SBSF FUNDS INC, 485BPOS, 1996-12-17

SBSF FUNDS INC
485BPOS, 1996-12-17

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<PAGE> 1

As filed with the Securities and Exchange Commission on December 17, 1996

File No. 2-84920

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

POST-EFFECTIVE AMENDMENT NO. 29

(Check Appropriate Box or Boxes) /X/

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 30 /X/

SBSF FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
45 Rockefeller Plaza
New York, New York 10111
(Address of Principal Executive Offices)(Zip Code)

Registrant's Telephone Number, including Area Code: (212) 903-1255

Leigh A. Wilson
c/o Karen F. Haber
KeyCorp Mutual Fund Advisers, Inc.
127 Public Square, 16th Floor
Cleveland, OH 44114
(Name and Address of Agent for Service)

COPIES TO:
Scott A. Englehart Robert M. Kurucza, Esq.
BISYS Fund Services Marco E. Adelfio, Esq.
3435 Stelzer Road Morrison & Foerster LLP
Suite 1000 2000 Pennsylvania Ave., NW
Columbus, OH 43219 Washington, DC 20006

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

<TABLE>
<S> <C>
/X/ immediately upon filing pursuant to Rule 485(b), / / on (date) pursuant to Rule
or, 485(b), or
/ / 60 days after filing pursuant to Rule 485(a)(1), / / on (date) pursuant to Rule
or 485(a)(1), or
/ / 75 days after filing pursuant to Rule 485(a)(2), / / on (date) pursuant to paragraph
or (a)(2) of Rule 485
</TABLE>

If appropriate, check the following box:

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

No filing fee is required under the Securities Act of 1933 because an indefinite
number of shares of the Registrant's Common Stock, par value $.01 per share, has
previously been registered pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Registrant will file the notice required by Rule 24f-2 on or
before January 29, 1997 for its fiscal year ended November 30, 1996.

<PAGE> 2

EXPLANATORY NOTE

This Post-Effective Amendment No. 29 to the Registration Statement (the
"Amendment") of SBSF Funds, Inc. (d/b/a Key Mutual Funds) (the "Company") is
being filed solely for the purpose of complying with an undertaking to a file a
post-effective amendment containing unaudited (four to six month) financial
statements for the Key Stock Index Fund. This Amendment does not affect the
Registration Statement for the Company's Key Money Market Mutual Fund, SBSF
Fund, SBSF Convertible Securities Fund, and SBSF Capital Growth Fund, or the
Registration Statement for the Company's KeyChoice Growth Fund, KeyChoice
Moderate Growth Fund, or KeyChoice Income and Growth Fund.

<PAGE> 3

CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C> <C>
PART A PART A

Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Expenses
Item 3. Condensed Financial Information Not Applicable
Item 4. General Description of Registrant Description of Common Stock;
Investment Objectives and
Policies; Descriptions of
Proprietary Portfolios;
Item 5. Management of the Fund Management of the Funds; Expenses,
Distribution Plan and Shareholder
Servicing Plan
Item 5A. Management's Discussion of Fund
Performance Not Applicable
Item 6. Capital Stock and Other Securities Description of Common Stock;
Shareholder Reports; Dividends,
Distributions and Federal Income
Taxes
Item 7. Purchase of Securities Being
Offered Expenses, Distribution Plan and
Shareholder Servicing Plan;
Determination of Net Asset Value;
Purchasing Shares; Investing for
Retirement; The Systematic
Investment Plan; The Systematic
Withdrawal Plan; Exchange
Privilege; Performance
Item 8. Redemption or Repurchase Redeeming Shares
Item 9. Pending Legal Proceedings Not Applicable

PART B

Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Other Information
</TABLE>

<PAGE> 4

<TABLE>
<S> <C> <C>
Item 13. Investment Objectives and Policies Investment Objectives and Policies;
Investment Restrictions of the
Funds; Portfolio Turnover; Appendix
Item 14. Management of the Fund Management of the Funds
Item 15. Control Persons and Principal
Holders of Securities Security Holders
Item 16. Investment Advisory and Other
Services The Investment Adviser of the
Funds; Expenses, Distributor and
Distribution Plan; Shareholder
Servicing Plan; Custodian, Transfer
Agent, Shareholder Servicing Agent
and Dividend Disbursing Agent;
Independent Accountants and
Reports; Counsel
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
and Brokerage
Item 18. Capital Stock and Other Securities Other Information
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered Purchase, Redemption
and Pricing
Item 20. Tax Status Federal Income Taxes
Item 21. Underwriters Expenses, Distributor and
Distribution Plan
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Independent Accountants and Reports
</TABLE>

PART C

Information required to be included in Part C is set forth under the appropriate
Item, so numbered in Part C to this Registration Statement.

<PAGE> 5

KEY MUTUAL FUNDS
KEY STOCK INDEX FUND
Supplement Dated December 17, 1996
to the Prospectus Dated June 12, 1996

The Prospectus for the Key Stock Index Fund is supplemented as follows:

1. By deleting the table on page 1 of the Prospectus entitled "Fund Expenses,"
and inserting the following table in its place:

FUND EXPENSES

Expenses are one of several factors to consider when investing in the Funds.
The following table summarizes shareholder transaction expenses and estimated
Fund operating expenses for the Funds.

<TABLE>
<CAPTION>
Key
Key Stock International
Index Index
Fund Fund
---- ----

<S> <C> <C>
Shareholder Transaction Expenses(1):
Maximum Sales Load Imposed on Purchases................... None None
Maximum Sales Load Imposed on Reinvested Dividends........ None None
Deferred Sales Load....................................... None None
Redemption Fees........................................... None None
Exchange Fees............................................. None None

Annual Fund Operating Expenses After Expense Waivers
and Reimbursements: (as a percentage of average net assets)
Management Fees(2)........................................ 0.00% 0.50%
Other Expenses(3)......................................... 0.00% 0.84%
---- ----
Total Fund Operating Expenses(4)........................... 0.00% 1.34%

<FN>
(1) Investors may be charged a fee if orders are placed through a broker or
agent, including affiliated banks and non-bank affiliates of KMFA and KeyCorp
(see "Purchasing Shares").

(2) The Management Fee payable by the Stock Index Fund has been reduced to
reflect a voluntary waiver by the Adviser. Absent such voluntary waiver,
"Management Fees" as a percentage of average daily net assets would be .10%.

<PAGE> 6

Index Fund, "Other Expenses" also include the shareholder servicing fees the
International Index Fund expects to pay (see "Expenses, Distribution Plan, and
Shareholder Servicing Plan").

(4) Absent fee waivers and/or expense reimbursements described in Notes (2)
and (3) above, "Total Fund Operating Expenses," are estimated to be 3.21% for
the Stock Index Fund. There can be no assurance that the foregoing voluntary fee
waivers and/or expenses reimbursements will continue.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that an investor in the Funds will bear directly
("Shareholder Transaction Expenses") or indirectly ("Annual Fund Operating
Expenses"). For a more complete description of the Funds' operating expenses,
see "Expenses, Distribution Plan and Shareholder Servicing Plan." From time to
time, fees may be waived or expenses reimbursed by one or more Funds.

The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
each of the Funds.

<TABLE>
<CAPTION>
Key
Key Stock International
Index Index
Fund Fund
---- ----
<S> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) full redemption at the end
of each time period:
1 Year..................................... $ 0 $ 14
3 Year..................................... 0 43
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER,
WHILE THE TABLE ASSUMES A 5% ANNUAL RETURN, A FUND'S ACTUAL PERFORMANCE WILL
VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%. YOU WOULD PAY
THE SAME AMOUNT OF EXPENSES ON THE SAME INVESTMENT ASSUMING NO REDEMPTION AT THE
END OF EACH TIME PERIOD.

2. By inserting the following table in the Prospectus on page 3 immediately
before the section entitled "Investment Objectives and Policies";

FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period.) The
table below sets forth certain financial information with respect to the
financial highlights for the Key Stock Index Fund for the period indicated. The
information has not been audited but is presented as the most current financial
data available. The unaudited financial statements of the Key Stock Index Fund
for the period are incorporated by reference into the Statement of Additional
Information. Financial Information for Key International Index Fund has not been
presented because, as of the date of this supplement, the Fund had not commenced
operations.

<PAGE> 7

KEY STOCK INDEX FUND
FINANCIAL HIGHLIGHTS
For the period ended October 31, 1996*
(Unaudited)
<TABLE>
<S> <C>
Per Share Operating Performance
Income from Investment Operations
Net asset value,
beginning of period................................... $ 10.00
Net investment income................................. 0.08
Net realized and unrealized gain (loss)............... 0.42
------
Total from investment operations........................... 0.50

Less: Dividends (from net investment income)............... (0.06)
-------

Net asset value, end of period............................. $ 10.44
-------

Total Investment Return.................................... 5.05% (a)

Ratios/Supplemental Data:
Net assets, end of period (in thousands)................... $10,427
Ratio of expenses to average net assets.................... 0.00% (b)
Ratio of net investment income to average net assets....... 3.21% (b)
Ratio of expenses to average net assets**.................. 3.11% (b)
Ratio of net investment income to average net assets**..... 0.10% (b)
Portfolio Turnover Rate.................................... 1%
Average Commission Rate Paid............................... $ .02

<FN>
* For the period from July 1, 1996 (commencement of operations) through
October 31, 1996.

** During the period, certain fees were voluntarily waived and certain expenses
were reimbursed. If such voluntary fee waivers and expense reimbursements
had not occurred, the ratios would have been as indicated.
(a) Not annualized
(b) Annualized (See notes to Financial Statements)
</TABLE>

3. By inserting under "Description of Common Stock" in the Prospectus the
following sentence:

As of November 30, 1996, KeyCorp 401(k) Plan owned a controlling interest (as
that term is used under the 1940 Act) in the Key Stock Index Found.

Please keep this Supplement with your Prospectus. Investors wishing to obtain
more information, please call the Transfer Agent without charge at 800-KEY-FUND
in the Prospectus.

<PAGE> 8
KEY MUTUAL FUNDS
[KEYFUNDS LOGO]
800-539-3863

PROSPECTUS

Key Mutual Funds, formerly known as SBSF Funds, Inc., (the "Company") is a
professionally managed, no-load, open end, series investment company currently
consisting of six different portfolios, two of which (the "Funds") are described
in this prospectus. Each Fund is a separately managed diversified portfolio with
its own investment objective and policies. The Funds have no sales loads,
redemption fees or exchange fees.

KeyCorp Mutual Fund Advisers, Inc. (the "Adviser" or "KMFA"), an indirect wholly
owned subsidiary of KeyCorp, serves as investment adviser to each of the Funds.
KMFA and its affiliates manage approximately $48 billion for numerous clients
including large corporate and public retirement plans, Taft-Hartley plans,
foundations and endowments, high net worth individuals and mutual funds. The
Funds were created to provide informed investors with experienced, professional
investment management and personal service.

KEY STOCK INDEX FUND

The investment objective of the Key Stock Index Fund ("Stock Index Fund") is
to seek to provide long-term capital appreciation by attempting to match the
investment performance of the Standard & Poor's 500 Composite Stock Index (the
"S&P 500 Index"). Under normal market conditions, the Stock Index Fund will
attempt to duplicate the capital performance and dividend income of the S&P 500
Index by investing primarily in the stocks which comprise the S&P 500 Index and
secondarily in stock index futures, while minimizing transaction costs.

KEY INTERNATIONAL INDEX FUND

The investment objective of the Key International Index Fund (the
"International Index Fund") is to seek to match as closely as possible the
investment performance of the Morgan Stanley Capital International Europe,
Australia and Far East Index (the "EAFE Index"), before fees and expenses of the
International Index Fund. The International Index Fund attempts to achieve its
objective by investing in a statistically selected sample of the equity
securities included in the EAFE Index.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, KMFA, ANY KEYCORP BANK, ANY OF THEIR AFFILIATES, OR ANY OTHER BANK.
THE SHARES OF THE FUNDS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
AN INVESTMENT IN MUTUAL FUND SHARES IS SUBJECT TO INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Additional information
about the Funds has been filed with the Securities and Exchange Commission (the
"Commission") in a Statement of Additional Information dated June 12, 1996, as
supplemented from time to time, which is incorporated herein by reference and is
available without charge upon request by writing to Key Mutual Funds at P.O. Box
8527, Boston, MA 02266 or calling the Funds at 800-539-FUND or 800-539-3863.

Investors are advised to read and retain this Prospectus for future reference.

- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
The date of this Prospectus is June 12, 1996

<PAGE> 9

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Fund Expenses.................................... 1
Investment Objectives and Policies............... 2
Management of the Funds.......................... 10
Expenses, Distribution Plan and
Shareholder Servicing Plan..................... 12
Determination of Net Asset Value................. 12
Purchasing Shares................................ 13
The Systematic Investment Plan................... 15
The Systematic Withdrawal Plan................... 15
Redeeming Shares................................. 16
Exchange Privilege............................... 17
Investing For Retirement......................... 18
Dividends
and Distributions.............................. 18
Federal Income Taxes............................. 19
Performance...................................... 20
Description of Common Stock...................... 20
Custodian, Transfer Agent, Shareholder Servicing
Agent and Dividend Disbursing Agent............ 21
Shareholder Reports.............................. 21
</TABLE>

- --------------------------------------------------------------------------------
<PAGE> 10

- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------

EXPENSES ARE ONE OF SEVERAL FACTORS TO CONSIDER WHEN INVESTING IN THE FUNDS. THE
FOLLOWING TABLE SUMMARIZES SHAREHOLDER TRANSACTION EXPENSES AND ESTIMATED FUND
OPERATING EXPENSES FOR THE FUNDS.

<TABLE>
<CAPTION>
KEY
KEY STOCK INTERNATIONAL
INDEX INDEX
FUND FUND
------------- -------------
<S> <C> <C>
Shareholder Transaction Expenses(1):
Maximum sales load imposed on purchases..................................... None None
Maximum sales load imposed on reinvested dividends.......................... None None
Deferred sales load......................................................... None None
Redemption Fees............................................................. None None
Exchange Fees............................................................... None None
Annual Fund Operating Expenses After Expense Waivers and Reimbursements
(as a percentage of average daily net assets):
Management Fees(2).......................................................... .08% .50%
Other Expenses(3)........................................................... .23% .84%
------------- -------------
Total Fund Operating Expenses(2)(3)(4)...................................... .31% 1.34%
=========== ===========
</TABLE>

(1) Investors may be charged a fee if orders are placed through a broker or
agent, including affiliated banks and non-bank affiliates of KMFA and
KeyCorp. (See "Purchasing Shares".)

(2) The Management Fee payable by the Stock Index Fund has been reduced to
reflect a voluntary partial fee waiver by the Adviser. Absent such voluntary
fee waiver, "Management Fees" as a percentage of average daily net assets
would be .10%.

(3) "Other Expenses" include estimates of such expenses as administration fees,
custodial and transfer agent fees, audit, legal and other business expenses
for the current fiscal year. In addition, with respect to the Stock Index
Fund, "Other Expenses" reflect certain voluntary fee waivers and expense
reimbursements. Absent voluntary fee waivers and expense reimbursements,
"Other Expenses" are estimated to be .34% for the Stock Index Fund. With
respect to the International Index Fund, "Other Expenses" also include the
shareholder servicing fees the International Index Fund expects to pay (see
"Expenses, Distribution Plan, and Shareholder Servicing Plan").

(4) Absent the fee waivers and/or expense reimbursements described in Notes (2)
and (3) above, "Total Fund Operating Expenses" are estimated to be .44% for
the Stock Index Fund. There can be no assurance that the foregoing voluntary
fee waivers and/or expense reimbursements will continue.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that an investor in the Funds will bear directly
("Shareholder Transaction Expenses") or indirectly ("Annual Fund Operating
Expenses"). For a more complete description of the Funds' operating expenses,
see "Expenses, Distribution Plan, and Shareholder Servicing Plan."
- --------------------------------------------------------------------------------

The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
each of the Funds.

KEY
KEY STOCK INTERNATIONAL
INDEX INDEX
FUND FUND
------------ ------------
<S> <C> <C>
EXAMPLE:
You would pay the following expenses on a $1,000 investment, assuming (1) a
5% annual return and (2) full redemption at the end of each time period:
1 Year................................................................... $ 3 $ 14
3 Years.................................................................. 10 43
</TABLE>

1
<PAGE> 11

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

The investment objective and policies of each of the two Funds are set forth
below.

KEY STOCK INDEX FUND

The investment objective of the Stock Index Fund is to seek to provide
long-term capital appreciation by attempting to match the investment performance
of the Standard & Poor's 500 Composite Stock Index (the "S&P 500 Index" or the
"Index")1.

Under normal market conditions, the Stock Index Fund will attempt to duplicate
the capital performance and dividend income of the S&P 500 Index by investing
primarily in the stocks which comprise the S&P 500 Index and secondarily in
stock index futures, while minimizing transaction costs. The S&P 500 Index is
composed of 500 common stocks chosen on the basis of market value and industry
diversification. While most issuers are among the 500 largest U.S. companies in
terms of aggregate market value, some other stocks are included for purposes of
diversification. The Stock Index Fund attempts to duplicate the investment
results of the S&P 500 Index before fees and expenses, essentially by
replicating the capitalization-weighted composition of the Index. No attempt is
made to manage the Stock Index Fund in the traditional sense using economic,
financial and market analysis. The Stock Index Fund may, from time to time, omit
or limit holdings of certain stocks in the Index due to their illiquidity or
other factors, such as bankruptcy or insolvency. The Stock Index Fund may
compensate for these omissions or limitations by purchasing stocks not included
in the Index that are similar to those omitted or limited if KMFA believes those
purchases will reduce "tracking error" (the difference between the Stock Index
Fund's investment results (before expenses) and that of the Index). To minimize
tracking error, when the Stock Index Fund does not hold all stocks in the Index
in proportion to their Index weighting, KMFA may use statistical analyses in
selecting stocks. As described further in "Futures Contracts", stock index
futures contracts may be used to minimize tracking error. In connection with
engaging in futures transactions, the Stock Index Fund may hold cash, cash
equivalents, and/or U.S. Government Securities. See "Futures Contracts" in this
prospectus and in the Statement of Additional Information.

It is a reasonable expectation that there will be a close correlation between
the Stock Index Fund's performance and that of the S&P 500 Index in both rising
and falling markets. In this connection, KMFA monitors the Stock Index Fund's
performance correlation to the S&P 500 Index and adjusts the portfolio to the
extent necessary to enable the Stock Index Fund to achieve a correlation to the
S&P 500 Index of at least 0.95, on an annual basis, without taking into account
Stock Index Fund operating expenses. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of the
Stock Index Fund, including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
500 Index. The Stock Index Fund's ability to track the S&P 500 Index, however,
may be affected by, among other things, transaction costs, changes in either the
composition of the S&P 500 Index or number of shares outstanding for the
components of the S&P 500 Index, and the timing and amount of shareholder
purchases and redemptions. The Board of Directors of the Company (the "Board" or
the "Directors") periodically reviews the Stock Index Fund's investment
performance before fees and expenses as compared to the S&P 500 Index. The Board
reviews discrepancies in performance for reasonableness, taking into account the
size of the Stock Index Fund's portfolio and net cash flows, and any corrective
actions deemed necessary will be taken to avert excessive discrepancies in the
future. There can, however, be no assurance that the Stock Index Fund will
achieve its investment objective.

Because of the Stock Index Fund's objective, securities may be purchased,
retained and sold by the Stock Index Fund when such transactions would not be
consistent with traditional investment criteria. Adverse performance will
ordinarily not result in the elimination of a stock from the Stock Index Fund's
portfolio. The Stock Index Fund will remain fully invested in common stocks even
when stock prices are generally falling. Accordingly, an investor is exposed to
a greater risk of loss from fluctuations in the value of the overall securities
market than would be the case if the Stock Index Fund reduced its exposure to
such market conditions. In addition, the share price of the Stock Index Fund is
expected to fluctuate, and investors should be able to sustain sudden and
sometimes substantial fluc-

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

1 "Standard & Poor's 500" is a registered service mark of Standard & Poor's
Corporation, which does not sponsor and is in no way affiliated with the Stock
Index Fund.

2
<PAGE> 12

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

tuations in the value of their investment. Brokerage costs, fees, operating
expenses and tracking error will cause the Stock Index Fund's total return to be
lower than that of the S&P 500 Index.

The Stock Index Fund may utilize stock index options and stock index futures
contracts and options on stock index futures contracts to a limited extent.
Options, futures contracts, and options on futures contracts may be used for
several reasons: to maintain cash reserves while effectively remaining fully
invested, to facilitate trading, or to reduce transaction costs. The Stock Index
Fund may enter into options and futures contracts only to the extent that total
obligations under such contracts or transactions at the time of purchase
represent not more than 33 1/3% of the Stock Index Fund's total assets.

The Stock Index Fund will attempt to be fully invested at all times, and in
any event, at least 80% of its total assets will be invested in stocks or
derivative securities (options, futures or options on futures).

The Stock Index Fund may also invest temporarily in certain short-term
obligations. Such securities may be used to invest uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions. The Stock Index Fund may
also borrow money for temporary or emergency purposes and purchase securities on
a when-issued or delayed-delivery basis.

KEY INTERNATIONAL INDEX FUND

The investment objective of the International Index Fund is to seek to match
as closely as possible the investment performance of the Morgan Stanley Capital
International ("Morgan Stanley") Europe, Australia and Far East Index (the "EAFE
Index")2 before fees and expenses of the International Index Fund. The
International Index Fund attempts to achieve this objective by investing in a
statistically selected sample of the equity securities included in the EAFE
Index.

The EAFE Index is a capitalization-weighted index that includes
approximately 1,100 equity securities of companies located outside the United
States. The countries included in the EAFE Index are Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. The International Index Fund may not invest
in certain stocks (numbering approximately 50) included in the EAFE Index
because corporate charters have provisions prohibiting ownership by foreign
investors.

The International Index Fund is constructed to have aggregate investment
characteristics similar to those of the EAFE Index. The International Index Fund
invests in a statistically selected sample of the securities included in the
EAFE Index, although not all companies within a country will be represented in
the International Index Fund's portfolio of securities at the same time. The
International Index Fund is expected to invest in approximately 350 stocks.
KMFA, the Adviser, will manage the International Index Fund using advanced
statistical techniques to determine which stocks are to be purchased or sold to
replicate the EAFE Index to the extent feasible. Stocks are selected for
inclusion in the International Index Fund based on country of origin, market
capitalization, yield, volatility and industry sector. From time to time,
adjustments may be made in the International Index Fund's portfolio because of
changes in the composition of the EAFE Index, but such changes should be
infrequent. No attempt is made to manage the portfolio in the traditional sense
using economic, financial and market analysis.

The International Index Fund believes the indexing approach described above is
an effective method of duplicating the performance of the EAFE Index. It is a
reasonable expectation that there will be a close correlation between the
International Index Fund's performance and that of the EAFE Index in both rising
and falling markets. In this connection, KMFA monitors the International Index
Fund's performance correlation to the EAFE Index and adjusts the portfolio to
the extent necessary to enable the International Index Fund to achieve a
correlation to the EAFE Index of at least 0.95, on an annual basis, without
taking into account International Index Fund operating expenses. A correlation
of 1.00 would indicate perfect correlation, which would be achieved when the net
asset value of the International Index Fund, including the value of its dividend
and capital gains distributions, increases or decreases in exact proportion to
changes in the EAFE Index. The International Index Fund's ability to track the
EAFE Index, however, may be affected by, among other things, transaction costs,
changes in

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

2 Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. The International
Index Fund is neither sponsored by nor affiliated with Morgan Stanley.

3
<PAGE> 13

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

either the composition of the EAFE Index or number of shares outstanding for the
components of the EAFE Index, and the timing and amount of shareholder purchases
and redemptions. The Board periodically reviews the International Index Fund's
investment performance before fees and expenses as compared to the EAFE Index.
The Board reviews discrepancies in performance for reasonableness, taking into
account the size of the International Index Fund's portfolio and net cash flows,
and any corrective actions deemed necessary will be taken to avert excessive
discrepancies in the future. There can, however, be no assurance that the
International Index Fund will achieve its investment objective.

The International Index Fund may utilize stock index options and stock index
futures contracts and options on stock index futures contracts to a limited
extent. Options, futures contracts, and options on futures contracts may be used
for several reasons: to maintain cash reserves while effectively remaining fully
invested, to facilitate trading, or to reduce transaction costs. The
International Index Fund may enter into options and futures contracts only to
the extent that total obligations under such contracts or transactions at the
time of purchase represent not more than 33 1/3% of the International Index
Fund's total assets. The International Index Fund may enter into index and
currency exchange rate swap agreements. The International Index Fund may engage
in foreign currency exchange transactions by buying or selling foreign
currencies, foreign currency options, or foreign currency futures and related
options, and entering into foreign currency forward contracts for the purpose of
more closely tracking the EAFE Index, enhancing portfolio returns or hedging
against foreign exchange risk arising from the International Index Fund's
investment or anticipated investment in securities denominated in foreign
currencies. See "Permissible Investments and Associated Risks -- Forward Foreign
Currency Contracts and Options on Foreign Currencies."

The International Index Fund will attempt to be fully invested at all times,
and in any event, at least 80% of its total assets will be invested in stocks or
derivative securities (options, futures, options on futures, or swaps).

The International Index Fund may also invest temporarily in certain short-term
obligations described below. Such securities may be used to invest uncommitted
cash balances or to maintain liquidity to meet shareholder redemptions. The
International Index Fund also may borrow money for temporary or emergency
purposes and purchase securities on a when-issued or delayed-delivery basis.

PERMISSIBLE INVESTMENTS AND ASSOCIATED RISKS.

In addition to the investments previously described, under normal market
conditions, the Stock Index Fund and the International Index Fund may each
invest up to 20% of their respective total assets in preferred stocks,
investment-grade corporate bonds and notes, warrants, and high quality
short-term debt obligations (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, commercial paper, repurchase
agreements, reverse repurchase agreements, obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, and demand and time
deposits of domestic and foreign banks and savings and loan associations. To the
extent that a significant portion of the assets of a Fund are invested in such
securities, the Fund's tracking error relative to its benchmark index may
increase.

Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect a Fund's net asset value.
Because each Fund invests primarily in equity securities, which fluctuate in
value, the Funds' shares will fluctuate in value.

SHORT-TERM OBLIGATIONS. Under normal market conditions each of the Funds will
be predominantly invested in equity securities; however, there may be times
when, in the opinion of KMFA, market conditions warrant that, for temporary
defensive purposes, a Fund may hold more than 20% of its total assets in
short-term obligations. To the extent that a Fund's assets are so invested, they
will not be invested so as to meet its investment objective. The instruments may
include investment grade liquid debt securities such as commercial paper,
certificates of deposit, bankers' acceptances, repurchase agreements which
mature in less than seven days and United States Treasury bills. Bankers'
acceptances are instruments of United States banks which are drafts or bills of
exchange "accepted" by a bank or trust company as an obligation to pay on
maturity. Also see "Repurchase Agreements."

INVESTMENT GRADE SECURITIES. Each Fund may invest in obligations which are
rated at the time of purchase within the four highest rating categories assigned
by a nationally recognized statistical rating organization ("NRSRO") (investment
grade) or, if unrated, which KMFA determines to be of comparable quality.
Securities rated in the lowest investment grade category have

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speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the debt issuer
to make principal and interest payments than is the case with higher grade debt
securities. The applicable securities ratings are described in Appendix A to the
Statement of Additional Information.

FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. The
International Index Fund may engage in forward foreign currency exchange
contracts ("forward contracts"). Forward contracts are intended to minimize the
risk of loss to the Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. A forward contract may be used, for example, when the International
Index Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar price of
the security. The International Index Fund also may purchase and write put and
call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. Foreign
currency options may also be used to protect against potential losses in
positions denominated in one foreign currency against another foreign currency
in which assets are or may be invested. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge up to the amount of the premium received and the
International Index Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to the International Index Fund's position, the entire amount of the
premium plus related transaction costs may have to be forfeited. Options on
foreign currencies to be written or purchased by the International Index Fund
will be traded on U.S. and foreign exchanges or over-the-counter. Exchange-
traded options generally settle in cash, whereas options traded over-the-counter
may settle in cash or result in delivery of the underlying currency upon
exercise of the option.

OPTIONS. The Stock Index Fund may engage in writing covered call options from
time to time. A call option is a short-term contract which gives the purchaser
the right to buy from the seller of the option the underlying security at a
specified price during the term of the option. A call option on a stock index
gives the purchaser of the option, in return for the premium paid, the right to
receive from the seller cash equal to the difference between the closing price
of the index and the exercise price of the option. The Stock Index Fund will
write only covered call options. A "covered" call option means generally that so
long as a Fund is obligated as the writer of a call option, the Fund will either
own the underlying securities subject to the call, or hold a call at the same
exercise price, for the same exercise period, and on the same securities as the
call written. Options in which the Stock Index Fund may invest must be listed on
a national securities exchange and issued by the Options Clearing Corporation.

The International Index Fund may write covered call options and "covered" put
options. A put option is a short-term contract which gives the purchaser of the
put option, in return for a premium, the right to sell the underlying security
to the seller of the option at a specified price during the term of the option.
A "covered" put option means generally that so long as the Fund is obligated as
the writer of the put option, the Fund will maintain liquid assets with a value
equal to the exercise price in a segregated account with its custodian, or hold
a put on the same underlying security at an equal or greater exercise price.
Options in which the International Index Fund may invest may be traded on
exchanges and in the over-the-counter market.

Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when a Fund desires.

FUTURES CONTRACTS. Each Fund may enter into stock index futures contracts,
and the International Index Fund may enter into futures contracts based on
foreign currencies. In addition, each Fund may purchase or sell options on any
futures contracts in which they may invest and may engage in related closing
transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified

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securities index. The Stock Index Fund will use stock index futures contracts as
a temporary substitute for taking positions in the securities that comprise the
S&P 500 Index. The International Index Fund also may use stock index futures
contracts and futures contracts based on foreign currencies as a temporary
substitute for taking positions in the securities that comprise the EAFE Index.
In addition, the International Index Fund may use futures contracts based on
foreign currencies for the purpose of hedging against changes in currency
exchange rates. A futures contract on a foreign currency is an agreement to buy
or sell a specified amount of a currency for a set price on a future date.

The acquisition of put and call options on futures contracts will give a Fund
the right (but not the obligation), for a specified price, to sell or purchase
the underlying futures contract, upon the exercise of the option, at any time
during the option period.

Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a fund's total assets (other than in
connection with bona fide hedging purposes), and the value of securities that
are the subject of such futures and options (both for receipt and delivery) may
not exceed 33 1/3% of the market value of a Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain each fund's
qualification as a regulated investment company.

Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities or foreign currencies,
limiting the Fund's ability to hedge effectively against exchange rates and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.

SWAP AGREEMENTS. The International Index Fund may enter into index and
currency exchange rate swap agreements. Swap agreements are two-party contracts
entered into primarily by institutional investors for periods ranging from a few
weeks to more than one year. In a standard "swap" transaction, two parties agree
to exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested in a particular foreign currency, or in a "basket" of
securities representing a particular index.

The "notional amount" of the swap agreement is only a fictive basis on which
to calculate the obligations which the parties to a swap agreement have agreed
to exchange. Most swap agreements entered into by the International Index Fund
would calculate the obligations of the parties to the agreement on a "net
basis." Consequently, obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The International Index Fund's obligations
under a swap agreement will be accrued daily (offset against amounts owed) and
any accrued but unpaid net amounts owed to a swap counterparty will be covered
by the maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the portfolio.

Success in the use of swap agreements will depend on the Adviser's ability to
correctly predict whether certain markets reflected in the EAFE Index are likely
to produce greater returns than other markets. Because they are two-party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, there is a risk of loss
of the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Adviser will cause
the International Index Fund to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the International Index Fund's repurchase agreement
guidelines. Certain restrictions imposed by the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), may limit the International Index
Fund's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market and the laws relating to swaps, including potential government
regulation, could adversely affect the International Index Fund's ability to
terminate existing swap agreements or to realize amounts to be

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received under such agreements, or to enter into swap agreements or could have
tax consequences. See the Statement of Additional Information for additional
information regarding swap agreements.

ZERO COUPON BONDS. The Stock Index Fund is permitted to purchase both zero
coupon U.S. government securities and zero coupon corporate securities ("zero
coupon bonds"). Zero coupon bonds are purchased at a discount from the face
amount because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates. For this reason, zero coupon bonds are subject to
substantially greater price fluctuations during periods of changing market
interest rates than are comparable securities which pay interest periodically.
The amount of price fluctuation tends to increase as maturity of the security
increases.

RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Stock Index Fund may also purchase separately traded interest and principal
component parts of such obligations that are transferable through the Federal
book entry system, known as Separately Traded Registered Interest and Principal
Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These
instruments are issued by banks and brokerage firms and are created by
depositing Treasury notes and Treasury bonds into a special account at a
custodian bank; the custodian holds the interest and principal payments for the
benefit of the registered owners of the certificates or receipts. The custodian
arranges for the issuance of the certificates or receipts evidencing ownership
and maintains the register. Receipts include Treasury Receipts ("TRs"), Treasury
Investment Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury
Securities ("CATS").

STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
fluctuations in value due to changes in interest rates than interest-paying U.S.
Treasury obligations. The Stock Index Fund will limit its investment in such
instruments to 20% of its total assets.

SECURITIES LENDING. In order to generate additional income, each Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The lending Fund must receive collateral
equal to 100% of the securities' value plus any interest due in the form of cash
or U.S. Government securities, which collateral must be marked to market daily
by KMFA. Should the market value of the loaned securities increase, the borrower
must furnish additional collateral to the Fund. During the time portfolio
securities are on loan, the borrower pays the Fund amounts equal to any
dividends or interest paid on such securities plus any interest negotiated
between the parties to the lending agreement. Loans are subject to termination
by the Funds or the borrower at any time. While the Funds do not have the right
to vote securities on loan, the Funds intend to terminate loans and regain the
right to vote if that is considered important with respect to the investment. A
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which KMFA has determined are creditworthy under guidelines
established by the Board. Each Fund intends to limit its securities lending to
33 1/3% of its total assets.

WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
a fund agrees to purchase securities on a when-issued basis, such fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to reflect any increase in the
fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Funds
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with their respective investment
objectives and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, a Fund relies on the seller to complete the

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transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be advantageous.

VARIABLE AND FLOATING RATE SECURITIES. The Stock Index Fund may purchase
variable and floating rate notes with ratings within the four highest rating
categories assigned by an NRSRO or, if unrated, which KMFA deems to be of
comparable quality. The interest rates on these securities may be reset daily,
weekly, quarterly, or some other reset period, and may be subject to a floor or
ceiling. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. There may be no active
secondary market with respect to a particular variable or floating rate note.
Variable and floating rate notes for which no readily available market exists
will be purchased in an amount which, together with other illiquid securities
held by the Fund, does not exceed 15% of the Fund's net assets unless such notes
are subject to a demand feature that will permit the Fund to receive payment of
the principal within seven days after demand therefor. These securities are
included among those which are sometimes referred to as "derivative securities".

REPURCHASE AGREEMENTS. Each Fund may engage in repurchase agreement
transactions. Under the terms of a repurchase agreement, a Fund acquires
securities from financial institutions or registered broker-dealers, subject to
the seller's agreement to repurchase such securities at a mutually agreed upon
date and price. The seller is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). If the seller were to default on its repurchase obligation or
become insolvent, a Fund holding such obligation would suffer a loss to the
extent that the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price, or to the extent that the disposition of such
securities by the Fund is delayed pending court action. Repurchase agreements
are considered by the staff of the Commission to be loans by a Fund.

REVERSE REPURCHASE AGREEMENTS. The Stock Index Fund and the International
Index Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements. Pursuant to such an agreement, a Fund sells portfolio
securities to financial institutions such as banks and broker-dealers, and
agrees to repurchase them at a mutually agreed-upon date and price. At the time
the Fund enters into a reverse repurchase agreement, it must place in a
segregated custodial account assets having a value equal to the repurchase price
(including accrued interest); the collateral will be marked to market on a daily
basis, and will be continuously monitored to ensure that such equivalent value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered by the staff of the Commission to be borrowings by a
Fund under the Investment Company Act of 1940, as amended ("1940 Act").

INVESTMENT COMPANY SECURITIES. Each Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order issued by the Commission, the Funds may invest in the money
market funds of other investment companies advised by KMFA or its affiliates.
KMFA will waive its fee attributable to a Fund's assets invested in a money
market fund that it advises, and, to the extent required by the laws of any
state in which shares of a Fund are sold, KMFA will waive investment advisory
fees as to all assets invested in other investment companies. Because such other
investment companies employ an investment adviser, such investment by a Fund
will cause shareholders to bear duplicative fees, such as management fees, to
the extent advisory fees are not waived by KMFA.

PRIVATE PLACEMENT INVESTMENTS. Each Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933, as amended (the "1933 Act"). Section 4(2)
commercial paper is generally sold to institutional investors, such as the
Funds, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction or pursuant to registration under the 1933 Act. Section
4(2) commercial paper is normally resold to other institutional investors like
the Funds through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity. The
Funds believe that Section 4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for liquidity established by the
Directors are liquid. The Funds intend, therefore, to treat the restricted
securities which meet the criteria for liquidity estab-

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lished by the Directors, including Section 4(2) commercial paper, as determined
by the Funds' investment adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. This restriction states that a
Fund may not purchase a security if, as a result, more than 15% of its net
assets would be invested in illiquid securities.

The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under a position of the staff of the Commission set
forth in the adopting release for Rule 144A under the Securities Act of 1933.
Rule 144A is a nonexclusive safe-harbor for certain secondary market
transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for resale under Rule 144A. The Company believes that
the staff of the Commission has left the question of determining the liquidity
of all restricted securities to the Directors. The Directors consider the
following criteria, among others, in determining the liquidity of certain
restricted securities: the frequency of trades and quotes for the security; the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace trades.

INVESTMENT RISKS

CERTAIN INVESTMENT TECHNIQUES. Certain investment management techniques which
the Funds may use, such as the purchase and sale of futures and options,
described above, may expose the Funds to special risks. These products may be
used to adjust the risk and return characteristics of a Fund's portfolio of
investments. These various products may increase or decrease exposure to
security prices, interest rates, or other factors that affect security values,
regardless of the issuer's credit risk. Regardless of whether the intent was to
decrease risk or increase return, if market conditions do not perform
consistently with expectations, use of these products may result in a loss. In
addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater
risk of loss than more traditional equity investments.

FOREIGN SECURITIES. The International Index Fund may invest in securities of
foreign issuers. Investors should carefully consider the substantial risks
involved in investing in securities issued by issuers in foreign nations, which
are in addition to the usual risks inherent in domestic investments.

Foreign investing involves the possibility of expropriation, nationalization
or confiscatory taxation, foreign taxation of income earned in the foreign
nation (including withholding taxes on interest and dividends) or other foreign
taxes imposed with respect to investments in the foreign nation, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability or diplomatic developments which could affect
investments in securities of issuers in those nations. In addition, in many
countries there is less publicly available information about issuers than is
available in reports about companies in the United States. Foreign companies are
not generally subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. In many foreign countries, there is less
government supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. Foreign
securities transactions may be subject to higher brokerage and custodial costs
than domestic securities transactions. In addition, the foreign securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid and subject to greater price volatility than those in the
United States.

Many of the foreign securities in which the Fund invests will be denominated
in foreign currencies. Changes in foreign exchange rates will affect the value
of securities denominated or quoted in foreign currencies. Exchange rate
movements can be large and can endure for extended periods of time, affecting
either favorably or unfavorably the value of the Fund's assets. The Fund may,
however, engage in foreign currency transactions to protect itself against
fluctuations in currency exchange rates in relation to the U.S. dollar. Such
foreign currency transactions may include forward foreign currency contracts,
currency exchange transactions on a spot (i.e., cash) basis, put and call
options on foreign currencies, and foreign exchange futures contracts.

FORWARD FOREIGN CURRENCY CONTRACTS. The International Index Fund may engage
in forward foreign currency exchange contracts which are obligations to purchase
or sell a specific currency at a future date,

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which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. Such contracts do
not eliminate fluctuations in the underlying prices of the securities held by
the Fund. Although such contracts tend to reduce the risk of loss due to a
decline in the value of a currency that has been sold forward, and the risk of
loss due to an increase in the value of a currency that has been purchased
forward, at the same time they tend to limit any potential gain that might be
realized should the value of the currency sold forward increase or the value of
the currency purchased forward decrease.

Successful use of forward contracts depends on the Adviser's skill in
analyzing and predicting relative currency values. Forward contracts alter the
Fund's exposure to currency exchange rate activity and could result in losses to
the Fund if currencies do not perform as the Adviser anticipates. The Fund may
also incur significant costs when converting assets from one currency to
another.

NOTE: The Statement of Additional Information contains information about
certain investment practices and portfolio securities of the Funds. The
Statement of Additional Information also contains information about investment
restrictions designed to reduce the risk of an investment in the Funds.

OTHER INFORMATION

The investment objectives of the Funds are not fundamental which means they
may be changed without a vote of the holders of a majority of a Fund's
outstanding shares (as defined in the Statement of Additional Information).
There can be no assurance that either Fund will achieve its investment
objective. The investment policies of the Stock Index Fund and the International
Index Fund may be changed without an affirmative vote of the holders of a
majority of shares of the respective Funds unless (1) a policy is expressly
stated to be a fundamental policy of a Fund or (2) a policy is expressly stated
to be changeable only by such majority vote.

In addition, investments in a Fund are not insured against loss of principal.
No single Fund should be considered, by itself, to provide a complete investment
program for any investor.

In order to permit the sale of a Fund's shares in certain states the Company
may, on behalf of a Fund, make commitments to a state or states that are more
restrictive than the investment policies and limitations described in the
Prospectus and in the Statement of Additional Information.

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MANAGEMENT OF THE FUNDS
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DIRECTORS AND OFFICERS

The Directors, in addition to reviewing the actions of the Funds' Adviser,
Administrator and Distributor, as set forth below, decide upon matters of
general policy. The Company's officers conduct and supervise the daily business
operations of the Funds. The names, addresses and business affiliations of the
directors and officers of the Company are set forth in the Statement of
Additional Information.

THE INVESTMENT ADVISER

The investment adviser to the Funds is KeyCorp Mutual Fund Advisers, Inc. The
Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc.
which is a wholly-owned subsidiary of KeyBank National Association, a
wholly-owned subsidiary of KeyCorp, one of the largest financial services
holding companies in the United States. KeyCorp's principal offices are located
at 127 Public Square, Cleveland, Ohio 44114.

The Adviser and its affiliates manage approximately $48 billion for numerous
clients including large corporate and public retirement plans, Taft-Hartley
plans, foundations and endowments, high net worth individuals and mutual funds.
The Adviser's principal offices are located at 127 Public Square, Cleveland,
Ohio 44114. KMFA is newly formed, but many of its professionals have, in their
capacity as employees of other subsidiaries of KeyCorp, managed mutual funds.
KMFA was organized as an Ohio corporation on July 27, 1995, and is registered as
an investment adviser under the Investment Adviser's Act of 1940, as amended.

Pursuant to an Investment Advisory Agreement, the Adviser continually conducts
investment research and supervision for the Funds and is responsible for the

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purchase and sale of the Funds' investments, subject to the general supervision
of the Board.

The Investment Advisory Agreement also provides that KMFA may delegate a
portion of its responsibilities to a subadviser. In addition, the Investment
Advisory Agreement provides that KMFA may render services through its own
employees or through the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons that is managed by authorized officers of KMFA.

As compensation for the services rendered and related expenses borne by the
Adviser under the Investment Advisory Agreement, the Stock Index Fund will pay
the Adviser a fee, computed daily and payable monthly, equal to .10% per annum
of the Fund's average daily net assets. The Investment Advisory Agreement
further provides that the International Index Fund will pay the Adviser a fee,
computed daily and payable monthly, equal to .50% per annum of its average daily
net assets. KMFA may periodically waive all or a portion of its advisory fees.
The Adviser is obligated to reimburse the Funds in the event the Funds' expenses
exceed certain prescribed limits. See "Expenses, Distribution Plan and
Shareholder Servicing Plan".

THE ADMINISTRATOR, DISTRIBUTOR
AND FUND ACCOUNTANT

BISYS Fund Services serves as the administrator for the Funds ("BISYS" or the
"Administrator"). The Administrator generally assists in all aspects of the
Funds' administration and operation. Pursuant to the Administration Agreement
between BISYS and the Company, for expenses incurred and services provided as
Administrator, BISYS receives a fee from each Fund, computed daily and paid
monthly, at an annual rate of .15% of each Fund's average daily net assets. The
Administrator may periodically waive all or a portion of its administration fee
with respect to a Fund.

BISYS also serves as the independent underwriter and distributor of the shares
of the Funds ("BISYS" or the "Distributor"). Pursuant to the Distribution
Agreement between the Company and BISYS, BISYS is obligated to use its best
efforts to sell shares of the Funds. In addition, under the Distribution
Agreement, BISYS may enter into agreements with selected dealers for the
distribution of shares.

KMFA neither participates in nor is responsible for the underwriting of Fund
shares.

BISYS Fund Services, Inc. ("BISYS Inc.") provides the Funds with certain
accounting services pursuant to a Fund Accounting Agreement with the Company and
receives a fee for such services.

The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Funds. The maximum cash
compensation payable by the Distributor is 0.25%, on an annual basis, of the net
asset value of the shares of a Fund. In addition, the Distributor will, from
time to time and at its own expense, provide compensation, including financial
assistance, to dealers in connection with conferences, sales or training
programs for their employees, seminars for the public, advertising campaigns
regarding one or more Key Mutual Funds and/or other dealer-sponsored special
events including payment for travel expenses and lodging incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature. Compensation will include the following types of
non-cash compensation offered through sales contests: (1) vacation trips
including the provision of travel arrangements and lodging; (2) tickets for
entertainment events (such as concerts, cruises and sporting events) and (3)
merchandise (such as clothing, trophies, clocks and pens). Dealers may not use
sales of the Funds' shares to qualify for this compensation if prohibited by the
laws of any state or any self-regulatory organization, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.

Morrison & Foerster LLP, counsel to the Company, has advised the Company that
KMFA may perform the services contemplated by the Investment Advisory Agreement
without violation of the Glass-Steagall Act or other applicable laws or
regulations. Such counsel has pointed out, however, that there are no
controlling judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes, including the Glass-Steagall Act, and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future changes in such statutes,
regulations and judicial and administrative decisions or interpretations, could
prevent KMFA from continuing to perform, in whole or in part, such services. If
KMFA were prohib-

11
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ited from performing any of such services, it is expected that the Board of
Directors of the Company would recommend to each Fund's shareholders that they
approve a new investment advisory agreement with another entity or entities
qualified to perform such services.

- --------------------------------------------------------------------------------
EXPENSES, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN
- --------------------------------------------------------------------------------

Except as set forth above under "Management of the Funds" and as set forth
below, each of the Funds bears the expenses directly applicable to it and a
portion of the general administrative expenses, applicable to all the Funds of
Key Mutual Funds, which may be allocated among the Funds in a manner believed to
be fair and equitable. Expenses that are directly applicable to a Fund include
expenses of portfolio transactions, shareholder servicing costs, expenses of
registering the shares under Federal and state securities laws, pricing costs
(including the daily calculation of net asset value), interest, certain taxes,
legal and auditing expenses directly incurred by the Fund, and charges of KMFA,
BISYS, BISYS Inc., the Custodian, the Transfer Agent, the Shareholder Servicing
Agent and the Distributor. General expenses which would be allocated include
Directors' fees, general corporate legal and auditing expenses, state franchise
taxes, costs of printing proxies, shareholder reports and prospectuses sent to
existing shareholders, trade association fees, Commission fees, and accounting
costs.

The Company has adopted a Distribution Plan (the "Distribution Plan") for the
International Index Fund pursuant to Rule 12b-1 under the 1940 Act. No separate
payments are authorized to be made by the International Index Fund under the
Plan. Rather, the Plan provides that to the extent any portion of the fees
payable under the Shareholder Servicing Plan or any Shareholder Servicing
Agreement (described below) is deemed to be for services primarily intended to
result in the sale of Fund shares, such fees are deemed approved and may be paid
pursuant to the Plan and in accordance with Rule 12b-1.

The Company has adopted a shareholder servicing plan for the International
Index Fund. In accordance with the Shareholder Servicing Plan, the Company, on
behalf of the International Index Fund, may enter into shareholder service
agreements under which the International Index Fund may pay fees of up to 0.25%
of its average daily net assets for fees incurred in connection with the
personal service and the maintenance of accounts holding the shares of the
International Index Fund. Such agreements are entered between the Company, on
behalf of the International Index Fund, and various shareholder servicing
agents, including the Distributor, Key Trust Company of Ohio, N.A. and its
affiliates, and other financial institutions and securities brokers (each a
"Shareholder Servicing Agent"). Each Shareholder Servicing Agent generally will
provide support services to shareholders by establishing and maintaining
accounts and records, processing dividend and distribution payments, providing
account information, arranging for bank wires, responding to routine inquiries,
forwarding shareholder communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting shareholders in changing
dividend options, account designations and addresses. Shareholder Servicing
Agents may periodically waive all or a portion of their respective shareholder
servicing fees with respect to the International Index Fund.

The Adviser has agreed that if in any fiscal year the sum of expenses exceeds
the limits set by applicable regulations of state securities commissions, the
amounts payable by the Funds to KMFA for the advisory fee for that year shall be
reduced. For further information see "Expenses, Distribution Plan and
Shareholder Servicing Plan" in the Statement of Additional Information.

- --------------------------------------------------------------------------------
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value of the shares of the Stock Index Fund and the
International Index Fund are determined as of the close of the New York Stock
Exchange ("NYSE"), which is normally at 4:00 P.M. Eastern time, each Business
Day (the "Valuation Time"). A "Business Day" is a day on which the NYSE is open
for trading. The NYSE will not be open in observance of the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.

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<PAGE> 22

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In general, a Fund's net asset value is equal to the value of its securities,
cash and other assets, less liabilities, divided by the number of shares
outstanding. Securities traded on securities exchanges or the NASDAQ national
market are valued at the last sales price on the exchange where the security is
primarily traded or, lacking any sales, at the mean between the most recent bid
and asked quotation. Securities traded over-the-counter are valued at the mean
between the most recent bid and asked price. Securities for which quotations are
not readily available and any other assets are valued at fair value as
determined in good faith by the Board of Directors. The Funds value short-term
debt instruments at market value except short-term debt instruments having a
maturity of less than 60 days which are valued at amortized cost.

Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of the NYSE. The values
of such securities used in computing the net asset value of the shares of the
Funds are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the NYSE which
will not be reflected in the computation of the Funds' net asset values. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Board.

- --------------------------------------------------------------------------------
PURCHASING SHARES
- --------------------------------------------------------------------------------

Shares may be purchased directly or through an Investment Professional of a
securities broker or other financial institution that has entered into selling
or servicing agreements with Key Mutual Funds or BISYS. An Investment
Professional is a salesperson, financial planner, investment adviser or trust
officer who provides you with information regarding the investment of your
assets. Shares are also available to clients of bank trust departments who have
qualified trust accounts. The minimum investment is $500 ($250 for Individual
Retirement Accounts) for the initial purchase and $25 thereafter. Accounts set
up through a bank trust department or an Investment Professional may be subject
to different minimums, features, requirements and fees. The Investment
Professional will provide this information to you.

Shares of the Funds are sold at the net asset value per share (see
"Determination of Net Asset Value") next determined after receipt and acceptance
by State Street Bank and Trust Company, the Funds' transfer agent (the "Transfer
Agent"), of an order to purchase shares. There are no sales commissions.

Purchases of shares will be effected only on a Business Day (as defined in
"Determination of Net Asset Value") of Key Mutual Funds. An order received and
accepted prior to the Valuation Time on any Business Day will be executed at the
net asset value determined as of the next Valuation Time on that Business Day.
An order received and/or accepted after the Valuation Time on any Business Day
will be executed at the net asset value determined as of the next Valuation Time
on the next Business Day of Key Mutual Funds. Generally, shares of the Funds
begin accruing income dividends on the day they are purchased.

INVESTING DIRECTLY

BY MAIL:

You may purchase shares by completing and signing an Account Application
(initial purchase only) and mailing it, together with a check (or other
negotiable bank draft or money order) in at least the minimum investment
requirement to:

Key Mutual Funds
P.O. Box 8527
Boston, MA 02266-8527

Subsequent purchases may be made in the same manner.

BY TELEPHONE:

Subsequent purchases of shares of the Funds may be made by telephone if you
have checked the Telephone Authorization box and supplied the necessary bank
information on the Account Application. The purchase amount will be transferred
between the bank account designated and your fund account via Automated Clearing
House ("ACH"). Only a bank account maintained in a domestic financial
institution which is an ACH member may be so designated. The Fund may modify or
terminate the telephone and/or ACH privilege at any time or charge a service fee
upon notice to

13
<PAGE> 23

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shareholders. No such fee is currently contemplated. If the designated bank
account does not contain sufficient assets at the time your order is processed,
the order may be canceled, and you could be held liable for resulting fees
and/or losses.

This service requires approximately 15 days to establish. Therefore, it may
not be applicable to request your initial purchase utilizing this method.

BY WIRE:

If an Account Application has been previously received by the Transfer Agent,
you may also purchase shares by wiring funds to: State Street Bank and Trust
Co., ABA #01100028, For Credit to DDA Account #9905-201-1, For Further Credit to
Account #(insert your account number, name and control number assigned by the
Transfer Agent). The Transfer Agent does not charge a wire fee. PRIOR TO WIRING
ANY FUNDS AND IN ORDER TO ENSURE THAT WIRE ORDERS ARE INVESTED PROMPTLY, YOU
MUST CALL THE TRANSFER AGENT AT 800-539-3863.

INVESTING THROUGH INVESTMENT PROFESSIONALS OR A BANK TRUST DEPARTMENT

Shares may be purchased by investors who designate an Investment Professional
or a bank trust department through procedures established by the Transfer Agent
in connection with requirements of qualified accounts maintained by or on behalf
of certain persons by Investment Professionals and bank trust departments. With
respect to such purchases, it is the responsibility of the Investment
Professional or a bank trust department to transmit purchase orders to the
Transfer Agent and to deliver federal funds for purchase on a timely basis in
order to receive that day's price. Your Investment Professional or bank trust
department may charge additional fees in connection with purchases and
redemptions of shares. Contact your Investment Professional or trust
representative for complete information.

The services rendered by your bank trust department, including affiliates of
KMFA, in the management of its accounts are not duplicative of any of the
services for which KMFA is compensated. The additional fees paid by clients of
bank trust departments, their affiliates, or an Investment Professional should
be considered in calculating the net yield on investment in a Fund, although
such charges do not affect the Fund's dividends or distributions.

ADDITIONAL INVESTMENT REQUIREMENTS

All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. All purchases made by check should be in U.S.
dollars and made payable to Key Mutual Funds, or in the case of a retirement
account, the custodian or trustee. Third party checks will not be accepted. When
purchases are made by check or periodic account investment, redemptions will not
be allowed until the investment being redeemed has been in the account for 15
calendar days. If you make a purchase with more than one check, each check must
have a value of at least $25, and the minimum investment requirement still
applies. Key Mutual Funds and its servicing agents reserve the right to limit
the number of checks processed at one time. If your check does not clear, your
purchase may be canceled and you could be liable for any losses and/or fees
incurred. Payment for purchase is expected at the time of the order. If payment
is not received within three business days of the order, the order may be
canceled, and you could be held liable for resulting fees and/or losses.

You may initiate most transactions by telephone through your Investment
Professional, or bank trust department. Subsequent investments by telephone may
be made directly. Note that Key Mutual Funds and its agents will not be
responsible for any losses resulting from unauthorized transactions if they
follow reasonable procedures designed to verify the identity of the caller.
These procedures may include requesting additional information, or using
personalized security codes. Your Investment Professional or the Transfer Agent
may also record calls, and you should verify the accuracy of your confirmation
statements immediately after you receive them. The Transfer Agent may reject any
purchase order for the Funds' shares in its sole discretion.

You will receive a monthly statement reflecting all transactions that affect
the share balance or the registration of your Fund account. You will receive a
confirmation after every transaction that affected the share balance of your
Fund account, except for dividend reinvestment, systematic investment and
systematic withdrawal transactions. These transactions will be detailed on your
Fund account statement. The Funds do not issue stock certificates for the
shares.

Although the Funds continuously offer their shares for sale, each Fund
reserves the right to reject any purchase request.

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<PAGE> 24

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THE SYSTEMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------

Under the Systematic Investment Plan, you may make regular systematic monthly
purchases of shares of a Fund through automatic deductions from your bank
account(s). Upon obtaining your authorization, Key Mutual Funds' Transfer Agent
will deduct the specified amount from your designated bank account, which will
then be automatically invested in shares of the relevant Fund at the net asset
value next determined. Bank accounts will be debited on any day from the 1st
through the 28th of each month, as selected by the shareholder. You must first
meet a Fund's initial investment requirement of $500 and are subject to a
minimum subsequent investment of $25. For officers, trustees, directors and
employees, including retired directors and employees, of KMFA, Spears, Benzak,
Salomon & Farrell, Inc., Key Mutual Funds, BISYS, KeyCorp and its affiliates,
(and family members of each of the foregoing) who participate in the Systematic
Investment Plan, there is no minimum initial investment required.

To participate in the Systematic Investment Plan, complete the appropriate
section of the account application and attach a voided personal check with the
bank's magnetic ink coding number across the front. If the bank account is
jointly owned, all owners must sign. Account applications can be obtained by
calling the Transfer Agent at 800-539-3863. To change or discontinue existing
Systematic Investment Plan instructions, submit a written request to or call the
Transfer Agent at 800-539-3863.

- --------------------------------------------------------------------------------
THE SYSTEMATIC WITHDRAWAL PLAN
- --------------------------------------------------------------------------------

The Systematic Withdrawal Plan enables shareholders to make regular monthly,
quarterly, semi-annual or annual redemptions of shares. With your authorization,
the Transfer Agent will automatically redeem shares at the net asset value on
the date of the withdrawal and have the proceeds transferred according to your
written instructions. Fund accounts will be debited on any day from the 1st
through the 28th of each month.

You can have checks sent from your Fund account directly to you, to your bank
account or to a third person. If you opt to have the proceeds sent to your bank
checking account, a voided personal check with the bank's magnetic coding number
across the front must be attached to the account application. The proceeds will
be transferred between your fund account and the bank account via ACH. If the
bank checking account is jointly owned, all owners must sign the application.

To participate in the Systematic Withdrawal Plan, the required minimum balance
is $5,000 per Fund. The required minimum withdrawal is $25.

To participate in the Systematic Withdrawal Plan, call 800-539-3863 for more
information. Systematic Withdrawal Plan payments are drawn from share
redemptions. If Systematic Withdrawal Plan redemptions exceed income and capital
gain dividend distributions earned on Fund shares, the Fund account may
eventually be exhausted. Your account cannot be closed automatically by
depleting the assets in your Systematic Withdrawal Plan. Purchases of additional
shares concurrent with withdrawals may be disadvantageous to certain
shareholders because of tax liabilities. The Systematic Withdrawal Plan is not
necessarily appropriate for use in conjunction with the Systematic Investment
Plan. To change or terminate Systematic Withdrawal Plan instructions, submit a
written request to, or call the Transfer Agent at 800-539-3863. The Systematic
Withdrawal Plan may be modified or terminated at any time without notice.

If the amount of the automatic withdrawal exceeds the income accrued for the
period, the principal balance invested will be reduced and shares will be
redeemed.

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<PAGE> 25

- --------------------------------------------------------------------------------
REDEEMING SHARES
- --------------------------------------------------------------------------------

Shares may ordinarily be redeemed by mail or telephone. However, all or part
of your shares may be redeemed in accordance with instructions and limitations
pertaining to your account with an Investment Professional. For example, if you
have agreed with an Investment Professional to maintain a minimum balance in
your account with the Investment Professional, and the balance in that account
falls below that minimum, you may be obligated to redeem, or the Investment
Professional may redeem for you and on your behalf, all or part of your shares
to the extent necessary to maintain the required minimum balance.

BY MAIL:

In order to redeem shares by mail, send a written request to:

Key Mutual Funds
P.O. Box 8527
Boston, MA 02266-8527

The Transfer Agent may require a signature guarantee by an eligible guarantor
institution. A signature guarantee is designed to protect you, the Fund, and
your and the Fund's agents from fraud. A written redemption request requires a
signature guarantee for redemptions of more than $10,000 worth of shares; if
your Fund account registration has changed within the last 60 days; if the check
is not being mailed to the address on your account; if the check is not being
made out to the account owner; or if the redemption proceeds are being
transferred to another account within Key Mutual Funds or The Victory Portfolios
with a different registration. The following institutions should be able to
provide you with a signature guarantee: banks, brokers, dealers, credit unions
(if authorized under state law), securities exchanges and associations, clearing
agencies, and savings associations. A signature guarantee may not be provided by
a notary public. The Transfer Agent reserves the right to reject any signature
guarantee if (1) it has reason to believe that the signature is not genuine, (2)
it has reason to believe that the transaction would otherwise be improper, or
(3) the guarantor institution is a broker or dealer that is neither a member of
a clearing corporation nor maintains net capital of at least $100,000.

BY TELEPHONE:

Arrangements for the payment of redemption proceeds may be made by telephone
if you have checked the Telephone Authorization box and supplied the necessary
bank information on the Fund's Account Application. Proceeds may be wired to a
domestic financial institution, sent via ACH, mailed to the address of record,
or mailed to a previously designated alternate address. If you select the ACH
method, only a bank account maintained in a domestic financial institution which
is an ACH member may be so designated.

It is not necessary to confirm telephone redemption requests in writing. If
you did not originally select the telephone authorization privilege, you must
provide written instructions as well as a signature guarantee to the Transfer
Agent to add this feature. Neither Key Mutual Funds nor its service agents will
be liable for any loss, damages, expense or cost arising out of any telephone
redemption effected in accordance with Key Mutual Funds' telephone redemption
procedures and pursuant to instructions reasonably believed to be genuine. Key
Mutual Funds will employ procedures designed to provide reasonable assurance
that instructions by telephone are genuine; if these procedures are not
followed, Key Mutual Funds or its service agents may be liable for any losses
due to unauthorized or fraudulent instructions. These procedures include, but
are not limited to, recording of phone conversations, sending confirmations to
shareholders within 72 hours of the telephone transaction, verification of
account name and account number or tax identification number, and sending
redemption proceeds to the address of record, a previously designated bank
account or alternate address. For telephone redemptions, call the Transfer Agent
at 800-539-3863. If you are unable to reach the Transfer Agent by telephone (for
example, during time of unusual market activity), consider placing your order by
mail directly to the Transfer Agent.

ADDITIONAL REDEMPTION INFORMATION

Redemption orders are effected at the net asset value per share next
determined after the shares are properly tendered for redemption, as described
above. The proceeds paid upon redemption of shares in a Fund may be more or less
than the amount invested. Payment to shareholders for shares redeemed will be
made within

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three Business Days after receipt by the Transfer Agent of the request for
redemption in proper form.

At various times, Key Mutual Funds may be requested to redeem shares of a Fund
for which good payment has not yet been received. In such circumstances, Key
Mutual Funds may delay the forwarding of proceeds for 15 days or more without
interest to the shareholder until payment has been collected for the purchase of
such shares. Key Mutual Funds intend to pay cash for all shares redeemed, but
under unusual circumstances, Key Mutual Funds may make payment wholly or partly
in portfolio securities at their then-current market value equal to the
redemption price. In such cases, an investor may incur brokerage costs in
converting such securities to cash.

Due to the relatively high cost of handling small investments, Key Mutual
Funds reserves the right to redeem, at net asset value, shares in your account
if, because of redemptions of shares by you or on your behalf, your account with
respect to a Fund has a value of less than $500 (except with respect to
officers, trustees, directors and employees, including retired directors and
employees, of KMFA, Spears, Benzak, Salomon & Farrell, Inc., Key Mutual Funds,
KeyCorp and its affiliates, (and family members of each of the foregoing)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). IRA and Keogh accounts are exempt from this mandatory
redemption. Before Key Mutual Funds exercises the right to redeem such shares
and to send the proceeds to you, you will be given notice that the value of the
shares in your account is less than the minimum amount and will be allowed 60
days to make an additional investment in the Fund in an amount which will
increase the value of the account to at least $500, if applicable.

Key Mutual Funds reserves the right to reject any order for the purchase of
its shares in whole or in part.

The Funds may suspend the right of redemption during any period when (a)
trading on the New York Stock Exchange is restricted as determined by the
Commission or such Exchange is closed, other than customary weekend and holiday
closings; (b) the Commission has by order permitted such suspension or
postponement; or (c) an emergency, as defined by rules of the Commission, exists
making disposal of portfolio securities or determination of the value of assets
of the Funds not reasonably practicable. In case of a suspension of the right of
redemption, the offer of redemption may be withdrawn by the shareholder, or
payment will be received at the net asset value next determined after the
suspension has been terminated.

- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

Shares of a Fund may be exchanged for shares of any Fund of Key Mutual Funds.
You may also exchange shares of a Fund for shares of funds in the Victory Group
(each a "Victory Fund") that are not subject to either a front-end or a
contingent deferred sales charge. In addition, shareholders of Key Mutual Funds
who qualify for a waiver of a front-end sales charge otherwise applicable to a
purchase of shares of a Victory Fund may exchange their shares of a Fund of Key
Mutual Funds for shares of a Victory Fund. Shares of a Fund of Key Mutual Funds
may also be exchanged for Key Class shares of a Victory Fund, when and if such
shares become available. Exchanges will be made on the basis of the relative net
asset value of the shares of the respective Funds. To exchange shares, several
conditions must be met:

1. Shares of the fund selected for exchange must be available for sale in your
state of residence.

2. The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.

3. You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any Business Day.

4. You must meet the minimum purchase requirements for the fund you purchase
by exchange.

5. The registration and tax identification numbers of the two accounts must be
identical.

6. BEFORE EXCHANGING, OBTAIN AND READ THE PROSPECTUS FOR THE FUND YOU WISH TO
PURCHASE BY EXCHANGE.

Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to Valuation Time on
any Business Day. (See "Determination of Net Asset Value.")

Exchanges of shares involve a redemption of the shares exchanged and a
purchase of shares acquired.

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<PAGE> 27

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

There are certain exchange policies you should be aware of:

- Shares are normally redeemed from one fund and issued from the other fund in
the exchange transaction on the same Business Day on which the Transfer
Agent receives an exchange request by Valuation Time (normally 4:00 p.m.
Eastern time for non-money market funds) that is in proper form, but either
fund may delay the issuance of shares of the fund into which you are
exchanging if it determines it would be disadvantaged by a same-day transfer
of the proceeds to buy shares. For example, the receipt of multiple exchange
requests from a dealer in a "market-timing" strategy might create excessive
turnover in the Fund's portfolio and associated expenses disadvantageous to
the Fund.

- Because excessive trading can hurt fund performance and harm shareholders,
the Funds reserve the right to refuse any exchange request that will impede
a Fund's ability to invest effectively or otherwise have the potential to
disadvantage the Fund, or to refuse multiple exchange requests submitted by
a shareholder or dealer.

- Key Mutual Funds may amend, suspend or terminate the exchange privilege at
any time upon 60 days' written notice to shareholders.

- If the Transfer Agent cannot exchange all the shares you request because of
a restriction cited above, only the shares eligible for exchange will be
exchanged.

- Each exchange may produce a gain or loss for tax purposes.

See "Redeeming Shares -- By Telephone" for a discussion of certain limitations
on the liability of the Funds and the Transfer Agent in connection with
unauthorized telephone transactions.

- --------------------------------------------------------------------------------
INVESTING FOR RETIREMENT
- --------------------------------------------------------------------------------

You may wish to invest in Key Mutual Funds in connection with Individual
Retirement Accounts (IRAs) and other retirement plans such as Simplified
Employee Pension Plans (SEP/IRA), Salary Reduction Simplified Employee Pensions
Plans (SAR-SEP/IRA), 401(k) Plans, and 403(b) Plans. For more information about
investing in Key Mutual Funds through tax-deferred accounts, call 800-539-3863.

- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------

Each Fund distributes to shareholders substantially all of its net investment
income and any net realized taxable capital gains resulting from sales of
portfolio securities.

The Stock Index Fund and the International Index Fund each declare and pay
dividends, equal to their net investment income, each calendar quarter. Realized
capital gains, if any, are paid annually.

DISTRIBUTION OPTIONS

When you fill out your Account Application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:

1. REINVESTMENT OPTION. Your income and capital gain dividends, if any, will
be automatically reinvested in additional shares of the respective Fund. Income
and capital gain dividends will be reinvested at the net asset value of the Fund
as of the day after the record date. If you do not indicate a choice on your
Account Application, you will be assigned this option.

2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7 days after
the dividend payment date which may be more than 7 days after the dividend
record date.

3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the respective Fund at the
net asset value as of the day after the record date, and have your income
dividends paid in cash.

4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in shares of
another Key Mutual Fund. Shares will be purchased at the NAV as of the day after
the record date. Dividend

18
<PAGE> 28

distributions can be directed only to an existing account with a registration
that is identical to that of your respective Fund account.

5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital gain
dividends, or only your income dividends, automatically transferred to your bank
checking or savings account. The amount will be determined on the dividend
record date and will normally be transferred to your account within 7 days of
the dividend record date. Dividend distributions can be directed only to an
existing account with a registration that is identical to that of your
respective Fund account. Please call or write the Transfer Agent to learn more
about this dividend distribution option.

Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Key Mutual Funds, P.O. Box 8527,
Boston, MA 02266-8527, or by calling the Transfer Agent at 800-539-3863, and
will become effective with respect to dividends having record dates after
receipt of the Account Application or request by the Transfer Agent.

Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.

- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------

Each Fund has qualified and intends to continue to qualify under Subchapter M
of the Internal Revenue Code as a regulated investment company so long as it is
in the best interest of its shareholders to do so. This qualification relieves
the Funds (but not their shareholders) from paying Federal income tax on income
which is currently distributed to shareholders, assuming certain distribution
requirements are met; it also permits net capital gains of the Funds (i.e., the
excess of net long-term capital gain over net short-term capital loss) to be
treated as long-term capital gains of the shareholders, regardless of how long
shares in the Funds are held. Under the Tax Reform Act of 1986, a nondeductible
4% excise tax may be imposed on the Funds to the extent the Funds do not meet
certain distribution requirements by the end of each calendar year.

Dividend distributions to shareholders from net investment income or net
short-term capital gain (i.e., the excess of short-term capital gain over net
long-term capital loss) are treated as ordinary income for Federal income tax
purposes whether such distributions are taken in cash or reinvested in
additional shares.

Dividends paid by the Stock Index Fund and the International Index Fund may be
eligible for the dividends received deduction for corporate shareholders to the
extent that the Funds' income is derived from certain dividends received from
domestic corporations. In order to qualify for the dividends received deduction,
a corporate shareholder of a Fund must hold the Fund shares paying the dividend
upon which such deduction is based for at least 46 days.

Distributions of net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) of the Funds are taxable to shareholders
as long-term capital gains whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Funds
have been held. Capital gain distributions are not eligible for the dividends
received deduction.

Dividends and capital gains distributions have the effect of reducing the NAV
per share by the amount distributed. Although a distribution paid to you on
newly issued or acquired Fund shares shortly after your purchase would
represent, in substance, a return of your capital, the distribution would
consist of net investment income, and therefore be taxable to you.

Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year.
Notwithstanding the above, any loss realized by a shareholder upon the sale of
shares in a Fund held six months or less will be treated as long-term capital
loss to the extent of any long-term capital gain distributions received by the
shareholder.

The Company will inform you of the amount and nature of dividends and capital
gains distributions in January of the following year. You should keep all
statements you receive to assist you in your record keeping. The Company is
required to withhold, subject to certain exemptions, at the rate of 31% on
dividends paid and redemption proceeds (and deemed proceeds from exchanges) paid
or credited to individual shareholders if a correct Taxpayer Identification
Number

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<PAGE> 29

("TIN"), certified when required, is not on file with the Company or Transfer
Agent. In connection with this withholding requirement, you will be asked to
certify on your account application that the social security number or TIN you
provide is correct and that you are not subject to 31% backup withholding for
previous under-reporting to the Internal Revenue Service ("IRS"). Moreover,
failure to furnish a certified TIN to the Company could subject an investor to a
$50 penalty imposed by the IRS.

Dividends and distributions are generally subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state or local taxes.

For additional tax-related information, see "Federal Income Taxes" in the
Statement of Additional Information.

- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------

From time to time a Fund may advertise the "yield" and "total return" of its
shares. Yield and total return figures are based on historical earnings and are
not intended to indicate future performance. The yield on shares of a Fund will
be calculated by dividing the net investment income per share during a recent
30-day (or one month) period by the maximum public offering price per share of
the Fund on the last day of that period. The results are compounded on a bond
equivalent (semiannual) basis and then annualized. The "total return" of shares
may be calculated on an average annual total return basis or an aggregate total
return basis. Average annual total return refers to the average annual
compounded rates of return on shares over one-, five-, and ten-year periods or
the life of the Fund (as stated in the advertisement) that would equate an
initial amount invested at the beginning of the stated period to the ending
redeemable value of the investment, assuming the reinvestment of all dividend
and capital gains distributions. Aggregate total return reflects the total
percentage change in the value of the investment over the measuring period,
again assuming the reinvestment of all dividends and capital gains
distributions. Total return may also be presented for other periods.

Investment performance, which will vary, is based on many factors, including
market conditions, the composition of the Fund's portfolio and such Fund's
operating expenses. Investment performance also often reflects the risks
associated with a Fund's investment objective and policies. These factors should
be considered when comparing a Fund's investment results to those of other
mutual funds and other investment vehicles. Since yields fluctuate, yield data
cannot necessarily be used to compare an investment in the Funds with bank
deposits, savings accounts and similar investment alternatives which often
provide for an agreed-upon or guaranteed fixed yield for a stated period of
time. Each Fund's annual report will contain additional performance information
and will be available without charge upon request.

See "Performance Information" in the Statement of Additional Information for
further information.

- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
- --------------------------------------------------------------------------------

The Company is an open-end, diversified management investment company,
incorporated under Maryland law on May 26, 1983. Pursuant to the Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of shares. Pursuant to such authority, the Board of Directors has
authorized the issuance of nine series of shares, each representing shares in
one of nine separate Funds. The par value of the shares of each of the Funds is
$.01 per share. The assets of each Fund are segregated and separately managed
and a shareholder's interest is in the assets and earnings of the Fund in which
he or she holds shares. Each share of a Fund represents an equal proportionate
interest in that portfolio with each other share of the same series. In the
event of the liquidation or dissolution of the Company, shares of a Fund are
entitled to receive the assets belonging to that portfolio that are available
for distribution and a proportionate distribution, based upon the relative net
assets of the respective Funds, of any general assets not belonging to any
particular portfolio that are available for distribution. Shareholders are
entitled to one vote for

20
<PAGE> 30

each share held and will vote in the aggregate and not by portfolio except as
otherwise required by the 1940 Act or Maryland law. It is anticipated that the
Company will not hold annual shareholder meetings except when required to do so
by the 1940 Act or Maryland law.

- --------------------------------------------------------------------------------
CUSTODIAN, TRANSFER AGENT, SHAREHOLDER SERVICING AGENT, AND DIVIDEND DISBURSING
AGENT
- --------------------------------------------------------------------------------

Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio 44114, is
the Custodian for the Funds' cash and securities. Key Trust Company of Ohio,
N.A. does not assist in any way, and is not responsible for, investment
decisions involving assets of the Funds. Key Trust Company of Ohio, N.A. is a
subsidiary of KeyCorp and an affiliate of the Adviser and receives compensation
from the Funds for the services it performs as custodian.

State Street Bank and Trust Company, 225 Franklin Street, Boston, Mass.
02110-2875 is Transfer Agent for the shares of the Funds and receives a fee for
its services. Boston Financial Data Services acts as dividend disbursing agent
and shareholder servicing agent for the Funds, and receives a fee for these
services. Their principal business address is Two Heritage Drive, Quincy, Mass.
02171.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS
- --------------------------------------------------------------------------------

The Funds will prepare and send to shareholders unaudited semi-annual and
audited annual reports which will include a list of investment securities held
by each of the Funds.

In addition, shareholders of the Funds will receive, monthly, a cumulative
account statement for the calendar year.

The Fund intends to eliminate duplicate mailings of Reports to an address at
which more than one shareholder of record with the same last name has indicated
that mail is to be delivered. Shareholders may receive additional copies of any
Report at no cost by writing to the Fund at the address listed below or by
calling 800-539-3863.

Shareholder inquiries should be addressed to the Funds at Key Mutual Funds,
P.O. Box 8527, Boston, MA 02266-8527. Shareholders may also call the Funds at
800-539-3863.

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KEY MUTUAL
FUNDS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY KEY
MUTUAL FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.

21
<PAGE> 31

KEY MUTUAL FUNDS

INVESTMENT ADVISER
KeyCorp Mutual Fund Advisers, Inc.
127 Public Square
Cleveland, OH 44114

ADMINISTRATOR
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219

COUNSEL
Morrison & Foerster LLP
2000 Pennsylvania Avenue, NW
Washington, DC 20006

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036

CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114

TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110-2875

DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219

The date of this Prospectus is June 12, 1996
<PAGE> 32

KEY MUTUAL FUNDS

KEY STOCK INDEX FUND

KEY INTERNATIONAL INDEX FUND

STATEMENT OF ADDITIONAL INFORMATION

June 12, 1996, as supplemented on December 17, 1996

This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of Key Mutual Funds, dated June 12, 1996, as
supplemented from time to time. This Statement of Additional Information is
incorporated by reference in its entirety into the prospectus for Key Stock
Index Fund and Key International Index Fund. Copies of the prospectus may be
obtained by writing to Key Mutual Funds at P.O. Box 8527, Boston, MA 02266-8527,
or by telephoning toll free 800-539-3863.
<PAGE> 33

TABLE OF CONTENTS

<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................... 3
Additional Information on Fund Investments........................................................... 3
INVESTMENT RESTRICTIONS.................................................................................. 16
PORTFOLIO TURNOVER....................................................................................... 17
MANAGEMENT OF THE FUNDS.................................................................................. 18
Directors and Officers............................................................................... 18
SECURITY HOLDERS ........................................................................................ 20
THE INVESTMENT ADVISER AND ADMINISTRATION................................................................ 22
EXPENSES, DISTRIBUTOR, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN.................................. 21
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.................................................. 22
PERFORMANCE INFORMATION.................................................................................. 22
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................................................... 25
PURCHASE, REDEMPTION AND PRICING......................................................................... 26
FEDERAL INCOME TAXES..................................................................................... 27
ADDITIONAL INFORMATION................................................................................... 30
INDEPENDENT ACCOUNTANTS AND REPORTS...................................................................... 30
COUNSEL.................................................................................................. 30
APPENDIX A............................................................................................... 31
</TABLE>

2
<PAGE> 34

INVESTMENT OBJECTIVES AND POLICIES

Key Mutual Funds, formerly known as SBSF Funds, Inc. (the "Company") is a
professionally managed, no-load, open-end series investment company currently
consisting of six different portfolios, two of which (each a "Fund" and,
collectively, the "Funds") are described in this Statement of Additional
Information. Prior to December, 1995, the Company operated under its corporate
name, "SBSF Funds, Inc." In December, 1995, the Company began operating under
the name "Key Mutual Funds." Each Fund is a separately managed, diversified
mutual fund with its own investment objective and policies. The Funds have no
sales loads, redemption fees or exchange fees. The two Funds and their
investment objectives are:

Key Stock Index Fund -- The investment objective of the Key Stock Index Fund
("Stock Index Fund") is to seek to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index (the "S&P 500 Index"). Under normal market conditions, the
Stock Index Fund will attempt to duplicate the capital performance and dividend
income of the S&P 500 Index by investing primarily in the stocks which comprise
the S&P 500 Index and secondarily in stock index futures, while minimizing
transaction costs.

Key International Index Fund -- The investment objective of the Key
International Index Fund ("International Index Fund") is to seek to match as
closely as possible the investment performance of the Morgan Stanley Capital
International Europe, Australia and Far East Index (the "EAFE Index"), before
fees and expenses of the International Index Fund. The International Index Fund
attempts to achieve its objective by investing in a statistically selected
sample of the equity securities included in the EAFE Index.

ADDITIONAL INFORMATION ON FUND INVESTMENTS

The following policies supplement the investment objectives and policies of
the Stock Index Fund and the International Index Fund as set forth above and in
the Prospectus.

BANKERS' ACCEPTANCES AND CERTIFICATES OF DEPOSIT. Each Fund may invest in
bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank or a savings
and loan association for a definite period of time and earn a specified return.

Bankers' acceptances will be those guaranteed by domestic and foreign banks,
if at the time of purchase such banks have capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of their most recently
published financial statements). Certificates of deposit and demand and time
deposits in which the Funds may invest will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.

Each Fund also may invest in Eurodollar Certificates of Deposit ("ECDs") which
are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, Yankee
Certificates of Deposit ("Yankee CDs") which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit insured by Canadian offices of major Canadian Banks.

COMMERCIAL PAPER. Commercial paper consists of unsecured promissory notes
issued by corporations. Except as noted below with respect to variable amount
master demand notes, issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.

The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by a nationally recognized statistical rating
organization ("NRSRO") or, if not rated, found by the Company's

3
<PAGE> 35

Board of Directors to present minimal credit risks and to be of comparable
quality to instruments that are rated high quality (i.e., in one of the two top
ratings categories) by a NRSRO that is neither controlling, controlled by, or
under common control with the issuer of, or any issuer, guarantor, or provider
of credit support for, the instruments.

For a description of the rating symbols of each NRSRO see Appendix A to this
Statement of Additional Information.

VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes in
which the Funds may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, a Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and a Fund could, for this or other
reasons, suffer a loss to the extent of the default. While the notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, KeyCorp Mutual Fund Advisers, Inc. ("KMFA" or the "Adviser")
will continuously monitor the issuer's financial status and ability to make
payments due under the instrument. Where necessary to ensure that a note is of
"high quality," a Fund will require that the issuer's obligation to pay the
principal of the note be backed by an unconditional bank letter or line of
credit, guarantee or commitment to lend. For purposes of a Fund's investment
policies, a variable amount master note will be deemed to have a maturity equal
to the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand. (See Variable and Floating Rate
Notes).

FOREIGN INVESTMENT. The International Index Fund may invest in securities
issued by foreign issuers. Such investments may subject the Fund to investment
risks that differ in some respects from those associated with investments in
obligations of U.S. domestic issuers or in U.S. securities markets. Such risks
include future adverse political and economic developments, possible seizure,
nationalization, or expropriation of foreign investments, less stringent
disclosure requirements, the possible establishment of exchange controls or
taxation at the source, and the adoption of other foreign governmental
restrictions. Additional risks include currency exchange risks, less publicly
available information, the risk that companies may not be subject to the
accounting, auditing and financial reporting standards and requirements of U.S.
companies, the risk that foreign securities markets may have less volume and
therefore many securities traded in these markets may be less liquid and their
prices more volatile than U.S. securities, and the risk that custodian and
brokerage costs may be higher. Permissible investments include obligations or
securities of foreign issuers, foreign branches of U.S. banks and of foreign
banks.

U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such agencies and instrumentalities only when KMFA
believes that the credit risk with respect thereto is minimal.

SECURITIES LENDING. Each Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. A Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by a Fund or the borrower at any
time. While a Fund will not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. A Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which KMFA has
determined are creditworthy under guidelines established by the Company's Board
of Directors.

4
<PAGE> 36

VARIABLE AND FLOATING RATE NOTES. The Stock Index Fund may acquire variable
and floating rate notes, subject to the Fund's investment objective, policies
and restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by KMFA, under guidelines established by the
Company, to pose minimal credit risks and to be of comparable quality, at the
time of purchase, to rated instruments eligible for purchase under the Fund's
investment policies. In making such determinations, KMFA will consider the
earning power, cash flow and other liquidity ratios of the issuers of such notes
(such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable or
floating rate note purchased by the Fund, the Fund may resell the note at any
time to a third party. The absence of an active secondary market, however, could
make it difficult for the Fund to dispose of a variable or floating rate note in
the event the issuer of the note defaulted on its payment obligations and the
Fund could, for this or other reasons, suffer a loss to the extent of the
default. Variable or floating rate notes may be secured by bank letters of
credit.

Variable or floating rate notes may have maturities of more than one year, as
follows:

1. A note that is issued or guaranteed by the United States government or any
agency thereof and which has a variable rate of interest readjusted no less
frequently than annually will be deemed by the Fund to have a maturity
equal to the period remaining until the next readjustment of the interest
rate.

2. A variable rate note, the principal amount of which is scheduled on the
face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.

3. A variable rate note that is subject to a demand feature scheduled to be
paid in one year or more will be deemed by the Fund to have a maturity
equal to the longer of the period remaining until the next readjustment of
the interest rate or the period remaining until the principal amount can be
recovered through demand.

4. A floating rate note that is subject to a demand feature will be deemed by
the Fund to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.

As used above, a note is "subject to a demand feature" where the Fund is
entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding one year and
upon no more than 30 days' notice.

FORWARD FOREIGN CURRENCY CONTRACTS. As provided in the prospectus, the
International Index Fund may purchase and sell forward foreign currency
contracts. Foreign securities involve currency risks. The U.S. dollar value of a
foreign security tends to decrease when the value of the U.S. dollar rises
against the foreign currency in which the security is denominated, and tends to
increase when the value of the U.S. dollar falls against such currency. To hedge
against foreign exchange risk arising from the Fund's investment or anticipated
investment in securities denominated in foreign currencies, the Fund may
purchase and sell forward foreign currency contracts. As provided in the
prospectus, the Fund also may use forward foreign currency contracts to more
closely track the EAFE Index and to enhance portfolio returns. To attempt to
minimize the risk to the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies, the Fund may purchase and sell forward
foreign currency contracts. A forward foreign currency contract (a "forward
contract") is an obligation to purchase or sell a specific currency for an
agreed price at a future date (usually less than a year), which is individually
negotiated and privately traded by currency traders and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for commissions, they do realize a profit based on the difference between
the price at which they are buying and selling various currencies. Although
these contracts are intended to minimize the risk of loss due to a decline in
the value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.

5
<PAGE> 37

While the Fund may enter into forward contracts to reduce currency exchange
risks, changes in currency exchange rates may result in poorer overall
performance for the Fund than if it had not engaged in such transactions.
Moreover, there may be an imperfect correlation between the Fund's portfolio
holdings of securities denominated in a particular currency and forward
contracts entered into by the Fund. Such imperfect correlation may prevent the
Fund from achieving the intended hedge or expose the Fund to the risk of
currency exchange loss.

The Fund will not enter into forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency. The International Index
Fund also may purchase and sell options on foreign currencies and foreign
currency futures contracts and related options. (See "Options on Foreign
Currencies" and "Currency Futures" in this Statement of Additional Information.)

The Fund will hold cash, cash items or U.S. Government securities and other
liquid assets in a segregated account with its custodian in an amount equal (on
a daily marked-to-market basis) to the amount of the commitments under these
contracts. At the maturity of a forward contract, the Fund may either accept or
make delivery of the currency specified in the contract, or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. The Fund will only enter into such a forward contract
if it is expected that there will be a liquid market in which to close out the
contract. However, there can be no assurance that a liquid market will exist in
which to close a forward contract, in which case the Fund may suffer a loss.

Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, the Adviser believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interest of the Fund will be served. For example, when the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the Fund will be able to insulate itself from a
possible loss resulting from a change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold and the date on which payment is made or
received, although the Fund would also forego any gain it might have realized
had rates moved in the opposite direction. This technique is sometimes referred
to as a "settlement hedge" or "transaction hedge."

When the Adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a "position hedge") will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. The Fund also may hedge the same position by using
another currency (or a basket of currencies) expected to perform similarly to
the hedged currency, when exchange rates between the two currencies are
sufficiently correlated ("proxy hedge"). The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
With respect to positions that constitute "transaction" or "position hedges"
(including "proxy hedges"), the Fund will not enter into forward contracts to
sell currency or maintain a net exposure to such contracts if the consummation
of such contracts would obligate the Fund to deliver an amount of foreign
currency in excess of the value of the Fund's portfolio securities or other
assets denominated in that currency (or the related currency, in the case of a
proxy hedge).

Finally, the Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
better relative to the U.S. dollar. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased, much as if the
Fund had sold a security denominated in one currency and purchased an equivalent
security denominated in another. Cross-hedges protect against losses resulting
from a

6
<PAGE> 38

decline in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.

At the consummation of the forward contract, the Fund may either make delivery
of the foreign currency or terminate its contractual obligation to deliver the
foreign currency by purchasing an offsetting contract obligating it to purchase
at the same maturity date the same amount of such foreign currency. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
such currency for delivery through the sale of portfolio securities denominated
in such currency or through conversion of other assets of the Fund into such
currency. If the Fund engages in an offsetting transaction, the Fund will
realize a gain or a loss to the extent that there has been a change in forward
contract prices. Closing purchase transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
forward contract.

The Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, the Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by the Adviser. The Fund generally will not
enter into a forward contract with a term of greater than one year.

The Fund will place cash not available for investment or liquid high grade
debt securities (denominated in U.S. or foreign currency) in a separate account
in an amount equal to the value of the Fund's total assets committed to the
consummation of forward currency exchange contracts entered into with respect to
"position hedges" or "cross hedges." If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account by the Fund on a daily basis so that the value of the account will
equal the amount of the Fund's commitments with respect to such contracts. As an
alternative to maintaining all or a part of the separate account, the Fund may
purchase a call option permitting the Fund to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no higher than the
forward contract price or the Fund may purchase a put option permitting the Fund
to sell the amount of foreign currency subject to a forward purchase contract at
a price as high or higher that the forward contract price.

It should be realized that this method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. It also reduces any potential gain which may have otherwise occurred had
the currency value increased above the settlement price of the contract.

The Fund's foreign currency transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended, for qualification
as a regulated investment company.

OPTIONS ON SECURITIES AND INDEXES. The Stock Index Fund may, as provided in
the Prospectus, purchase and sell ("write") "covered" call options on securities
and indexes. Similarly, as described in the Prospectus, the International Index
Fund may purchase and write "covered" call and put options on securities and
indexes.

An option on a security (or index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation, upon exercise of the option, to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.) Options in which the Stock Index
Fund may invest will be issued by the Options Clearing Corporation and listed on
a national securities exchange. Options in which the International Index Fund
may invest may be traded on exchanges or in the over-the-counter market.

A Fund will write call options only if they are "covered." A call option on a
security is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Fund. A call option
on an index is covered if the Fund maintains with its custodian cash or cash
equivalents

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<PAGE> 39

equal to the contract value. A call option also is covered if the Fund owns a
call on the same security or index as the call written where the exercise price
of the call held is (i) equal to or less than the exercise price of the call
written, or (ii) greater than the exercise price of the call written, provided
the difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian. A put option on a security or an index is
"covered" if the Fund maintains cash or cash equivalents equal to the exercise
price in a segregated account with its custodian. A put option also is covered
if the Fund holds a put on the same security or index as the put written where
the exercise price of the put held is (i) equal to or greater than the exercise
price of the put written, or (ii) less than the exercise price of the put
written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.

If an option written by a Fund expires, the Fund realizes a gain equal to the
premium received at the time the option was written. In an option purchased by a
Fund expires unexercised, the Fund realizes a loss equal to the premium paid.

Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Fund desires.

A Fund will realize a gain from a closing purchase transaction if the cost of
the closing option is less than the premium received from writing the option,
or, if it is more, the Fund will realize a loss. If the premium received from a
closing sale transaction is more than the premium paid to purchase the option,
the Fund will realize a gain or, if it is less, the Fund will realize a loss.
The principal factors affecting the market value of a put or call option include
the supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.

The premium paid for a put or call option purchased by a Fund is an asset of
the Fund. The premium received for an option written by a Fund is recorded as a
deferred credit. The value of an option purchased or written is marked to market
daily and is valued at the closing price on the exchange on which it is traded
or, if not traded on an exchange or no closing price is available, at the mean
between the last bid and asked prices.

The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter options and assets used to cover written
over-the-counter options are illiquid and, therefore, together with other
illiquid securities, may not exceed 15% of a Fund's net assets.

Risks Associated with Options on Securities and Indexes. The purchase and
writing of options involves certain risks. The writer of the option has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities at the
exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security, in
the case of a put, remains equal to or greater than the exercise price, the Fund
will lose its entire investment in the option. If a Fund were unable to close
out a covered call option that it had written on a security, it would not be
able to sell the underlying security unless the option expired without exercise.
Furthermore, during the option period, the covered call writer has, in return
for the premium received for the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, but, as
long as its obligation as a writer continues, has retained the risk of loss
should the price of the underlying security decline. In addition, except to the
extent that a call option on an index written by a Fund is covered by an option
on the same index purchased by the Fund, movements in the index may result in a
loss to the Fund.

There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Additionally, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position. The writing of call options could result in increases in a
Fund's portfolio turnover rate, particularly during periods when market prices
of the underlying securities appreciate.

A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events.

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<PAGE> 40

Moreover, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives.

OPTIONS ON FOREIGN CURRENCIES. The International Index Fund may, as provided
in the Prospectus, purchase and sell ("write") put and call options on foreign
currencies, either on exchanges or in the over-the-counter market. A put option
on a foreign currency gives the purchaser of the option the right to sell a
foreign currency at the exercise price until the option expires. A call option
on a foreign currency gives the purchaser of the option the right to purchase
the currency at the exercise price until the option expires. Currency options
traded on U.S. or other exchanges may be subject to position limits which may
limit the ability of the Fund to reduce foreign currency risk using such
options. Over-the-counter options differ from traded options in that they are
two-party contracts with price and other terms negotiated between the buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options.

The International Index Fund will purchase and sell options on foreign
currencies for hedging purposes. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign currency.
If the value of the currency does decline, that Fund will have the right to sell
such currency for a fixed amount of dollars which exceeds the market value of
such currency, resulting in a gain that may offset, in whole or in part, the
negative effect of currency depreciation on the value of the Fund's securities
denominated in that currency.

Conversely, if a rise in the dollar value of a currency in which securities to
be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options on such currency. If the value of
such currency does increase, the purchase of such call options would enable the
Fund to purchase currency for a fixed amount of dollars which is less than the
market value of such currency, resulting in a gain that may offset, at least
partially, the effect of any currency-related increase in the price of
securities the Fund intends to acquire. As in the case of other types of options
transactions, however, the benefit the Fund derives from purchasing foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would deprive it of a portion or
all of the benefits of advantageous changes in such rates.

The International Index Fund also may write options on foreign currencies for
hedging purposes. For example, if the Fund anticipates a decline in the dollar
value of foreign currency-denominated securities due to declining exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received by the Fund.

Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency. If rates move in the manner projected, the
put option will expire unexercised and allow the Fund to offset such increased
cost up to the amount of the premium. As in the case of other types of options
transactions, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move in
the expected direction. If unanticipated exchange rate fluctuations occur, the
option may be exercised and the Fund would be required to purchase or sell the
underlying currency at a loss which may not be fully offset by the amount of the
premium. As a result of writing options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in currency exchange rates.

A call option written on foreign currency by the Fund is "covered" if the Fund
owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written

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<PAGE> 41

or (b) is greater than the exercise price of the call written if the amount of
the difference is maintained by a Fund in cash and liquid high grade debt
securities in a segregated account with its custodian.

FUTURES TRANSACTIONS. A futures contract is an agreement to buy or sell a
security or currency (or to deliver a final cash settlement price in the case of
a contract relating to an index or otherwise not calling for physical delivery
at the end of trading in the contracts), for a set price in a future month. Each
Fund may, as provided in the Prospectus, enter into stock index futures
contracts, and the International Index Fund may enter into futures contracts
based on foreign currencies. More specifically, as provided in the Prospectus,
the Stock Index Fund may use stock index futures contracts as a substitute for
taking positions in securities that comprise the S&P 500 Index and to minimize
tracking error. Furthermore, as described in the Prospectus, the International
Index Fund may use stock index futures contracts and foreign currency futures
contracts as a temporary substitute for taking positions in securities that
comprise the EAFE Index. The International Index Fund also may use foreign
currency futures contracts and related options for the purpose of hedging
against changes in currency exchange rates or to enhance returns.

Each of the Funds, as specified for the Fund in the Prospectus, may also
purchase and write put and call options on futures contracts of the type into
which such Fund is authorized to enter and may engage in related closing
transactions. In the United States, all such futures on securities, stock index
futures, foreign currency futures and related options will be traded on
exchanges that are regulated by the Commodity Futures Trading Commission
("CFTC"). Subject to compliance with applicable CFTC rules, the International
Index Fund also may enter into futures contracts traded on foreign futures
exchanges as long as trading on the aforesaid foreign futures exchanges does not
subject the Fund to risks that are materially greater than the risks associated
with trading on U.S. exchanges. In the United States, futures contracts are
traded on boards of trade which have been designated "contract markets" by the
CFTC. Futures contracts trade on these markets through an "open outcry" auction
on the exchange floor. Currently, there are futures contracts based on a variety
of instruments, indexes and currencies.

When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin requirement may be as low as 2% or less of a contract's face
value. The initial margin is in the nature of a performance bond or good faith
deposit on the futures contract which is returned to the Fund upon termination
of the contract assuming all contractual obligations have been satisfied. Each
Fund expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"daily settlement," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.

A Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.

Positions taken in the futures markets are not normally held until delivery or
final cash settlement is required, but are instead liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Fund will usually be liquidated in this manner, the Fund may instead make
or take delivery of underlying securities (or currencies) whenever it appears
economically advantageous to the Fund to do so. A clearing organization
associated with the exchange on which futures are traded assumes responsibility
for closing-out transactions and guarantees that as between the clearing members
of the exchange, the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.

STOCK INDEX FUTURES. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market

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<PAGE> 42

value of a particular stock index futures contract reflect changes in the
specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.

CURRENCY FUTURES. The International Index Fund may, as provided in the
Prospectus, purchase and sell futures contracts on foreign currencies. A sale of
a currency futures contract creates an obligation by the Fund, as seller, to
deliver the amount of currency called for in the contract at a specified future
time for a specified price. A purchase of a currency futures contract creates an
obligation by the Fund, as purchaser, to take delivery of an amount of currency
at a specified future time at a specified price. The Fund may, as provided in
the Prospectus, sell a currency futures contract if the Adviser anticipates that
exchange rates for a particular currency will fall, as a hedge against a decline
in the value of the Fund's securities denominated in such currency. If the
Adviser anticipates that exchange rates will rise, the Fund may purchase a
currency futures contract to protect against an increase in the price of
securities denominated in a particular currency the Fund intends to purchase.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. To offset a currency futures contract sold by the Fund, the
Fund purchases a currency futures contract for the same aggregate amount of
currency and delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund is immediately paid the difference. Similarly, to
close out a currency futures contract purchased by the Fund, the Fund sells a
currency futures contract. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the offsetting sale price is less than
the purchase price, the Fund realizes a loss.

A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of a Fund's securities.
The degree of correlation may be distorted by the fact that the currency futures
market may be dominated by short-term traders seeking to profit from changes in
exchange rates. This would reduce the value of such contracts for hedging
purposes over a short-term period. Such distortions are generally minor and
would diminish as the contract approached maturity. Another risk is that an
Adviser could be incorrect in its expectation as to the direction or extent of
various exchange rate movements or the time span within which the movements take
place.

OPTIONS ON FUTURES. For bona fide hedging and other appropriate risk
management purposes, each Fund may, to the extent provided in the Prospectus,
purchase and write call and put options on futures contracts which are traded on
exchanges that are licensed and regulated by the CFTC for the purpose of options
trading, or, subject to applicable CFTC rules, on foreign exchanges. A "call"
option on a futures contract gives the purchaser the right, in return for the
premium paid, to purchase a futures contract (assume a "long" position) at a
specified exercise price at any time before the option expires. A "put" option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price at any time
before the option expires. The writer of an option on a futures contract, unlike
the holder, is subject to initial margin and variation margin requirements on
the option position.

Upon the exercise of a "call," the writer of the option is obligated to sell
the futures contract (to deliver a "long" position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a "put," the
writer of the option is obligated to purchase the futures contract (deliver a
"short" position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.

Options on futures contracts can be used by a Fund to hedge substantially the
same risks and for the same duration and risk management purposes as might be
addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.

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<PAGE> 43

The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of declining securities prices or declining
exchange rates for a particular currency. The purchase of a call option on a
futures contract represents a means of hedging against a market advance
affecting securities prices or currency exchange rates when the Fund is not
fully invested. 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
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.

In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.

If a Fund writes options on futures contracts, the Fund will receive a premium
but will assume a risk of adverse movement in the price of the underlying
futures contract comparable to that involved in holding a futures position. If
the option is not exercised, the Fund will realize a gain in the amount of the
premium, which may partially offset unfavorable changes in the value of
securities held by or to be acquired for the Fund. If the option is exercised,
the Fund will incur a loss in the option transaction, which will be reduced by
the amount of the premium it has received, but which may partially offset
favorable changes in the value of its portfolio securities or the currencies in
which such securities are denominated.

The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the underlying securities or the currencies in which
such securities are denominated. If the futures price at expiration is below the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Fund's holdings of securities or the currencies in which such securities are
denominated.

The writing of a put option on a futures contract is analogous to the purchase
of a futures contract. For example, if the Fund writes a put option on a futures
contract on securities related to securities that the Fund expects to acquire
and the market price of such securities increases, the net cost to a Fund of the
securities acquired by it will be reduced by the amount of the option premium
received. Of course, if market prices have declined, the Fund's purchase price
upon exercise may be greater than the price at which the securities might be
purchased in the securities market.

While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.

LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. In general, the Funds will engage in transactions in futures
contracts and related options only for bona fide hedging and other appropriate
risk management purposes, and not for speculation. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
a Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.

When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) cash, U.S. Government securities, or other
high quality liquid debt securities that, when added to the amounts deposited
with a futures commission merchant as margin, are equal to the market value of
the futures contract. Alternatively, the Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
or higher than the price of the contract held by the Fund.

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<PAGE> 44

When selling a futures contract, a Fund will maintain with its custodian (and
mark-to-market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).

When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option. Alternatively,
the Fund may cover its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract, or by holding a
separate call option permitting the Fund to purchase the same futures contract
at a price not higher than the strike price of the call option sold by the Fund.

When selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that equal the purchase
price of the futures contract, less any margin on deposit. Alternatively, the
Fund may cover the position either by entering into a short position in the same
futures contract, or by owning a separate put option permitting it to sell the
same futures contract so long as the strike price of the purchased put option is
the same or higher than the strike price of the put option sold by the Fund.

The requirements for qualification as a regulated investment company also may
limit the extent to which a Fund may enter into futures or futures options. See
"Federal Income Taxes."

RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Fund's securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to 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.

Futures exchanges may limit the amount of fluctuation permitted in certain
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 the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.

There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.

ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS
THEREON. Options on securities, futures contracts, options on futures
contracts,

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<PAGE> 45

currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.

SWAP AGREEMENTS. The International Index Fund may enter into index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that desired return or for other
portfolio management purposes. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested in a particular foreign currency or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the "net amount"). The
Fund's obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the Fund's portfolio.

Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Adviser's ability to predict correctly
whether certain markets reflected in the EAFE Index are likely to produce
greater returns than other markets. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Adviser will cause
the Fund to enter into swap agreements only with counterparties that would be
eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the Fund
by the Internal Revenue Code may limit the Fund's ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.

Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which includes the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the Investment Company Act of
1940, commodity pool, corporation, partnership, proprietorship, organization,
trust or other entity, employee benefit plan, governmental entity, broker-
dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have assets exceeding $5 million. An eligible swap transaction must also meet
three conditions. First, the swap agreement may not be part of a fungible class
of agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.

14
<PAGE> 46

This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.

SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest up to 5% of
its total assets in the securities of any one investment company, but may not
own more than 3% of the securities of any one investment company or invest more
than 10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order issued by the Securities and Exchange Commission
(the "SEC" or the "Commission"), the Funds may invest in the money market funds
of other investment companies advised by KMFA or its affiliates. KMFA will waive
its fee with respect to assets of a Fund invested in a money market fund that it
advises, and, to the extent required by the laws of any state in which a Fund's
shares are sold, KMFA will waive its investment advisory fee as to all assets
invested in other investment companies. Because such other investment companies
employ an investment adviser, such investment by a Fund will cause shareholders
to bear duplicative fees, such as management fees, to the extent advisory fees
are not waived by KMFA.

REPURCHASE AGREEMENTS. Securities held by each Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities from financial institutions or registered broker-dealers
deemed creditworthy by KMFA pursuant to guidelines adopted by the Directors of
the Company, subject to the seller's agreement to repurchase such securities at
a mutually agreed upon date and price. The seller is required to maintain the
value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
it repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.

REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with such Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price at which the Fund is obligated to repurchase
the securities.

"WHEN-ISSUED" SECURITIES. As discussed in the Prospectus, each Fund may
purchase securities on a "when-issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). The payment obligation and
the interest rate that will be received on when-issued securities are fixed at
the time the buyer enters into the commitment. When a Fund agrees to purchase
securities on a "when-issued" basis, the Fund's custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
the purchase commitment, and in such a case, a Fund may be required subsequently
to place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that any such Fund's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. To the extent cash is set aside in a
separate account, it will not be available for new investment or to meet
redemptions.

When a Fund engages in "when-issued" transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Fund
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous. Neither Fund intends to purchase "when-issued" securities for
speculative purposes, but only in furtherance of its investment objective.

15
<PAGE> 47

The investment policies of the Funds set forth above may be changed or altered
by the Board of Directors of the Funds, except to the extent set forth under
"Investment Restrictions".

INVESTMENT RESTRICTIONS

The following investment restrictions are fundamental policies of each of the
Funds and may only be changed if approved by the holders of a majority of the
outstanding voting securities of the affected Fund. Under the Investment Company
Act of 1940, as amended ("1940 Act") such approval requires the affirmative
vote, at a meeting of shareholders of a Fund, of (i) at least 67% of the shares
of the Fund present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by represented proxy; or
(ii) more than 50% of the outstanding shares of the Fund, whichever is less.

Neither the Stock Index Fund nor the International Index Fund may:

1. Participate on a joint or joint and several basis in any securities
trading account.

2. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities, and this shall further not prevent the International Index
Fund from purchasing and selling currencies on a spot or forward basis).

3. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Fund from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments
by a Fund in securities backed by mortgages on real estate or in
marketable securities of companies engaged in such activities are not
hereby precluded.

4. Issue any senior security (as defined in the 1940 Act), except that (a) a
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) a Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth below, a Fund may borrow money as authorized by the
1940 Act.

5. Borrow money, except that (a) a Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase
agreements, provided that the total amount of any such borrowing does not
exceed one-third of the Fund's total assets; and (b) a Fund may borrow
money for temporary or emergency purposes in an amount not exceeding 5% of
the value of its total assets at the time when the loan is made. Any
borrowings representing more than 5% of a Fund's total assets must be
repaid before the Fund may make additional investments.

6. Lend any security or make any other loan if, as a result, more than
one-third of a Fund's total assets would be lent to other parties, but
this limitation does not apply to purchases of publicly issued debt
securities or to repurchase agreements.

7. Underwrite securities issued by others, except to the extent that a Fund
may be considered an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities.

8. With respect to 75% of a Fund's total assets, a Fund may not purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Fund's total assets would be invested in
the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.

9. Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of a Fund's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry. In the utilities category, the industry shall be determined
according to the service provided. For example, gas, electric, water and
telephone will be considered to be separate industries.

16
<PAGE> 48

The following investment restrictions are non-fundamental and may be changed
without a vote of the shareholders of a Fund:

1. A Fund will not purchase or retain securities of any issuer if the
officers or Directors of the Company or the officers or directors of the
investment adviser to the Fund owning beneficially more than one half of
1% of the securities of such issuer together own beneficially more than 5%
of such securities.

2. A Fund will not invest more than 10% of its total assets in the securities
of issuers which together with any predecessors have a record of less than
three years of continuous operation.

3. The Stock Index Fund will not write or sell puts, straddles, spreads or
combinations thereof or write or purchase put options or purchase call
options.

4. A Fund will not invest in illiquid securities in an amount exceeding, in
the aggregate, 15% of its net assets. An illiquid security is a security
which cannot be disposed of promptly (within seven days), and in the usual
course of business at approximately the price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A and securities acquired in a
transaction or chain of transactions pursuant to Section 4(2) of, or
securities otherwise subject to restrictions or limitations on resale,
under the 1933 Act ("Restricted Securities"), shall not be deemed illiquid
solely by reason of being unregistered. KMFA shall determine whether a
particular security is deemed to be liquid based on the trading markets
for the specific security or other factors. However, because state
securities laws may limit a Fund's investment in Restricted Securities
(regardless of the liquidity of the investment), investments in Restricted
Securities resalable under Rule 144A will continue to be subject to
applicable state law requirements until such time, if ever, that such
limitations are changed.

5. A Fund will not make short sales of securities, other than short sales
"against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that
this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.

6. A Fund may invest up to 5% of its total assets in the securities of any
one investment company, but may not own more than 3% of the securities of
any one investment company or invest more than 10% of its total assets in
the securities of other investment companies. Pursuant to an exemptive
order issued by the Securities and Exchange Commission, the Funds may
invest in the money market funds of other investment companies advised
KeyCorp Mutual Fund Advisers, Inc. or its affiliates.

7. The Stock Index Fund will not buy state, municipal, or private activity
bonds.

The policies and limitations listed above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Fund's net assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Fund's acquisition of such security or other asset except in
the case of borrowing (or other activities that may be deemed to result in the
issuance of a "senior security" under the 1940 Act). Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
and limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Directors
will consider what actions, if any, are appropriate to maintain adequate
liquidity.

PORTFOLIO TURNOVER

Purchases and sales of securities are made at such times as the Adviser deems
to be in the best interest of the Funds' shareholders without regard to the rate
of portfolio turnover, about which there are no restrictions. From time to time,
the Funds may trade in securities for the short term. It is anticipated that the
annual portfolio turnover rate of the Stock Index Fund and the International
Index Fund will not exceed 50% and 50%, respectively. In any particular year,
market conditions could result in portfolio activity at a greater or lesser rate
than anticipated. Portfolio turnover rate is, generally, the percentage computed
by dividing the lesser of purchases or sales by the average value of the
portfolio. High portfolio turnover involves correspondingly higher brokerage
commission expenses which are borne directly by the Funds. In addition, the
effect of engaging in options transactions may be to increase portfolio
turnover.

17
<PAGE> 49

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

Officers and employees of the Adviser are not permitted to serve as officers
or directors of the Company due to certain regulatory restrictions imposed on
banking organizations and their subsidiaries. See "The Investment Adviser and
Administrator" below. The persons who have been elected to serve as officers and
directors of the Company, their position with the Company and their principal
occupations during the last five years are set forth below:

<TABLE>
<CAPTION>
NAME, AGE, ADDRESS AND PRINCIPAL
OCCUPATION DURING PAST FIVE YEARS POSITION WITH REGISTRANT
- ---------------------------------------------------------------------------------- ------------------------
<S> <C>
EDWARD P. CAMPBELL (46) 28601 Clemens Road, Westlake, Ohio 44145. Executive Vice Director
President and Chief Operating Officer of Nordson Corporation (manufacturer of
application equipment). Currently, Trustee of The Victory Portfolios mutual fund
complex.
EUGENE J. MCDONALD (62) 2200 Main Street, Suite 1000, Durham, North Carolina Director
27705. Executive Vice President for Asset Management of Duke University and
President of Duke Management Co.; Director of Central Carolina Financial Corp.
and Sphinx Pharmaceuticals, Inc.
FRANK A. WEIL (64) 147 E. 48th Street, New York, New York 10017. Chairman and Non-Executive
Chief Executive Officer of Abacus & Associates, Inc. (private investment firm). Chairman and
Chairman of the Council for Excellence in Government and Director and President and Director
of the Norman and Hickrill Foundations.
*LEIGH A. WILSON (51) 420 East 54th Street, New York, New York 10012. Chairman and President and
Chief Executive Officer of Glenleigh International Limited (merchant bank); from Director
1993 to present, President of The Victory Funds. Currently, Director of Paribas
North America, Paribas Corporation (investment bank) and Chimney Rock Vineyard &
Winery and Trustee of The Victory Portfolios mutual fund complex.
WILLIAM B. BLUNDIN (57) 125 West 55th Street, New York, NY 10019. Vice Chairman of Vice President
Concord Holding Corp.
SCOTT A. ENGLEHART (33) 3435 Stelzer Road, Columbus, Ohio 43219. Director of Vice President and
Client Services, BISYS Fund Services, Inc. (October 1990 to present). Assistant Secretary
KEVIN L. MARTIN (35) 3435 Stelzer Road, Columbus, Ohio 43219. Vice President of Treasurer
Accounting Services, BISYS Fund Services, Inc. (February 1996 to present);
Senior Manager at Ernst & Young (1984 to February 1996).
KAREN A. DOYLE (38) 125 West 55th Street, New York, NY 10019. Manager of Client Secretary
Services, BISYS Fund Services, Inc., (October 1994 to present); Assistant
Treasurer at The Bank of New York (April 1979 to October 1994).
ROBERT L. TUCH (44) 3435 Stelzer Road, Columbus, Ohio 43219. Employee of BISYS Assistant Secretary
Fund Services, Inc. (June 1991 to present); Vice President and Associate General
Counsel, National Securities Research Corp. (July 1990 to June 1991).
ALAINA V. METZ (29) 3435 Stelzer Road, Columbus, Ohio 43219. Chief Administrator, Assistant Secretary
Administrative and Regulatory Services, BISYS Fund Services Limited Partnership
(June, 1995 to present); Supervisor, Mutual Fund Legal Department, Alliance
Capital Management (May 1989 to June 1995).

<FN>
*Mr. Wilson is an "interested person" of the Company solely by reason of his
position as President.
</TABLE>

Directors who are not "interested persons" of either an investment adviser to
or principal underwriter for the Funds receive an annual fee of $7,500 plus $750
per meeting of the Board of Directors attended and reasonable out-of-pocket
expenses incurred in connection with attending such meetings. Each director who
is an "interested

18
<PAGE> 50

person" of either an investment adviser to or principal underwriter for the
Funds does not receive any compensation from the Company.

<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM COMPANY
AGGREGATE COMPENSATION AND VICTORY FUND
FROM COMPANY FOR THE FISCAL COMPLEX FOR THE YEAR
NAME YEAR ENDED NOVEMBER 30, 1995 ENDED NOVEMBER 30, 1995
------------------------------------ ---------------------------- -----------------------
<S> <C> <C>
Edward P. Campbell $6,000 $42,200(2)
Ted H. McCourtney $9,375 $ 9,375(1)(3)
Eugene J. McDonald $9,375 $ 9,375(3)
Frank A. Weil $9,375 $ 9,375(3)
Leigh A. Wilson $6,000 $49,717(2)

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

<FN>
(1) Mr. McCourtney resigned his position as a Director of the Company effective
December 7, 1995.
(2) These amounts include compensation received from the Company, The Victory
Funds (which were reorganized into The Victory Portfolios as of June 5,
1995). There are presently 24 mutual funds in the Victory "Fund Complex"
from which Messrs. Campbell and Wilson receive compensation.
(3) Total compensation paid with respect to service on the board of the Company
only.
</TABLE>

19
<PAGE> 51

SECURITY HOLDERS

The name, address and percentage of ownership of each person who is known by the
Registrant to have owned of record or beneficially 5 percent or more of any of
the Funds' shares as of November 30, 1996 is:

<TABLE>
<CAPTION>
SHARES OWNED
------------------------------------------------------------------------------
(PERCENT OF CLASS)
- ------------------------------------------------------------------------------------------------------------
SBSF
NAME, ADDRESS KEY MONEY CONVERTIBLE SBSF
AND NATURE MARKET MUTUAL SECURITIES CAPITAL GROWTH KEY STOCK
OF INTEREST SBSF FUND FUND FUND FUND INDEX FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles Schwab & Co. 726,680.280
/FBO Cust. 12.09%
101 Montgomery St.
San Francisco, CA 94104
- - Record Owner

MAC & Co 354,450.450 336,727.561
c/o Mellon Bank 5.78% 5.60%
Mutual Funds Operation
P.O. Box 3198
Pittsburgh, PA 15230-3198
- - Record Owner

Brookdale Hospital Medical 348,010.159 1,351,460.064
Center 5.68% 22.48%
Linden Blvd at Brookdale
Plaza
Brooklyn, NY 11212
- - Record Owner

Donaldson Lufkin & 321,597.603
Jenrette Sec. 5.35%
Mutual Funds Dept.
P.O. Box 2052
Jersey City, NJ 07303-2052
- - Record Owner

Norman/Weil Office 306,515.800
c/o Abacus & Associates 5.10%
147 East 48th Street
New York, NY 10017
- - Beneficial Owner

Key Trust 2,613,469.655
Attn: Jim Osborne 70.16%
4900 Tiedeman Road
P.O. Box 93971
Brooklyn, OH 44101
- - Record Owner

Richard E. Salomon 2,165,123.300
45 Rockefeller Plaza 5.14%
New York, New York 10111
- - Beneficial Owner

Summit County Treasurer 15,000,000.000
175 South Main Street 35.58%
Akron OH 44308
- - Record Owner
</TABLE>

20
<PAGE> 52

<TABLE>
<CAPTION>
SHARES OWNED
------------------------------------------------------------------------------
(PERCENT OF CLASS)
- ------------------------------------------------------------------------------------------------------------
SBSF
NAME, ADDRESS KEY MONEY CONVERTIBLE SBSF
AND NATURE MARKET MUTUAL SECURITIES CAPITAL GROWTH KEY STOCK
OF INTEREST SBSF FUND FUND FUND FUND INDEX FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lucas County Treasurer 4,005,187.870
One Government Center 9.50%
Toledo, OH 43604
- - Record Owner

ADP of Roseland Inc. 2,204,176.040
1 ADP Blvd. 5.23%
Roseland, NJ 07068-1728
- - Record Owner

Key Trust Co. of the 58,434.669
Northwest 5.9%
Investment Manager for the
Totem Resources Corp.
P.O. Box 24908
Seattle, WA 98124
- - Beneficial Owner

Foss Maritime Company 79,143.75
Attn: Mr. Lane Tanabe 7.9%
660 West Ewing Street
Seattle, WA 98119
- - Beneficial Owner

KeyCorp 401(k) Plan 561,559.152
127 Public Square 56.4%
Cleveland, OH 44114
- - Beneficial Owner
</TABLE>

21
<PAGE> 53

THE INVESTMENT ADVISER AND ADMINISTRATOR

INVESTMENT ADVISER. The investment adviser to the Funds is Key Mutual Fund
Advisers, Inc. ("KMFA" or the "Adviser"). KMFA was organized as an Ohio
Corporation on July 27, 1995 and is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940, as amended. KMFA is a wholly
owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is a wholly
owned subsidiary of KeyBank National Association ("KeyBank"). KeyBank is a
wholly owned subsidiary of KeyCorp, one of the largest financial services
holding companies in the United States. KMFA and its affiliates manage
approximately $48 billion for numerous clients, including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments and high
net worth individuals. All references appearing in the prospectus and this
statement of additional information as to the level of assets under the
management of KMFA and its affiliates are as of March 31, 1996.

As of March 31, 1996, KeyCorp had an asset base of $65 billion, with banking
offices in 26 states from Maine to Alaska, and trust and investment offices in
16 states. KeyCorp is the resulting entity of the 1994 merger of Society
Corporation, the bank holding company of which KeyBank, formerly Society
National Bank, was a wholly-owned subsidiary, and KeyCorp, the former bank
holding company. KeyCorp's major business activities include providing consumer,
business and traditional banking and associated financial services to consumer,
business and commercial markets. KeyCorp's non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing and leasing companies. KeyBank is the lead affiliate bank of KeyCorp.
KeyCorp's principal offices are located at 127 Public Square, Cleveland, Ohio
44114.

Pursuant to the investment advisory agreement, dated July 1, 1996, between the
Company, on behalf of the Funds, and KMFA (the "Investment Advisory Agreement"),
KMFA furnishes a continuous investment program for the Funds' portfolios, makes
the day-to-day investment decisions for the Funds, executes the purchase and
sale orders for the portfolio transactions of the Funds and generally manages
the Funds' investments in accordance with the stated policies of the Funds,
subject to the general supervision of the Board of Directors of the Funds.

As compensation for the services rendered and related expenses borne by the
Adviser under the Investment Advisory Agreement, the Stock Index Fund pays the
Adviser a fee, computed daily and payable monthly, equal to .10% per annum of
the Fund's average daily net assets. The Investment Advisory Agreement further
provides that the International Index Fund will pay the Adviser a fee, computed
daily and payable monthly, equal to .50% per annum of its average daily net
assets. The Adviser is obligated to reimburse the Funds in the event expenses
exceed certain prescribed limits (see "Expenses, Distributor, Distribution Plan
and Shareholder Servicing Plan").

22
<PAGE> 54

Unless sooner terminated, the Investment Advisory Agreement, provides that it
will continue in effect for an initial two-year term and, with respect to each
Fund, for consecutive one-year terms thereafter, provided that such continuance
is approved at least annually by the Board of Directors of the Company or by a
vote of a majority of the outstanding voting securities of a Fund (as defined in
the 1940 Act), and, in either case, by a majority of the Directors who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any such party, by votes cast in person at a meeting called
for such purpose.

The Investment Advisory Agreement is terminable as to a Fund at any time on 60
days' written notice without penalty by the Directors, by vote a majority of the
outstanding voting securities of the Fund, or by KMFA. The Investment Advisory
Agreement also terminates automatically in the event of its assignment, as
defined in the 1940 Act.

The Investment Advisory Agreement provides that KMFA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of its services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of KMFA in the
performance of its duties, or from reckless disregard by it of either duties or
obligations thereunder.

The Investment Advisory Agreement also provides that KMFA may delegate a
portion of its responsibilities to a subadviser. In addition, the Investment
Advisory Agreement provides that KMFA may render services through its own
employees or through the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Funds and are under the control
of KeyCorp as long as all such persons are functioning as part of an organized
group of persons that is managed by authorized officers of KMFA.

ADMINISTRATOR. BISYS Fund Services Limited Partnership (D/B/A, BISYS Fund
Services) ("BISYS" or the "Administrator") serves as the Administrator of the
Funds pursuant to an Administration Agreement dated July 1, 1996 (the
"Administration Agreement"). The Administrator assists in supervising all
operations of each Fund (other than those performed by KMFA under the
Investment Advisory Agreement), subject to the supervision of the Board of
Directors.

For the services rendered to the Funds and related expenses borne by BISYS as
Administrator, each Fund pays BISYS an annual fee, computed daily and paid
monthly, equal to .15% of the average daily net assets of each Fund. BISYS may
periodically waive all or a portion of its fee with respect to any Fund in order
to increase the net income of one or more of the Funds of the Company available
for distribution to shareholders.

Unless sooner terminated, the Administration Agreement will continue in effect
as to the Funds for a period of one year, and, with respect to each Fund, for
successive one year terms thereafter, unless terminated by either party on not
less than 90 days prior written notice to the other party.

The Administration Agreement provides that BISYS shall not be liable for any
action taken or omitted by BISYS in the absence of willful misfeasance, bad
faith or negligence in the performance of its duties, or from the reckless
disregard by it of its obligations and duties thereunder.

Under the Administration Agreement, BISYS assists in the Funds' administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing office
facilities necessary to carry out its duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder.

FUND ACCOUNTANT. BISYS Fund Services, Inc. ("BISYS Inc.") serves as a fund
accountant for each Fund pursuant to a fund accounting agreement with the
Company dated July 1, 1996 (the "Fund Accounting Agreement"). As fund
accountant, BISYS Inc. calculates the Funds' net asset value, the dividend and
capital gain distribution, if any, and the yield and total return. BISYS Inc.
also provides a current security position report, a summary report of
transactions and pending securities, a current cash position report, and
maintains the general ledger accounting records for each Fund. Under the Fund
Accounting Agreement, BISYS Inc. is entitled to receive a fee from each Fund
equal to an annual rate of .03% of the first $100 million of each Fund's average
daily net assets, plus .02% of next $100 million of each Fund's average daily
net assets, plus .01% of each Fund's average daily net assets in excess of $200
million. This fee is subject to a minimum monthly asset charge of $2,500 for the
Stock Index Fund and $3,333 for the International Index Fund, and does not
include out-of-pocket expenses.

<PAGE> 55

EXPENSES, DISTRIBUTOR, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN

Except as set forth above, and as set forth below, the Funds are responsible
for the payment of their expenses. Such expenses include the fees payable to
KMFA; any brokerage fees and commissions; taxes; interest; the cost of any
liability insurance or fidelity bonds; costs, expenses, or losses arising out of
any liability of or claim for damages or other relief asserted against the Funds
for violation of any law; legal and auditing fees and expenses; the fees and
certain expenses of the Funds' Custodian, Transfer Agent and Distributor; the
fees of any trade association of which the Funds are a member; the expenses of
printing and mailing reports and notices to the Funds' shareholders; filing fees
for the registration or qualification of Fund shares under Federal or state
securities laws; the fees and expenses involved in registering and maintaining
registration of the Funds and of their shares with the SEC; fees of directors
who are not "interested persons" of an investment adviser to or the principal
underwriter for the Funds; the costs of registering the Funds as a broker or
dealer; the costs of qualifying its shares under state securities laws; the
expenses of servicing shareholders and shareholder accounts not otherwise
incurred by the Adviser or the Administrator; and any extraordinary expenses
incurred by the Funds.

As a result of certain regulatory restrictions imposed on banking
organizations and their subsidiaries, the Company is not permitted to sell
shares of the Funds directly without an independent underwriter. Accordingly,
pursuant to a distribution agreement dated as of July 1, 1996 (the "Distribution
Agreement"), BISYS was appointed to serve as independent underwriter/distributor
for the continuous offering of the shares of the Company. Under the Distribution
Agreement, BISYS is obligated to devote its best efforts to effect sales of
shares of the Funds, but is not required to sell any certain number of shares.
In addition, under the Distribution Agreement, BISYS may enter into agreements
with selected dealers for the distribution of shares of the Funds.

If not earlier terminated, the Distribution Agreement will continue in effect
for successive terms of one year, provided that such continuance is specifically
approved at least annually (a) by a majority of those members of the Board of
Directors of the Company who are not parties to the Agreement or "interested
persons" of any such party (the "Disinterested Directors"), pursuant to a vote
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Board of Directors of the Company or by vote of a "majority of
the outstanding voting securities" of each Fund. The Distribution Agreement may
be terminated by the Company at any time with respect to any Fund, without the
payment of any penalty, by vote of a majority of the Disinterested Directors or
by vote of a "majority of the outstanding voting securities" of such Fund on 60
days' written notice to Concord Financial, or by Concord Financial at any time,
without the payment of any penalty, on 60 days' written notice to the Fund. The
Distribution Agreement will automatically terminate in the event of its
"assignment".

The Company has adopted a Distribution Plan (the "Distribution Plan") for the
International Index Fund pursuant to Rule 12b-1 under the 1940 Act. No separate
payments are authorized to be made by the International Index Fund under the
Plan. Rather, the Plan provides that to the extent that any portion of the fees
payable under the Shareholder Servicing Plan or any Shareholder Servicing
Agreement (described below) is deemed to be for services primarily intended to
result in the sale of Fund shares, such fees are deemed approved and may be paid
pursuant to the Plan and in accordance with Rule 12b-1.

Rule 12b-1 requires that the Distribution Plan be approved by a vote of at
least a majority of the outstanding voting securities of the Fund and by a
majority of the Board of Directors, including those directors who are not
"interested persons" of the Funds (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Distribution Plan. The Distribution
Plan must be approved at least annually in the manner described in the foregoing
sentence and may be terminated at any time by a vote of a majority of the
outstanding voting securities of the Fund or a majority of those directors who
are not "interested persons" and who have no direct or indirect financial
interest in the Distribution Plan.

While the Distribution Plan is in effect, the selection and nomination of
directors who are not "interested persons" of the Company (as defined in the
1940 Act) is committed to the discretion of the directors who are not interested
persons of the Company.

The Company, on behalf of the International Index Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(including affiliates of the Adviser) (each a "Shareholder Servicing Agent")
that provide administrative support services to customers who may from time to
time beneficially own shares of the Fund, which services may include: (i)
aggregating and processing purchase and redemption requests

24
<PAGE> 56

for shares from customers and promptly transmitting net purchase and redemption
orders to the distributor or transfer agent; (ii) providing customers with a
service that invests the assets of their accounts in shares pursuant to specific
or pre-authorized instructions; (iii) processing dividend and distribution
payments on behalf of customers; (iv) providing information periodically to
customers showing their positions in shares; (v) arranging for bank wires; (vi)
responding to customer inquiries; (vii) providing subaccounting with respect to
shares beneficially owned by customers or providing the information to the Fund
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and semi-
annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding this Plan; and (x) providing such other similar services
as the Fund may reasonably request to the extent Shareholder Servicing Agents
are permitted to do so under applicable statutes, rules or regulations. For
expenses incurred and services provided pursuant to the Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and payable monthly, in amounts aggregating not more than 0.25%, on an annual
basis, of the average daily net assets of the Fund. A Shareholder Servicing
Agent may periodically waive all or a portion of its respective shareholder
servicing fees with respect to the Fund to increase the net income of the Fund
available for distribution as dividends.

If total expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, KMFA will waive
its fees to the extent such excess expenses exceed such expense limitation. As
of the date of this Statement of Additional Information, the most restrictive
expense limitation applicable to the Funds limits the aggregate annual expenses
of each Fund, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of remaining average net assets. Any expenses to be borne by
KMFA will be estimated daily and reconciled and paid on a monthly basis. Fees
imposed on customer accounts by KMFA, Key Trust Company of Ohio, N.A. or its
correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of such limitation.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio 44114 has
been retained as custodian for the Funds' investments. Key Trust Company of
Ohio, N.A. also maintains certain accounting and financial records of the Funds.
Key Trust Company of Ohio, N.A. is a subsidiary of KeyCorp and an affiliate of
the Adviser and receives compensation from the Funds for services it performs as
custodian.

State Street Bank and Trust Company, 225 Franklin Street, Boston, Mass.
02110-2875 has been retained as the Funds' Transfer Agent. Boston Financial Data
Services, Two Heritage Drive, Quincy, Mass. 02171 acts as dividend disbursing
agent and shareholder servicing agent for the Funds and receives a fee for these
services.

PERFORMANCE INFORMATION

From time to time the "standardized yield," "dividend yield," "average annual
total return" and "total return" of an investment in Fund shares may be
advertised. An explanation of how yields and total returns are calculated and
the components of those calculations are set forth below.

Yield and total return information may be useful to investors in reviewing a
Fund's performance. A Fund's advertisement of its performance must, under
applicable Commission rules, include the average annual total returns for the
Fund for the 1, 5 and 10-year period (or the life of the Fund, if less) as of
the most recently ended calendar quarter. This enables an investor to compare a
Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. An investment in a Fund is not
insured; yield and total return are not guaranteed and normally will fluctuate
on a daily basis. When redeemed, an investor's shares may be worth more or less
than their original cost. Yield and total return for any given past period are
not a prediction or representation by the Company of future yields or rates of
return on its shares. The yield and total returns of a Fund are affected by
portfolio quality, portfolio maturity, the type of investments the Fund holds
and its operating expenses.

25
<PAGE> 57

STANDARDIZED YIELDS. A Fund's "yield" (referred to as "standardized yield")
for a given 30-day period for the shares of a Fund is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:

<TABLE>
<S> <C> <C>
2[(a-b+1)(to the 6th power)-1]
---
Standardized Yield = cd
</TABLE>

The symbols above represent the following factors:

a = dividends and interest earned during the 30-day period.

b = expenses accrued for the period (net of any expense reimbursements).

c = the average daily number of shares of the Fund outstanding during the
30-day period that were entitled to receive dividends.

d = the maximum offering price per share on the last day of the period,
adjusted for undistributed net investment income.

The standardized yield for a 30-day period may differ from its yield for any
other period. The Commission formula assumes that the standardized yield for a
30-day period occurs at a constant rate for a six-month period and is annualized
at the end of the six-month period. This standardized yield is not based on
actual distributions paid by the Fund to shareholders in the 30-day period, but
is a hypothetical yield based upon the net investment income from the Fund's
portfolio investments calculated for that period. The standardized yield may
differ from the "dividend yield," described below.

DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time a Fund may quote a
"dividend yield" or a "distribution return." Dividend yield is based on the
share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share on the last day of the period.
When the result is annualized for a period of less than one year, the "dividend
yield" is calculated as follows:

Dividends + Number of days (accrual period) x 365
Dividend Yield = ------------------
Max. Offering Price (last day of period)

TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:

<TABLE>
<S> <C> <C>
ERV(1n) - 1
-----------
(P) = Average Annual Total Return
</TABLE>

The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:

<TABLE>
<S> <C> <C>
ERV-P
-----
P = Total Return
</TABLE>

Total returns assume that all dividends and capital gains distributions during
the period are reinvested to buy additional shares at net asset value per share,
and that the investment is redeemed at the end of the period.

OTHER PERFORMANCE COMPARISONS. From time to time, a Fund may publish the
ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring

26
<PAGE> 58

service. Lipper monitors the performance of regulated investment companies,
including the Funds, and ranks the performance of the Funds against (i) all
other funds, excluding money market funds, and (ii) all other equity funds. The
Lipper performance rankings are based on a total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.

From time to time, a Fund may publish the ranking of the performance of its
shares by Morningstar, Inc., an independent mutual fund monitoring service that
ranks mutual funds, including the Funds, in broad investment categories (equity,
taxable bond, tax-exempt and other) monthly, based upon each funds' three, five
and ten-year average annual total returns (when available) and a risk adjustment
factor that reflects Fund performance relative to three-month U.S. Treasury bill
monthly returns. Such returns are adjusted for fees and sales loads. There are
five ranking categories with a corresponding number of stars: highest (5), above
average (4), neutral (3), below average (2) and lowest (1). Ten percent of the
funds, series or classes in an investment category receive 5 stars, 22.5%
receive 4 stars, 35% receive 3 stars, 22.5% receive 2 stars, and the bottom 10%
receive one star.

The total return on an investment made in shares of a Fund may be compared
with the performance for the same period of one or more of the following
indices: the Standard & Poor's 500 Index, the Morgan Stanley Capital
International Europe, Australia and Far East Index, the Consumer Price Index,
the Salomon Brothers World Government Bond Index, the Shearson Lehman
Government/Corporate Bond Index, and the Dow Jones Industrial Average Index.
Other indices also may be used from time to time. The Consumer Price Index is
generally considered to be a measure of inflation. The Salomon Brothers World
Government Bond Index generally represents the performance of government debt
securities of various markets throughout the world, including the United States.
The Lehman Government/Corporate Bond Index generally represents the performance
of intermediate and long-term government and investment grade corporate debt
securities. The foregoing indices are unmanaged indices of securities that do
not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.

From time to time, the yields and the total returns of the Funds may be quoted
in and compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. The
Funds also may include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. A Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund, as well as the views of
the investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund). A Fund also may
include in advertisements, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, Treasury bills and shares of the Fund
as well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, a Fund
may reprint articles (or excerpts) written regarding a Fund and provide them to
prospective shareholders. Performance information with respect to the Funds is
generally available by calling 800-539-3863.

Investors also may judge, and the Funds may at times advertise, performance by
comparing it to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies, which

27
<PAGE> 59

performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC's Money Fund Reports, Value Line Mutual Fund Survey, Ibottson
Associates, Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The
Wall Street Journal, The New York Times, Business Week, American Banker,
Fortune, Institutional Investor and U.S.A. Today. In addition to yield
information, general information about the Funds that appears in a publication
such as those mentioned above may also be quoted or reproduced in advertisements
or in reports to shareholders.

Advertisements and sales literature may include discussions of specifics of
the portfolio manager's investment strategy and process, including, but not
limited to, descriptions of security selection and analysis.

Advertisements may also include descriptive information about the investment
adviser, including, but not limited to, its status within the industry, other
services and products it makes available, total assets under management and its
investment philosophy.

When comparing yield, total return and investment risk of an investment in a
Fund with other investments, investors should understand that certain other
investments have different risk characteristics than an investment in shares of
the Fund. For example, certificates of deposit may have fixed rates of return
and may be insured as to principal and interest by the FDIC, while a Fund's
returns will fluctuate and its share values and returns are not guaranteed.
Money market accounts offered by banks also may be insured by the FDIC and may
offer stability of principal. U.S. Treasury securities are guaranteed as to
principal and interest by the full faith and credit of the U.S. government.
Money market mutual funds may seek to offer a fixed price per share.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Pursuant to the Investment Advisory Agreement, KMFA determines, subject to the
general supervision of the Directors of the Company, and in accordance with each
Fund's investment objective and restrictions, which securities are to be
purchased or sold by a Fund, and which brokers are to be eligible to execute its
portfolio transactions. Purchases from underwriters and/or broker dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker/dealer and purchases from dealers serving as
market makers may include the spread between bid and asked price. At times, the
Funds also may purchase portfolio securities directly from dealers acting as
principals, underwriters or market makers. As these transactions are usually
conducted on a net basis, no brokerage commissions are paid by a Fund. While
KMFA generally seeks competitive spreads or commissions, a Fund may not
necessarily pay the lowest prices available on each transaction, for reasons
discussed below.

Allocation of transactions to dealers is determined by KMFA in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. In assessing the best overall terms available for any
transaction, KMFA considers all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, research services
provided to KMFA and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis.

In selecting brokers or dealers qualified to execute a particular transaction,
brokers or dealers may be selected who provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to KMFA, the Funds or other accounts over which KMFA exercises investment
discretion. Research so received is in addition to and not in lieu of services
required to be performed by KMFA and does not reduce the advisory fees payable
to KMFA by the Funds. Such information may be useful to KMFA in serving both the
Funds and other clients and, conversely, such supplemental research information
obtained by the placement of orders on behalf of other clients may be useful to
KMFA in carrying out its obligations to the Funds. The Investment Advisory
Agreement authorizes KMFA to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for a
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if KMFA determines in good
faith that the total commission is reasonable in relation to the value of the
brokerage and research services provided by such

28
<PAGE> 60

broker or dealer, viewed in terms of either that particular transaction or the
overall responsibilities of KMFA with respect accounts over which it exercises
investment discretion.

The Funds will not execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with KMFA, Key Trust Company of Ohio, N.A. or its
affiliates, BISYS or their affiliates, and will not give preference to Key Trust
Company of Ohio, N.A.'s correspondent banks or affiliates, or BISYS with respect
to such transactions, securities, savings deposits, repurchase agreements and
reverse repurchase agreements.

Investment decisions for the Funds are made independently from those made for
other funds or any other investment company or account managed by KMFA. Any such
other investment company or account may also invest in the same securities as a
particular Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and another Fund or investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which KMFA believes to be
equitable to the Fund and such other Fund or investment company or account. In
some instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained by the Fund. To the
extent permitted by law, KMFA may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for the other Funds or
for other investment companies or accounts in order to obtain best execution. In
making investment recommendations for the Funds, KMFA will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by a Fund is a customer of KMFA, its parents or subsidiaries or affiliates and,
in dealing with their commercial customers, KMFA, its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Funds.

PURCHASE, REDEMPTION AND PRICING

The methods of purchase and redemption of shares, and special retirement,
withdrawal and exchange plans offered are fully set forth in the Prospectus.
Certain additional information is provided below.

Pursuant to Rule 11a-3 under the 1940 Act, a Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under that Rule, the 60-day notification requirement may be
waived if (1) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (2) a Fund temporarily suspends the offering
of shares as permitted under the 1940 Act or by the SEC, or because it is unable
to invest amounts effectively in accordance with its investment objective and
policies.

The Company and KMFA reserve the right at any time without prior notice to
shareholders to refuse exchange purchases by any person or group if, in the
judgment of KMFA, a Fund would be unable to invest effectively in accordance
with its investment objective and policies, or would potentially be adversely
affected.

As indicated in the Prospectus, the net asset value of each Fund is determined
and the shares of each Fund are normally priced as of the close of regular
trading of the NYSE ("the Valuation Time") on each Business Day of the Fund. A
"Business Day" is a day on which the NYSE is open for trading. The NYSE will not
be open in observance of the following holidays: New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.

The net asset value of the shares of each Fund is normally determined at 4:00
p.m., New York time, each Business Day, and each is equal to the value of the
securities, cash and other assets, less liabilities, divided by the number of
shares outstanding. Securities traded on securities exchanges or the NASDAQ
national market are valued at the last sales price on the exchange where the
security is primarily traded or, lacking any sales, at the mean between the most
recent bid and asked quotation. Securities traded over-the-counter are valued at
the mean between the most recent bid and asked price. Securities for which
quotations are not readily available and any other assets are valued at fair
value as determined in good faith by the Board of Directors. Money market
instruments are valued at market value except money market instruments having a
maturity of less than 60 days which are valued at amortized cost. The amortized
cost method values a security initially at its cost and thereafter assumes a
constant amortization of

<PAGE> 61

any discount or premium regardless of the impact of fluctuating interest rates
on the market value of the security. This method does not take into account
unrealized gains or losses.

Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset values
of the shares of the Funds are determined as of such times. Foreign currency
exchange rates also are generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the values of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange which will not be reflected in the
computation of such Funds' net asset values. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by the Board of
Directors.

FEDERAL INCOME TAXES

The Prospectus describes generally the tax treatment of distributions by each
Fund. This section of the Statement of Additional Information includes
additional information concerning Federal income taxes.

Qualification as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended, (the "Code") requires, among other things, that (a) at
least 90% of each Fund's annual gross income be derived from interest; payments
with respect to securities loans; dividends; and gains from the sale or other
disposition of securities, or foreign currencies, or other income (including but
not limited to gains from options, futures, or forward contracts) derived with
respect to each Fund's business of investing in such securities or currencies;
(b) each Fund generally derives less than 30% of its gross income from gains
from the sale or other disposition of securities, options, futures or forward
contracts held for less than three months; and (c) each Fund diversifies its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of each Fund's assets is represented by cash, government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of each Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities and the securities of other regulated investment
companies), or of two or more issuers which the taxpayer controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses. As a regulated investment company, each Fund will not be
subject to Federal income tax on its net investment income and net capital gains
distributed to its shareholders, provided that it distributes to its
shareholders at least 90% of its net investment income and tax-exempt income
earned in each year.

A 4% nondeductible excise tax will be imposed on each Fund (other than to the
extent of each Fund's tax-exempt income) to the extent it does not meet certain
minimum distribution requirements by the end of each calendar year. For this
purpose, any income or gain retained by each Fund that is subject to income tax
will be considered to have been distributed by year-end. Each Fund intends to
distribute substantially all of its net investment income and net capital gains
and, thus, expects not to be subject to the excise tax. In addition, dividends
and distributions of taxable income declared payable as of a record date in
October, November or December of any calendar year are deemed under the Code to
have been received by the shareholders on December 31 of that calendar year if
the dividend is actually paid in the following January. Such dividends will,
accordingly, be subject to income tax for the year in which the record date
falls.

Income and dividends received by each Fund from sources within foreign
countries may be subject to withholding and other taxes (generally at rates from
10% to 40%) imposed by such countries. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes. If more than 50% in
value of a Fund's total assets at the close of its taxable year consist of
securities of non-U.S. corporations, the Fund will be eligible to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund must (a) include their respective pro rata portions of such withholding
taxes in their Federal income tax returns as gross income, (b) treat such
amounts as foreign taxes paid by them, and (c) either deduct such amounts in
computing their taxable incomes or use these amounts as foreign tax credits
against their Federal income taxes. The Stock Index Fund does not currently
expect to meet the eligibility requirement for filing this election as its
investments in securities of non -U.S. issuers are limited. However, the
International Index Fund, which invests primarily in foreign securities,

30
<PAGE> 62

does expect to meet the such eligibility requirements for filing this election
because of its substantial investment in securities of non -U.S. issuers.

Gains or losses on sales of portfolio securities by a Fund generally will be
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases including where each Fund acquires a
put or grants a call thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gain recognized on the disposition
of a debt obligation (including tax-exempt obligations purchased after April 30,
1993) purchased by each Fund at a market discount (generally, at a price less
than its principal amount) will generally be treated as ordinary income to the
extent of the portion of the market discount which accrued during the period of
time the Fund held the debt obligation.

To the extent that a Fund recognizes long-term capital gains, such gains will
be distributed at least annually. Such distributions will be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held Fund shares. If a Fund share is held for six months or less, then
(unless otherwise disallowed) any loss on the sale or exchange of that Fund
share will be treated as a long-term capital loss to the extent of the
designated capital gain distribution thereon. In addition, any loss realized by
a shareholder upon the sale or redemption of Fund shares held less than six
months is disallowed to the extent of any tax exempt-interest dividends received
thereon by the shareholder. These rules shall not apply, however, to losses
incurred under a periodic redemption plan. If a shareholder exchanges or
otherwise disposes of shares of a Fund within 90 days of having acquired such
shares, and if, as a result of having acquired those shares, the shareholder
subsequently pays a reduced sales charge for shares of the Fund, or of a
different fund, the sales charge previously incurred acquiring the Fund's shares
shall not be taken into account (to the extent such previous sales charges do
not exceed the reduction in sales charges) for the purpose of determining the
amount of gain or loss on the exchange, but will be treated as having been
incurred in the acquisition of such other shares. Also, any loss realized on a
redemption or exchange of shares of a Fund will be disallowed to the extent
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.

As of the printing of this Statement of Additional Information, the maximum
individual tax rate applicable to ordinary income is 39.60%; the maximum
individual tax rate applicable to net capital gains is 28%; and the maximum
corporate tax rate applicable to ordinary income and net realized capital gains
is 35% (however, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional amount of income tax of up to
$11,750 and corporations which have taxable income in excess of $15,000,000 for
a taxable year will be required to pay an additional amount of tax of up to
$100,000).

Individuals who are not active participants (and who do not have a spouse who
is an active participant) in certain types of retirement plans ("qualified
retirement plans") may deduct contributions to an individual retirement account
("IRA"), up to specified limits. Investment earnings in an IRA will be
tax-deferred until withdrawn. The maximum annual deductible contribution to an
IRA for individuals under age seventy and a half is 100% of includible
compensation up to a maximum of (i) $2,000 for single individuals; (ii) $4,000
for a married couple when both spouses earn income; and (iii) $2,250 when one
spouse earns, or elects for IRA purposes to be treated as earning, no income
(together the "IRA contribution limits").

The IRA deduction is also available for single individual taxpayers and
married couples who are active participants in qualified retirement plans but
who have adjusted gross incomes which do not exceed certain specified limits. If
their adjusted gross income exceeds these limits, the amount of the deductible
contribution is phased down and eventually eliminated.

Any individual who works may make nondeductible contributions to an IRA in
addition to any deductible contributions. Total aggregate deductible and
nondeductible contributions are limited to the IRA contribution limits discussed
above. Nondeductible contributions in excess of the applicable IRA contribution
limit are "nondeductible excess contributions". In addition, contributions made
to an IRA for the year in which an individual attains the age of seventy and a
half, or any year thereafter, are also nondeductible excess contributions.
Nondeductible excess contributions are subject to a 6% excise tax penalty which
is charged each year that the nondeductible excess contribution remains in the
IRA.

31
<PAGE> 63

An employer also may contribute to an individual's IRA by establishing a
Simplified Employee Pension Plan, known as a SEP-IRA. Participating employers
may make an annual contribution in an amount up to the lesser of 15% of earned
income or $30,000, subject to certain provisions of the Code. Investment
earnings will be tax-deferred until withdrawn.

The foregoing discussion regarding IRAs is based upon the Code and Federal
regulations in effect as of the date of this Statement of Additional Information
and summarizes only some of the important Federal income tax considerations
generally effecting IRA contributions made by individuals or their employers. It
is not intended as a substitute for careful tax planning.

If an option granted by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they result
from a position that is part of a tax "straddle," discussed below. If securities
are sold by a Fund pursuant to the exercise of a call option granted by it, such
Fund will add the premium received to the sale price of the securities delivered
in determining the amount of gain or loss on the sale. If securities are
purchased by the Fund pursuant to the exercise of a put option granted by it,
such Fund will subtract the premium received from its cost basis in the
securities purchased. The requirement that each Fund derive less than 30% of its
gross income from gains from the sale of securities held for less than three
months may limit a Fund's ability to grant options.

The amount of any gain or loss realized by a Fund on closing out a futures
contract will generally result in a realized capital gain or loss for tax
purposes. Futures contracts held at the end of each fiscal year will be required
to be "marked to market" for Federal income tax purposes pursuant to Section
1256 of the Code. In this regard, they will be deemed to have been sold at
market value. Sixty percent (60%) of any net gain or loss recognized on these
deemed sales and sixty percent (60%) of any net realized gain or loss from any
actual sales, generally will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. Transactions
that qualify as designated hedges are excepted from the marked to market rule
and the "60%/40%" rule. Currency transactions may be subject to Section 988 of
the Code, under which foreign currency gains or losses would generally be
computed separately and treated as ordinary income or losses. Each Fund will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.

Offsetting positions held by a regulated investment company involving certain
financial forward, futures or option contracts may be considered, for tax
purposes, to constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256, discussed
above. If a regulated investment company were treated as entering into straddles
by reason of its engaging in certain financial forward, futures or option
contracts, such straddles could be characterized as "mixed straddles" if the
futures, forwards, or options comprising a part of such straddles were governed
by Section 1256 of the Code. The regulated investment company may make one or
more elections with respect to "mixed straddles" and "straddles." Depending upon
which election is made, if any, the results with respect to the regulated
investment company may differ. Generally, to the extent the straddle rules apply
to positions established by the regulated investment company, losses realized by
the regulated investment company may be deferred to the extent of unrealized
gain in any offsetting positions. Moreover, as a result of the straddle and the
conversion transaction rules, short-term capital loss on straddle positions may
be recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain or ordinary income.

If a Fund purchases an equity interest in a "passive foreign investment
company" ("PFIC"), the Fund may be subject to an interest charge by the IRS upon
distributions from the PFIC or the Fund's disposition of its interest in the
PFIC. If a Fund invests in a PFIC, the Fund intends to make an available
election under which the Fund will not be subject to the interest charge, but
must annually include its allocable share of income from the PFIC, regardless of
whether the Fund receives any distributions from the PFIC.

FOREIGN SHAREHOLDERS. Under the Code, distributions of net investment income
by any Fund to a non-resident alien individual, non-resident alien fiduciary of
a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a
lower treaty rate).

32
<PAGE> 64

Withholding will not apply if a dividend paid by each Fund to a foreign
shareholder is "effectively connected" with a U.S. trade or business, in which
case the reporting and withholding requirements applicable to U.S. citizens or
domestic corporations will apply. Distributions of net long-term capital gains
are not subject to tax withholding, but, in the case of a foreign shareholder
who is a nonresident alien individual, such distributions ordinarily will be
subject to U.S. income tax at a rate of 30% if the individual is physically
present in the U.S. for more than 182 days during the taxable year.

OTHER MATTERS. Investors should be aware that the investments to be made by
the Fund may involve sophisticated tax rules such as the original issue
discount, real estate mortgage investment conduit, and subpart F income rules
that would result in income or gain recognition by the Fund without
corresponding current cash receipts. Although the Fund will seek to avoid
significant noncash income, such noncash income could be recognized by the Fund,
in which case the Fund may distribute cash derived from other sources in order
to meet the minimum distribution requirements described above.

The foregoing discussion, and the discussions in the prospectus applicable to
each shareholder, address only some of the Federal tax considerations generally
effecting investments in a Fund. Each investor is urged to consult his or her
tax adviser regarding specific questions as to Federal, state or local taxes.

ADDITIONAL INFORMATION

The Company is an open-end management investment company organized as a
corporation under the laws of the State of Maryland on May 26, 1983. The Company
offers shares of common stock which represent interests in one of six separate
portfolios. This SAI relates to the following Funds of the Company: Key Stock
Index Fund and Key International Index Fund. Each Fund offers only one class of
shares. Shares of each Fund of the Company are redeemable at the net asset value
thereof at the option of the holders thereof or in certain circumstances at the
option of the Company. For information concerning the methods of redemption and
the rights of shares ownership, see the Prospectus under the caption "Redeeming
Shares."

Generally, on each matter submitted to a vote of shareholders, each
shareholder is entitled to one vote per share. In addition, all shares of each
Fund vote as a single class; provided, however, that (i) as to any matter with
respect to which a separate vote of any Fund is required by the 1940 Act or
under the Maryland General Corporation law, the requirements as to a separate
vote by that Fund apply in lieu of single class voting; (ii) in the event that
the separate vote requirements referred to in (i) apply with respect to one or
more Funds, then, subject to (iii) below, the shares of all other Funds vote as
a single class; and (iv) as to any matter which does not affect the interest of
a particular Fund, only the holders of shares of the one or more affected Funds
are entitled to vote. And, notwithstanding any provision of the Maryland General
Corporation Law requiring a greater portion than a majority of the votes
entitled to be cast in order to take or authorize any action, any such action
may be taken or authorized upon the concurrence of a majority of the aggregate
number of votes entitled to be cast thereon.

Shares of the Funds have no subscription or preemptive rights and only such
conversion or exchange privileges as the Directors may grant in their
discretion.

Generally, a special meeting of shareholders of the Company will be called by
the Secretary upon receipt of a request in writing signed by stockholders
holding not less than 25% of the common stock at the time issued and outstanding
and entitled to vote thereat.

INDEPENDENT ACCOUNTANTS AND REPORTS

At least semi-annually, the Company will furnish the shareholders of the Funds
with a list of the investments held in the Funds and financial statement for the
Funds. The annual financial statements of the Funds will be audited by the
Company's independent auditors. The Board of Directors has selected Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036 as the
independent accountant to audit the Funds' books and review and prepare the
Funds' tax returns for fiscal years ending on or after November 30, 1996.

Incorporated by reference to this Statement of Additional Information are the
current unaudited financial statements and schedules for the Key Stock Index
Fund, dated October 31, 1996.

COUNSEL

Morrison & Foerster LLP, 2000 Pennsylvania Avenue NW, Washington, D.C. 20006,
serves as legal counsel to the Company.

33
<PAGE> 65

APPENDIX A

MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")

MOODY'S BOND RATINGS

<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong positions of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are considered as upper-
medium-grade obligations. Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate and municipal bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
</TABLE>

MOODY'S SHORT-TERM DEBT RATINGS

Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: Prime-1, Prime-2 and Prime-3.

Issuers rated Prime-1 have a superior ability for repayment of senior
short-term debt obligations. Issuers rated Prime-2 have a strong ability for
repayment of senior short-term debt obligations; and issuers rated Prime-3 have
an acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.

STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")

STANDARD & POOR'S BOND RATINGS

A Standard & Poor's rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers or lessees.

The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likeli-

34
<PAGE> 66

hood 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; (2) nature of and provisions of the obligation; and (3) 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.

Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.

<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions than debt
in the higher-rated categories.
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 for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
NR Indicates that no rating has been requested, that there is insufficient information on which to base
a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of
policy.
</TABLE>

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The commercial paper rating is not a recommendation to purchase, sell,
or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based upon current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in or unavailability of such information, or based on other
circumstances. Ratings are graded into two group categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The categories are as
follows:

Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 or 3 to indicate the relative degree of safety.

<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely payment is strong.
A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree
of safety is not as high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher
designations.
</TABLE>

<PAGE> 67
THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
COMMERCIAL PAPER (39.5%)

AUTOMOTIVE (6.8%)
$300,000 Ford Motor Credit Corp., 5.26%, 11/4/96 $ 300,000
400,000 General Motors Acceptance Corp., 5.27%, 11/8/96 400,000
--------------
Total 700,000
--------------
FINANCIAL SERVICES (28.9%)
400,000 American Express Corp., 5.24%, 11/1/96 400,000
2,213,849 General Electric Capital Corp., 5.57%, 11/1/96 2,213,849
400,000 Heller Financial Corp., 5.23%, 11/1/96 400,000
--------------
Total 3,013,849
--------------
RETAIL STORES (3.8%)
400,000 Sears Acceptance Corp., 5.23%, 11/1/96 400,000
--------------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST $4,113,849) 4,113,849
- ---------------------------------------------------------------------------------------------------------------------

COMMON STOCK (58.8%)

ADVERTISING (0.0%)
92 Interpublic Group Cos., Inc. 4,462
--------------
AEROSPACE/DEFENSE (1.4%)
326 Allied Signal, Inc. 21,353
401 Boeing Co. 38,245
72 General Dynamics Corp. 4,941
231 Lockheed Martin Corp. 20,703
249 McDonnell Douglas Corp. 13,571
66 Northrop Grumman Corp. 5,330
252 Rockwell International Corp. 13,860
93 Textron, Inc. 8,254
139 United Technologies Corp. 17,896
--------------
144,153
--------------
AIR FREIGHT (0.1%)
105 AMR Corp. Delaware (b) 8,820
74 U. S. Air Group, Inc. (b) 1,286
--------------
10,106
--------------
AIRLINES (0.1%)
90 Delta Air Lines, Inc. 6,379
167 Southwest Airlines Co. 3,787
--------------
10,166
--------------
ALUMINUM (0.1%)
201 Aluminum Co. of America 11,784
--------------
APPAREL (0.0%)
84 Liz Claiborne, Inc. 3,549
</TABLE>

See notes to financial statements.

1
<PAGE> 68
THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
--------------
AUTOMOBILES (1.2%)
844 Chrysler Corp. $ 28,380
1,365 Ford Motor Co. 42,656
873 General Motors Corp. 47,033
86 Navistar International Corp. (b) 796
44 PACCAR, Inc. 2,453
--------------
121,318
--------------
AUTOMOTIVE PARTS (0.3%)
43 Cummins Engine, Inc. 1,873
116 Dana Corp. 3,436
88 Eaton Corp. 5,258
70 Echlin, Inc. 2,284
139 Genuine Parts Co. 6,081
70 Pep Boys 2,450
276 Placer Dome Inc. 6,624
73 TRW, Inc. 6,607
--------------
34,613
--------------

BANKS (4.5%)
505 Banc One Corp. 21,399
139 Bank of Boston Corp. 8,896
445 Bank of New York Co. 14,741
416 BankAmerica Corp. 38,064
92 Bankers Trust New York 7,774
221 Barnett Banks, Inc. 8,426
181 Boatmens Bancshares, Inc. 10,996
503 Chase Manhattan Corp. 43,132
555 Citicorp 54,945
133 Comerica, Inc. 7,066
257 CoreStates Financial Corp. 12,496
121 Fifth Third Bancorp 7,578
162 First Bank Systems, Inc. 10,692
365 First Chicago NBD Corp. 18,615
318 First Union Corp. 23,135
65 Golden West Financial Corp. Delaware 4,217
157 Great Western Financial Corp. 4,396
215 J.P. Morgan & Co., Inc. 18,571
68 KeyCorp 3,171
157 Mellon Bank Corp. 10,225
256 National City Corp. 11,104
337 NationsBank Corp. 31,762
427 Norwest Corp. 18,735
393 PNC Bank Corp. 14,246
63 Republic New York Corp. 4,804
257 SunTrust Banks, Inc. 11,983
178 U.S. Bancorp 7,120
192 Wachovia Corp. 10,320
109 Wells Fargo & Co. 29,117
--------------
467,726
--------------
BEVERAGES (2.3%)
573 Anheuser-Busch Co., Inc. 22,061
78 Brown Forman Corp., Class B 3,373
2,883 Coca-Cola Co. 145,592
43 Coors Adolph Co., Class B 839
1,811 Pepsico, Inc. 53,650
433 Seagram, Ltd. 16,400
--------------
241,915
--------------
BROKERAGE SERVICES (0.3%)
</TABLE>

See notes to financial statements.

2
<PAGE> 69

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
195 Merrill Lynch & Co., Inc. $ 13,699
175 Morgan Stanley Group, Inc. 8,794
120 Salomon Brothers, Inc. 5,145
--------------
27,638
--------------
BUILDING MATERIALS (0.5%)
41 Armstrong World Industries, Inc. 2,736
31 Centex Corp. 934
34 Crane Co. 1,581
41 Fleetwood Enterprises, Inc. 1,384
44 Kaufman & Broad Home Corp. 528
186 Masco Corp. 5,836
678 Monsanto Co. 26,866
165 Morton International, Inc. 6,497
58 Owens Corning Fiberglas Corp. (b) 2,247
28 Pulte Corp. 742
--------------
49,351
--------------
CHEMICALS - GENERAL (1.5%)
128 Air Products & Chemicals, Inc. 7,680
61 Avery Dennison Corp. 4,018
284 Dow Chemical Co. 22,081
648 E.I. Du Pont De Nemours Co. 60,102
90 Eastman Chemical Co. 4,748
73 Ecolab, Inc. 2,664
41 FMC Corp. (b) 3,019
73 Great Lakes Chemical Corp. 3,805
123 Hercules, Inc. 5,858
84 Mallinckrodt, Inc. 3,654
77 Nalco Chemical Co. 2,801
215 PPG Industries, Inc. 12,255
179 Praxair, Inc. 7,921
74 Rohm & Haas Co. 5,282
57 Sigma-Aldrich Corp. 3,349
149 Union Carbide Corp. 6,351
112 W.R. Grace & Co. 5,936
--------------
161,524
--------------
COMMERCIAL SERVICES (0.1%)
376 CUC International, Inc. (b) 9,212
--------------
COMPUTERS & PERIPHERALS (2.6%)
194 3Com Corp. (b) 13,119
139 Amdahl Corp. (b) 1,425
143 Apple Computer, Inc. 3,289
217 Bay Networks, Inc. (b) 4,394
83 Cabletron Systems, Inc. (b) 5,177
683 Cisco Systems, Inc. (b) 42,261
311 Compaq Computer Corp. (b) 21,653
70 Computer Sciences Corp. (b) 5,198
44 Data General Corp. (b) 654
61 Dell Computer, Inc. (b) 4,964
179 Digital Equipment Corp. (b) 5,281
265 EMC Corp. (b) 6,956
1,179 Hewlett Packard Corp. 52,023
53 Integraph Corp. (b) 497
611 International Business Machines Corp. 78,819
92 Seagate Technology, Inc. (b) 6,141
</TABLE>

See notes to financial statements.

3
<PAGE> 70

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
COMPUTERS & PERIPHERALS - CONTINUED
197 Silicon Graphics, Inc. (b) $ 3,645
211 Sun Microsystems, Inc. (b) 12,871
135 Tandem Computers, Inc. (b) 1,704
199 Unisys Corp. (b) 1,244
--------------
271,315
--------------
CONGLOMERATES (0.1%)
264 Corning, Inc. 10,230
--------------
CONSTRUCTION (0.1%)
82 Case Corp. 3,813
96 Fluor Corp. 6,288
45 Foster Wheeler Corp. 1,845
--------------
11,946
--------------
CONSUMER GOODS (1.2%)
85 American Greetings Corp. 2,491
58 Clorox Co. 6,329
169 Colgate-Palmolive Co. 15,548
43 Jostens, Inc. 925
330 Nike, Inc. 19,429
791 Procter & Gamble Co. 78,309
67 Reebok International Ltd. 2,395
57 Stride Rite Corp. 470
--------------
125,896
--------------
CONTAINERS (0.2%)
34 Ball Corp. 820
60 Bemis, Inc. 2,100
147 Crown Cork & Seal, Inc. 7,056
182 Newell Co. 5,164
173 Rubbermaid, Inc. 4,023
113 Stone Container Corp. 1,723
71 Tupperware Corp. 3,648
--------------
24,534
--------------
COSMETICS & RELATED (0.5%)
31 Alberto Culver Co. 1,418
153 Avon Products, Inc. 8,300
515 Gillette Co. 38,496
127 International Flavor & Fragance, Inc. 8,588
--------------
56,802
--------------
DEPARTMENT STORES (0.2%)
130 Dillard Department Stores, Inc., Class A 4,127
260 J. C. Penney Co., Inc. 13,650
41 Mercantile Stores, Inc. 2,034
--------------
19,811
--------------
</TABLE>

See notes to financial statements.

4
<PAGE> 71

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
DIVERSIFIED - CONGLOMERATES, HOLDINGS (0.0%)
54 National Service Industries, Inc. $ 1,863
--------------
DRUG STORES (0.0%)
22 Longs Drug Stores Corp. 987
96 Rite Aid Corp. 3,264
--------------
4,251
--------------
ELECTRICAL EQUIPMENT (2.1%)
134 DSC Communications Corp. (b) 1,859
258 Emerson Electric Co. 22,962
1,910 General Electric Co. 184,793
156 General Instrument Corp. (b) 3,140
47 Johnson Controls, Inc. 3,431
45 Thomas & Betts Corp. 1,907
58 W. W. Grainger, Inc. 4299
486 Westinghouse Electric Corp. 270
--------------
222,661
--------------
ELECTRICAL SERVICES (0.0%)
138 General Public Utilities Corp. 4,537
--------------
ELECTRONIC & ELECTRICAL - GENERAL (0.9%)
156 Advanced Micro Devices, Inc. (b) 2,769
253 AMP, Inc. 8,570
69 Andrew Corp. (b) 3,364
124 Cooper Industries, Inc. 4,991
54 E G & G, Inc. 952
57 General Signal Corp. 2,323
44 Harris Corp. 2,756
146 Honeywell, Inc. 9,070
684 Motorola, Inc. 31,464
158 National Semiconductor Corp. (b) 3,042
273 Raytheon Co. 13,445
68 Tandy Corp. 2,559
37 Tektronix, Inc. 1,448
218 Texas Instruments, Inc. 10,491
--------------
97,244
--------------
ENTERTAINMENT (0.6%)
58 Bally Entertainment Corp. 1,747
112 Brunswick Corp. 2,632
117 Harrahs Entertainment (b) 1,960
99 Hasbro, Inc. 3,849
43 King World Productions (b) 1,548
784 Walt Disney Co. 51,646
--------------
63,382
--------------
ENVIRONMENTAL CONTROL (0.0%)
353 Laidlaw, Inc., Class B 4,148
--------------
FINANCIAL SERVICES (1.7%)
548 American Express Co. 25,756
334 Automatic Data Processing, Inc. 13,903
61 Beneficial Corp. 3,568
78 Ceridian Corp. (b) 3,871
189 Dean Witter Discover & Co. 11,127
206 Federal Home Loan Mortgage Corp. 20,806
1,263 Federal National Mortgage Assoc. 49,415
302 Fleet Financial Group 15,062
158 Green Tree Financial Corp. 6,261

FINANCIAL SERVICES - CONTINUED
</TABLE>

See notes to financial statements.

5
<PAGE> 72

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
125 H.F. Ahmanson & Co. $ 3,922
112 Household International, Inc. 9,912
257 MBNA Corp. 9,702
76 Transamerica Corp. 5,766
--------------
179,071
--------------
FOOD DISTRIBUTORS (0.3%)
291 Albertsons, Inc. 10,003
43 Fleming Cos., Inc. 747
43 Great Altantic & Pacific Tea, Inc. 1,290
145 Kroger Co. (b) 6,471
77 Supervalu, Inc. 2,291
209 Sysco Corp. 7,106
174 Winn Dixie Stores, Inc. 5,807
--------------
33,715
--------------
FOOD PROCESSING & PACKAGING (1.5%)
630 Archer-Daniels-Midland Co. 13,702
167 CPC International, Inc. 13,172
265 Campbell Soup Co. 21,200
281 ConAgra, Inc. 14,015
182 General Mills, Inc. 10,397
427 H.J. Heinz Co. 15,159
175 Hershey Foods Corp. 8,466
245 Kellogg Co. 15,557
95 Pioneer Hi-Bred International, Inc. 6,377
156 Quaker Oats Co. 5,538
121 Ralston Purina Group 8,001
560 Sara Lee Corp. 19,880
133 Wm. Wrigley Jr. Co. 8,013
--------------
159,477
--------------
FOREST PRODUCTS - LUMBER & PAPER (1.3%)
150 Alco Standard Corp. 6,956
54 Boise Casacade Corp. 1,674
109 Champion International Corp. 4,742
104 Georgia Pacific Corp. 7,800
345 International Paper Co. 14,749
97 James River Corp. 3,055
324 Kimberly-Clark Corp. 30,213
125 Louisiana Pacific Corp. 2,609
61 Mead Corp. 3,462
114 Moore Corp. Ltd. 2,308
33 Potlatch Corp. 1,411
62 Temple Inland, Inc. 3,178
78 Union Camp Corp. 3,802
116 Westvaco Corp. 3,306
228 Weyerhauser Co. 10,460
62 Willamette Industries, Inc. 4,185
--------------
103,910
--------------
FUNERAL SERVICES (0.1%)
272 Service Corp. International 7,752
--------------
HEALTH CARE (0.3%)
775 Columbia HCA Healthcare Corp. 27,706
186 Humana, Inc. (b) 3,395
--------------
31,101
--------------
</TABLE>

See notes to financial statements.

6
<PAGE> 73

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
HEAVY MACHINERY (0.5%)
165 Baker Hughes, Inc. $ 5,878
222 Caterpillar Tractor, Inc. 15,235
298 Deere & Co. 12,441
53 Harnischfeger Industries, Inc. 2,120
125 Ingersoll Rand Co. 5,203
62 McDermott International, Inc. 1,101
174 Tyco Laboratories, Inc. 8,635
--------------
50,613
--------------
HOLDING COMPANIES (0.1%)
135 ITT Corp. (b) 5,670
136 ITT Industries 3,162
--------------
8,832
--------------
HOSPITAL & NURSING EQUIPMENT (0.0%)
65 Bard C.R., Inc. 1,836
--------------
HOTELS & MOTELS (0.2%)
130 HFS, Inc. (b) 9,523
220 Hilton Hotels Corp. 6,682
148 Marriott International, Inc. 8,418
--------------
24,623
--------------
HOUSEHOLD GOODS - APPLIANCES & FURNISHINGS (0.1%)
116 Maytag Corp. 2,305
84 Whirlpool Corp. 3,969
--------------
6,274
--------------

INSURANCE - MULTI-LINE (2.5%)
171 Aetna Life & Casualty Co. 11,436
51 Alexander & Alexander Services, Inc. 778
514 Allstate Corp. 28,848
236 American General Corp. 8,791
542 American International Group, Inc. 58,874
124 AON Corp. 7,161
88 Cigna Corp. 11,484
201 Chubb Corp. 10,050
90 General Re Corp. 13,253
135 ITT Hartford Group, Inc. 8,505
81 Jefferson Pilot Corp. 4,607
119 Lincoln National Corp. 5771
132 Loews Corp. 10,907
83 Marsh & McLennan Cos., Inc. 8642
65 MGIC Investment Corp. 4,461
108 Providian Corp 5,076
144 Safeco Corp. 5,436
96 St. Paul Cos., Inc. 5,220
82 Torchmark Corp. 3,967
554 Travelers, Inc. 30,054
84 UNUM Corp. 5,281
136 USF & G Corp. 2,584
39 USLIFE Corp. 1,219
211 United Healthcare 7,992
--------------
260,397
--------------
</TABLE>

See notes to financial statements.

<PAGE> 74

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
MACHINE TOOLS (0.0%)
45 Cincinnati Milacron, Inc. $ 861
39 Giddings & Lewis, Inc. 458
--------------
1,319
--------------
MANUFACTURING - CAPITAL GOODS (0.5%)
131 Dover Corp. 6,730
140 Illinois Tool Works, Inc. 9,835
484 Minnesota Mining & Manufacturing 37,087
31 Trinova Corp. 1,019
--------------
54,671
--------------
MANUFACTURING - CONSUMER GOODS (0.1%)
316 Mattel, Inc. 9,125
61 Western Atlas, Inc. (b) 4,232
--------------
13,357
--------------
MANUFACTURING - MISCELLANEOUS (0.4%)
33 Briggs & Stratton Corp. 1,320
49 Millipore Corp. 58
132 Pall Corp. 3,383
84 Parker-Hannifin Corp. 3,182
183 Unilever N. V. 27,976
121 Whitman Corp. 2,934
--------------
38,853
--------------
MEDICAL SERVICES (0.1%)
113 Beverly Enterprises, Inc. (b) 1,398
50 Community Psychiatric Centers, Inc. (b) 444
71 Manor Care, Inc. 2,787
248 Tenet Healthcare Corp. (b) 5,177
--------------
9,806
--------------
MEDICAL SUPPLIES (0.6%)
65 Bausch & Lomb, Inc. 2,194
314 Baxter International, Inc. 13,070
143 Becton Dickinson & Co. 6,221
133 Biomet, Inc. 2,145
204 Boston Scientific Corp. (b) 11,092
274 Medtronic, Inc. 17,639
93 St. Jude Medical, Inc. (b) 3,674
71 United States Surgical Corp. 2,973
--------------
59,008
--------------
</TABLE>

See notes to financial statements.

8
<PAGE> 75

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
METALS - FABRICATION (0.4%)
261 Alcan Aluminum Ltd. $ 8,580
140 Allegheny Teledyne Inc. 2,993
49 Asarco, Inc. 1,286
106 Cyprus Amax Minerals 2,398
225 Freeport-McMoRan Copper & Gold, Inc., Class B 6,834
169 Homestake Mining Co. 2,408
55 Inland Steel Industries, Inc. 887
113 Newmont Mining Corp. 5,226
75 Phelps Dodge Corp. 4,716
73 Reynolds Metals Co. 4,106
--------------
39,434
--------------
MINING (0.0%)
151 Santa Fe Pacific Gold Corp. 1,793
--------------
PRIMARY METAL & MINERAL PRODUCTION (0.2%)
122 Armco, Inc. (b) 458
102 Battle Mountain Gold Co. 778
412 Barrick Gold Corp. 10,764
127 Bethlehem Steel Corp. (b) 1,032
160 Echo Bay Mines Ltd. 1,250
166 Englehard Corp. 3,029
150 Inco Ltd. 4,762
97 USX-U.S. Steel Group, Inc. 2,643
--------------
24,716
--------------
NEWSPAPERS (0.3%)
161 Gannett Co., Inc. 12,216
109 Knight-Ridder, Inc. 4,074
112 New York Times Co., Class A 4,046
119 Times Mirror Co., Class A 5,504
70 Tribune Co. 5,723
--------------
31,563
--------------
OFFICE EQUIPMENT & SUPPLIES (0.3%)
172 Pitney Bowes, Inc. 9,610
374 Xerox Corp. 17,344
--------------
26,954
--------------
OIL & GAS EXPLORATION & PRODUCTION (1.8%)
106 Amerada Hess Corp. 5,869
74 Ashland, Inc. 3,145
144 Burlington Resource, Inc. 7,254
121 Coastal Corp. 5,203
62 Columbia Gas System, Inc. 3,766
22 Eastern Enterprises 847
291 Enron Corp. 13,532
78 Enserch Corp. 1,677
27 Helmerich & Payne, Inc. 1,461
56 Kerr-Mcgee Corp. 3,514
39 Louisana Land & Exploration Co. 2,218
454 Mobil Corp. 53,005
158 Noram Energy Corp. 2,429
372 Occidental Petroleum Corp. 9,114
30 Oneok, Inc. 806
120 Oryx Energy Co. (b) 2,310
174 Panenergy Corp. 6,699
53 Pennzoil Co. 2,703
304 Phillips Petroleum Co. 12,464
97 Rowan Cos. (b) 2,170
104 Sante Fe Energy Resources, Inc. (b) 1,482
</TABLE>

See notes to financial statements.

9
<PAGE> 76

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
OIL & GAS EXPLORATION & PRODUCTION - CONTINUED
99 Sonat, Inc. $ 4,876
84 Sun Co., Inc. 1,879
197 Tenneco, Inc. 9,752
332 USX - Marathon Group 7,263
250 Union Pacific Resources Group, Inc. 6,862
286 Unocal Corp. 10,475
120 Williams Co., Inc. 6,270
--------------
189,045
--------------
OIL - INTEGRATED COMPANIES (3.6%)
574 Amoco Corp. 43,481
185 Atlantic Richfield Co. 24,512
754 Chevron Corp. 49,576
1,435 Exxon Corp. 127,177
618 Royal Dutch Petroleum Co. 102,202
304 Texaco, Inc. 30,894
--------------
377,842
--------------
OILFIELD EQUIPMENT & SERVICES (0.4%)
206 Dresser Industries, Inc. 6,772
131 Halliburton Co. 7,418
283 Schlumberger Ltd. 28,052
--------------
42,242
--------------
PAINT, VARNISHES & ENAMELS (0.0%)
97 Sherwin-Williams Co. 4,862
--------------
PHARMACEUTICALS (5.1%)
902 Abbott Laboratories 45,663
75 Allergan, Inc. 2,288
96 Alza Corp., Class A (b) 2,484
734 American Home Products Corp. 44,957
305 Amgen, Inc. (b) 18,701
580 Bristol-Myers Squibb Co. 61,335
631 Eli Lilly & Co. 44,485
1,539 Johnson & Johnson, Inc. 75,796
1,407 Merck & Co., Inc. 104,294
742 Pfizer, Inc. 61,400
587 Pharmacia & Upjohn Co. 21,132
425 Schering-Plough Corp. 27,200
312 Warner-Lambert Co. 19,851
--------------
529,586
--------------
PHOTOGRAPHY (0.3%)
390 Eastman Kodak Co. 31,103
52 Polaroid Corp. 2,112
--------------
33,215
--------------
POLLUTION CONTROL SERVICES & EQUIPMENT (0.3%)
245 Browning-Ferris Industries, Inc. 6,431
66 Safety Kleen 1,031
568 WMX Technologies,Inc. 19,525
--------------
26,987
--------------
PRECISION INSTRUMENTS & RELATED (0.0%)
50 Perkin-Elmer Corp. 2,681
--------------
</TABLE>

See notes to financial statements.

<PAGE> 77

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
PUBLISHING (0.5%)
94 Deluxe Corp. $ 3,067
112 Dow Jones & Co., Inc. 3,696
196 Dun & Bradstreet Corp. 11,344
35 John H. Harland Co. 1,089
114 McGraw Hill, Inc. 5,344
31 Meredith Corp. 1,558
177 R.R. Donnelley & Sons Co. 5,376
614 Time Warner, Inc. 22,871
--------------
54,345
--------------
RADIO & TELEVISION (0.3%)
270 Comcast, Class A Special Shares 3,983
755 Tele-Communications, Inc., Class A (b) 9,390
547 US West Media Group (b) 8,547
413 Viacom, Class B (b) 13,474
--------------
35,394
--------------
RAILROADS (0.6%)
175 Burlington Northern/Santa Fe, Inc. 14,416
244 CSX Corp. 10,522
93 Conrail, Inc. 8,847
146 Norfolk Southern Corp. 13,012
258 Union Pacific Corp. 14,480
--------------
61,277
--------------
RESTAURANTS (0.4%)
181 Darden Restaurants, Inc. 1,516
27 Luby's Cafeterias, Inc. 567
809 McDonald's Corp. 35,899
59 Ryan's Family Steak Houses, Inc. (b) 435
57 Shoney's, Inc. (b) 420
148 Wendy's International, Inc. 3,053
--------------
41,890
--------------
RETAIL (1.6%)
168 American Stores Co. 6,951
119 Charming Shoppes, Inc. (b) 550
248 Dayton Hudson Corp. 8,587
240 Federated Department Stores, Inc. (b) 7,920
83 Harcourt General, Inc. 4,129
561 K-Mart Corp. 5,470
188 Lowes Cos., Inc. 7,591
289 May Department Stores Co. 13,691
92 Nordstrom, Inc. 3,318
226 Price/Costco, Inc. (b) 4,492
452 Sears, Roebuck & Co. 21,865
2,651 Wal-Mart Stores, Inc. 70,583
284 Walgreen Co. 10,721
152 Woolworth Corp. (b) 3,192
--------------
169,060
--------------
</TABLE>

See notes to financial statements.

<PAGE> 78

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
RETAIL - SPECIALTY STORES (0.7%)
113 Circuit City Stores, Inc. $ 3,701
35 Footstar, Inc. (b) 766
330 The Gap 9,570
69 Giant Food, Inc. 2,329
553 Home Depot, Inc. 30,277
312 The Limited, Inc. 5,733
121 Melville Corp. 4,508
83 TJX Cos., Inc. 3,320
316 Toys R Us, Inc. (b) 10,705
--------------
70,909
--------------
RUBBER & RUBBER PRODUCTS (0.1%)
62 B.F. Goodrich, Inc. 2,627
96 Cooper Tire & Rubber Co. 1,884
179 Goodyear Tire & Rubber Co. 8,212
--------------
12,723
--------------
SEMICONDUCTORS (1.4%)
206 Applied Materials, Inc. (b) 5,446
949 Intel Corp. 110,943
148 LSI Logic Corp. (b) 3,922
240 Micron Technology, Inc. 6,030
--------------
126,341
--------------
SOFTWARE & COMPUTER SERVICES (1.7%)
53 Autodesk, Inc. 1,212
419 Computer Associates International, Inc. 24,773
257 First Data Corp. 20,496
690 Microsoft Corp. (b) 94,703
409 Novell, Inc. (b) 3,783
756 Oracle Systems Corp. (b) 31,988
26 Shared Medical Systems Corp. 1,255
--------------
178,210
--------------
STEEL (0.1%)
100 Nucor Corp. 4,737
104 Worthington Industries, Inc. 2,158
--------------
6,895
--------------
TAX RETURN PREPARATION (0.0%)
118 H & R Block, Inc. 2,921
--------------
TELECOMMUNICATIONS (1.7%)
576 AirTouch Communications, Inc. (b) 15,048
218 Alltel Corp. 6,649
505 Bell Atlantic Corp. 30,426
731 Lucent Technologies, Inc. 34,357
298 Northern Telecom Ltd. 19,407
495 Pacific Telesis Group 16,830
89 Scientific-Atlanta, Inc. 1,290
498 Sprint Corp. 19,547
101 Tellabs, Inc. (b) 8,598
552 U. S. West, Inc. 16,767
448 Worldcom, Inc. (b) 10,920
--------------
179,839
--------------
</TABLE>

See notes to financial statements.

<PAGE> 79

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
TEXTILE MANUFACTURING (0.1%)
87 Fruit of The Loom, Inc. (b) $ 3,165
44 Russell Corp. 1,248
22 Springs Industries, Inc., Class A 993
73 V. F. Corp. 4,772
--------------
10,178
--------------
TOBACCO & TOBACCO PRODUCTS (1.0%)
197 American Brands, Inc. 9,406
947 Philip Morris Cos., Inc. 87,716
218 UST, Inc. 6,295
--------------
103,417
--------------
TOOLS & HARDWARE MANUFACTURING (0.1%)
101 Black & Decker Corp. 3,775
67 Snap On Tools, Inc. 2,152
102 Stanley Works 2,881
35 Timken Co. 1,562
--------------
10,370
--------------
TRANSPORTATION LEASING & TRUCKING (0.1%)
45 Caliber Systems, Inc. 759
49 Consolidated Freightways, Inc. 1,176
65 Federal Express Corp. (b) 5,233
93 Ryder Systems, Inc. 2,767
31 Yellow Corp. (b) 405
--------------
10,340
--------------
TRUCKS - MANUFACTURING (0.0%)
10 Nacco Industries, Inc. 463
--------------
UTILITIES - ELECTRIC (1.6%)
215 American Electric Power Co. 8,922
174 Carolina Power & Light Co. 6,286
242 Central & South West Corp. 6,413
181 CINergy Corp. 5,996
272 Consolidated Edison Co. NY, Inc. 7,956
166 Detroit Edison Co. 5,001
205 Dominion Resources, Inc. 7,739
234 Duke Power Co. 11,437
507 Edison International 10,013
264 Entergy Corp 7,392
211 FPL Group, Inc. 9,706
303 Houston Industries 6,931
166 Niagara Mohawk Power Corp. 1,411
79 Northern States Power Co. Minnesota 3,713
174 Ohio Edison Co. 3,632
338 PacifiCorp 7,140
256 Peco Energy Co. 6,464
185 PP&L Resources, Inc. 4,324
282 Public Service Enterprise Group 7,579
50 Raychem Corp. 3,906
779 Southern Co. 17,235
259 Texas Utilities Co. 10,489
</TABLE>

See notes to financial statements.

<PAGE> 80
THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
UTILITIES - ELECTRIC (1.6%)
248 Unicom Corp. $ 6,448
117 Union Electric Co. 4,519
--------------
170,652
--------------
UTILITIES - ELECTRIC & GAS (0.2%)
169 Baltimore Gas & Electric Co. 4,605
480 Pacific Gas & Electric Co. 11,280
39 Peoples Energy Corp. 1,375
--------------
17,260
--------------
UTILITIES - NATURAL GAS (0.1%)
109 Consolidated Natural Gas Co. 5,790
57 Nicor, Inc. 1,988
97 Pacific Enterprises 2,983
--------------
10,761
--------------
UTILITIES - TELECOMMUNICATIONS (2.6%)
1,863 A T & T Corp. 64,972
636 Ameritech Corp. 34,821
1,148 BellSouth Corp. 46,781
1,119 GTE Corp. 47,138
795 MCI Telecommunications Corp. 19,974
506 Nynex Corp. 22,517
704 SBC Communications, Inc. 34,232
--------------
270,435
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $5,849,053) 6,135,352
- ---------------------------------------------------------------------------------------------------------------------

U.S. TREASURY BILLS (1.2%)
$125,000 5.20%, 12/19/96(c) (COST $124,162) 124,168
--------------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL (COST $10,087,064) (a) $ 10,373,369
- ---------------------------------------------------------------------------------------------------------------------

- --------------
<FN>
Percentages indicated are based on net assets of $10,427,345.

(a) Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows (amount in thousands):

Unrealized appreciation $ 448,046
Unrealized depreciation (161,741)
--------------
Net unrealized appreciation $ 286,305
==============
(b) Represents non-income producing security.

See notes to financial statements.

<PAGE> 81

THE KEY FUNDS Schedule of Investments
STOCK INDEX FUND October 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE

FUTURES CONTRACTS
Number of Unrealized
Contracts Appreciation
--------------
<S> <C> <C>
Long, Standard & Poor's 500 Index
Futures Contract, face amount $3,056,660
expiring December 19, 1996 9 $ 136,764
--------------
$ 136,764
==============
See Notes to Financial Statements.
</TABLE>

<PAGE> 82
KEY STOCK INDEX FUND
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
(Unaudited)

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost,$10,087,064) $10,373,369
Cash 1
Receivable for securities sold 3,447
Dividend and interest receivable 11,563
Receivable from Adviser 15,616
Variation margin receivable 30,825
Deferred organizational costs 28,398
-----------

Total Assets 10,463,219
-----------
LIABILITIES:
Payable for securities purchased
Accrued expenses and other liabilities: 2,159
Accounting and transfer agent fees 6,306
Legal fees and audit fees 8,993
Other 18,416
-----------

Total Liabilities 35,874
-----------

NET ASSETS - Applicable for 998,962 shares of capital
stock outstanding (25 million shares authorized) $10,427,345
===========

NET ASSET VALUE AND REDEMPTION
VALUE PER SHARE $10.44
===========

NET ASSETS CONSISTS OF:
Paid in capital $9,960,267
Undistributed net investment income 28,160
Realized capital gains/(losses) on investments 15,849
Unrealized appreciation/(depreciation) on investments 423,069
-----------
NET ASSETS $10,427,345
===========
</TABLE>

(See Notes to Financial Statements)

<PAGE> 83

KEY STOCK INDEX FUND
STATEMENT OF OPERATIONS
For the Period Ended October 31, 1996*
(Unaudited)

<TABLE>
<S> <C> <C>
INVESTMENT IINCOME:
Dividend income $35,389
Interest income 45,750
---------
Total Income $81,139
---------

Expenses:
Investment advisory fees 2,524
Administration fees 3,786
Accounting fees 22,067
Transfer agent fees 2,376
Custodian fees 21,671
Legal and audit fees 13,482
Trustees' fees and expenses 980
Registration and filing fees 9,200
Printing fees 1,494
Miscellaneous 1,022
---------
Total Expenses 78,602

Less: Waiver of investment advisory fees 2,524
Waiver of administration fees 2,090
Reimbursement of other expenses 73,988
---------

Total Waivers and Reimbursements (78,602)
---------

Net Expenses 0
---------

NET INVESTMENT INCOME 81,139
---------

NET REALIZED AND UNREALIZED GAINS/(LOSSES):
Net realized gains/(losses) 15,849
Net change in unrealized appreciation/(depreciation) 423,069
---------
Net Realized and Unrealized Gains/(Losses) 438,918
---------

NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $520,057
=========

<FN>
*For the period from July 1, 1996 (commencement of operations) through October
31, 1996.
</TABLE>

(See Notes to Financial Statements)

17
<PAGE> 84

KEY STOCK INDEX FUND
STATEMENT OF CHANGES IN NET ASSETS
For the period ended October 31, 1996*
(Unaudited)

<TABLE>
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $81,139
Net realized gains 15,849
Net change in unrealized appreciation/(depreciation) 423,069
------------
Net increase/(decrease) in net assets resulting from operations 520,057
------------

DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (52,978)
------------
Total dividends and distributions (52,978)
------------

CAPITAL STOCK TRANSACTIONS:
Proceeds from capital stock sold 10,433,835
Reinvestment of dividends 52,979
Cost of capital stock redeemed (526,547)
------------
Net increase/(decrease) in net assets from capital 9,960,267
stock transactions ------------

Total Increase/(Decrease) in Net Assets 10,427,345
------------

NET ASSETS:
Beginning of period 0
------------
End of period (includes undistributed net $10,427,345
investment income of $28,160) ============

SHARE TRANSACTIONS:
Shares sold 1,045,851
Dividends reinvested 5,225
Shares redeemed (52,114)
------------
Increase in shares for the Period 998,962
============

<FN>
*For the period from July 1 ,1996 (commencement of operations) through October
31, 1996.
</TABLE>

(See Notes to Financial Statements)

18
<PAGE> 85

KEY STOCK INDEX FUND
FINANCIAL HIGHLIGHTS
For the period ended October 31, 1996*
(Unaudited)

<TABLE>
<S> <C>
Per Share Operating Performance
Income from Investment Operations
Net asset value, beginning of period $10.00
Net investment income 0.08
Net realized and unrealized gain (loss) 0.42
----------
Total from investment operations 0.50

Less:
Dividends from (net investment income) (0.06)
----------

Net asset value, end of period $10.44
==========

Total Investment Return 5.05%(a)

Ratios/Supplemental Data:
Net assets end of period (in thousands) $10,427
Ratio of expenses to average net assets 0.00%(b)
Ratio of net investment income to average net assets 3.21%(b)
Ratio of expenses to average net assets** 3.11%(b)
Ratio of net investment income to average net assets** 0.10%(b)
Portfolio Turnover 1%
Average Commission Rate paid per Share $0.02

<FN>
* For the period from July 1, 1996 (commencement of operations) through
October 31, 1996.

** During the period, certain fees were voluntarily waived and certain
expenses were reimbursed. If such voluntary fee waivers and expense
reimbursements had not occurred, the ratios would have been as indicated.

(a) Not annualized.

(b) Annualized.
</TABLE>

(See Notes to Financial Statements)

19
<PAGE> 86

KEY MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------

NOTE 1 - GENERAL

Key Mutual Funds (the "Company") is registered under the Investment Company Act
of 1940 (the "Act"), as an open-end management investment company. The Company,
incorporated in Maryland on May 26, 1983 under the name SBSF Funds, Inc., is
currently doing business under the name "Key Mutual Funds." Key Mutual Funds is
a series company currently issuing capital stock of several different investment
portfolios, one of which: the Key Stock Index Fund (the "Fund") is included in
this report. The Company has 25 billion shares of $.01 par value capital stock
authorized.

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles. The
preparation of financial statements requires BISYS Fund Services ("BISYS") to
make estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.

(a) INVESTMENT VALUATION: Securities traded on a national securities exchange or
the NASDAQ National Market are valued as of the close of regular trading of the
New York Exchange which is generally 4:00 p.m. (Eastern time) on each business
day of the Funds. Listed and unlisted securities for which such information is
regularly reported are valued at the last sales price or, in the absence of
sales, at the mean between the most recent bid and asked price. Listed debt
securities and over-the-counter securities are valued at the mean between the
most recent bid and asked price. Securities for which quotations are not readily
available and any other assets are valued at fair value as determined in good
faith under the supervision of the Board of Directors. Short-term investments
with maturities of sixty days or less are valued at amortized cost, which
approximates market value.

(b) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is recognized on the
accrual basis. Discounts on debt securities are accreted to interest income over
the life of the security with a corresponding increase in the security's cost
basis.

(c) DIVIDENDS TO SHAREHOLDERS: Dividends payable to shareholders are recorded by
the Funds on the ex-dividend date. The Key Stock Index Fund declares and pays
dividends from net investment income quarterly. Distributions from net realized
capital gains, offset by loss carryovers, if any, are declared and paid
annually. The amount of dividends and distributions from net investment income
and net realized capital gains are determined in accordance with federal income
tax regulations which may differ from generally accepted accounting principles.
These "book/tax" differences may be considered either temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income and net realized capital gains for
tax purposes, they are reported as distributions of paid-in capital.

20
<PAGE> 87

KEY MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
- --------------------------------------------------------------------------------

(d) EXPENSES: Assets, liabilities and operations are accounted for separately by
each investment portfolio of the Company. Expenses directly attributable to each
investment portfolio are charged to that investment portfolio's operations;
expenses which are applicable to the several investment portfolios are allocated
among them in relation to the net assets of each investment portfolio or on
another reasonable basis.

(e) ORGANIZATIONAL EXPENSE: Costs incurred in connection with the organization
of the Key Stock Index Fund amounted to $30,000. Such amount is being amortized
on a straight-line basis over a period not to exceed sixty months from the date
the Fund commenced operations.

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

NOTE 3 - INVESTMENT ADVISORY AND ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:

(a) INVESTMENT ADVISORY AND ADMINISTRATION FEES: KeyCorp. Mutual Fund Advisers,
Inc. ("KMFA") serves as investment adviser to the Fund. Pursuant to the
Investment Advisory Agreement, KMFA receives an advisory fee computed daily and
paid monthly which is computed based on an annual rate of 0.10 of 1% of average
net assets. The Investment Advisory Agreement further provides that in the event
that the total expenses of the Fund exceed the limits on investment company
expenses imposed by any statute or any regulatory authority of any jurisdication
in which shares of the Fund are qualified for offer and sale, KMFA will bear the
amount of such excess, except: (I) KMFA shall not be required to bear such
excess to an extent greater than the compensation due to KMFA for the period for
which such expense limitation is required to be calculated unless such statute
or regulatory authority shall so require, and (ii) KMFA shall not be required to
bear the expenses of the Fund to an extent which would result in the Fund's or
Company's inability to qualify as a regulated investment company under the
provisions of Subchapter M of the Internal Revenue Code.

For the period ended October 31, 1996, KMFA earned advisory fees of $2,524, all
of which were waived. In addition, KMFA reimbursed $73,988 of other expenses to
the Fund.

BISYS serves as Administrator to the Fund. In this capacity, BISYS provides
facilities, equipment, statistical and research data, clerical services, fund
accounting and internal compliance services and personnel necessary to carry out
all administrative services required for the operation of the business affairs
of the Fund. For services rendered by BISYS and related expenses borne by BISYS
as Administrator, the Fund was obligated to pay BISYS a fee, computed daily and
payable monthly, based on the average daily net assets of the Fund at an annual
rate of 0.15 of 1%. During the period ended October 31, 1996, BISYS earned
$3,786 in administration fees of which BISYS voluntarily waived $2,090. In
addition to serving the Fund as Administrator, BISYS serves as independent
distributor (the "Distributor") of the Fund's capital stock.

BISYS Fund Services, Inc. (BISYS, Inc.) provides the Fund with certain
accounting services. During the period ended October 31, 1996, BISYS, Inc.
earned fees of $22,067 for these services.

(b) DIRECTORS' FEES: Fees of $7,500 per annum, and $750 per meeting, are paid to
each director of the Company.

(c) CUSTODIAN FEES: Key Trust Company of Ohio, N.A. ("Key Trust"), a subsidiary
of KeyCorp and an affiliate of the Adviser, is the custodian for the Funds' cash
and securities. Custodian fees, as reflected in the accompanying statement of
operations, represent fees paid by the Fund to Key Trust for services it
performs as custodian.

21
<PAGE> 88

KEY MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
- --------------------------------------------------------------------------------

NOTE 4 - SECURITIES

For the month period ended October 31, 1996, the cost of purchases and the
proceeds from sales of investment securities, excluding short-term securities,
for the Key Stock Index Fund amounted to:

<TABLE>
<CAPTION>
TOTAL PURCHASES TOTAL SALES
--------------- -----------
<S> <C>
$5,912,676 $36,985
</TABLE>

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

NOTE 5 - FEDERAL INCOME TAX STATUS

It is the policy of the Fund to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to shareholders. Therefore, no federal income tax
provision is required. The Fund is treated as a separate entity for the purpose
of determining such compliance.

<PAGE> 89
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements:
Included in Part A:
Financial Highlights
Previously filed:
Audited Financial Statements, including (for SBSF Fund, SBSF Convertible
Securities Fund, SBSF Capital Growth Fund and Key Money Market Mutual
Fund):
Statements of Investments, November 30, 1995
Statements of Assets and Liabilities, November 30, 1995
Statements of Operations, November 30, 1995
Statements of Changes in Net Assets for the years ended November 30, 1995 and
1994
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants dated January 17, 1996

Unaudited Financial Statements, including (for SBSF Fund, SBSF Convertible
Securities Fund, SBSF Capital Growth Fund and Key Money Market Mutual
Fund):
Statements of Investments, May 31, 1996
Statements of Assets and Liabilities, May 31, 1996
Statements of Operations, May 31, 1996
Statements of Changes in Net Assets for the six month period ended May 31,
1996 and the year ended November 30, 1995
Financial Highlights
Notes to Financial Statements

Incorporated by reference in Part B:
Unaudited Financial Statements for the period from July 1, 1996 (commencement
of operations) through October 31, 1996, including (for Key Stock Index
Fund only):
Statement of Investments, October 31, 1996
Statement of Assets and Liabilities, October 31, 1996
Statement of Operations, October 31, 1996
Financial Highlights
Notes to Financial Statements

To be filed when available:
Financial Statements with respect to KeyChoice Growth Fund, KeyChoice
Moderate Growth Fund and KeyChoice Income and Growth Fund

(b) Exhibits:

<PAGE> 90

1(a) Articles of Incorporation, as amended and supplemented (filed
on January 31, 1996 as Exhibit 1 to Post-Effective Amendment
No. 16 and incorporated herein by reference).

(b) Articles Supplementary to Articles of Incorporation (filed on
June 11, 1996 as Exhibit 1(a) to Post-Effective Amendment No.
23 and incorporated herein by reference).

(c) Articles of Amendment (filed on July 12, 1996 as Exhibit 1(a)
to Post-Effective Amendment No. 24 and incorporated herein by
reference).

(d) Articles of Amendment to Articles of Incorporation (filed on
December 16, 1996 as Exhibit 1(d) to Post-Effective Amendment
No. 28 and incorporated herein by reference).

2 By-Laws, as Amended and Restated August 14, 1996 (filed on
December 16, 1996 as Exhibit 2 to Post-Effective Amendment No.
28 and incorporated herein by reference).

3 Not Applicable.

4 Not Applicable.

5(a) Investment Advisory Agreement (for SBSF Fund, SBSF Money
Market Fund, SBSF Convertible Securities Fund and SBSF Capital
Growth Fund filed on December 16, 1996 as Exhibit 5(a) to
Post-Effective Amendment No. 28 and incorporated herein by
reference).

(b) Investment Advisory Agreement (for Key Stock Index Fund and
Key International Index Fund filed on December 16, 1996 as
Exhibit 5(b) to Post-Effective Amendment No. 28 and
incorporated herein by reference).

(c) Asset Management Agreement (for KeyChoice Growth Fund,
KeyChoice Moderate Growth Fund and KeyChoice Income and Growth
Fund filed on December 16, 1996 as Exhibit 5(c) to
Post-Effective Amendment No. 28 and incorporated herein by
reference).

6(a) Distribution Agreement (filed on December 16, 1996 as Exhibit
6(a) to Post-Effective Amendment No. 28 and incorporated
herein by reference).

(a)(1) Amendment No. 1 to Distribution Agreement (or KeyChoice Growth
Fund, KeyChoice Moderate Growth Fund and KeyChoice Income and
Growth Fund filed on December 16, 1996 as Exhibit 6(a)(1) to
Post-Effective Amendment No. 28 and incorporated herein by
reference).

<PAGE> 91

7 Not Applicable.

8(a) Mutual Fund Custody Agreement (filed on January 31, 1996 as
Exhibit 8(a)(ii) to Post-Effective Amendment No. 16 and
incorporated herein by reference).

(b) Amendment No. 1 to Mutual Fund Custody Agreement (filed on
December 16, 1996 as Exhibit 8(b) to Post-Effective Amendment
No. 28 and incorporated herein by reference).

(c) Amendment No. 2 to Mutual Fund Custody Agreement (filed on
December 16, 1996 as Exhibit 8(c) to Post-Effective Amendment
No. 28 and incorporated herein by reference).

(d) Transfer Agency Agreement (filed on December 16, 1996 as
Exhibit 8(d) to Post-Effective Amendment No. 28 and
incorporated herein by reference).

9(a) Administration Agreement (for SBSF Fund, Key Money Market
Mutual Fund, SBSF Convertible Securities Fund and SBSF Capital
Growth Fund filed on December 16, 1996 as Exhibit 9(a) to
Post-Effective Amendment No. 28 and incorporated herein by
reference).

(b) Administration Agreement (for Key Stock Index Fund and Key
International Index Fund filed on December 16, 1996 as Exhibit
9(b) to Post-Effective Amendment No. 28 and incorporated
herein by reference).

(b)(1) Amendment No. 1 to Administration Agreement (for KeyChoice
Growth Fund, KeyChoice Moderate Growth Fund and KeyChoice
Income and Growth Fund filed on December 16, 1996 as Exhibit
9(b)(1) to Post-Effective Amendment No. 28 and incorporated
herein by reference).

(c) Sub-Administration Agreement (for SBSF Fund, SBSF Money Market
Fund, SBSF Convertible Securities Fund and SBSF Capital Growth
Fund filed on December 16, 1996 as Exhibit 9(c) to
Post-Effective Amendment No. 28 and incorporated herein by
reference).

(d) Fund Accounting Agreement (for Key Stock Index Fund and Key
International Index Fund filed on December 16, 1996 as Exhibit
9(d) to Post-Effective Amendment No. 28 and incorporated
herein by reference).

(d)(1) Amendment No. 1 to Fund Accounting Agreement (for KeyChoice
Growth Fund, KeyChoice Moderate Growth Fund and KeyChoice
Income and Growth Fund filed on December 16, 1996 as Exhibit
9(d)(1) to Post-Effective Amendment No. 28 and incorporated
herein by reference).

<PAGE> 92

10 Opinion and consent of counsel.

11 Consent of Independent Accountants.

12 Not Applicable.

13 Not Applicable.

14 Not Applicable.

15(a) Plan of Distribution pursuant to Rule 12b-1 (for SBSF Fund,
SBSF Convertible Securities Fund, SBSF Capital Growth Fund,
Key Money Market Mutual Fund and Key International Index Fund
filed on June 11, 1996 as Exhibit 15(c) to Post-Effective
Amendment No. 23 and incorporated herein by reference).

(b) Plan of Distribution pursuant to Rule 12b-1 (for KeyChoice
Growth Fund, KeyChoice Moderate Growth Fund and KeyChoice
Income and Growth Fund filed on December 16, 1996 as Exhibit
15(b) to Post-Effective Amendment No. 28 and incorporated
herein by reference).

(c) Shareholder Servicing Plan and related form of Shareholder
Servicing Agreement (for SBSF Fund, SBSF Convertible
Securities Fund, SBSF Capital Growth Fund, Key Money Market
Mutual Fund and Key International Index Fund filed on June 11,
1996 as Exhibit 15(d) to Post-Effective Amendment No. 23 and
incorporated herein by reference).

(d) Shareholder Servicing Plan and related form of Shareholder
Servicing Agreement (for KeyChoice Growth Fund, KeyChoice
Moderate Growth Fund, and KeyChoice Income and Growth Fund
filed on December 16, 1996 as Exhibit 15(d) to Post-Effective
Amendment No. 28 and incorporated herein by reference).

16 Computation of performance quotations (for Key Stock Index
Fund).

17 Financial Data Schedules.

18 Not Applicable.

<PAGE> 93

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

No person is controlled by or under common control with Registrant.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

Number of Record Holders as of October 31, 1996: SBSF Fund, 1,083
record holders; SBSF Convertible Securities Fund, 477 record holders; SBSF
Capital Growth Fund, 323 record holders; Key Money Market Mutual Fund, 310
record holders; and Key Stock Index Fund, 16 record holders.

ITEM 27. INDEMNIFICATION.

The Corporation shall indemnify directors, officers, employees and
agents of the Corporation against judgments, fines, settlements and expenses
(including attorney's fees) to the fullest extent authorized, and in the manner
permitted, by applicable federal and state law, except that such indemnification
will not be permitted if, in the opinion of the Board of Directors, such
indemnification would be inconsistent with the position of the staff of the
Securities and Exchange Commission (the "Commission") in its interpretive
releases relating to matters of indemnification, including Investment Company
Act Release No. 11330 (September 4, 1980) for so long as such releases remain
the position of the staff of the Commission. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the Registrant pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

See information set forth under the caption "Investment Adviser" in the
Prospectus and the Statement of Additional Information.

KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers") is the investment
adviser to each fund of the Victory Portfolios. Key Advisers is a wholly owned
indirect subsidiary of KeyCorp, a bank holding company which had total assets of
approximately $65 billion as of September 30, 1996 and is also a wholly owned
indirect subsidiary of KeyBank National Association. KeyCorp is a leading
financial institution doing business in 26 states from Maine to Alaska,
providing a full array of trust, commercial, and retail banking services. Its
non-bank subsidiaries include investment advisory, securities brokerage,
insurance, bank credit card processing, mortgage and leasing companies. As of
September 30, 1996, Key Advisers and its affiliates have over $49 billion in
assets under management, and provide a full range of investment management
services to personal and corporate clients.

<PAGE> 94
To the knowledge of Registrant, none of the directors or officers of
Key Advisers, except those set forth below, is or has been at any time during
the past two calendar years engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain directors and
officers of Key Advisers also hold positions with KeyCorp or its subsidiaries.

The principal executive officers and directors of Key Advisers are as
follows:

W. Christopher Maxwell, Director, Chairman and Chief Executive
Officer. Also Executive Vice President of KeyCorp Management
Company ("KMC").

Kathleen A. Dennis, Director and President. Also Senior Vice
President of KMC.

William G. Spears, Director. Also Chairman, Director and
Managing Director of Spears, Benzak, Salomon and Farrell, Inc.
("SBSF"); Director and Chairman of Society and Group Executive
for KeyCorp Asset Management.

John M. Keane, Vice President and Treasurer. Also Vice
President, KMC.

William J. Blake, Secretary. Also Senior Vice President and
Senior Managing Counsel, KMC.

Steven N. Bulloch, Assistant Secretary. Also Senior Vice
President and Senior Counsel, KMC.

Charles G. Crane, Senior Vice President and Senior Management
Director. Also Senior Vice President and Managing Director
SBSF.

Dennis M. Grapo, Senior Vice President and Senior Managing
Director. Also Senior Managing Director of Society.

<PAGE> 95

Frank J. Riccardi, Senior Vice President and Senior Managing
Director. Also Senior Managing Director of Society.

Anthony Aveni, Senior Vice President and Senior Managing
Director. Also Senior Managing Director of Society.

Eric P. Rasmussen, Senior Vice President and Senior Managing
Director. Also Director, CEO and Chairman, Applied Technology
Investments, Inc.

The business address of each of the foregoing individuals is 127 Public
Square, Cleveland, Ohio 44114.

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) BISYS Fund Services Limited Partnership ("BISYS") serves as
distributor and administrator for the Registrant. BISYS also
distributes the securities of the American Performance Funds,
the AmSouth Mutual Funds, The ARCH Fund, Inc., The BB&T Mutual
Funds Group, The Coventry Group, First Choice Funds Trust,
Fountain Square Funds, HSBC Family of Funds, The Highmark
Group, The Infinity Mutual Funds, Inc., The Kent Funds, the
MarketWatch Funds, the MMA Praxis Mutual Funds, M.S.D.&T.
Funds, the Pacific Capital Funds, the Parkstone Group of
Funds, The Parkstone Advantage Funds, Pegasus Funds, the
Qualivest Funds, The Republic Funds, The Republic Advisors
Funds Trust, The Riverfront Funds, Inc., The Sessions Group,
Summit Investment Trust, The Time Horizon Funds and The
Victory Portfolios, each of which is an open-end management
investment company.

(b) Partners of BISYS, as of November 30, 1996, were as follows:

<TABLE>
<CAPTION>
NAME AND PRINCIPAL
OFFICES WITH POSITIONS AND OFFICES WITH POSITIONS AND
BUSINESS ADDRESS BISYS FUND SERVICES REGISTRANT
- ---------------- ------------------- ----------
<S> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, OH 43219

WC Subsidiary Corporation Sole Limited Partner None
150 Clove Road
Little Falls, N.J. 07424

The BISYS Group, Inc. Sole Shareholder None
150 Clove Road
Little Falls, N.J. 07424
</TABLE>

<PAGE> 96

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of:

(1) Key Mutual Funds, 127 Public Square, Cleveland, Ohio 44114;

(2) BFDS, Two Heritage Drive, Quincy, MA 02071 (records relating
to its functions as dividend disbursing agent and servicing
agent);

(3) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as Administrator,
Distributor and Fund Accountant);

(4) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland,
Ohio, 44114 (records relating to its functions as Custodian);
and

(5) KeyCorp Mutual Fund Advisers, Inc., 127 Public Square,
Cleveland, Ohio 44114-1306 (records relating to its functions
as Investment Adviser).

ITEM 31. MANAGEMENT SERVICES.

Other than as set forth under the captions "Investment Adviser" and
"Administrator" in Parts A and B of the Registration Statement, Registrant is
not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS.

(a) Not applicable.

(b) Registrant undertakes to file a post-effective amendment with
respect to the Key International Index Fund, KeyChoice Growth Fund, KeyChoice
Moderate Growth Fund, and KeyChoice Income Growth Fund, using financial
statements which need not be certified, within four to six months of the date of
commencement of operations of the Registration Statements for such Funds under
the Securities Act of 1933.

(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, when such annual report is issued, containing information called
for by Item 5A of Form N-1A, upon request and without charge.

(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion

<PAGE> 97

of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer of controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

<PAGE> 98

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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Columbus,
and State of Ohio, on the 17th day of December, 1996.

SBSF FUNDS, INC.

By *
-------------------------
Leigh A. Wilson
President

By /s/ Scott A. Englehart
Scott A. Englehart
* Attorney-in-Fact

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registrant's Registration Statement has been signed
below by the following individuals in the capacities indicated on the date
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* President and Director
- ---------------------------- (Principal Executive Officer) December 17, 1996
Leigh A. Wilson

*
- ----------------------------
Eugene J. McDonald Director December 17, 1996

*
- ----------------------------
Frank A. Weil Non-Executive Chairman and
Director December 17, 1996

*
- ----------------------------
Edward P. Campbell Director December 17, 1996

*
- ----------------------------
Kevin L. Martin Treasurer (Principal Financial
Officer and Principal
Accounting Officer) December 17, 1996
</TABLE>

<PAGE> 99

/s/ Scott A. Englehart
Scott A. Englehart
*Attorney-in-Fact

<PAGE> 100

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------

<S> <C>
EX-99.B10 Opinion of Counsel
EX-99.B11 Consent of Independent Accountants
EX-99.B16 Computation of performance quotations
EX-99.B17 Financial Data Schedules
</TABLE>

<PAGE> 1
EXHIBIT 99.B10

[MORRISON & FOERSTER LLP LETTERHEAD]

December 13, 1996

SBSF Funds, Inc.
45 Rockefeller Plaza
New York, NY 10111

Re: Post-Effective Amendment No. 29 to
SBSF Funds, Inc. Registration Statement on Form N-1A

Gentlemen:

We refer to Post-Effective Amendment No. 29 and Amendment No. 30 to the
Registration Statement on Form N-1A (SEC File No. 2-84920) (the "Registration
Statement") of SBSF Funds, Inc., a Maryland corporation (d/b/a Key Mutual Funds)
(the "Company"), relating to the registration of an indefinite number of shares
of common stock of one portfolio offered by the Company, namely Key Stock Index
Fund (the "Shares").

We have been requested by the Company to furnish this opinion as
Exhibit 10 to the Registration Statement.

We have examined documents relating to the organization of the Company
and the authorization and issuance of shares of the Fund. We have also made such
inquiries of the Company and examined such questions of law as we have deemed
necessary for the purpose of rendering the opinion set forth herein. We have
assumed the genuineness of all signatures and the authenticity of all items
submitted to us as originals and the conformity with originals of all items
submitted to us as copies.

Based upon and subject to the foregoing, we are of the opinion that:

The issuance and sale of the Shares have been duly and validly
authorized by all appropriate corporate action, and assuming delivery of the
Shares by sale or in accord with the Company's dividend reinvestment plan in
accordance with the Company's then-current Registration Statement under the
Securities Act of 1933, the Shares will be validly issued, fully paid and
nonassessable.

We consent to the inclusion of this opinion as an exhibit to the
Registration Statement.

<PAGE> 2

In addition, we consent to the use of our name and to the reference to
our firm under the heading "Counsel" in the Prospectus, which is included as
part of the Registration Statement.

Very truly yours,

/s/ Morrison & Foerster LLP

MORRISON & FOERSTER LLP

<PAGE> 1
EXHIBIT 99.B11

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the reference to us under the heading "Independent
Accountants and Reports" in the Statement of Additional Information constituting
part of this Post-Effective Amendment No. 29 to the registration statement on
Form N-1A (the "Registration Statement") relating to the Key Stock Index Fund
and the Key International Index Fund, two of the portfolios of Key Mutual Funds
(SBSF Funds, Inc.).

/s/ Price Waterhouse LLP

Price Waterhouse LLP
New York, New York
December 16, 1996

<PAGE> 1
EX 99.B16

KEY MUTUAL FUNDS
EXHIBIT 16
TOTAL RETURN

KEY STOCK INDEX FUND

AGGREGATE TOTAL RETURN
---------------------------------------------------

T = (ERV/P) - 1

WHERE: T = TOTAL RETURN

ERV = REDEEMABLE VALUE AT THE END OF THE
PERIOD OF A HYPOTHETICAL $1,000
INVESTMENT MADE AT THE BEGINNING OF THE
PERIOD.

P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.

EXAMPLE:

SINCE INCEPTION: ( 07/01/96 TO 10/31/96):
( 1,050.5 /1,000) - 1 = 5.05%
YEAR TO DATE: ( 07/01/96 TO 10/31/96):
( 1,050.50/1,000) - 1 = 5.05%
QUARTERLY: ( 08/01/96 TO 10/31/96):
( 1,102.28/1,000) - 1 = 10.23%
MONTHLY: ( 10/01/96 TO 10/31/96):
( 1,027.56/1,000) - 1 = 2.76%

<PAGE> 2

KEY MUTUAL FUNDS
30-DAY S.E.C. YIELD CALCULATIONS
KEY STOCK INDEX FUND

ACTUAL (WITH WAIVERS)
(a-b)
----------
30-Day S.E.C. Yield Equation = 2 *{[( (cd) +1)(to the 6th power)]-1} =

WHERE a= Dividends and interest earned during the period

b= Expenses accrued for the period (net of reimbursements)

c= The average daily number of shares outstanding during the period
that were entitled to receive dividends

d= The offering price (without CDSC) or the maximum redemption price
(with CDSC) per share on the last day of the period

MAXIMUM FEES (without waivers)
(a-b)
---------
30-Day S.E.C. Yield Equation = 2 *{[( (cd) +1)(to the 6th power)]-1} =

WHERE a= Dividends and interest earned during the period

b= Expenses accrued for the period (without waivers)

c= The average daily number of shares outstanding during the period
that were entitled to receive dividends

d= The offering price (without CDSC) or the maximum redemption price
(with CDSC) per share on the last day of the period

ACTUAL

( 25,750.42- 0.00)
2*{[( ------------------------------- +1)(to the 6th power)]-1) = 3.22%
( 926.381.069* 10.44)

The performance was computed based on the thirty day period ending
October 31, 1996.

FULL FEES (WITHOUT WAIVERS)

( 25,750.42- 49,464.88)
2*{[( ------------------------------- +1)(to the 6th power)]-1) = -2.92%
( 926.381.069* 10.44)

The performance was computed based on the thirty day period ending
October 31, 1996.

<PAGE> 1
[ARTICLE] 6
[CIK] 0000722833
[NAME] KEY MUTUAL FUNDS
[SERIES]
[NUMBER] 051
[NAME] KEY STOCK INDEX
<TABLE>
<S> <C>
[PERIOD-TYPE] 4-MOS
[FISCAL-YEAR-END] APR-30-1997
[PERIOD-START] JUL-01-1996
[PERIOD-END] OCT-31-1996
[INVESTMENTS-AT-COST] 10,087,064
[INVESTMENTS-AT-VALUE] 10,373,369
[RECEIVABLES] 61,451
[ASSETS-OTHER] 28,399
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 10,463,219
[PAYABLE-FOR-SECURITIES] 2,159
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 33,715
[TOTAL-LIABILITIES] 35,874
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 9,960,267
[SHARES-COMMON-STOCK] 998,962
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 28,160
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 15,849
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 423,069
[NET-ASSETS] 10,427,345
[DIVIDEND-INCOME] 35,389
[INTEREST-INCOME] 45,750
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 81,139
[REALIZED-GAINS-CURRENT] 15,849
[APPREC-INCREASE-CURRENT] 423,069
[NET-CHANGE-FROM-OPS] 520,057
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 52,978
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,045,851
[NUMBER-OF-SHARES-REDEEMED] 52,114
[SHARES-REINVESTED] 5,225
[NET-CHANGE-IN-ASSETS] 10,427,345
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,524
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 59,794
[AVERAGE-NET-ASSETS] 7,489,510
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] .08
[PER-SHARE-GAIN-APPREC] .42
[PER-SHARE-DIVIDEND] .06
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.44
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>