANGE-IN-ASSETS> (171,284,140)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,788,171)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (12,999,001)
<AVERAGE-NET-ASSETS> 674,727,600
<PER-SHARE-NAV-BEGIN> 4.42
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> (0.27)
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 4.10
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>