MFS SERIES TRUST X, 485BPOS, 1998-11-25

MFS SERIES TRUST X
485BPOS, 1998-11-25

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As filed with the Securities and Exchange Commission on November 25, 1998

1933 Act File No. 33-1657
1940 Act File No. 811-4492
===============================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

POST-EFFECTIVE AMENDMENT NO. 24

AND

REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 25

MFS(R) SERIES TRUST X

(Exact Name of Registrant as Specified in Charter)

500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, MA 02116
(Name and Address of Agent for Service)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)
[X] on November 28, 1998 pursuant to paragraph (b)

[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on [date] pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on [date] pursuant to paragraph (a)(ii) of rule 485

If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment

===============================================================================

<PAGE>

MFS SERIES TRUST X

MFS(R) GOVERNMENT MORTGAGE FUND
MFS(R) STRATEGIC VALUE FUND
MFS(R) SMALL CAP VALUE FUND
MFS(R) EMERGING MARKETS DEBT FUND

CROSS REFERENCE SHEET
---------------------

(Pursuant to Rule 404 showing location in the Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)

<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *

2 (a) Expense Summary *

(b), (c) * *

3 (a) Condensed Financial *
Information

(b) * *

(d) Condensed Financial *
Information

4 (a) The Fund; Investment Objective *
and Policies; Investment
Techniques; Risk Factors

(b), (c) Investment Objective and *
Policies; Risk Factors; Year 2000
Issues
</TABLE>

<PAGE>

(b) Front Cover Page; - *
Management of the Fund;
Back Cover Page

(d) Management of the Fund - *
Investment Adviser;
Administrator - Back Cover Page

(e) Management of the Fund - *
Shareholder Servicing
Agent; Back Cover Page

(f) Expense Summary; Condensed *
Financial Information;
Information Concerning
Shares of the Fund - Expenses

(g) Investment Objective and *
Policies - Portfolio Trading;
Information Concerning
Shares of the Fund -
Purchases

5A (a), (b), (c) ** **

6 (a) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Description of Shares, Voting
Rights and Liabilities
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(b), (c), (d) * *

(e) Shareholder Services *

(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options

(g) Information Concerning Shares *
of the Fund - Distributions;
Information Concerning Shares
of the Fund - Tax Status

(h) * *

7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page

(b) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value;
Year 2000 Issue

(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services

(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services

(e) Expense Summary; Information *
Concerning Shares of the Fund -
Purchases; Information
Concerning Shares of the Fund -
Distribution Plan

(f) Information Concerning Shares *
of the Fund - Distribution Plan
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>

(g) Expense Summary; Information *
Concerning Shares of the
Fund - Purchases; Information
Concerning Shares of the
Fund - Exchanges; Information
Concerning Shares of the Fund Redemptions
and Repurchases; Information Concerning
Shares of the Fund - Distribution Plan;
Information Concerning Shares of the Fund -
Distributions; Information Concerning
Shares of the Fund - Performance
Information; Shareholder Services

8 (a) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Shareholder
Services

(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases

9 * *
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>

10 (a), (b) * Front Cover Page

11 * Front Cover Page

12 * Definitions

13 (a), (b), (c) * Investment Objective,
Policies and Restrictions

(d) * *

14 (a), (b) * Management of the Fund -
Trustees and Officers

15 (a) * *

(b), (c) * Management of the Fund -
Trustees and Officers

16 (a), (b) Management of the Fund Management of the Fund -
Investment Adviser;
Management of the Fund -
Trustees and Officers

(d) * Management of the Fund -
Investment Adviser;
Administrator

(e) * Portfolio Transactions and
Brokerage Commissions

(f) Information Concerning Distribution Plan
Shares of the Fund -
Distribution Plan

(g) * *
</TABLE>

<PAGE>

(i) * Management of the Fund -
Shareholder Servicing
Agent

17 (a), (b) (c), (d), (e) * Portfolio Transactions and
Brokerage Commissions

18 (a) Information Concerning Description of Shares,
Shares of the Fund - Voting Rights and
Description of Shares, Voting Liabilities
Rights and Liabilities

(b) * *

19 (a) Information Concerning Shareholder Services
Shares of the Fund -
Purchases; Shareholder
Services

(b) Information Concerning Management of the Fund -
Shares of the Fund - Net Distributor; Determination
Asset Value; Information of Net Asset Value and
Concerning Shares of the Performance - Net Asset
Fund - Purchases Value

20 * Tax Status

21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plan

22 (a) * *
</TABLE>

<PAGE>

23 * Independent Auditors and
Financial Statements
</TABLE>

- ------------------------
* Not Applicable
** Contained in Annual Report

<PAGE>

MFS(R) GOVERNMENT MORTGAGE FUND

Supplement to the December 1, 1998 Prospectus and
Statement of Additional Information

The following information should be read in conjunction with the Fund's
Prospectus and Statement of Additional Information ("SAI"), dated December 1,
1998, and contains a description of Class I shares.

Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.

EXPENSE SUMMARY

<TABLE>
<CAPTION>
Shareholder Transaction Expenses: Class I
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................................ None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable)................................. None

Annual Operating Expenses of the Fund (as a percentage of average net assets):

Management Fees (after fee reduction) (1)........................................................... 0.40%
Rule 12b-1 Fees..................................................................................... None
Other Expenses(2)(3)................................................................................ 0.27%
-----
Total Operating Expenses (after fee reduction)(1)................................................... 0.67%

</TABLE>
- --------------------

(1) Effective November 1, 1998, the Adviser voluntarily reduced the Management
Fee to 0.40% of the Fund's average daily net assets. Absent any fee
reductions, "Management Fees" would have been 0.45% for Class I Shares and
"Total Operating Expenses," expressed as a percentage of average daily net
assets, would have been 0.72% .
(2) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended July 31, 1998.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."

Example of Expenses
-------------------

An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:

<TABLE>
<CAPTION>
Period Class I
------ -------

<S> <C>
1 year............................................... $ 7
3 years.............................................. 21
5 years.............................................. 37
10 years............................................. 83
</TABLE>

The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.

The "Example" set forth above should not be considered a representation of past
or future expenses of the Fund; actual expenses may be greater or less than
those shown.

- 1 -

<PAGE>

CONDENSED FINANCIAL INFORMATION

The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to Shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are
Deloitte & Touche LLP.

Financial Highlights - Class I Shares

Fiscal Year Ended Period Ended
July 31, 1998 July 31,1997*
----------------- -------------
<S> <C> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 6.72 $ 6.59
-------- -------

Income from investment operations # -

Net investment income $ 0.44 $ 0.31
Net realized and unrealized gain (loss)
on investments (0.02) 0.09
--------- -------
Total from investment operations $ 0.42 $ 0.40
--------- -------

Less distributions declared to shareholders -

From net investment income $ (0.43) $ (0.26)
From net realized gains on investments (0.02) --
From tax return of capital $ -- (0.01)
--------- -------
Total distributions declared to shareholders $ (0.45) $ (0.27)
--------- -------

Net asset value - end of period $ 6.69 $ 6.72
--------- -------
Total return 6.47% 6.19%++

Ratios (to average net assets)/
Supplemental data:
Expenses## 0.73% 0.73%+
Net investment income 6.67% 7.06%+
Portfolio turnover 72% 33%
Net assets, end of period
(000 omitted) $ 51 $113
</TABLE>

- --------------------------
* For the period from the inception of Class I, January 2, 1997, through July
31, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.

ELIGIBLE PURCHASERS

Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):

(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and

(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.

In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.

- 2 -

<PAGE>

SHARE CLASSES OFFERED BY THE FUND

Three classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares and Class I shares. Class I shares are available for
purchase only by Eligible Purchasers, as defined above, and are described in
this Supplement. Class A shares and Class B shares are described in the Fund's
Prospectus and are available for purchase by the general public.

Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class I shares do not convert to any
other class of shares of the Fund.

OTHER INFORMATION

Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares and Class B shares because expenses
attributable to Class A shares and Class B shares generally will be higher.

The date of this Supplement is December 1, 1998

<PAGE>

<TABLE>
<S> <C>
PROSPECTUS
MFS[RegTM] GOVERNMENT December 1, 1998
MORTGAGE FUND Class A Shares of Beneficial Interest
(A member of the MFS Family of Funds[RegTM]) Class B Shares of Beneficial Interest
</TABLE>
- --------------------------------------------------------------------------------

MFS GOVERNMENT MORTGAGE FUND,
500 Boyston St., Boston, MA 02116 (617) 954-5000

This Prospectus pertains to the MFS Government Mortgage Fund (the "Fund"), a
diversified series of MFS Series Trust X (the "Trust"), an open-end investment
company presently consisting of seven series. The primary investment objective
of the Fund is to provide a high level of current income. The secondary
objective of the Fund is to protect shareholders' capital. The Fund seeks to
achieve its objectives by investing, under normal circumstances, at least 65%
of its total assets in obligations issued or guaranteed by the Government
National Mortgage Association ("GNMA") (including pass-through certificates of
GNMA) and in obligations fully collateralized or otherwise fully secured by
obligations issued or guaranteed by GNMA (see "Investment Objectives and
Policies"). The minimum initial investment is generally $1,000 per account (see
"Purchases").

The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.

(continued on next page)

Investment products are not insured by the FDIC or any other government agency,
and are not deposits or other obligations of, or guaranteed by, any financial
institution. Shares of mutual funds are subject to investment risk, including
possible loss of the principal amount invested, and will fluctuate in value.
You may receive more or less than you paid when you redeem your shares.

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.

Investors should read this Prospectus and retain it for future reference.

<PAGE>

(continued from previous page)

This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with
the Securities and Exchange Commission (the "SEC") a Statement of Additional
Information dated December 1, 1998, as amended or supplemented from time to
time (the "SAI"), which contains more detailed information about the Fund. The
SAI is incorporated into this Prospectus by reference. See page 37 for a
further description of the information set forth in the SAI. A copy of the SAI
may be obtained without charge by contacting the Shareholder Servicing Agent
(see back cover for address and phone number). The SEC maintains an Internet
World Wide Web site (http://www.sec.gov) that contains the SAI, materials that
are incorporated by reference into this Prospectus and the SAI, and other
information regarding the Fund. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.

Table of Contents

<TABLE>
<CAPTION>
Page
-----
<S> <C>
1. Expense Summary ................................................. 3
2. Condensed Financial Information ................................. 4
3. The Fund ........................................................ 8
4. Investment Objectives and Policies .............................. 8
5. Management of the Fund .......................................... 15
6. Year 2000 Issues ................................................ 17
7. Information Concerning Shares of the Fund ....................... 17
Purchases ..................................................... 17
Exchanges ..................................................... 24
Redemptions and Repurchases ................................... 26
Distribution Plan ............................................. 29
Distributions ................................................. 31
Tax Status .................................................... 32
Net Asset Value ............................................... 32
Description of Shares, Voting Rights and Liabilities .......... 33
Performance Information ....................................... 34
Provision of Annual and Semiannual Reports .................... 35
8. Shareholder Services ............................................ 35
APPENDIX A ..................................................... A-1
APPENDIX B ..................................................... B-1
</TABLE>

2
<PAGE>

1. EXPENSE SUMMARY

<TABLE>
<CAPTION>
Class A Class B
------------ --------
<S> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a percentage
of offering price) ............................. 4.75% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable) ......... See below(1) 4.00%
Annual Operating Expenses (as a percentage
of average net assets):
Management Fees (after fee reduction)(2) ......... 0.40% 0.40%
Rule 12b-1 Fees .................................. 0.25%(3) 1.00%(4)
Other Expenses(5) ................................ 0.27% 0.27%
--------- -----
Total Operating Expenses (after fee
reduction)(2) .................................. 0.92% 1.67%
</TABLE>

- ----------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge (a "CDSC") of 1% will be imposed on such purchases in the
event of certain redemption transactions within 12 months following such
purchases (see "Information Concerning Shares of the Fund -- Purchases").

(2) Effective November 1, 1998 the Adviser voluntarily reduced the Management
fee to 0.40% of the Fund's average daily net assets. Absent any fee
reduction, "Management Fees" would have been 0.45% for Class A and Class B
shares and "Total Operating Expenses" expressed as a percentage of average
daily net assets, would have been 0.97% and 1.72%, respectively, for Class
A and Class B shares.

(3) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. Payment of the 10% per annum Class A distribution fee has been
suspended indefinitely, and will only be implemented on such date as the
Trustees of the Trust may determine. Distribution expenses paid under this
Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have
been permissible if imposed entirely as an initial sales charge. See
"Information Concerning Shares of the Fund -- Distribution Plan".

(4) The Fund's Distribution Plan provides that it will pay distribution/
service fees aggregating up to 1.00% per annum of the average daily net
assets attributable to Class B shares. Distribution expenses paid under
the Distribution Plan, together with any CDSC payable upon redemption of
Class B shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely
as an initial sales charge. See "Information Concerning Shares of the Fund
-- Distribution Plan".

3
<PAGE>

(5) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."

Example of Expenses
-------------------

An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):

<TABLE>
<CAPTION>
Period Class A Class B(1)
- ------------------- --------- --------------------
<S> <C> <C> <C>
1 year ............ $ 56 $ 57 $ 17
3 years ........... 75 83 53
5 years ........... 96 111 91
10 years .......... 155 177(2) 177(2)
</TABLE>

- ----------------
(1) Assumes no redemption.

(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.

The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution Plan."

The "Example" set forth above should not be considered a representation of past
or future expenses of the Fund; actual expenses may be greater or less than
those shown.

2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors, given upon their authority as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte &
Touche LLP.

4
<PAGE>

Financial Highlights
Class A

<TABLE>
<CAPTION>
Eight
Year Ended July 31, Months Ended Year Ended
--------------------------------------- July 31, November 30,
1998 1997 1996 1995 1994 1993
-------- --------- ---------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning
of period .......................... $ 6.72 $ 6.53 $6.65 $6.49 $ 6.85 $ 6.82
------ ------ ----- ----- ------ ------
Income from investment
operations# --
Net investment income[sec] ........... $ 0.43 $ 0.44 $0.45 $0.45 $ 0.29 $ 0.34
Net realized and unrealized gain
(loss) on investments .............. (0.03) 0.18 (0.14) 0.14 (0.36) 0.20
------ ------ ------ ----- ------ ------
Total from investment operations...... $ 0.40 $ 0.62 $0.31 $0.59 $(0.07) $ 0.54
------ ------ ------ ----- ------- ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.41) $ (0.42) $(0.42) $(0.42) $(0.20) $(0.47)
From net realized gains on
investments ....................... (0.02) -- -- -- -- --
In excess of net realized gain
on investments .................... -- -- -- -- -- (0.04)
From paid-in capital ............... -- -- -- -- (0.09) --
From tax return of capital ......... -- (0.01) (0.01) (0.01) -- --
------ ------- ------ ------ ------ ------
Total distributions declared
to shareholders ................. $(0.43) $ (0.43) $(0.43) $(0.43) $(0.29) $(0.51)
------ ------- ------ ------ ------ ------
Net asset value -- end of period ..... $ 6.69 $ 6.72 $6.53 $6.65 $ 6.49 $ 6.85
====== ======= ====== ====== ====== ======
Total return [double dagger].......... 6.17% 9.90% 4.76% 9.60% (1.51)%++ 8.11%
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## ......................... 0.97% 1.09% 1.16% 1.25% 1.27%+ 1.38%
Net investment income .............. 6.43% 6.75% 6.75% 6.99% 6.46%+ 6.30%
Portfolio turnover ................... 72% 33% 25% 87% 37% 167%
Net assets at end of period
(000,000 omitted) .................. $ 657 $ 653 $ 541 $ 534 $ 424 $ 522
</TABLE>

- ----------------
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993,
are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for fees paid
indirectly.
[double dagger] Total returns for Class A shares do not include the applicable
sales charge. If the charge had been included, the results
would have been lower.

[sec] The investment adviser voluntarily waived a portion of its
management fee for certain of the periods indicated. If the fee
had been incurred by the Fund, the net investment income per
share and the ratios would have been:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income ............. -- -- -- -- $ 0.29 $ 0.34
Ratios (to average net assets):
Expenses## ....................... -- -- -- -- 1.28%+ 1.46%
Net investment income ............ -- -- -- -- 6.45%+ 6.22%
</TABLE>

5
<PAGE>

Financial Highlights
Class A

<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------------------
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period ......................... $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ........................................ $ 0.46 $ 0.48 $ 0.53 $ 0.59 $ 0.64
Net realized and unrealized gain (loss)
on investments .............................................. 0.09 0.25 (0.40) 0.48 (0.06)
------ ------ ------- ------ -------
Total from investment operations ............................ $ 0.55 $ 0.73 $ 0.13 $ 1.07 $ 0.58
------ ------ ------- ------ -------
Less distributions declared to
shareholders --
From net investment income ................................... $ (0.42) $ (0.44) $ (0.49) $ (0.58) $ (0.64)
From paid-in capital ......................................... (0.26) (0.35) (0.49) (0.45) (0.46)
------- ------- ------- ------- -------
Total distributions declared
to shareholders ........................................... $ (0.68) $ (0.79) $ (0.98) $ (1.03) $ (1.10)
------- ------- ------- ------- -------
Net asset value -- end of period ............................... $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82
------- ------- ------- ------- -------
Total return [double dagger].................................... 8.25% 11.00% 2.05% 14.72% 7.39%
Ratios (to average net assets)/
Supplemental data:
Expenses ..................................................... 1.42% 1.44% 1.40% 1.37% 1.38%
Net investment income ........................................ 6.57% 6.91% 7.29% 7.57% 7.88%
Portfolio turnover ............................................. 484% 731% 507% 489% 285%
Net assets at end of period
(000,000 omitted) ............................................ $ 715 $ 886 $ 1,068 $ 1,380 $ 1,295
</TABLE>

- ----------------
[double dagger] Total returns for Class A shares do not include the applicable
sales charge (except for reinvested dividends prior to October
1, 1989). If the charge had been included, the results would
have been lower.

6
<PAGE>

Financial Highlights
Class B

<TABLE>
<CAPTION>
Eight
Year Ended July 31, Months Ended Period Ended
------------------------------------------- July 31, November 30,
1998 1997 1996 1995 1994 1993*
---------- ---------- ---------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning
of period .......................... $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84 $ 6.97
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income[sec] ........... $ 0.38 $ 0.40 $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain
(loss) on investments .............. (0.03) 0.17 (0.13) 0.14 (0.35) (0.44)
------ ------ ------ ------ ------- ------
Total from investment operations...... $ 0.35 $ 0.57 $ 0.27 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------ ------- ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.35) $(0.37) $(0.38) $(0.38) $(0.18) $(0.07)
From net realized gains on
investments ....................... (0.02) -- -- -- -- --
From paid-in capital ............... -- -- -- -- (0.08) --
From tax return of capital ......... -- (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------- ------
Total distributions declared
to shareholders ................. $(0.37) $(0.38) $(0.39) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------ ------- ------
Net asset value -- end of period ..... $ 6.70 $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ====== ====== ======
Total return [double dagger].......... 5.40% 9.09% 3.98% 8.81% (1.97)%++ (3.91)%++
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## ......................... 1.72% 1.78% 1.87% 1.96% 1.94%+ 1.87%+
Net investment income .............. 5.67% 6.02% 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover ................... 72% 33% 25% 87% 37% 167%
Net assets at end of period
(000,000 omitted) .................. $ 155 $ 286 $ 553 $ 812 $1,229 $1,628
</TABLE>

- ----------------
* For the period from the inception of Class B, September 7, 1993,
through November 30, 1993.
+ Annualized.
[double dagger] Not annualized.
# Per share data for the periods subsequent to November 30, 1993,
are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for fees paid
indirectly.
[sec] The investment adviser voluntarily waived a portion of its
management fee for certain of the periods indicated. If the fee
had been incurred by the Fund, the net investment income per
share and the ratios would have been:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income ............. -- -- -- -- $0.26 $0.38
Ratios (to average net assets):
Expenses## ....................... -- -- -- -- 1.94%+ 1.94%+
Net investment income ............ -- -- -- -- 5.80%+ 5.85%+
</TABLE>

7
<PAGE>

3. THE FUND

The Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts in 1985. The Trust presently consists of
seven series, each of which represents a portfolio with separate investment
objectives and policies. Shares of the Fund are continuously sold to the public
and the Fund then uses the proceeds to buy securities for its portfolio. Two
classes of shares of the Fund currently are offered for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a CDSC upon
redemption of 1.00% during the first year in the case of certain purchases of
$1 million or more and certain purchases by retirement plans) and subject to an
annual distribution and service fee up to a maximum of 0.35% per annum. Class B
shares are offered at net asset value without an initial sales charge but
subject to a CDSC upon redemption (declining from 4.00% during the first year
to 0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum. Class B shares will convert to Class A shares
approximately eight years after purchase. In addition, the Fund offers an
additional class of shares, Class I shares, exclusively to certain
institutional investors. Class I shares are made available by means of a
separate Prospectus Supplement provided to institutional investors eligible to
purchase Class I shares, and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.

The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. The Adviser is responsible for the management of the Fund's assets
and the officers of the Trust are responsible for the Fund's operations. The
Adviser manages the portfolio from day to day in accordance with the Fund's
investment objectives and policies. A majority of the Trustees are not
affiliated with the Adviser. The Fund also offers to buy back (redeem) its
shares from its shareholders at any time at net asset value, less any
applicable CDSC.

4. INVESTMENT OBJECTIVES AND POLICIES

Investment Objectives -- The Fund's primary investment objective is to provide
a high level of current income. The Fund's secondary objective is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve its objectives.

Investment Policies -- The Fund seeks to achieve its investment objectives by
investing at least 65% of its total assets, under normal circumstances, in
obligations issued or guaranteed by GNMA (including pass-through certificates
of GNMA which are described below) and in obligations fully collateralized or
otherwise fully secured by obligations issued or guaranteed by GNMA. The Fund
may also invest in other securities that are issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("Government Securities"). Such Government Securities include
(1) the following U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one to 10
years), and U.S. Treasury bonds (generally maturities of greater than 10 years)
all of which are backed by the full faith and credit of the United States; and
(2) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, some of which are

8
<PAGE>

backed by the full faith and credit of the U.S. Treasury; some of which are
supported by the right of the issuer to borrow from the U.S. Government, e.g.,
obligations of Federal Home Loan Banks; some of which are backed only by the
credit of the issuer itself, e.g., obligations of the Student Loan Marketing
Association; and some of which are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations, e.g., obligations of
the Federal National Mortgage Association ("FNMA"). No assurance can be given
that the U.S. Government will provide financial support to these agencies and
instrumentalities because it is not obligated by law, in certain instances, to
do so. The primary types of Government Securities in which the Fund invests are
described in Appendix B.

The Fund may invest in pass-through certificates of GNMA. These certificates
are mortgage-backed securities which represent a partial ownership interest in
a pool of mortgage loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan included in the
pool is either insured by the Federal Housing Administration or guaranteed by
the Veterans Administration. For a further description of these and other such
obligations and of the consequences of the prepayment of mortgages underlying
these certificates, see "Mortgage Pass-Through Securities" below and Appendix
B.

When and if available, Government Securities may be purchased at a discount
from face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive.

Depending on market conditions, the Fund may temporarily take a defensive
position by investing a substantial portion of its assets in cash, short-term
Government Securities and related repurchase agreements.

Government Securities do not generally involve the credit risks associated with
other types of fixed income securities, although, as a result, the yields
available from Government Securities are generally lower than the yields
available from corporate fixed income securities. Like other fixed income
securities, however, the values of Government Securities change as interest
rates fluctuate. Therefore, the net asset value of the shares of an open-end
investment company such as the Fund which invests in fixed income securities
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a portfolio invested at higher yields can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
at lower yields can be expected to decline. Although changes in the value of
the Fund's portfolio securities subsequent to their acquisition are reflected
in the net asset value of shares of the Fund, such changes will not affect the
income received by the Fund from such securities. While the Fund seeks to
maintain a relatively high, stable dividend, no specific level of income or
yield differential can ever be assured since available yields vary over time.
The dividends paid by the Fund will increase or decrease in relation to the
income received by the Fund from its investments which will in any case be
reduced by the Fund's expenses before being distributed to the Fund's
shareholders.

Mortgage Pass-Through Securities: The Fund may invest in mortgage pass-
through securities that are Government Securities. Mortgage pass-through
securities are securities

9
<PAGE>

representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to
the Fund may be different from the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise, the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed income securities.

Repurchase Agreements: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.

"When-Issued" Securities: Some Government Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will
be made on a future date may be deemed a separate security. Although the Fund
is not limited as to the amount of Government Securities for which it may have
commitments to purchase on such bases, it is expected that under normal
circumstances the Fund will not commit more than 30% of its total assets to
such purchases. The Fund does not pay for the securities until received, and
does not start earning interest on the securities until the contractual
settlement date. While awaiting delivery of the securities purchased on such
bases, the Fund will segregate liquid assets or Government Securities
sufficient to cover its commitments.

Mortgage "Dollar Roll" Transactions: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
The Fund will only enter into covered rolls. A "covered roll" is a specific
type of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction.

Restricted Securities: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended ("1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under

10
<PAGE>

the 1933 Act ("Rule 144A securities"). A determination is made based upon a
continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to the Fund's limitation
on investing not more than 10% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily
function of determining and monitoring the liquidity of Rule 144A securities.
The Board, however, retains oversight of the liquidity determinations, focusing
on factors such as valuation, liquidity and availability of information.
Investing in Rule 144A Securities could have the effect of decreasing the level
of liquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these Rule 144A securities held in
the Fund's portfolio. Subject to the Fund's 10% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that
may not be sold under Rule 144A, which presents certain risks. As a result, the
Fund might not be able to sell these securities when the Adviser wishes to do
so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.

Zero Coupon Bonds: The Fund may invest in zero coupon bonds, which are debt
obligations issued or purchased at a significant discount from face value. The
Fund will only purchase zero coupon bonds which are Government Securities. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon bonds do not
require the periodic payment of interest. Such investments benefit the issuer
by mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations.

Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
The Fund may invest a portion of its assets in collateralized mortgage
obligations ("CMOs") which are debt obligations collateralized by mortgage
loans or mortgage pass- through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Mortgage Assets underlying CMOs
purchased by the Fund must be issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities. The Fund may also invest a portion
of its assets in multiclass pass-through securities which are interests in a
trust composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs or make
scheduled distributions on the multiclass pass-through securities. In a CMO, a
series of bonds or certificates is usually issued in multiple classes with
different maturities. Each class of CMOs, often referred to as a "tranche," is
issued at a specific fixed or floating coupon rate and has a stated maturity or
final distribution date. Principal prepayments on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution dates resulting in a loss of all or part of the pre-

11
<PAGE>

mium, if any has been paid. Certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which the Fund invests, the investment may be
subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities.

The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs and the risks related to
transactions therein, see the SAI.

Stripped Mortgage-Backed Securities: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities usually structured with two classes that receive
different proportions of the interest and principal distributions from an
underlying pool of mortgage assets. The Fund will only invest in SMBS whose
mortgage assets are issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. For a further description of SMBS and the
risks related to transactions therein, see the SAI.

Swaps and Related Transactions: The Fund may enter into interest rate swaps
and other types of available swap agreements. Swaps involve the exchange by the
Fund with another party of cash payments based upon different interest rate
indexes, and other prices or rates, such as the value of mortgage prepayment
rates. For example, in the typical interest rate swap, the Fund might exchange
a sequence of cash payments based on a floating rate index for cash payments
based on a fixed rate.

The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements
of buying a cap and selling a floor.

Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for further information on, and the risks involved
in, these activities.

Lending of Securities and Short Sales: The Fund may make loans of its
portfolio securities. Such loans will usually be made to member banks of the
Federal Reserve System and member firms (and subsidiaries thereof) of the New
York Stock Exchange (the "Exchange") under contracts calling for collateral in
U.S. Government Securities, cash or an irrevocable letter of credit. The Fund
will continue to collect the equivalent of interest on the securities loaned
and will also receive either interest (through investment of cash collateral)
or a fee (if the collateral is Government Securities or a letter of credit).
The Fund may pay finder's and other fees in connection with securities loans.
The Fund may also make short

12
<PAGE>

sales involving either securities retained in the Fund's portfolio or
securities which the Fund has the right to acquire without paying additional
consideration.

Indexed Securities: The Fund may invest in indexed securities whose value is
linked to interest rates, commodities, indices or other financial indicators.
Most indexed securities are short to intermediate term fixed-income securities
whose values at maturity (i.e., principal value) or interest rates rise or fall
according to changes in the value of one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying instrument appreciates), and may have return characteristics similar
to direct investments in the underlying instrument or to one or more options on
the underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself and could involve the loss of all or a portion of
the principal amount of or interest on the instrument.

Portfolio Trading: The Fund intends to manage its portfolio by buying and
selling Government Securities, as well as holding selected obligations to
maturity, and by engaging in transactions involving related options, Futures
Contracts and swap transactions. In managing its portfolio the Fund seeks to
maximize the return on its portfolio by taking advantage of market developments
and yield disparities. For a description of the strategies which may be used by
the Fund in managing its portfolio, see the SAI.

The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of other investment company clients of MFD, the Fund's
distributor, as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions. From time to time, the Adviser may direct
certain portfolio transactions to broker-dealer firms which, in turn, have
agreed to pay a portion of the Fund's operating expenses (e.g., fees charged by
the custodian of the Fund's assets). For a further discussion of portfolio
trading, see the SAI.

Options on Fixed Income Securities: The Fund may write (sell) covered put and
call options on fixed income securities and purchase put and call options. The
Fund will write such options for hedging purposes and to increase its return;
however, it will not write such options for the purpose of attempting to pay
out a pre-established level of dividends or distributions. The Fund may also
write combinations of put and call options on the same security, known as
"straddles." The Fund may purchase put or call options in anticipation of
declines in the value of fixed income portfolio securities or increases in the
value of securities to be acquired.

For hedging purposes, the Fund may also enter into options on the yield
"spread," or yield differential, between two securities. This transaction is
referred to as a "yield curve" option. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve

13
<PAGE>

option is profitable to the holder if this differential widens (in the case of
a call) or narrows (in the case of a put), regardless of whether the yields of
the underlying securities increase or decrease. Yield curve options written by
the Fund will be covered as described in the SAI. The trading of yield curve
options is subject to all the risks associated with trading other types of
options, as discussed below under "Risks of Investment in Options, Futures
Contracts and Options on Futures Contracts" and in the SAI. In addition, such
options present risks of loss even if the yield on one of the underlying
securities remains constant, if the spread moves in a direction or to an extent
which was not anticipated.

In certain instances, the Fund may enter into options on Treasury Securities.
This type of option is referred to as "reset" options or "adjustable strike"
options. These options provide for periodic adjustment of the strike price and
may also provide for the periodic adjustment of the premium during the term of
the option.

The Fund may purchase and sell options that are traded on U.S. exchanges, and
options traded over-the-counter, with broker-dealers who deal in these options.
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such options at a formula price, in which
event only an amount of the cover determined with reference to the formula will
be considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers and will treat the assets used to cover these options as
illiquid. See "Investment Objectives, Policies and Restrictions -- Options on
Fixed Income Securities" in the SAI for a further discussion of options on
fixed income securities, as well as the associated risks.

Futures Contracts: The Fund may enter into futures contracts on fixed income
securities ("Futures Contracts"). Such transactions may be used to hedge
against anticipated future changes in interest rates which otherwise might
either adversely affect the value of the Fund's portfolio securities or
adversely affect the prices of Government Securities which the Fund intends to
purchase at a later date. Should interest rates move in an unexpected manner,
the Fund may not achieve the anticipated benefits of Futures Contracts or may
realize a loss.

The Fund may also enter into Futures Contracts for non-hedging purposes, to the
extent permitted by applicable law, which involves greater risks. See
"Investment Objectives, Policies and Restrictions -- Futures Contracts" in the
SAI for a further discussion of Futures Contracts, as well as the associated
risks.

Options on Futures Contracts: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of
protecting against declines in the value of fixed income portfolio securities
or against increases in the cost of such securities to be acquired, as well as
for non-hedging purposes to the extent permitted by applicable law. Purchases
of Options on Futures Contracts may present less risk in hedging the portfolio
of the Fund than the purchase or sale of the underlying Futures Contracts,
because the potential loss is limited to the amount of the premium paid for the
option, plus

14
<PAGE>

related transaction costs. The writing of such options, however, does not
present less risk than the trading of Futures Contracts, and will constitute
only a partial hedge, up to the amount of the premium received, less related
transaction costs. In addition, if an option is exercised, the Fund may suffer
a loss on the transaction. See "Investment Objectives, Policies and
Restrictions -- Options on Futures Contracts" in the SAI for a further
discussion of Options on Futures Contracts, as well as the associated risks.

Risks of Investment in Options, Futures Contracts and Options on Futures
Contracts: The Fund's use of options, Futures Contracts and Options on Futures
Contracts involves certain risks. For example, a lack of correlation between
the instrument underlying an option or Futures Contract and the assets being
hedged, or unexpected adverse price movements, could render the Fund's hedging
strategy unsuccessful and could result in losses. The Fund also may enter into
transactions in such instruments for non-hedging purposes to the extent
permitted by applicable law, which involves greater risk. In particular, such
transactions may result in losses for the Fund which are not offset by gains on
other portfolio positions, thereby reducing gross income. There also can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, and the Fund may be required to maintain a position until exercise or
expiration, which could result in losses. The SAI contains a description of the
nature and trading mechanics of options, Futures Contracts and Options on
Futures Contracts and includes a discussion of the risks related to
transactions therein.

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

The investment objectives and the policies described above may be changed
without shareholder approval.

The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. Except with respect to the
Fund's policy on borrowing and investing in illiquid securities, the Fund's
investment limitations and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.

5. MANAGEMENT OF THE FUND

Investment Adviser -- The Adviser manages the assets of the Fund pursuant to an
Investment Advisory Agreement, dated December 19, 1985, as amended (the
"Advisory Agreement"). Under the Advisory Agreement, the Adviser provides the
Fund with overall investment advisory services. D. Richard Smith, a Vice
President of the Adviser, is the Fund's portfolio manager. Mr. Smith has been
employed as a portfolio manager with the Adviser since 1993. Prior to 1993, Mr.
Smith was a Vice President at Salomon Brothers, Inc. Subject to such policies
as the Trustees may determine, the Adviser makes investment decisions for the
Fund. For these services, the Adviser receives a management fee, computed and
paid monthly, equal to 0.45% of the Fund's average daily net asset value.
Effective November 1, 1998, the Adviser voluntarily reduced the management fee
to 0.40% of the Fund's average daily net asset value.

15
<PAGE>

For the Fund's fiscal year ended July 31, 1998, management fees paid to MFS
under the Advisory Agreement amounted to $3,929,806, equivalent on an
annualized basis, to 0.45% of the Fund's average daily net assets.

MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Variable Insurance Trust, MFS/Sun Life Series Trust
and seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"), in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., also provide investment advice to substantial
private clients.

MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $83.1 billion on behalf of over 3.5 million investor accounts as
of September 30, 1998. As of such date, the MFS organization managed
approximately $20.6 billion of assets in fixed income securities and $54.6
billion of assets in equity securities. MFS is a subsidiary of Sun Life of
Canada (U.S.), Financial Services Holdings, Inc., which in turn is an indirect
wholly owned subsidiary of Sun Life. The Directors of MFS are John W. Ballen,
Thomas J. Cashman, Joseph W. Dello Russo, John D. McNeil, Kevin R. Parke,
Arnold D. Scott, William W. Scott, Jr., Jeffrey L. Shames and Donald A.
Stewart. Mr. Shames is the Chairman and Chief Executive Officer of MFS, Mr.
Ballen is the President and the Chief Investment Officer of MFS, Mr. Cashman is
an Executive Vice President of MFS, Mr. Dello Russo is the Chief Financial
Officer and an Executive Vice President of MFS, Mr. Parke is the Chief Equity
Officer, Director of Equity Research and an Executive Vice President of MFS,
Mr. Arnold Scott is the Secretary and a Senior Executive Vice President of MFS
and Mr. William Scott is the President of MFS Fund Distributors Inc., the
distributor of MFS Funds. Messrs. McNeil and Stewart are the Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life insurance
company, is one of the largest international life insurance companies and has
been operating in the U.S. since 1895, establishing a headquarters office here
in 1973. The executive officers of MFS report to the Chairman of Sun Life.

Mr. Shames, the Chairman of MFS, is also a Trustee of the Trust. W. Thomas
London, Stephen E. Cavan, James O. Yost, Ellen Moynihan, Mark E. Bradley and
James R. Bordewick, Jr., all of whom are officers of MFS, are officers of the
Trust.

In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, it may produce increased investment opportunities for the Fund.

16
<PAGE>

Administrator -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997 as
amended. Under this Agreement, the Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.

Distributor -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and serves as distributor for each of the other MFS Funds.

Shareholder Servicing Agent -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.

6. YEAR 2000 ISSUES

The Fund could be adversely affected if the computer systems used by MFS, the
Fund's other service providers or the companies in which the Fund invests do
not properly process date-related information from and after January 1, 2000
(the "Year 2000 Issue"). MFS recognizes the importance of the Year 2000 Issue
and, to address Year 2000 compliance, created a Year 2000 Program Management
Office in 1996, which is separately funded, has a specialized staff and reports
directly to MFS Senior Management. The Office, with the help of external
consultants, is responsible for ascertaining that all internal systems, data
feeds and third party applications are Year 2000 compliant. While MFS is
confident that all MFS systems will be Year 2000 compliant before the turn of
the century, there are significant systems interdependencies in the domestic
and foreign markets for securities, the business environments in which
companies held by the Fund operate and in MFS' own business environment. MFS
has been actively working with the Fund's other service providers to identify
and respond to potential problems in an effort to ensure Year 2000 compliance
or develop contingency plans. Year 2000 compliance is also one of the factors
considered by MFS in its ongoing assessment of companies in which the Fund
invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Fund.

7. INFORMATION CONCERNING SHARES OF THE FUND

Purchases
Class A and B shares of the Fund may be purchased at the public offering price
through any dealer. As used in the Prospectus and any appendices thereto, the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investment
in the Fund.

This Prospectus offers two classes of shares to the general public (Class A and
B shares) which bear sales charges and distribution fees in different forms and
amounts, as described below:

17
<PAGE>

Class A Shares: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.

Purchases Subject to Initial Sales Charge. Class A shares are offered at net
asset value plus an initial sales charge as follows:

<TABLE>
<CAPTION>
Sales Charge* as
Percentage of:
----------------------- Dealer Allowance
Offering Net Amount as a Percentage
Amount of Purchase Price Invested of Offering Price
- ------------------------------------------- ---------- ------------ ------------------
<S> <C> <C> <C>
Less than $100,000 ........................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ........... 4.00 4.17 3.20
$250,000 but less than $500,000 ........... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ......... 2.20 2.25 1.70
$1,000,000 or more ........................ None** None** See Below**
</TABLE>

- ----------------
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less then those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.

MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.

Purchases Subject to a CDSC (but not subject to an initial sales charge). In
the following five circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares, in the event
of a share redemption within 12 months following the purchase:

(i) on investments of $1 million or more in Class A shares;

(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if, prior to July 1, 1996: (a) the plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization has
demonstrated to the satisfaction of MFD that either (i) the employer had at
least 25 employees or (ii) the aggregate purchases by the retirement plan of
Class A shares of Funds in the MFS Funds would be in an aggregate amount of at
least $250,000 within a reasonable period of time, as determined by MFD in its
sole discretion;

18
<PAGE>

(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar recordkeeping
system made available by the Shareholder Servicing Agent (the "MFS Participant
Recordkeeping System"); (b) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996; and (c) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be in
an aggregate amount of at least $500,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and (d) the plan has not redeemed its
Class B shares in the MFS Funds in order to purchase Class A shares under this
category;

(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds. The retirement plan will qualify under this category
only if the plan or its sponsoring organization informs the Shareholder
Servicing Agent prior to the purchases that the plan has a market value of
$500,000 or more invested in shares of any class or classes of the MFS Funds.
The Shareholder Servicing Agent has no obligation independently to determine
whether such a plan qualifies under this category; and

(v) on investments in Class A shares by certain retirement plans subject to
ERISA if: (a) the plan establishes an account with the Shareholder Servicing
Agent on or after July 1, 1997; (b) such plan's records are maintained on a
pooled basis by the Shareholder Servicing Agent; and (c) the sponsoring
organization demonstrates to the satisfaction of MFD that, at the time of
purchase, the employer has at least 200 eligible employees and the plan has
aggregate assets of at least $2,000,000.

In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:

<TABLE>
<CAPTION>
Commission Paid
by MFD Cumulative Purchase
to Dealers Amount
- ----------------- -------------------------------------
<S> <C>
1.00% ........... On the first $2,000,000, plus
0.80% ........... Over $2,000,000 to $3,000,000, plus
0.50% ........... Over $3,000,000 to $50,000,000, plus
0.25% ........... Over $50,000,000
</TABLE>

For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment, purchases for each shareholder
account (and certain other accounts for which the shareholder is a record or
beneficial holder) will be aggregated over a 12-month period (commencing from
the date of the first such purchase).

See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.

Waivers of Initial Sales Charge and CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemp-

19
<PAGE>

tion of Class A shares is waived. These circumstances are described in Appendix
A to this Prospectus. In addition to these circumstances, the CDSC imposed upon
the redemption of Class A shares is waived with respect to shares held by
certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:

(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and

(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to a
purchase order placed with the certification, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds and aggregate
assets of at least $10 million;

provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulation which results in a material adverse change to the tax advantaged
nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.

Class B Shares: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:

<TABLE>
<CAPTION>
Year of Contingent
Redemption Deferred Sales
After Purchase Charge
- ----------------------------------- ---------------
<S> <C>
First ......................... 4%
Second ........................ 4%
Third ......................... 3%
Fourth ........................ 3%
Fifth ......................... 2%
Sixth ......................... 1%
Seventh and following ......... 0%
</TABLE>

The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.

See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.

Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to deal-

20
<PAGE>

ers the first year service fee payable under the Fund's Distribution Plan (see
"Distribution Plan" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).

Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent between July 1,
1996 and December 31, 1998, will be subject to the CDSC described above, only
under limited circumstances, as explained below under "Waivers of CDSC." With
respect to such purchases, MFD pays an amount to dealers equal to 3.00% of the
amount purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of the
first year service fee equal to 0.25% of the purchase price payable under the
Fund's Distribution Plan. For purchases of Class B shares by a retirement plan
whose sponsoring organization subscribes to the MFS Recordkeeper Plus product
and which establishes its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in good
order on or after November 15, 1998), MFD pays no up front commissions to
dealers, but instead pays an amount to dealers equal to 1% per annum of the
average daily net assets of the Fund attributable to plan assets, payable at
the rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a
pre-existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus Product.

Certain retirement plans are eligible to purchase Class A shares of the Fund at
net asset value without an initial sales charge but subject to a 1% CDSC if the
plan has, at the time of purchase, a market value of $500,000 or more invested
in shares of any class or classes of the MFS Funds. In this event, the plan or
its sponsoring organization should inform the Shareholder Servicing Agent that
the plan is eligible to purchase Class A shares under this category; the
Shareholder Servicing Agent has no obligation independently to determine
whether such a plan qualifies under this category for the purchase of Class A
shares.

Waivers of CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which established an account with the Shareholder
Servicing Agent between July 1, 1996 and December 31, 1998; provided, however,
that the CDSC will not be waived (i.e., it will be imposed) in the event that
there is a change in law or regulations which results in a material adverse
change to the tax advantaged nature of the plan, or in the event that the plan
and/or sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.

21
<PAGE>

In addition to these circumstances, the CDSC imposed upon the redemption of
Class B shares is waived with respect to shares held by a retirement plan whose
sponsoring organization subscribes to the MFS Recordkeeping Plus product and
which establishes its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s) with any MFS
Fund which switches to the MFS Recordkeeper Plus product will not become
eligible for this waiver category.

Conversion of Class B Shares. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of
Class B shares (and which have not converted to Class A shares as provided in
the following sentence) will be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to
Class A shares bear to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.

General: The following information applies to purchases of all classes of the
Fund's shares.

Minimum Investment. Except as described below, the minimum initial investment
is $1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.

22
<PAGE>

Subsequent Investment by Telephone: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on
any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify the
identity of the caller. The Shareholder Servicing Agent will request personal
or other information from the caller, and will normally also record calls.
Shareholders should verify the accuracy of confirmation statements immediately
after their receipt.

Right to Reject Purchase Orders/Market Timing. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserve the right
to reject or restrict any specific purchase or exchange request. Because an
exchange request involves both a request to redeem shares of one fund and to
purchase shares of another fund, the Fund considers the underlying redemption
request be conditioned upon the acceptance of the underlying purchase request.
Therefore, in the event that the Fund or MFD rejects an exchange request,
neither the redemption nor the purchase side of the exchange will be processed.

The MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The MFS
Family of Funds defines a "market timer" as an individual or organization
acting on behalf of one or more individuals, if (i) the individual or
organization makes six or more exchange requests among the MFS Family of Funds
or three or more exchange requests out of any of the MFS high yield bond funds
or MFS municipal bond funds per calendar year and (ii) any one of such exchange
requests represents shares equal in value to $1 million or more. Accounts under
common ownership or control, including accounts administered by market timers,
will be aggregated for purposes of this definition.

As noted above, the Fund and MFD each reserve the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose
specific limitations with respect to market timers, including (i) delaying for
up to seven days the purchase side of an exchange request by market timers,
(ii) rejecting or otherwise restricting purchase or exchange requests by market
timers; and (iii) permitting exchanges by market timers only into certain MFS
Funds.

Dealer Concessions. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may
pay dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales
period. In addition, MFD or its affiliates may, from time to time, pay dealers
an additional commission equal to 0.50% of the net asset value of all of the
Class B shares of certain specified MFS Funds sold by such dealer

23
<PAGE>

during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell or arrange for the sale of
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding
one or more MFS Funds, and/or other dealer-sponsored events. From time to time,
MFD may make expense reimbursements for special training of a dealer's
registered representatives and other employees in group meetings or to help pay
the expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the NASD.

Special Investment Programs. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand- held calculator, or (ii) make a nominal
charitable contribution on their behalf.

Restrictions on Activities of National Banks. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services
in respect of shareholders who invested in the Fund through a national bank. It
is not expected that shareholders would suffer any adverse financial
consequence as a result of these occurrences. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.

A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.

Exchanges
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of
the other MFS Funds at net asset value (if available for sale). Shares of one
class may not be exchanged for shares of any other class.

Exchanges among MFS Funds (excluding exchanges from MFS money market funds):
No initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS

24
<PAGE>

money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.

Exchanges From an MFS Money Market Fund: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.

Exchanges Involving the MFS Fixed Fund: Class A shares of any MFS Fund held
by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares
and Units with respect to shares on which the initial sales charge has already
been paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with
respect to subsequent exchanges shall be governed by the rules set forth above
in this paragraph.

General: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received
for an established account by the Shareholder Servicing Agent in proper form
(i.e., if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement
plan participants whose sponsoring organizations subscribe to the MFS
FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system made
available by the Shareholder Servicing Agent) or all the shares in the account.
If an Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the exchange will occur on that day if all the
requirements set forth above have been complied with at that time and subject
to the Fund's right to reject purchase orders. No more than five exchanges may
be made in any one Exchange Request by telephone. Additional information
concerning this exchange privilege and prospectuses for any of the other MFS
Funds may be obtained from dealers or the Shareholder Servicing Agent. For
federal

25
<PAGE>

and (generally) state income tax purposes, an exchange is treated as a sale of
the shares exchanged and, therefore, an exchange could result in a gain or loss
to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any
aspect of it) may be changed or discontinued and is subject to certain
limitations, including certain restrictions on purchases by market timers.

Redemptions and Repurchases
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a sufficient
number of full and fractional shares in his account to cover the amount
withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or cashier's
checks). Payment of redemption proceeds may be delayed for up to 15 days from
the purchase date in an effort to assure that such check has cleared.

Redemption By Mail -- Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or a letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the manner
set forth below under the caption "Signature Guarantee." In addition, in some
cases "good order" will require the furnishing of additional documents. The
Shareholder Servicing Agent may make certain de minimis exceptions to the above
requirements for redemption. Within seven days after receipt of a redemption
request in "good order" by the Shareholder Servicing Agent, the Fund will make
payment in cash of the net asset value of the shares next determined after such
redemption request was received, reduced by the amount of any applicable CDSC
described above and the amount of any income tax required to be withheld,
except during any period in which the right of redemption is suspended or date
of payment is postponed because the Exchange is closed or trading on such
Exchange is restricted or to the extent otherwise permitted by the 1940 Act if
an emergency exists. See "Tax Status" below.

Redemption By Telephone -- Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to

26
<PAGE>

receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the
caption "Signature Guarantee." The proceeds of such a redemption, reduced by
the amount of any applicable CDSC and the amount of any income tax required to
be withheld, are mailed by check to the designated account, without charge, if
the redemption proceeds do not exceed $1,000, and are wired in federal funds to
the designated account if the redemption proceeds exceed $1,000. If a telephone
redemption request is received by the Shareholder Servicing Agent by the close
of regular trading on the Exchange on any business day, shares will be redeemed
at the closing net asset value of the Fund on that day. Subject to the
conditions described in this section, proceeds of a redemption are normally
mailed or wired on the next business day following the date of receipt of the
order for redemption. The Shareholder Servicing Agent may be liable for any
losses resulting from unauthorized telephone transactions if it does not follow
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.

Repurchase Through A Dealer -- If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase order
with his dealer, who may charge the shareholder a fee. If the dealer receives
the shareholder's order prior to the close of regular trading on the Exchange
and communicates it to MFD before the close of business on the same day, the
shareholder will receive the net asset value calculated on that day, reduced by
the amount of any applicable CDSC and the amount of any income tax required to
be withheld.

Redemption By Check -- Only Class A shares may be redeemed by check. A
shareholder owning Class A shares of the Fund may elect to have a special
account with State Street Bank and Trust Company (the "Bank") for the purpose
of redeeming Class A shares from his or her account by check. The Bank will
provide each Class A shareholder, upon request, with forms of checks drawn on
the Bank. Only shareholders having accounts in which no share certificates have
been issued will be permitted to redeem shares by check. Checks may be made
payable in any amount not less than $500. Shareholders wishing to avail
themselves of this redemption by check privilege should so request on their
Account Application, must execute signature cards (for additional information,
see the Account Application) with signature guaranteed in the manner set forth
under the caption "Signature Guarantee" below and must return any Class A share
certificates issued to them. Additional documentation will be required from
corporations, partnerships, fiduciaries or other such institutional investors.
All checks must be signed by the shareholder(s) of record exactly as the
account is registered before the Bank will honor them. The shareholders of
joint accounts may authorize each shareholder to redeem by check. The check may
not draw on monthly dividends which have been declared but not distributed.
Shareholders who purchase Class A shares by check (including certified checks
or cashier's checks) may write checks against those shares only after they have
been on the Fund's books for 15 days. When such a check is presented to the
Bank for payment, a sufficient number of full and fractional shares will be
redeemed to cover the amount of the check, any applicable CDSC and the amount
of any income tax required

27
<PAGE>

to be withheld. If the amount of the check, plus any applicable CDSC and the
amount of any income tax required to be withheld is greater than the value of
the Class A shares held in the shareholder's account, the check will be
returned unpaid, and the shareholder may be subject to extra charges. To avoid
dishonor of checks due to fluctuation in account value, shareholders are
advised against redeeming all or most of their account by check. Checks should
not be used to close a Fund account because when the check is written, the
shareholder will not know the exact total value of the account on the day the
check clears. There is presently no charge to the shareholder for the
maintenance of this special account or for the clearance of any checks, but the
Fund and the bank reserve the right to impose such charges or to modify or
terminate the redemption by check privilege at any time.

Contingent Deferred Sales Charge -- Investments in Class A or B shares ("Direct
Purchases") will be subject to a CDSC for a period of (i) with respect to Class
A shares, 12 months (however, the CDSC on Class A shares is only imposed with
respect to purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) or (ii) with respect to Class B
shares, six years. Purchases of Class A shares made during a calendar month,
regardless of when during the month the investment occurred, will age one month
on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis all transactions made during a calendar month, regardless of when during
the month they have occurred, will age one year at the close of business on the
last day of such month in the following calendar year and each subsequent year.
For Class B shares of the Fund purchased prior to January 1, 1993, transactions
will be aggregated on a calendar year basis all transactions made during a
calendar year, regardless of when during the year they have occurred, will age
one year at the close of business on December 31 of that year and each
subsequent year.

At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC and (ii) the
amount of redemption equal to the then-current value of Reinvested Shares is
not subject to the CDSC, but (iii) any amount of the redemption in excess of
the aggregate of the then-current value of Reinvested Shares and the Free
Amount is subject to a CDSC. The CDSC will first be applied against the amount
of Direct Purchases which will result in any such charge being imposed at the
lowest possible rate. The CDSC to be imposed upon redemptions will be
calculated as set forth in "Purchases" above.

The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.

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<PAGE>

General: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.

Signature Guarantee. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.

Reinstatement Privilege. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within twelve months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.

In-Kind Distributions. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.

Involuntary Redemptions/Small Accounts. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in
such account drops below $500 because of redemptions or exchanges, except in
the case of accounts being established for monthly automatic investments and
certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases -- General -- Minimum Investment." Shareholders
will be notified that the value of their account is less than the minimum
investment requirement and allowed 60 days to make an additional investment
before the redemption is processed.

Distribution Plan
The Trustees have adopted a Distribution Plan for Class A and Class B shares
pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.

In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."

29
<PAGE>

Features Common To Each Class of Shares: There are certain features of the
Distribution Plan that are common to each class of shares, as described below.

Service Fees. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A or Class
B shares, as appropriate) (the "Designated Class") annually in order that MFD
may pay expenses on behalf of the Fund relating to the servicing of shares of
the Designated Class. The service fee is used by MFD to compensate dealers
which enter into a sales agreement with MFD in consideration for all personal
services and/or account maintenance services rendered by the dealer with
respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of record
for an investor who owns shares of the Fund having an aggregate net asset value
at or above a certain dollar level. Dealers may from time to time be required
to meet certain criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.

Distribution Fees. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each
class of shares.

Other Common Features. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.

Features Unique To Each Class of Shares: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.

Class A Shares. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.

The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred

30
<PAGE>

by it under its distribution agreement with the Fund, including commissions to
dealers and payments to wholesalers employed by MFD (e.g., MFD pays commissions
to dealers with respect to purchases of $1 million or more and purchases by
certain retirement plans of Class A shares which are sold at net asset value
but which are subject to a 1% CDSC for one year after purchase). See "Purchases
- -- Class A Shares" above. In addition, to the extent that the aggregate service
and distribution fees paid under the Distribution Plan do not exceed 0.25% per
annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or
other distribution-related expenses. Payment of the 0.10% per annum Class A
distribution fee has been suspended indefinitely and will only be implemented
on such date or dates as the Trustees of the Trust may determine (see
"Information Concerning Shares of the Fund -- Distribution Plan" in the
Prospectus).

Class B Shares. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above
at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefor, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to
such shares commencing in the thirteenth month following purchase.

Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).

Current Level of Distribution and Service Fees. The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.25% and 1.00%
per annum, respectively.

Distributions
The Fund intends to pay substantially all of its net investment income as
dividends on a monthly basis. In determining the net investment income
available for distributions, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual
net investment income for the period. If the Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains, and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or
additional shares of the class with respect to which the distribution is made.
See "Tax Status" and "Shareholder Services -- Distribution Options" below.
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B shares because expenses
attributable to Class B shares will generally be higher.

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<PAGE>

Tax Status

The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay entity level federal income or excise
taxes.

Shareholders of the Fund normally will have to pay federal income taxes on the
dividends and capital gain distributions they receive from the Fund, whether
the distribution is paid in cash or reinvested in additional shares. The Fund
expects that none of its distributions will be eligible for the dividends
received deduction for corporations. Shareholders may not have to pay state or
local taxes on dividends derived from interest on U.S. Government obligations.
Investors should consult with their tax advisers in this regard. Shortly after
the end of each calendar year, each shareholder will be sent a statement
setting forth the federal income tax status of all dividends and distributions
for that year, including the portion taxable as ordinary income, the portion
taxable as long-term capital gain (as well as the rate category or categories
under which such gain is taxable), the portion, if any, representing a return
of capital (which is generally free of current taxes but which results in a
basis reduction), the portion representing interest on U.S. Government
obligations, and the amount, if any, of federal income tax withheld.

Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.

The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. The Fund is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.

Net Asset Value
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each day as of the close of regular trading on the Exchange by deducting
the amount of the Fund's liabilities attributable to the class from the value
of the Fund's assets attributable to the class and dividing the difference by
the number of shares of the class outstanding. Assets in the Fund's

32
<PAGE>

portfolio are valued on the basis of their market or other fair value, as
described in the SAI. The net asset value of each class of shares is effective
for orders received by the dealer prior to its calculation and received by MFD
prior to the close of that business day. The Fund has authorized one or more
dealers to receive purchase and redemption orders on behalf of the Fund. Such
dealers are authorized to designate other intermediaries to receive purchase
and redemption orders on behalf of the Fund. The Fund will be deemed to have
received a purchase or redemption order when an authorized dealer or, if
applicable, a dealer's authorized designee, receives the order. Customer orders
will be priced at the net asset value of the Fund next computed after such
orders are received by an authorized dealer or the dealer's authorized
designee.

Description of Shares, Voting Rights and Liabilities
The Fund has two classes of shares which it offers to the general public,
entitled Class A and Class B Shares of Beneficial Interest (without par value).
The Fund also has a class of shares which it offers exclusively to certain
institutional investors, entitled Class I shares. The Fund has reserved the
right to create and issue additional classes and series of shares, in which
case each class of shares of a series would participate equally in the
earnings, dividends and assets attributable to that class of shares of that
particular series. Shareholders are entitled to one vote for each share held
and shares of each series would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Fund does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities"
in the SAI).

Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
described above in "Information Concerning Shares of the Fund -- Purchases --
Conversion of Class B Shares"). Shares are fully paid and non-assessable.
Should the Fund be liquidated, shareholders of each class are entitled to share
pro rata in the net assets of the Fund attributable to that class available for
distribution to shareholders. Shares will remain on deposit with the
Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.

The Fund is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and omission insurance)
and the Fund itself was unable to meet its obligations.

33
<PAGE>

Performance Information

From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as the
Lipper Analytical Securities Corporation and Weisenberger Investment Companies
Service. Yield quotations will be based on the annualized net investment income
per share of a class of the Fund over a 30 day period stated as a percent of
the maximum public offering price of shares of that class on the last day of
that period. The current distribution rate for each class is calculated by (i)
annualizing the distributions (excluding short-term capital gains) of the class
for a stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result by the
maximum offering price or net asset value per share on the last day of the
period. Current distribution rate calculations for Class B shares assume no
CDSC is paid. The current distribution rate differs from the yield calculation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains, and return of invested capital, and may be calculated over a
different period of time. Total rate of return quotations will reflect the
average annual percentage change over stated periods in the value of an
investment in a class of the Fund made at the maximum public offering price of
shares of that class with all distributions reinvested and which will give
effect to the imposition of any applicable CDSC assessed upon redemption of the
Fund's Class B shares. Such total rate of return quotations may be accompanied
by quotations which do not reflect the reduction in the value of the initial
investment due to the sales charge or the deduction of a CDSC, and which will
therefore be higher. The Fund offers multiple classes of shares which were
initially offered for sale to, and purchased by, the public on different dates
(the "class inception date"). The calculation of total rate of return for a
class of shares which has a later class inception date than another class of
shares of the Fund is based both on (i) the performance of the Fund's newer
class from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class. See the SAI for further information on the calculation of total rate of
return for share classes with different class inception dates.

All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net annualized
portfolio income as of a stated time and current distribution rate reflects
only the annualized rate of distributions paid by the Fund over a stated period
of time, while total rate of return reflects all components of investment
return. The Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion
of the manner in which the Fund will calculate its yield, current distribution
rate and total rate of return, see the SAI. For further information about the
Fund's performance for the fiscal year ended July 31, 1998, please refer to the
Fund's Annual Report. A copy of the Annual Report may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.

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<PAGE>

Provision of Annual and Semiannual Reports

To avoid sending duplicate copies of materials to households, effective
September 15, 1998, only one copy of each Fund annual and semiannual report may
be mailed to shareholders having the same residential address on the Fund's
records. However, any shareholder may call the Shareholder Servicing Agent at
1-800-225-2606 to request that copies of such reports be sent personally to
that shareholder.

8. SHAREHOLDER SERVICES

Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).

Account and Confirmation Statements -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year
(see "Tax Status").

Distribution Options -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:

--Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;

--Dividends in cash; capital gain distributions (except as provided below)
reinvested in additional shares;

--Dividends and capital gain distributions in cash.

With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares.

Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares at the net asset value in effect at the close of business on
the record date. Checks for dividends and capital gain distributions in amounts
less than $10 will automatically be reinvested in additional shares of the
Fund. If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from the Shareholder Servicing Agent with regard to
uncashed distribution checks, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by the record date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.

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<PAGE>

Investment and Withdrawal Programs -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.

Letter of Intent: If a shareholder (other than a group purchaser as described
in the SAI) anticipates purchasing $100,000 or more of Class A shares of the
Fund alone or in combination with shares of any class of other MFS Funds or the
MFS Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period for purchases of $1 million or more), the shareholder may
obtain such shares of the Fund at the same reduced sales charge as though the
total quantity were invested in one lump sum, subject to escrow agreements and
the appointment of an attorney for redemptions from the escrow amount, if the
intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.

Right of Accumulation: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C shares of
that shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.

Distribution Investment Program: Shares of a particular class of the Fund may
be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.

Dollar Cost Averaging Programs --

Automatic Investment Plan: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
Shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.

Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other

36
<PAGE>

MFS Funds under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares in other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made
to up to six different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to exchange money
into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund will be subject
to any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the
Automatic Exchange Plan.

Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low or
falling price levels. Maintaining a dollar cost averaging program concurrently
with a withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.

Tax-Deferred Retirement Plans -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.

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

The Fund's SAI, dated December 1, 1998, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) investment objectives, policies and
restrictions, (ii) its Trustees, officers and investment adviser, (iii)
portfolio transactions and brokerage commissions, (iv) the method used to
calculate yield, distribution rate and total rate of return quotations of the
Fund, (v) the Distribution Plan, and (vi) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.

37
<PAGE>

APPENDIX A

Waivers of Sales Charges

This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III). Some of the following information will not apply to certain funds in the
MFS Family of Funds depending on which classes of shares are offered by such
Fund. As used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement with MFS Fund Distributor, Inc. ("MFD").

I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases
of Class A shares and the CDSC imposed on certain redemptions of Class A shares
and on redemptions of Class B shares, as applicable, are waived:

1. Dividend Reinvestment

--Shares acquired through dividend or capital gain reinvestment; and

--Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.

2. Certain Acquisitions/Liquidations

--Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.

3. Affiliates of an MFS Fund/Certain Dealers. Shares acquired by:

--Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;

--Trustees and retired trustees of any investment company for which MFD
serves as distributor;

--Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;

--Employees or registered representatives of dealers;

--Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and

--Institutional Clients of MFS or MFS Institutional Advisors, Inc.

A-1
<PAGE>

4. Involuntary Redemptions (CDSC waiver only)

--Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases --
General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.

5. Retirement Plans (CDSC waiver only). Shares redeemed on account of
distributions made under the following circumstances:

Individual Retirement Accounts ("IRAs")

--Death or disability of the IRA Owner.

Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer Sponsored
Plans ("ESP Plans")

--Death, disability or retirement of 401(a) or ESP Plan participant;

--Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);

--Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);

--Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);

--Tax-free return of excess 401(a) or ESP Plan contributions;

--To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g., participant
account fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by MFS Service Center, Inc. (the "Shareholder Servicing Agent");
and

--Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a) or
ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a) or
ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the total
value of the 401(a) or ESP Plan's assets in the MFS Funds, in which case
the sales charges will not be waived.

--Shares purchased by certain retirement plans or trust accounts if: (i) the
plan is currently a party to a retirement plan recordkeeping or
administrative services agreement with MFD or one of its affiliates and
(ii) the shares purchased or redeemed represent transfers from or
transfers to plan investments other than the MFS Funds of which retirement
plan recordkeeping services are provided under the terms of such
agreement.

A-2
<PAGE>

Section 403(b) Salary Reduction Only Plans ("SRO Plans")

--Death or disability of SRO Plan participant.

6. Certain Transfers of Registration (CDSC waiver only). Shares transferred:

--To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and

--From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.

7. Loan Repayments

--Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).

II. WAIVERS OF CLASS A SALES CHARGES

In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:

1. Wrap Account Investments and Fund "Supermarket" Investments

--Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or a
similar program under which such clients pay a fee to such dealer.

2. Investment by Insurance Company Separate Accounts

--Shares acquired by insurance company separate accounts.

3. Retirement Plans

Administrative Services Arrangements

--Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.

Reinvestment of Distributions from Qualified Retirement Plans

-- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.

A-3
<PAGE>

Shares redeemed on account of distributions made under the following
circumstances:

IRAs

--Distributions made on or after the IRA owner has attained the age of
59-1/2 years old; and

--Tax-free returns of excess IRA contributions.

401(a) Plans

--Distributions made on or after the 401(a) Plan participant has attained
the age of 59-1/2 years old; and

--Certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a 401(a) Plan.

ESP Plans and SRO Plans

--Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59-1/2 years old.

4. Purchases of at Least $5 Million (CDSC waiver only)

--Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed
payment of commissions with respect to the Initial Purchase and all
subsequent investments by the shareholder in the Eligible Funds subject to
such requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases Subject to a
CDSC" in the Prospectus). The Eligible Funds are all funds included in the
MFS Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.

5. Bank Trust Departments and Law Firms

--Shares acquired by certain bank trust departments or law firms acting as
trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such shares
for the benefits of their trust account clients.

6. Investment of Proceeds From Certain Redemptions of Class I Shares

--The initial sales charge imposed on purchases of Class A shares, and the
contingent deferred sales charge imposed on certain redemptions of Class A
shares, are waived with respect to Class A shares acquired of any of the

A-4
<PAGE>

MFS Funds through the immediate reinvestment of the proceeds of a
redemption of Class I shares of any of the MFS Funds.

III. WAIVERS OF CLASS B SALES CHARGES

In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:

1. Systematic Withdrawal Plan

--Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.

2. Death of Owner

--Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.

3. Disability of Owner

--Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's name
or in a living trust for the benefit of the disabled individual (in which
case a disability certification form is required to be submitted to the
Shareholder Servicing Agent).

4. Retirement Plans. Shares redeemed on account of distributions made under
the following circumstances:

IRAs, 401(a) Plans, ESP Plans and SRO Plans

--Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70-1/2 years old,
but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.

Salary Reduction Simplified Employee Pension Plans ("SAR-SEP Plans")

--Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70-1/2 old, but only with respect to the minimum distribution
under applicable Code rules; and

--Death or disability of a SAR-SEP Plan participant.

A-5
<PAGE>

APPENDIX B

Description of Obligations Issued or Guaranteed by
U.S. Government Agencies, Authorities or Instrumentalities

GNMA Certificates -- are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.

The Fund will purchase only GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal of and interest on GNMA Certificates
of the "modified pass-through" type is guaranteed by GNMA.

The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested far in advance
of the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.

As the prepayment rates of individual mortgage pools will vary widely, it is
not possible to accurately predict the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that the
average life of a single-family dwelling mortgage with a 25- 30-year maturity,
the type of mortgage which backs the vast majority of GNMA Certificates, is
approximately 12 years. It is therefore customary practice to treat GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.

As a consequence of the fees paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest
paid on the VA-guaranteed or FHA-insured mortgages underlying the GNMA
Certificates.

The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned
on the Certificates; and (iv) the actual yield of each Certificate is affected
by the prepayment of mortgages included in the mortgage pool underlying the
Certificates and the rate at which principal so prepaid is reinvested. In
addition, prepayment of mortgages included in the mortgage pool underlying a
GNMA Certificate purchased at a premium may result in a loss to the Fund.

Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities deal-

B-1
<PAGE>

ers and depend on, among other things, the level of market rates, the
Certificate's coupon rate and the prepayment experience of the pool of
mortgages backing each Certificate.

FNMA Bonds -- are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.

FHLMC Bonds -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation and are not guaranteed by the U.S. Government.

Export-Import Bank Certificates -- are certificates of beneficial interest and
participation certificates issued and guaranteed by the Export-Import Bank of
the United States.

Federal Agricultural Mortgage Corporation Certificates -- are certificates of
beneficial interest guaranteed by the Federal Agricultural Mortgage
Corporation.

Federal Agricultural Mortgage Corporation Bonds and Notes -- are bonds and
notes guaranteed by the Federal Agricultural Mortgage Corporation.

Federal Farm Credit Banks Consolidated Systemwide Notes and Bonds -- are bonds
issued and guaranteed by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration.

Federal Home Loan Bank Notes and Bonds -- are notes and bonds issued by the
Federal Home Loan Bank System.

Federal Home Loan Bank Certificates -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Federal Home Loan
Bank System.

FHA Debentures -- are debentures issued by the Federal Housing Authority of the
U.S. Government.

FICO Bonds and Notes -- are bonds and notes issued and guaranteed by the
Financing Corporation.

GSA Participation Certificates -- are participation certificates issued by the
General Services Administration of the U.S. Government.

Maritime Administration Bonds -- are bonds issued by the Department of
Transportation of the U.S. Government.

New Communities Debentures -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.

REFCORP Bonds and Notes -- are bonds and notes issued and guaranteed by the
Resolution Funding Corporation.

SBA Debentures -- are debentures fully guaranteed as to principal and interest
by the Small Business Administration of the U.S. Government.

SLMA Debentures -- are debentures backed by the Student Loan Marketing
Association.

B-2
<PAGE>

Title XI Bonds -- are bonds issued in accordance with the provisions of Title
XI of the Merchant Marine Act of 1936, as amended, the payment of which is
guaranteed by the U.S. Government.

TVA Bonds and Notes -- are bonds and notes issued and guaranteed by the
Tennessee Valley Authority.

U.S. Department of Veteran Affairs Certificates -- are certificates of
beneficial interest guaranteed by the U.S. Department of Veteran Affairs.

Washington Metropolitan Area Transit Authority Bonds -- are bonds issued by the
Washington Metropolitan Area Transit Authority and guaranteed by the Secretary
of Transportation of the U.S. Government.

Although this list includes the primary types of Government Securities in which
the Fund invests (other than U.S. Treasury obligations), the Fund may also
invest in Government Securities other than those listed above.

B-3
<PAGE>

Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000

Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000

Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606

Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906

Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110

<PAGE>

[MFS LOGO] Bulk Rate
U.S. Postage
Paid
MFS
MFS[RegTM] Government Mortgage Fund
500 Boylston Street, Boston, MA 02116-3741

This is your fund's current prospectus.
Please keep it with your financial records
because it provides important information
about your investment.

<PAGE>

MFS(R) STRATEGIC VALUE FUND
MFS(R) SMALL CAP VALUE FUND
MFS(R) EMERGING MARKETS DEBT FUND

Supplement to the December 1, 1998 Prospectus and
Statement of Additional Information

The following information should be read in conjunction with the Funds'
Prospectus and Statement of Additional Information ("SAI"), dated December 1,
1998, and contains a description of Class I shares.

Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.

EXPENSE SUMMARY

<TABLE>
<CAPTION>
Class I
----------------------------------------------
Strategic Small Emerging Markets
Value Fund Cap Fund Debt Fund
---------- -------- ---------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price) None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of original purchase price
or redemption proceeds, as applicable None None None

Strategic Small Emerging Markets
Value Fund Cap Fund Debt Fund
---------- -------- ---------
Annual Operating Expenses (as a percentage of average net assets):
Management Fees (after fee reduction)(1) 0.00% 0.00% 0.00%
Rule 12b-1 Fees None None None
Other Expenses (after fee reduction)(2)(3)(4) 1.25% 1.30% 1.65%
Total Operating Expenses (after fee reduction)(5) 1.25% 1.30% 1.65%
</TABLE>

- -----------------
(1) The Adviser intends during the Funds' current fiscal year to waive its
right to receive management fees from each Fund. Absent this waiver,
"Management Fees" would be as follows:

Strategic Small Emerging Markets
Value Fund Cap Fund Debt Fund
---------- -------- ---------
<S> <C> <C>
0.75% 0.90% 0.85%
</TABLE>

(2) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."

(3) The Adviser has agreed to bear the expenses of Strategic Value Fund, Small
Cap Fund and Emerging Markets Debt Fund, subject to reimbursement by each
Fund, such that "Other Expenses" do not exceed 1.25%, 1.30% and 1.65% per
annum, respectively, of each such Fund's average daily net assets during
the current fiscal year. Otherwise, "Other Expenses" would be 7.48% for
Strategic Value Fund, 7.46% for Small Cap Fund and 5.69% for Emerging
Markets Debt Fund. See "Information Concerning Shares of the Fund -
Expenses" in the Prospectus.

(4) "Other Expenses" for each Fund are based on estimates of payments to be
made during each Fund's current fiscal year.

(5) Absent any fee waivers and expense reductions, "Total Operating Expenses"
for each Fund would be as follows:

Strategic Small Emerging Markets
Value Fund Cap Fund Debt Fund
---------- -------- ---------
<S> <C> <C>
8.23% 8.36% 6.54%
</TABLE>

-1-
<PAGE>

Example of Expenses
-------------------

An investor would pay the following dollar amounts of expenses on a
$1,000 investment in Class I shares of each Fund, assuming (a) a 5% annual
return and (b) redemption at the end of each of the time periods indicated:

Strategic Small Emerging Markets
Period Value Fund Cap Fund Debt Fund
- ------ ---------- -------- ---------
<S> <C> <C>
1 year $13 $13 $17
3 years 40 41 52
</TABLE>

The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Funds will bear
directly or indirectly. A more complete description of each Fund's management
fee is set forth under the caption "Management of the Funds" in the Prospectus.

The "Example" set forth above should not be considered a representation of past
or future expenses of the Funds; actual expenses may be greater or less than
those shown.

CONDENSED FINANCIAL INFORMATION

Financial Highlights - Class I Shares

Income from investment operations # -
Net investment income [sec] $ 0.05 $ 0.01 $ 0.25
Net realized and unrealized gain (loss)
on investments and foreign currency transactions 0.60 0.01 [sec][sec] (0.67)
Total from investment operations 0.65 0.02 $(0.42)

Net asset value - end of period $10.65 $10.02 $ 9.58
Total return 6.50%++ 0.10%++ (4.20)%++

Ratios (to average net assets)/
Supplemental data [sec]
Expenses 1.25%+ 1.30%+ 1.65%+##
Net investment income 1.19%+ 0.10%+ 6.92%+
Portfolio turnover 48% 67% 68%
Net assets at end of period
(000 omitted) $ 166 $ 486 $ 1
</TABLE>

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

* For the period from the commencement of the Funds' investment operations,
March 17, 1998, through July 31, 1998.

+ Annualized.

++ Not annualized.

# Per share data are based on average shares outstanding.

## The Fund's expenses are calculated with reduction for fees paid
indirectly. If they had not been, the ratio would be 1.70%.

### The Fund's expenses are calculated without reduction for fees paid
indirectly.

[sec] Subject to reimbursement by the Fund, the investment adviser voluntarily
agreed to maintain other expenses of the Fund, exclusive of management and
distribution fees, at not more than 1.25% for Strategic Value Fund, 1.30%
for Small Cap Fund and 1.65% for

-2-

<PAGE>

Emerging Markets Debt Fund of average daily net assets. The investment
adviser and the distributor did not impose any of their fees for the period
indicated. If these fees had not been waived and other expenses had not
been limited, the net investment income (loss) per share and the ratios
would have been: Emerging Markets Strategic Value Fund Small Cap Fund Debt
Fund

Strategic Small Emerging Markets
Value Fund Cap Fund Debt Fund
---------- -------- ---------
<S> <C> <C>

Net investment income (loss) $(0.25) $(0.26) $0.07
Ratios (to average net assets):
Expenses### 8.23%+ 8.36%+ 6.54%+
Net investment income (loss) (5.78)%+ (6.94)%+ 2.08%+
</TABLE>

[sec][sec] The per share amount is not in accordance with the net realized and
unrealized loss for the period because of the timing of sales of Fund
shares and the amount of per share realized and unrealized gains and
losses at such time.

ELIGIBLE PURCHASERS

Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):

(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and

In no event will the Fund, MFS, MFD or any of their affiliates pay any
sales commissions or compensation to any third party in connection with the sale
of Class I shares; the payment of any such sales commission or compensation
would, under the Fund's policies, disqualify the purchaser as an eligible
investor of Class I shares.

SHARE CLASSES OFFERED BY THE FUNDS

While each Fund has four classes of shares (Class A, Class B, Class C
and Class I shares), Class A and Class I shares are the only classes presently
available for sale. Class I shares are available for purchase only by Eligible
Purchasers, as defined above, and are described in this Supplement. Class A
shares, Class B shares and Class C shares are described in the Funds'
Prospectus. Class A shares are available for purchase by employees of MFS and
its affiliates and certain of their family members who are residents of The
Commonwealth of Massachusetts, and members of the governing boards of the
various funds sponsored by MFS.

Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") of 1.00% upon redemption during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares convert to Class A shares approximately eight years after purchase. Class
C shares are offered at net asset value without an initial sales charge but are
subject to a CDSC of 1.00% upon redemption during the first year and an annual
distribution fee and service fee up to a maximum of 1.00% per annum. Class I
shares are offered at net asset value without an initial sales charge or CDSC
and are not subject to a distribution or service fee. Class C and Class I shares
do not convert to any other class of shares of the Funds.

OTHER INFORMATION

Eligible Purchasers may purchase Class I shares only directly through
MFD. Eligible Purchasers may exchange Class I shares of a Fund for Class I
shares of any other MFS Fund available for purchase by such Eligible Purchasers
at their net asset value (if available for sale), and may exchange Class I
shares of a Fund for shares of the MFS Money Market Fund (if available for
sale), and may redeem Class I shares of a Fund at net asset value. Distributions
paid by a Fund with respect to Class I shares generally will be greater than
those paid with respect to Class A shares, Class B shares and Class C shares
because expenses attributable to Class A shares, Class B shares and Class C
shares generally will be higher.

The date of this Supplement is December 1, 1998

-3-
<PAGE>

[MFS LOGO]

MFS[RegTM] Strategic Value Fund
MFS[RegTM] Small Cap Value Fund PROSPECTUS
MFS[RegTM] Emerging Markets Debt Fund December 1, 1998

Class A Shares of Beneficial Interest
(Members of the MFS Family of Funds[RegTM])Class B Shares of Beneficial Interest
Each a series of MFS Series Trust X Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
MFS Strategic Value Fund (the "Strategic Value Fund")--The investment objective
of the Strategic Value Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies which the Adviser believes are undervalued in the marketplace
relative to their long term potential.

MFS Small Cap Value Fund (the "Small Cap Fund")--The investment objective of
the Small Cap Fund is capital appreciation. The Fund invests, under normal
market conditions, at least 65% of its total assets in equity securities of
companies with small market capitalizations.

MFS Emerging Markets Debt Fund (the "Emerging Markets Debt Fund")--The
investment objective of the Emerging Markets Debt Fund is total return (high
current income and long-term growth of capital). The Fund invests, under normal
market conditions, at least 65% of its total assets in fixed income securities
of government, government-related, supranational and corporate issuers located
or primarily conducting their business in emerging market countries.

Each Fund's investment adviser and distributor are Massachusetts Financial
Services Company (the "Adviser" or "MFS") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116. Each Fund is a series of MFS Series Trust X (the
"Trust").

The Emerging Markets Debt Fund may invest up to 100% of its net assets, in
lower rated bonds, commonly known as "junk bonds," that entail greater risks
than those found in higher rated securities. Investors should carefully
consider these risks before investing (see "Additional Risk Factors--Lower
Rated Bonds").

While three classes of shares of each Fund are described in this Prospectus,
the Funds do not currently offer Class B and Class C Shares. Class A shares are
available for purchase at net asset value only by employees of MFS and its
affiliates and certain of their family members who are residents of The
Commonwealth of Massachusetts, and members of the governing boards of the
various funds sponsored by MFS.

(Continued on the Next Page)

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.

Investors should read this Prospectus and retain it for future reference.

1
<PAGE>

(continued from previous page)

This Prospectus sets forth concisely the information concerning each Fund and
the Trust that a prospective investor ought to know before investing. The
Trust, on behalf of each Fund, has filed with the Securities and Exchange
Commission (the "SEC") a Statement of Additional Information, dated December 1,
1998, as amended or supplemented from time to time (the "SAI"), which contains
more detailed information about the Trust and each Fund. See page 32 for a
further description of the information set forth in the SAI. A copy of the SAI
may be obtained without charge by contacting the Shareholder Servicing Agent
(see back cover for address and phone number). The SAI is incorporated by
reference into this Prospectus. The SEC maintains an Internet World Wide Web
site (http://www.sec.gov) that contains the SAI, materials that are
incorporated by reference into this Prospectus and SAI, and other information
regarding the Funds.

2
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Section Page
- --------------------------------------------------------------------------- -----
<S> <C> <C>
1. Expense Summary ................................................. 4
2. Condensed Financial Information ................................. 6
3. The Funds ....................................................... 7
4. Investment Objectives and Policies .............................. 7
Strategic Value Fund ............................................ 8
Small Cap Value Fund ............................................ 8
Emerging Markets Debt Fund ...................................... 9
5. Certain Securities and Investment Techniques .................... 10
6. Additional Risk Factors ......................................... 15
7. Management of the Funds ......................................... 18
8. Year 2000 Issues ................................................ 19
9. Information Concerning Shares of the Funds ...................... 19
Purchases ..................................................... 19
Exchanges ..................................................... 24
Redemptions and Repurchases ................................... 24
Distribution Plan ............................................. 26
Distributions ................................................. 28
Tax Status .................................................... 28
Net Asset Value ............................................... 29
Expenses ...................................................... 29
Description of Shares, Voting Rights and Liabilities .......... 29
Performance Information ....................................... 30
Provision of Annual and Semiannual Reports .................... 30
10. Shareholder Services ............................................ 31
Appendix A--Waivers of Sales Charges ............................ A-1
Appendix B--Description of Bond Ratings ......................... B-1
Appendix C--Portfolio Composition Chart ......................... C-1
</TABLE>

3
<PAGE>

1. EXPENSE SUMMARY

<TABLE>
<CAPTION>
Class A Class B Class C
-------------- --------- ----------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price) ............................... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) ............. See Below(1) 4.00% 1.00%
</TABLE>

Annual Operating Expenses (as a percentage of average daily net assets):

CLASS A SHARES

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ---------- ----------
<S> <C> <C> <C>
Management Fees (after fee reduction)(2) .................. 0.00% 0.00% 0.00%
Rule 12b-1 Fees (after fee reduction)(3) .................. 0.00% 0.00% 0.00%
Other Expenses (after fee reduction)(5)(6)(7) ............. 1.25% 1.30% 1.65%
---- ---- ----
Total Operating Expenses (after fee reduction)(8) ......... 1.25% 1.30% 1.65%
</TABLE>

CLASS B SHARES

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ---------- ----------
<S> <C> <C> <C>
Management Fees (after fee reduction)(2) .................. 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4) ........................................ 1.00% 1.00% 1.00%
Other Expenses (after fee reduction)(5)(6)(7) ............. 1.25% 1.30% 1.65%
---- ---- ----
Total Operating Expenses (after fee reduction)(8) ......... 2.25% 2.30% 2.65%
</TABLE>

CLASS C SHARES

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ---------- ----------
<S> <C> <C> <C>
Management Fees (after fee reduction)(2) .................. 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4) ........................................ 1.00% 1.00% 1.00%
Other Expenses (after fee reduction)(5)(6)(7) ............. 1.25% 1.30% 1.65%
---- ---- ----
Total Operating Expenses (after fee reduction)(8) ......... 2.25% 2.30% 2.65%
</TABLE>

- -----------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Funds--Purchases"
below.

(2) The Adviser intends during the Funds' current fiscal year to waive its right
to receive management fees from each Fund. Absent this waiver, "Management
Fees" would be as follows:

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ---------- ----------
<S> <C> <C>
0.75% 0.90% 0.85%
</TABLE>

(3) Each Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. Class A distribution and service fees under the Distribution Plan
are currently being waived on a voluntary basis and, while they may be
imposed at the discretion of MFD at any time, MFD currently intends to waive
these fees during the Funds' current fiscal year. Distribution expenses paid
under the Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See "Information
Concerning Shares of the Funds--Distribution Plan" below.

4
<PAGE>

(4) Each Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund--Distribution Plan" below.

(5) The Adviser has agreed to bear the expenses of Strategic Value Fund, Small
Cap Fund and Emerging Markets Debt Fund, subject to reimbursement by each
Fund, such that "Other Expenses" do not exceed 1.25%, 1.30% and 1.65% per
annum, respectively, of each Fund's average daily net assets during the
current fiscal year. Otherwise, "Other Expenses" would be 7.48% for
Strategic Value Fund, 7.46% for Small Cap Fund and 5.69% for Emerging
Markets Debt Fund. See "Information Concerning Shares of the Fund--Expenses"
below.

(6) "Other Expenses" for each Fund are based on estimates of payments to be made
during each Fund's current fiscal year.

(7) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."

(8) Absent any fee waivers and expense reductions, "Total Operating Expenses,"
expressed as a percentage of average daily net assets, would be as follows:

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ---------- ----------
<S> <C> <C> <C>
Class A ......... 8.58% 8.71% 6.89%
Class B ......... 9.23% 9.36% 7.54%
Class C ......... 9.23% 9.36% 7.54%
</TABLE>

EXAMPLE OF EXPENSES

An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:

CLASS A SHARES

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ------- ----------
<S> <C> <C> <C>
1 year .......... $70 $70 $ 73
3 years ......... 95 96 107
</TABLE>

CLASS B SHARES
(ASSUMES REDEMPTION)

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ------- ----------
<S> <C> <C> <C>
1 year .......... $ 63 $ 63 $ 67
3 years ......... 100 102 112
</TABLE>

CLASS B SHARES
(ASSUMES NO REDEMPTION)

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ------- ----------
<S> <C> <C> <C>
1 year .......... $23 $23 $27
3 years ......... 70 72 82
</TABLE>

<PAGE>

CLASS C SHARES (ASSUMES REDEMPTION)

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ------- ----------
<S> <C> <C> <C>
1 year .......... $33 $33 $37
3 years ......... 70 72 82
</TABLE>

CLASS C SHARES
(ASSUMES NO REDEMPTION)

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
----------- ------- ----------
<S> <C> <C> <C>
1 year .......... $23 $23 $27
3 years ......... 70 72 82
</TABLE>

The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of each Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases--"Purchases"; (ii) varying CDSCs--"Purchases"; (iii) management
fees--"Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees--"Distribution Plan."

The "Example" set forth above should not be considered a representation of past
or future expenses of a Fund; actual expenses may be greater or less than those
shown.

2. CONDENSED FINANCIAL INFORMATION

The following information is audited and should be read in conjunction with the
financial statements included in the Funds' annual report to shareholders which
are incorporated by reference into the SAI in reliance upon the report of each
Fund's independent auditors, given upon their authority as experts in
accounting and auditing. Each Fund's current independent auditors are Ernst &
Young LLP.

Financial Highlights -- Class A Shares

<TABLE>
<CAPTION>
Emerging Markets
Strategic Value Fund Small Cap Fund Debt Fund
Period Ended Period Ended Period Ended
July 31, 1998* July 31, 1998* July 31, 1998*
---------------------- -------------------- -----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout the period):
Net asset value--beginning of period ................ $10.00 $10.00 $10.00
Income from investment operations#--
Net investment income[sec] ......................... $ 0.05 $ 0.01 $ 0.25
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ...................................... 0.61 0.01[sec][sec] (0.67)
Total from investment operations .................. 0.66 0.02 (0.42)
Net asset value--end of period ...................... $10.66 $10.02 $ 9.58
Total return ........................................ 6.70%++ 0.10%++ (4.20)%++
Ratios (to average net assets)/Supplemental data[sec]
Expenses ........................................... 1.25%+ 1.30%+ 1.65%+##
Net investment income .............................. 1.22%+ 0.13%+ 6.65%+
Portfolio turnover .................................. 48% 67% 68%
Net assets at end of period (000 omitted) ........... $ 585 $ 418 $ 959
</TABLE>

- -----------
* For the period from the commencement of the Funds' investment
operations March 17, 1998 through July 31, 1998.
+ Annualized

6
<PAGE>

++ Not annualized # Per share data are based on average shares
outstanding.

## The Fund's expenses are calculated with reduction for fees paid
indirectly. If they had not been, the ratio would be 1.70% for Class
A shares.

### The Fund's expenses are calculated without reduction for fees paid
indirectly.

[sec][sec] The per share amount is not in accordance with the net realized and
unrealized loss for the period because of the timing of Fund shares
and the amount of per share realized and unrealized gains and losses
at such time.

[sec] Subject to reimbursement by each Fund, the investment adviser
voluntarily agreed to maintain other expenses of each Fund,
exclusive of management and distribution fees, at not more than
1.25% for Strategic Value Fund, 1.30% for Small Cap Fund and 1.65%
for Emerging Markets Debt Fund of average daily net assets. The
investment adviser and the distributor did not impose any of their
fees for the period indicated. If these fees had not been waived
and other expenses had not been limited, the net investment income
(loss) per share and the ratios would have been:

<TABLE>
<CAPTION>
Emerging Markets
Strategic Value Fund Small Cap Fund Debt Fund
---------------------- ---------------- -----------------
<S> <C> <C> <C>
Net investment income (loss) .......... $(0.23) $(0.28) $0.06
Ratios (to average net assets):
Expenses### .......................... 8.58%+ 8.71%+ 6.89%+
Net investment income (loss) ......... (6.10)%+ (7.26)%+ 1.46%+
</TABLE>

3. THE FUNDS

Each Fund is a series of the Trust, an open-end management investment company
which was organized as a business trust under the laws of The Commonwealth of
Massachusetts in 1985. The Strategic Value Fund and the Small Cap Fund are
diversified funds and the Emerging Markets Debt Fund is a non-diversified fund.
The Trust presently consists of seven series, which are offered for sale
pursuant to separate prospectuses, and each of which represents a portfolio
with separate investment objectives and policies. Shares of each Fund are sold
continuously to the public and each Fund then uses the proceeds to buy
securities for its portfolio. While each Fund has three classes of shares
designed for sale generally to the public, Class A shares are the only class
presently available for sale. Class A shares are offered at net asset value
plus an initial sales charge up to a maximum of 5.75% of the offering price (or
a CDSC of 1.00% upon redemption during the first year in the case of certain
purchases of $1 million or more and certain purchases by retirement plans) and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares will
convert to Class A shares approximately eight years after purchase. Class C
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC of 1.00% upon redemption during the first year and an annual
distribution fee and service fee up to a maximum of 1.00% per annum. Class C
shares do not convert to any other class of shares of a Fund. In addition, the
Funds offer an additional class of shares, Class I shares, exclusively to
certain institutional investors. Class I shares are made available by means of
a separate Prospectus supplement provided to institutional investors eligible
to purchase Class I shares and are offered at net asset value without an
initial sales charge or CDSC upon redemption and without an annual distribution
and service fee.

The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. MFS is each Fund's investment adviser and is responsible for the
management of each Fund's assets. The officers of the Trust are responsible for
its operations. The Adviser manages each Fund's portfolio from day to day in
accordance with each Fund's investment objective and policies. A majority of
the Trustees are not affiliated with the Adviser. The selection of investments
and the way they are managed depend on the conditions and trends in the
economies of the various countries of the world, their financial markets and
the relationship of their currencies to the U.S. dollar. The Trust also offers
to buy back (redeem) shares of each Fund from shareholders at any time at net
asset value, less any applicable CDSC.

4. INVESTMENT OBJECTIVES AND POLICIES

Each Fund has an investment objective which it pursues through separate
investment policies, as described below. The differences in objectives and
policies among the Funds can be expected to affect the market and financial
risk to which each Fund is subject and the performance of each Fund. The
investment objective and polices of each Fund, unless otherwise specifically
stated, may be changed by the Trustees of the Trust without a vote of the
shareholders. A change in a Fund's objective may result in the Fund having an
investment objective different from the objective which shareholders considered
appropriate at the time of investment in the Fund. Any investment involves risk
and there is no assurance that the investment objective of any Fund will be
achieved.

7
<PAGE>

STRATEGIC VALUE FUND--The Strategic Value Fund's investment objective is
capital appreciation.

The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in equity securities of companies
which the Adviser believes are undervalued in the marketplace relative to their
long term potential (see "Certain Securities and Investment Techniques--Equity
Securities" below). Securities in which the Fund may invest may be undervalued
because they are temporarily out of favor in the market due to market decline,
poor economic conditions, or actual or anticipated unfavorable developments
affecting the issuer of the security or its industry, or because the market has
overlooked them.

The remaining 35% of the Fund's total assets may be invested in other types of
securities, such as fixed income securities, convertible bonds, convertible
preferred stocks and warrants when relative values make such purchases appear
attractive either as individual issues or as types of securities in certain
economic environments. The Fund may invest up to 10% of its net assets in fixed
income securities rated BB or lower by Standard & Poor's Rating Service
("S&P"), Fitch IBCA ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps") or Ba or lower by Moody's Investors Service, Inc. ("Moody's"), or, if
unrated, determined to be of equivalent quality by the Adviser (commonly
referred to as "junk bonds") (see "Additional Risk Factors--Lower Rated Bonds"
below). For a description of these ratings, see Appendix B to the Prospectus.

The Fund may engage in short sales of securities which the Adviser expects to
decline in price (see "Certain Securities and Investment Techniques--Short
Sales" below).

Consistent with its investment objective and policies described above, the Fund
may also invest up to 20% of its net assets in foreign securities which are not
traded on a U.S. Exchange (see "Additional Risk Factors--Foreign Securities"
below).

The Fund may engage in certain investment techniques as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI.
The Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described below
under the caption "Additional Risk Factors."

SMALL CAP FUND--The Small Cap Fund's investment objective is capital
appreciation.

The portfolio securities of the Fund are selected by a committee of investment
research analysts. This committee includes investment analysts employed not
only by the Adviser but also by MFS International (U.K.) Limited, a wholly
owned subsidiary of MFS. The Fund's assets are allocated among industries by
the analysts acting together as a group. Individual analysts are then
responsible for selecting what they view as the securities best suited to meet
the Fund's investment objective within their assigned industry responsibility.

The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in equity securities of companies
with small market capitalizations ("Small Cap Companies"). Small Cap Companies
are those with market capitalizations of $2 billion or less at the time of the
Fund's investment. Companies whose capitalization falls outside this range
after purchase continue to be considered Small Cap Companies for purposes of
this 65% investment policy.

In choosing the Fund's investments, the Adviser will seek Small Cap Companies
with valuations which do not reflect their longer-term growth potential. Small
Cap Companies in which the Fund may invest may be undervalued because they are
temporarily out of favor in the market due to market decline, poor economic
conditions, or actual or anticipated unfavorable developments affecting the
issuer of the security or its industry, or because the market has overlooked
them. Such companies generally would be expected to show earnings growth over
time above the growth rate of the overall economy, with valuations
representative of companies discounted in the marketplace for inferior growth
prospects.

The Fund may also invest in fixed income securities offering an opportunity for
capital appreciation, including up to 10% of its net assets in fixed income
securities rated BB or lower by S&P, Fitch or Duff & Phelps or Ba or lower by
Moody's or, if unrated, determined to be of equivalent quality by the Adviser
(commonly referred to as "junk bonds"). See "Additional Risk Factors--Lower
Rated Bonds" below. For a description of these ratings, see Appendix B to the
Prospectus.

The Fund may engage in short sales of securities which the Adviser expects to
decline in price (see "Certain Securities and Investment Techniques--Short
Sales" below).

Consistent with its investment objective and policies described above, the Fund
may also invest up to 20% of its net assets in foreign securities which are not
traded on a U.S. Exchange. See "Additional Risk Factors--Foreign Securities"
below.

8
<PAGE>

EMERGING MARKETS DEBT FUND--The Emerging Markets Debt Fund's investment
objective is total return (high current income and long-term growth of
capital).

The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in fixed income securities of
government, government-related, supranational and corporate issuers located, or
primarily conducting their business, in emerging markets (see "Certain
Securities and Investment Techniques--Fixed Income Securities" and "--Emerging
Market Securities" below).

The Fund may invest in government, government-related and restructured debt
securities which will consist of: (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging countries (including loans between
governments and financial institutions); (ii) debt securities or obligations
issued by government owned, controlled or sponsored entities located in
emerging countries; (iii) interests in issuers organized and operated for the
purpose of restructuring the investment characteristics of instruments issued
by any of the entities described above; and (iv) debt obligations issued by
supranational organizations such as the Asian Development Bank and the
Inter-American Development Bank, among others. The restructuring described
above involves the deposit with or purchase by an entity of specific
instruments and the issuance by that entity of one or more classes of
securities backed by, or representing interests in, the underlying instruments.
Certain issuers of such structured securities may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investment in
such securities may be limited by certain investment restrictions contained in
the 1940 Act. See "Certain Securities Investment Techniques--Structured
Securities" and "--Investment in Other Investment Companies" below.

The Fund takes a global approach to portfolio management and currently expects
to pursue investment opportunities in Latin America, Asia, Africa, the Middle
East and the developing countries of Europe, primarily in Eastern Europe. While
the Fund is not "diversified" for purposes of the 1940 Act, it intends to
maintain investments, under normal market conditions, in at least five
countries (outside of the U.S.).

Emerging market fixed income securities held by the Fund may include Brady
Bonds, Yankee Bonds and Eurobonds, loans, loan assignments and interests issued
by entities organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by emerging market issuers.
The Fund is not restricted by limits on weighted average maturity or duration
of an individual issue. Fixed income securities in which the Fund may invest
may have stated maturities ranging from overnight to 30 years.

While the Fund will not invest in equity securities, the Adviser considers a
variety of factors in selecting emerging market fixed income securities to
achieve capital appreciation, including the creditworthiness of issuers,
interest rates, and currency exchange rates.

The Fund may invest up to 100% of its net assets in foreign securities. The
Fund is not restricted in the portion of its assets which may be invested in
securities denominated in a particular currency and up to 100% of the Fund's
assets may be invested in securities denominated in foreign currencies and
international currency units. The portion of the Fund's assets invested in
securities denominated in currencies other than the U.S. dollar will vary
depending on market conditions. Therefore, the value of the Fund's investments
may be significantly affected by changes in currency exchange rates. (See
"Additional Risk Factors--Foreign Securities" below.)

The Fund may invest up to 100% of its net assets in fixed income securities
rated in the lower rating categories of recognized rating agencies (that is,
ratings of Ba or lower by Moody's, or BB or lower by S&P, Fitch or Duff &
Phelps), and comparable unrated securities (commonly referred to as "junk
bonds"). Emerging market fixed income securities generally are rated in the
lower rating categories of recognized rating agencies. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers
of such securities) and may involve greater volatility of price than securities
in the higher rating categories (see "Additional Risk Factors--Lower Rated
Bonds" below). For a description of these ratings, see Appendix B to this
Prospectus.

For a chart indicating the composition of the Emerging Markets Debt Fund's
portfolio for the fiscal year ended July 31, 1998, see Appendix C to this
Prospectus.

9
<PAGE>

The Fund may engage in certain investment techniques as described below under
the caption "Certain Securities and Investment Techniques" below and in the
SAI. The Fund's investments are subject to certain risks, as described in the
above-referenced sections of this Prospectus and the SAI and as described below
under the caption "Additional Risk Factors."

5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES

The securities and investment techniques described below are applicable to all
or certain of the Funds, as specified. Additional information about certain of
these securities and investment techniques can be found under the caption
"Certain Securities and Investment Techniques" in the SAI and "Additional Risk
Factors" below.

CERTAIN SECURITIES AND INVESTMENT TECHNIQUES APPLICABLE TO EACH FUND. The
following securities and investment techniques are applicable to each Fund:

Fixed Income Securities: Fixed income securities in which each Fund may invest
include bonds, debentures, mortgage securities, notes, bills, commercial paper,
U.S. Government Securities (as defined below) and certificates of deposit.

Restricted Securities: Each Fund may purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, retains oversight of the liquidity determinations, focusing on factors
such as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity in a
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Fund's portfolio.
Subject to each Fund's 15% limitation on investments in illiquid investments, a
Fund may also invest in restricted securities that may not be sold under Rule
144A, which presents certain risks. As a result, a Fund might not be able to
sell these securities when the Adviser wishes to do so, or might have to sell
them at less than fair value. In addition, market quotations are less readily
available. Therefore, judgment may at times play a greater role in valuing
these securities than in the case of unrestricted securities.

Lending of Portfolio Securities: Each Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, irrevocable letters of credit or
U.S. Treasury securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. If the Adviser determines
to lend portfolio securities, it is intended that the value of the securities
loaned would not exceed 30% of the value of the net assets of the Fund making
the loans.

Repurchase Agreements: Each Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, a Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). Each
Fund has adopted certain procedures intended to minimize the risks of such
transactions.

"When Issued" Securities: Each Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis, which means that the securities will be
delivered to a Fund at a future date usually beyond customary settlement time.
The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, a Fund does not pay
for such securities until received, and does not start earning interest on the
securities until the contractual settlement date. While awaiting delivery of
securities purchased on such bases, a Fund will segregate liquid assets
sufficient to cover its commitments. Although a Fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.

U.S. Government Securities: Each Fund, for temporary defensive purposes, as
discussed below, may invest, in U.S. Government securities, including: (1) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance: U.S. Treasury bills (maturities of one year or less); U.S.
Treasury notes (maturities of one to ten years); and U.S. Treasury bonds
(generally maturities of greater than ten years), all of which are backed by
the full faith and credit of the U.S. Government; and (2) obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities, some
of which are backed by the full faith and credit of the U.S. Treasury, e.g.,
direct pass-through certificates of the Government National Mortgage
Association ("GNMA"); some of which are supported by the right of the issuer to
borrow from the U.S.

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Government, e.g., obligations of Federal Home Loan Banks; and some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association (collectively, "U.S. Government
Securities"). The term "U.S. Government Securities" also includes interests in
trusts or other entities issuing interests in obligations that are backed by
the full faith and credit of the U.S. Government or are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities.

Investments for Temporary Defensive Purposes: During periods of unusual market
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of a Fund may be invested in cash (including
foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers' acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government Securities and related repurchase agreements.

Emerging Growth Companies: Each Fund may invest in securities of small and
medium-size U.S. and foreign companies that are early in their life cycle but
which have the potential to become major enterprises (emerging growth
companies). Such companies may be of any size, would be expected to show
earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation, and would have the products, management, and
market opportunities which are usually necessary to become more widely
recognized as growth companies. Each Fund may also invest in more established
companies whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, changes in
consumer demand, or basic changes in the economic environment or which
otherwise represent opportunities for long-term growth. See "Risk
Factors--Emerging Growth Companies" below.

Emerging Markets Securities: Consistent with each Fund's respective objectives
and policies, each Fund may invest in securities of issuers whose principal
activities are located in emerging market countries (which may include foreign
governments and their subdivisions, agencies or instrumentalities). Emerging
markets include any country determined by the Adviser to have an emerging
market economy, taking into account a number of factors, including whether the
country has a low- to middle-income economy according to the International Bank
for Reconstruction and Development, the country's foreign currency debt rating,
its political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal
activities are located in an emerging market country by considering such
factors as its country of organization, the principal trading market for its
securities, the source of its revenues and the location of its assets. The
issuer's principal activities generally are deemed to be located in a
particular country if: (a) the security is issued or guaranteed by the
government of that country or any of its agencies, authorities or
instrumentalities; (b) the issuer is organized under the laws of, and maintains
a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more
of its total revenues from goods sold or services performed in that country; or
(e) the issuer has 50% or more of its assets in that country.

Brady Bonds: Each Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds
or floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.

Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each Fund may
invest in zero coupon bonds, deferred interest bonds and payment-in-kind
("PIK") bonds. Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which
provide that the issuer thereof may, at its option, pay interest on such bonds
in cash or in the form of additional debt obligations. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but also

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require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value due to changes in interest rates than debt obligations which make
regular payments of interest. A Fund will accrue income on such investments for
tax and accounting purposes, as required, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.

Indexed Securities: Each Fund may invest in indexed securities whose value
is linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) and/or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself and could involve the loss
of all or a portion of the principal amount of or interest on the investment.

Swaps and Related Transactions: As one way of managing its exposure to
different types of investments, each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by a Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example,
in the typical interest rate swap, a Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed
rate. Payments made by both parties to a swap transaction are based on a
notional principal amount determined by the parties and the payment obligations
of parties are typically netted on the payment dates.

Each Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements
of buying a cap and selling a floor.

Swap agreements could be used to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of a Fund's investments and its share price and yield.

Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risk assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on a Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in
value if the counterparty's creditworthiness deteriorates. A Fund may also
suffer losses if it is unable to terminate outstanding swap agreements or
reduce its exposure through offsetting transactions. Swaps, caps, floors and
collars are highly specialized activities which involve certain risks as
described in the SAI.

Options on Securities: Each Fund may write (sell) covered put and call
options and purchase put and call options on securities. Each Fund will write
options on securities for the purpose of increasing its return and/or to
protect the value of its portfolio. In particular, where a Fund writes an
option that expires unexercised or is closed out by the Fund at a profit, it
will retain the premium paid for the option which will increase its gross
income and will offset in part the reduced value of the portfolio security
underlying the option, or the increased cost of portfolio securities to be
acquired. However, the writing of options constitutes only a partial hedge, up
to the amount of the premium less any transaction costs. In contrast, if the
price of the underlying security moves adversely to the Fund's position, the
option may be exercised and the Fund will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium. Each Fund may also write combinations of
put and call options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk.

By writing a call option on a security, a Fund limits its opportunity to profit
from any increase in the market value of the underlying security, since the
holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.

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Each Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that a Fund wants to purchase at a later date. In the
event that the expected market fluctuations occur, a Fund may be able to offset
the resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.

In certain instances, a Fund may enter into options on Treasury securities that
are "reset" options or "adjustable strike" options. These options provide for
periodic adjustment of the strike price and may also provide for the periodic
adjustment of the premium during the term of the option.

Options on Indices: Consistent with each Fund's respective investment
objective and policies, each Fund may write (sell) covered call and put options
and purchase call and put options on indices. Each Fund may write options on
indices for the purpose of increasing its gross income and to protect its
portfolio against declines in the value of securities it owns or increases in
the value of securities to be acquired. When a Fund writes an option on an
index, and the value of the index moves adversely to the holder's position, the
option will not be exercised, and the Fund will either close out the option at
a profit or allow it to expire unexercised. A Fund will thereby retain the
amount of the premium, less related transaction costs, which will increase its
gross income and offset part of the reduced value of portfolio securities or
the increased cost of securities to be acquired. Such transactions, however,
will constitute only partial hedges against adverse price fluctuations, since
any such fluctuations will be offset only to the extent of the premium received
by a Fund for the writing of the option, less related transaction costs. In
addition, if the value of an underlying index moves adversely to a Fund's
option position, the option may be exercised, and the Fund will experience a
loss which may only be partially offset by the amount of the premium received.

Each Fund may also purchase put or call options on indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. A Fund's
possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.

"Yield Curve" Options: Each Fund may enter into options on the yield
"spread," or yield differential, between two securities, a transaction referred
to as a "yield curve" option, for hedging and non-hedging (an effort to
increase current income) purposes. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows
(in the case of a put), regardless of whether the yields of the underlying
securities increase or decrease. Yield curve options written by a Fund will be
covered as described in the SAI. The trading of yield curve options is subject
to all the risks associated with trading other types of options, as discussed
below under "Additional Risk Factors" and in the SAI. In addition, such options
present risks of loss even if the yield on one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which was
not anticipated.

Futures Contracts and Options on Futures Contracts: Each Fund may purchase
and sell futures contracts on stock indices, and may purchase and sell Futures
Contracts on foreign currencies or indices of foreign currencies ("Futures
Contracts"). Each Fund may also purchase and write options on such Futures
Contracts. Consistent with each Fund's respective investment objective and
policies, each may purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities, including municipal bond
indices and any other indices of foreign or domestic fixed income securities
that may become available for trading. These Funds may also purchase and write
options on such Futures Contracts. All above-referenced options on Futures
Contracts are referred to as "Options on Futures Contracts."

Such transactions will be entered into for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. A Fund will incur brokerage
fees when it purchases and sells Futures Contracts, and will be required to
maintain margin deposits. In addition, Futures Contracts entail risks. Although
the Adviser believes that use of such contracts will benefit the Funds, if its
investment judgment about the general direction of exchange rates or the stock
market is incorrect, a Fund's overall performance may be poorer than if it had
not entered into any such contract and the Fund may realize a loss.

Purchases of Options on Futures Contracts may present less risk in hedging a
Fund's portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less
risk than the trading of Futures Contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, a Fund may suffer a loss on the transaction.

Futures Contracts and Options on Futures Contracts that are entered into by a
Fund will be traded on U.S. and foreign exchanges.

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Forward Contracts: Each Fund may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date at a price set at the time of the contract ("Forward
Contracts"). Each Fund may enter into Forward Contracts for hedging purposes
and for non-hedging purposes of increasing the Fund's current income. By
entering into transactions in Forward Contracts for hedging purposes, a Fund
may be required to forego the benefits of advantageous changes in exchange
rates and, in the case of Forward Contracts entered into for non-hedging
purposes, a Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative. Forward Contracts are
traded over-the-counter and not on organized commodities or securities
exchanges. As a result, Forward Contracts operate in a manner distinct from
exchange-traded instruments, and their use involves certain risks beyond those
associated with transactions in Futures Contracts or options traded on
exchanges. A Fund may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts it has entered into. Under
certain circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Adviser anticipates, for any other reason, that the exchange rate will improve,
a Fund may hold such currencies for an indefinite period of time. A Fund may
also enter into a Forward Contract on one currency to hedge against risk of
loss arising from fluctuations in the value of a second currency (referred to
as a "cross hedge") if, in the judgment of the Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. Each Fund has established procedures, which require use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts.

Options on Foreign Currencies: Each Fund may also purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and a Fund may 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
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Fund may also choose, or be
required to receive delivery of the foreign currencies underlying Options on
Foreign Currencies into which it has entered. Under certain circumstances, such
as where the Adviser believes that the applicable exchange rate is unfavorable
at the time the currencies are received or the Adviser anticipates, for any
other reason, that the exchange rate will improve, a Fund may hold such
currencies for an indefinite period of time.

CERTAIN SECURITIES AND INVESTMENT TECHNIQUES APPLICABLE TO CERTAIN FUNDS. The
following securities and investment techniques are applicable only to certain
Funds, as specified:

Equity Securities: Each Fund except the Emerging Markets Debt Fund may
invest in all types of equity securities, including the following: common
stocks, preferred stocks and preference stocks; securities such as bonds,
warrants or rights that are convertible into stocks; and depository receipts
for those securities. These securities may be listed on securities exchanges,
traded in various over-the-counter markets or have no organized market.

Foreign Growth Securities: Each Fund except the Emerging Markets Debt Fund
may invest in securities of foreign growth companies, including established
foreign companies, whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment or
which otherwise represent opportunities for long term growth. See "Additional
Risk Factors--Foreign Securities" below. It is anticipated that these companies
will primarily be in nations with more developed securities markets, such as
Japan, Australia, Canada, New Zealand, Hong Kong and most Western European
countries, including Great Britain.

Short Sales: If each Fund (except the Emerging Markets Debt Fund)
anticipates that the price of a security will decline, it may sell the security
short and borrow the same type of security from a broker or other institution
to complete the sale. A Fund may make a profit or loss depending upon whether
the market price of the security decreases or increases between the date of the
short sale and the date on which the Fund must replace the borrowed security.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. Each
Fund's short sales must be fully collateralized. A Fund will not sell short
securities whose underlying value, minus any amounts pledged by the Fund as
collateral (which does not include the proceeds from the short sale), exceeds
40% of its net assets.

Loans and Other Direct Indebtedness: The Emerging Markets Debt Fund may
invest a portion of its assets in loans. By purchasing a loan, the Fund
acquires some or all of the interest of a bank or other lending institution in
a loan to a corporate, government or other borrower. Many such loans are
secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase

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trade or other claims against companies, which generally represent money owed
by the company to a supplier of goods and services. These claims may also be
purchased at a time when the company is in default. Certain of the loans
acquired by the Fund may involve revolving credit facilities or other standby
financing commitments which obligate the Fund to pay additional cash on a
certain date or on demand.

The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans may not
be in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Fund may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value.

Investment in Other Investment Companies: The Funds may invest in other
investment companies to the extent permitted by the 1940 Act and the SEC. If
the Funds invest in such investment companies, the Funds' shareholders will
bear not only their proportionate share of the expenses of the Funds (including
operating expenses and the fees of the Adviser), but also will indirectly bear
similar expenses of the underlying investment companies. The Emerging Markets
Debt Fund may invest in other investment companies (i) as a means by which the
Fund may invest in securities of certain countries which do not otherwise
permit investment, (ii) as a means to purchase securities of emerging market
companies having limited free float, or (iii) when the Adviser believes such
investments may be more advantageous to the Fund than a direct market purchase
of securities.

Structured Securities: The Emerging Markets Debt Fund may invest a portion of
its assets in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations.
This type of restructuring involves the deposit with, or purchase by, an
entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Fund anticipates it will invest typically
involve no credit enhancement, their credit risk generally will be equivalent
to that of the underlying instruments. The Fund is permitted to invest in a
class of Structured Securities that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated Structured Securities
typically have higher yields and present greater risks than unsubordinated
Structured Securities. Structured Securities are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Securities.

6. ADDITIONAL RISK FACTORS

The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Certain Securities and Investment Techniques" in the
SAI.

Non-diversification: The Emerging Markets Fund is "non-diversified," as that
term is defined in the 1940 Act, but intends to qualify as a "regulated
investment company" for federal income tax purposes. This means, in general,
that although more than 5% of the Fund's total assets may be invested in the
securities of one issuer (including a foreign government), at the close of each
quarter of its taxable year, the aggregate amount of such holdings may not
exceed 50% of the value of its total assets, and no more than 25% of the value
of its total assets may be invested in the securities of a single issuer. To
the extent that a non-diversified Fund at times may hold the securities of a
smaller number of issuers than if it were "diversified" (as defined in the 1940
Act), the Fund will at such times be subject to greater risk with respect to
its portfolio securities than a fund that invests in a broader range of
securities, because changes in the financial condition or market assessment of
a single issuer may cause greater fluctuations in the Fund's total return and
the net asset value of its shares.

Emerging Growth Companies: Investing in emerging growth companies involves
greater risk than is customarily associated with investing in more established
companies. Emerging growth companies often have limited product lines, markets
or financial resources, and they may be dependent on one-person management. The
securities of emerging growth companies may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. Similarly, many of the securities offering
the capital appreciation sought by the Funds will involve a higher degree of
risk than would established growth stocks.

Fixed Income Securities: To the extent a Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed
income securities can be expected to rise. Conversely, when interest rates
rise, the value of fixed income securities can be expected to decline. The
Funds are not subject to restrictions on the maturities of the fixed income
securities they hold. A Fund's investments in fixed income securities with
longer terms to maturity are subject to greater volatility than the Fund's
shorter-term obligations.

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Options, Futures Contracts and Forward Contracts: Although each Fund may
enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Fund's hedging strategy unsuccessful and could result in losses.
The Funds also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Fund which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There also can be no assurance
that a liquid secondary market will exist for any contract purchased or sold,
and a Fund may be required to maintain a position until exercise or expiration,
which could result in losses. The SAI contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.

Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indices
underlying options, Futures Contracts and Options on Futures Contracts traded
by the Fund will include both domestic and foreign securities.

Lower Rated Bonds: Each Fund may invest in fixed income securities, rated
Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade securities.

Each Fund may also invest in securities rated Ba or lower by Moody's or BB or
lower by S&P, Fitch or Duff & Phelps and comparable unrated securities
(commonly known as "junk bonds") to the extent described above. These
securities are considered speculative and, while generally providing greater
income than investments in higher rated securities, will involve greater risk
of principal and income (including the possibility of default or bankruptcy of
the issuers of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than securities
in the higher rating categories. However, since yields vary over time, no
specific level of income can ever be assured. These lower rated high yielding
fixed income securities generally tend to reflect economic changes and
short-term corporate and industry developments to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates, the market's perception of their credit
quality, and the outlook for economic growth). In the past, economic downturns
or an increase in interest rates have, under certain circumstances, caused a
higher incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on a Fund's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, a Fund may continue to earn the same level
of interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss
of principal. The market for these lower rated fixed income securities may be
less liquid than the market for investment grade fixed income securities, and
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities. Changes in the value of
securities subsequent to their acquisition will not affect cash income or yield
to maturity to a Fund but will be reflected in the net asset value of shares of
the Fund.

Foreign Securities: Each Fund may invest in dollar denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, securities settlement practices, governmental
administration or economic or monetary policy (in the United States or abroad)
or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different accounting standards and thinner trading markets.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. Each Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. Each Fund may also hold foreign currency
in anticipation of purchasing foreign securities.

16
<PAGE>

of an underlying non-U.S. stock on deposit with a custodian bank as collateral.
Because ADRs trade on U.S. securities exchanges, the Adviser does not treat
them as foreign securities. However, they are subject to many of the risks of
foreign securities described above such as changes in exchange rates and more
limited information about foreign issuers.

Emerging Market Securities: Each Fund may invest in emerging markets. In
addition to the general risks of investing in foreign securities, investments
in emerging markets involve special risks. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. These securities may be considered speculative
and, while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a Fund is uninvested and no return is earned thereon. The inability
of a Fund to make intended securities purchases due to settlement problems
could cause a Fund to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result in
losses to a Fund due to subsequent declines in value of the portfolio security,
a decrease in the level of liquidity in the Fund's portfolio, or, if the Fund
has entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery,
and in such markets a Fund bears the risk that the securities will not be
delivered and that the Fund's payments will not be returned. Securities prices
in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the
risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of
property rights than more developed countries. The economies of countries with
emerging markets may be predominantly based on only a few industries, may be
highly vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates. Local
securities markets may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times.
Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic movements in
price.

Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. A Fund could be adversely affected
by delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.

Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of a Fund.

Portfolio Trading: Each Fund intends to manage its portfolio by buying and
selling securities, as well as holding securities to maturity, to help attain
its investment objective and policies.

Each Fund will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objective. In trading portfolio securities, a Fund seeks to take advantage of
market developments, yield disparities and variations in the creditworthiness
of issuers. For a description of the strategies which may be used by the Funds
in trading portfolio securities, see "Portfolio Transactions and Brokerage
Commissions" in the SAI. Because the Funds are expected to have a portfolio
turnover rate of approximately 200% during its current fiscal year, transaction
costs incurred by each Fund and the realized capital gains and losses of each
Fund may be greater than that of a fund with a lower portfolio turnover rate.

The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD") and
such other policies as the Trustees of the Trust may determine, the Adviser may
consider sales of shares of other investment company clients of MFD, the
distributor of shares of the Trust and of the MFS Family of Funds (the "MFS
Funds"), as a factor in the selection of broker-dealers to execute each Fund's
portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to
pay a portion of a Fund's operating expenses (e.g., fees charged by the
custodian of the Fund's assets).

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

The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the investment policies of each
Fund. The specific investment restrictions listed in the SAI may be changed
without shareholder

17
<PAGE>

approval unless indicated otherwise (see the SAI). Except with respect to a
Fund's policy on borrowing and investing in illiquid securities, a Fund's
investment limitations, policies and rating standards are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.

7. MANAGEMENT OF THE FUNDS

Investment Adviser--The Adviser manages each Fund pursuant to separate
Investment Advisory Agreements, each dated March 16, 1998 (the "Advisory
Agreements"). Under the Advisory Agreements, the Adviser provides each Fund
with overall investment advisory services. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for each Fund.
For its services, the Adviser is entitled to receive a management fee, computed
and paid monthly, in an amount listed below per annum of the average daily net
assets of such Fund:

<TABLE>
<CAPTION>
Strategic Small Emerging
Value Cap Markets
Fund Fund Debt Fund
- ----------- ---------- ----------
<S> <C> <C>
0.75% 0.90% 0.85%
</TABLE>

The Adviser is currently waiving its right to receive management fees from each
Fund.

The identity and background of the portfolio manager(s) for each Fund is set
forth below. Each portfolio manager has acted in that capacity since the
commencement of investment operations of each Fund.

<TABLE>
<CAPTION>
Fund Portfolio Manager(s)
- ---------------------------- ---------------------------------------------------------------------------------------
<S> <C>
Strategic Value Fund The Fund's portfolio manager is Kenneth J. Enright. Mr. Enright, a Vice President
of the Adviser, has been employed as a portfolio manager with the Adviser since 1986.

Small Cap Fund The Fund is currently managed by a committee comprised of various equity research
analysts employed by the Adviser.

Emerging Markets Debt Fund The portfolio managers of the Fund are Matthew W. Ryan and Robert S. Manning. Mr.
Ryan has been employed as an analyst by the Adviser since April 1997. From July 1993
to March 1997, Mr. Ryan worked as an economist with the U.S. Executive Director's
Office of the International Monetary Fund. Mr. Manning, a Senior Vice President of the
Adviser, has been employed as a portfolio manager by the Adviser since 1984.
</TABLE>

MFS also serves as investment adviser to each of the other MFS Funds and to
MFS[RegTM] Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust,
MFS Special Value Trust, MFS Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.), a subsidiary of Sun Life Assurance Company of Canada ("Sun
Life") in connection with the sale of various fixed/ variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisors,
Inc., provide investment advice to substantial private clients.

MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately
$83.1 billion on behalf of approximately 3.5 million investor accounts as of
September 30, 1998. As of such date, the MFS organization managed approximately
$19.4 billion of assets invested in fixed income funds and fixed income
portfolios, approximately $4.3 billion of assets invested in foreign
securities, and approximately $51.5 billion of assets invested in equity
securities. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun
Life. The Directors of MFS are John W. Ballen, Thomas J. Cashman, Joseph W.
Dello Russo, John D. McNeil, Kevin R. Parke, Arnold D. Scott, William W. Scott,
Jr., Jeffrey L. Shames and Donald A. Stewart. Mr. Shames is the Chairman and
Chief Executive Officer of MFS, Mr. Ballen is the President and the Chief
Investment Officer of MFS, Mr. Cashman is an Executive Vice President of MFS,
Mr. Dello Russo is the Chief Financial Officer and an Executive Vice President
of MFS, Mr. Parke is the Chief Equity Officer, Director of Equity Research and
an Executive Vice President of MFS, Mr. Arnold Scott is the Secretary and a
Senior Executive Vice President of MFS and Mr. William Scott is the President
of MFS Fund Distributors Inc., the distributor of MFS Funds. Messrs. McNeil and
Stewart are the Chairman and President of Sun Life, respectively. Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the U.S. since 1895, establishing
a headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.

Jeffrey L. Shames, the Chairman and Chief Executive Officer of MFS, is also a
Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost, Mark
E. Bradley, Ellen Moynihan and James R. Bordewick, Jr., all of whom are
officers of MFS, are officers of the Trust.

18
<PAGE>

In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as a Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the
Funds.

Administrator--MFS provides each Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.

Distributor--MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor of each of the other MFS
Funds.

Shareholder Servicing Agent--MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for each Fund.

8. YEAR 2000 ISSUES

Funds could be adversely affected if the computer systems used by MFS, a Fund's
other service providers or the companies in which a Fund invests do not
properly process date-related information from and after January 1, 2000 (the
"Year 2000 Issue"). MFS recognizes the importance of the Year 2000 Issue and,
to address Year 2000 compliance, created a Year 2000 Program Management Office
in 1996, which is separately funded, has a specialized staff and reports
directly to MFS Senior Management. The Office, with the help of external
consultants, is responsible for ascertaining that all internal systems, data
feeds and third party applications are Year 2000 compliant. While MFS is
confident that all MFS systems will be Year 2000 compliant before the turn of
the century, there are significant systems interdependencies in the domestic
and foreign markets for securities, the business environments in which
companies held by the Funds operate and in MFS' own business environment. MFS
has been actively working with each Fund's other service providers to identify
and respond to potential problems in an effort to ensure Year 2000 compliance
or develop contingency plans. Year 2000 compliance is also one of the factors
considered by MFS in its ongoing assessment of companies in which a Fund
invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the Funds.

9. INFORMATION CONCERNING SHARES OF THE FUNDS

PURCHASES

Class A, Class B and Class C shares of each Fund may be purchased at the public
offering price through any dealer. Dealers may also charge their customers fees
relating to investments in each Fund. As used in the Prospectus and any
appendices thereto, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser, financial
planner and any other financial institutions having a selling agreement or
other similar agreement with MFD.

This Prospectus offers Class A, Class B and Class C shares which bear sales
charges and distribution fees in different forms and amounts, as described
below (currently, only Class A shares are available for sale):

CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.

Purchases Subject to Initial Sales Charge. Class A shares are offered at
net asset value plus an initial sales charge as follows:

<TABLE>
<CAPTION>
Sales Charge* As Percentage Of:
- ---------------------------------------------------------------------------------------------
Dealer Allowance
Offering Net Amount as a Percentage of
Amount of Purchase Price Invested Offering Price
- ------------------------------------------- ---------- ------------ -------------------
<S> <C> <C> <C>
Less than $50,000 ......................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ............ 4.75 4.99 4.00
$100,000 but less than $250,000 ........... 4.00 4.17 3.20
$250,000 but less than $500,000 ........... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ......... 2.20 2.25 1.70
$1,000,000 or more ........................ None** None** See Below**
</TABLE>

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

* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.

** A CDSC will apply to such purchases, as discussed below.

19
<PAGE>

MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of each Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.

Purchases Subject to a CDSC (but not an initial sales charge). In the
following five circumstances, Class A shares of each Fund are also offered at
net asset value without an initial sales charge but subject to a CDSC, equal to
1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:

(i) on investments of $1 million or more in Class A shares;

(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization demonstrates to the satisfaction of MFD that
either (i) the employer has at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of the Funds in the
MFS Funds will be in an aggregate amount of at least $250,000 within a
reasonable period of time, as determined by MFD in its sole discretion;

(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; (c) the aggregate purchases by the retirement plan of Class A
shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and (d) the plan has not redeemed its Class B
shares in the MFS Funds in order to purchase Class A shares under this
category;

(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds; the retirement plan will
qualify under this category only if the plan or its sponsoring
organization informs the Shareholder Servicing Agent prior to the
purchases that the plan has a market value of $500,000 or more invested
in shares of any class or classes of the MFS Funds; the Shareholder
Servicing Agent has no obligation independently to determine whether
such a plan qualifies under this category; and

(v) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and
(c) the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.

In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:

<TABLE>
<CAPTION>
Commission Paid by MFD to Dealers Cumulative Purchase Amount
- ----------------------------------- -------------------------------------
<S> <C>
1.00% ........................... On the first $2,000,000, plus
0.80% ........................... Over $2,000,000 to $3,000,000, plus
0.50% ........................... Over $3,000,000 to $50,000,000, plus
0.25% ........................... Over $50,000,000
</TABLE>

For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares, purchases for each
shareholder account (and certain other accounts for which the shareholder is a
record or beneficial holder) will be aggregated over a 12-month period
(commencing from the date of the first such purchase).

See "Redemptions and Repurchases--Contingent Deferred Sales Charge" below for
further discussion of the CDSC.

Waivers of Initial Sales Charge and CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares are waived. These circumstances are
described

20
<PAGE>

in Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:

(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and

(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification, or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;

provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulations which results in a material adverse change to the tax advantaged
nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.

CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC as follows:

<TABLE>
<CAPTION>
Contingent
Year of Redemption Deferred Sales
After Purchase Charge
- --------------------------------------- ---------------
<S> <C>
First ......................... 4%
Second ........................ 4%
Third ......................... 3%
Fourth ........................ 3%
Fifth ......................... 2%
Sixth ......................... 1%
Seventh and following ......... 0%
</TABLE>

Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under each Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).

Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent between July 1,
1996 and December 31, 1998, will be subject to the CDSC described above, only
under limited circumstances, as explained below under "Waivers of CDSC." With
respect to such purchases, MFD pays an amount to dealers equal to 3.00% of the
amount purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of the
first year service fee equal to 0.25% of the purchase price payable under each
Fund's Distribution Plan. For purchases of Class B shares by a retirement plan
whose sponsoring organization subscribes to the MFS Recordkeeper Plus product
and which establishes its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in good
order on or after November 15, 1998), MFD pays no up front commissions to
dealers, but instead pays an amount to dealers equal to 1% per annum of the
average daily net assets of the Fund attributable to plan assets, payable at
the rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a
pre-existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus Product.

21
<PAGE>

of any class or classes of the MFS Funds. In this event, the plan or its
sponsoring organization should inform the Shareholder Servicing Agent that the
plan is eligible to purchase Class A shares under this category; the
Shareholder Servicing Agent has no obligation independently to determine
whether such a plan qualifies under this category for the purchase of Class A
shares.

Waivers of CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which established an account with the
Shareholder Servicing Agent between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated under ERISA or is liquidated or dissolved; or
(iii) is acquired by, merged into, or consolidated with, any other entity.

In addition to these circumstances, the CDSC imposed upon the redemption
of Class B shares is waived with respect to shares held by a retirement plan
whose sponsoring organization subscribes to the MFS Recordkeeper Plus product
and which establishes its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in good
order on or after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus product will not
become eligible for this waiver category.

Conversion of Class B Shares. Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under each Fund's Distribution
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of
Class B shares (and which have not converted to Class A shares as provided in
the following sentence) will be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to
Class A shares bear to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.

CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC of 1.00% upon redemption during
the first year. Class C shares do not convert to any other class of shares. The
maximum investment in Class C shares is up to $1,000,000 per transaction.

The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases--Contingent Deferred Sales Charge" below for
further discussion of the CDSC.

MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under each Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).

Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code, if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.

Waivers of CDSC: In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.

GENERAL: The following information applies to purchases of all classes of each
Fund's shares.

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Minimum Investment. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
Individual Retirement Accounts ("IRAs")) involving the submission of
investments by means of group remittal statements are subject to a $50 minimum
on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment
is $50 per account. Accounts being established for participation in the
Automatic Exchange Plan are subject to a $50 minimum on initial and additional
investments per account. There are also other limited exceptions to these
minimums for certain tax-deferred retirement programs. Any minimums may be
changed at any time at the discretion of MFD. Each Fund reserves the right to
cease offering its shares at any time.

Subsequent Investment by Telephone. Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing
agent toll-free at (800) 225-2606. The minimum purchase amount is $50 and the
maximum purchase amount is $100,000. Shareholders wishing to avail themselves
of this telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will be
made. If a telephone purchase request is received by the Shareholder Servicing
Agent on any business day prior to the close of regular trading on the Exchange
(generally, 4.00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify the
identity of the caller. The Shareholder Servicing agent will request personal
or other information from the caller, and will normally also record calls.
Shareholders should verify the accuracy of confirmation statements immediately
after their receipt.

Right to Reject Purchase Orders/Market Timing. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. Because
an exchange request involves both a request to redeem shares of one fund and to
purchase shares of another fund, the Fund considers the underlying redemption
requests conditioned upon the acceptance of the underlying purchase request.
Therefore, in the event that the Fund or MFD rejects an exchange request,
neither the redemption nor the purchase side of the exchange will be processed.

The MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The MFS
Family of Funds defines a "market timer" as an individual or organization
acting on behalf of one or more individuals, if (i) the individual or
organization makes six or more exchange requests among the MFS Family of Funds
or three or more exchange requests out of any of the MFS high yield bond funds
or MFS municipal bond funds per calendar year and (ii) any one of such exchange
requests represents shares equal in value to $1 million. Accounts under common
ownership or control, including accounts administered by market timers, will be
aggregated for purposes of this definition.

Dealer Concessions. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell or
arrange for the sale of shares of a Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in group
meetings or to help pay the expenses of sales contests. Other concessions may
be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.

Special Investment Programs. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.

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<PAGE>

Restrictions on Activities of National Banks. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services
in respect of shareholders who invested in a Fund through a national bank. It
is not expected that shareholders would suffer any adverse financial
consequence as a result of these occurrences. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.

EXCHANGES

Subject to the requirements set forth below, some or all of the shares in an
account with a Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of
the other MFS Funds at net asset value (if available for sale). Shares of one
class may not be exchanged for shares of any other class.

EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market funds): No
initial sales charge or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.

EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.

EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares
and Units with respect to shares on which the initial sales charge has already
been paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with
respect to subsequent exchanges shall be governed by the rules set forth above
in this paragraph.

GENERAL: A shareholder should read the prospectus of the other MFS Funds and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by
the Shareholder Servicing Agent in proper form (i.e., if in writing--signed by
the record owner(s) exactly as the shares are registered; if by
telephone--proper account identification is given by the dealer or shareholder
of record) and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or
another similar 401(k) recordkeeping system made available by the Shareholder
Servicing Agent) or all the shares in the account. If an Exchange Request is
received by the Shareholder Servicing Agent on any business day prior to the
close of regular trading on the Exchange (generally, 4:00 p.m., Eastern time),
the exchange will occur on that day if all the requirements set forth above
have been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.

REDEMPTIONS AND REPURCHASES

A shareholder may withdraw all or any portion of the value of his account on
any date on which a Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to a Fund through a dealer
(a repurchase). Certain redemptions and repurchases are, however, subject to a
CDSC. See "Contingent Deferred Sales Charge" below.

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<PAGE>

Because the net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a sufficient
number of full and fractional shares in his account to cover the amount
withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or cashier's
checks). Payment of redemption proceeds may be delayed for up to 15 days from
the purchase date in an effort to assure that such check has cleared.

REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the manner
set forth below under the caption "Signature Guarantee." In addition, in some
cases "good order" will require the furnishing of additional documents. The
Shareholder Servicing Agent may make certain de minimis exceptions to the above
requirements for redemption. Within seven days after receipt of a redemption
request in "good order" by the Shareholder Servicing Agent, each Fund will make
payment in cash of the net asset value of the shares next determined after such
redemption request was received, reduced by the amount of any applicable CDSC
described above and the amount of any income tax required to be withheld,
except during any period in which the right of redemption is suspended or date
of payment is postponed because the Exchange is closed or trading on such
Exchange is restricted or to the extent otherwise permitted by the 1940 Act if
an emergency exists. See "Tax Status" below.

REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and
account number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
may be liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.

REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase order
with his dealer, who may charge the shareholder a fee. If the dealer receives
the shareholder's order prior to the close of regular trading on the Exchange
and communicates it to MFD before the close of business on the same day, the
shareholder will receive the net asset value calculated on that day, reduced by
the amount of any applicable CDSC and the amount of any income tax required to
be withheld.

CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C and Class B shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis--all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one
year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of each Fund
purchased prior to January 1, 1993, transactions will be aggregated on a
calendar year basis-- all transactions made during a calendar year, regardless
of when during the year they have occurred, will age one year at the close of
business on December 31 of that year and each subsequent year.

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<PAGE>

A shares) of Direct Purchases may be redeemed without charge ("Free Amount").
Moreover, no CDSC is ever assessed on additional shares acquired through the
automatic reinvestment of dividends or capital gain distributions ("Reinvested
Shares"). Therefore, at the time of redemption of a particular class, (i) any
Free Amount is not subject to the CDSC and (ii) the amount of the redemption
equal to the then-current value of Reinvested Shares is not subject to the
CDSC, but (iii) any amount of the redemption in excess of the aggregate of the
then-current value of Reinvested Shares and the Free Amount is subject to a
CDSC. The CDSC will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions of shares will be calculated as set
forth in "Purchases" above.

The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.

GENERAL: The following information applies to redemptions and repurchases of all
classes of each Fund's shares.

Signature Guarantee. In order to protect shareholders against fraud, each
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases, the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.

Reinstatement Privilege. Shareholders of a Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will be
imposed upon redemption. Such purchases under the Reinstatement Privilege are
subject to all limitations in the SAI regarding this privilege.

In-Kind Distributions. The Trust agrees to redeem shares of each Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder. Each Fund has reserved
the right to pay other redemptions, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's portfolio.
The securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash.

Involuntary Redemptions/Small Accounts. Due to the relatively high cost of
maintaining small accounts, each Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment in
such account drops below $500 because of redemptions or exchanges, except in
the case of accounts being established for monthly automatic investments and
certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases--General Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.

DISTRIBUTION PLAN

The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit each Fund and its shareholders.

FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each Class of shares, as described below.

Service Fees. The Distribution Plan provides that a Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees

26
<PAGE>

may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of a Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder
accounts.

Distribution Fees. The Distribution Plan provides that a Fund may pay MFD
a distribution fee in addition to the service fee described above based on the
average daily net assets attributable to the Designated Class as partial
consideration for distribution services performed and expenses incurred in the
performance of MFD's obligations under its distribution agreement with the
Fund. See "Management of the Funds--Distributor" in the SAI. The amount of the
distribution fee paid by a Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.

Other Common Features. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan are severable with respect to
each class of shares offered by the Fund.

FEATURES UNIQUE TO CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.

Class A Shares. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases--Class A Shares" above. In addition to the initial sales charge, the
dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.

The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of a Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). Distribution fee payments under the
Distribution Plan may be used by MFD to pay securities dealers a distribution
fee in an amount equal to 0.10% per annum of each Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors from whom that securities
dealer is the holder or dealer of record. See "Purchases--Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Class A Distribution Plan do not exceed 0.35% per annum of
the average daily net assets of a Fund attributable to Class A shares, the Fund
is permitted to pay such distribution-related expenses or other
distribution-related expenses.

Class B Shares. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases--Class B Shares"
above. MFD will advance to dealers the first year service fee described above
at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefor, MFD may retain the service fee paid by a Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to
such shares commencing in the thirteenth month following purchase.

Under the Distribution Plan, a Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases--Class B Shares" above).

Class C Shares. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption of 1.00%
during the first year See "Purchases--Class C shares" above. MFD will pay a
commission to dealers of 1.00% of the purchase price of Class C shares
purchased through dealers at the time of purchase. In compensation for this
1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per annum
Class C distribution and service fees paid by the Fund with respect to such
shares for the first year after purchase, and dealers will become eligible to
receive from MFD the ongoing 1.00% per annum distribution and service fees paid
by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.

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<PAGE>

This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Distribution Plan equal, on an annual basis, to
0.75% of a Fund's average daily net assets attributable to Class C shares.

CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: Each Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.00%, 1.00% and 1.00%, per annum, respectively. Distribution and service fees
for Class A shares under the Distribution Plan are currently being waived on a
voluntary basis and may be imposed at the discretion of MFD.

DISTRIBUTIONS

Each Fund intends to pay substantially all of its net investment income to its
shareholders as dividends at least annually. In determining the net investment
income available for distributions, each Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual
net investment income for the period. If a Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. Each Fund may make one or
more distributions during the calendar year to its shareholders from any
long-term capital gains and may also make one or more distributions during the
calendar year to its shareholders from short-term capital gains. Shareholders
may elect to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. See "Tax Status" and "Shareholder Services--Distribution Options" below.
Distributions paid by a Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.

TAX STATUS

Each Fund is treated as an entity separate from the other Funds and the other
series of the Trust for federal income tax purposes. In order to minimize the
taxes each Fund would otherwise be required to pay, each Fund intends to
qualify each year as a "regulated investment company" under Subchapter M of the
Code. Because each Fund intends to distribute all of its net investment income
and net realized capital gains to its shareholders in accordance with the
timing requirements imposed by the Code, it is not expected that the Funds will
be required to pay any federal income or excise taxes, although a Fund's
foreign-source income may be subject to foreign withholding taxes.

Shareholders of a Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested
in additional shares. A portion of the dividends received from the Strategic
Value Fund and the Small Cap Fund (but none of the Funds' capital gains
distributions) may qualify for the dividends-received deduction for
corporations. The Emerging Markets Debt Fund expects that none of its
distributions will be eligible for the dividends received deduction for
corporations. Shortly after the end of each calendar year, each shareholder of
a Fund will be sent a statement setting forth the federal income tax status of
all of the Fund's dividends and distributions for that year, including the
portion taxable as ordinary income, the portion, if any, taxable as long-term
capital gain (as well as the rate category or categories under which such gain
is taxable), the portion, if any, representing a return of capital (which is
generally free of current taxes but which results in a basis reduction) and the
amount, if any, of federal income tax withheld. In certain circumstances, the
Emerging Markets Debt Fund may also elect to "pass through" to shareholders
foreign income taxes paid by the Fund. Under those circumstances, the Fund will
notify shareholders of their pro-rata portion of the foreign income taxes paid
by the Fund; Shareholders may be eligible for foreign tax credit or deductions
with respect to those taxes, but, will be required to treat the amount of taxes
as an amount distributed to them and thus includable in their gross income for
federal income tax purposes.

Fund distributions will reduce a Fund's net asset value per share. Shareholders
who buy shares shortly before a Fund makes a distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.

Each Fund intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted under an applicable treaty) on taxable dividends and
other payments that are subject to such withholding and that are made to
persons who are neither citizens nor residents of the U.S. Each Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Funds' Account Application for additional
information

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<PAGE>

regarding backup withholding of federal income tax and should consult their own
tax advisers as to the tax consequences to them of an investment in a Fund.

NET ASSET VALUE

The net asset value per share of each class of each Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in a Fund's portfolio are valued on the
basis of their market values or otherwise at their fair values, as described in
the SAI. All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. The net asset value per share of each class of
shares is effective for orders received in "good order" by the dealer prior to
its calculation and received by the dealer prior to the close of that business
day. The Fund has authorized one or more dealers to receive purchase and
redemption orders on behalf of the Fund. Such dealers are authorized to
designate other intermediaries to receive purchase and redemption orders on
behalf of the Fund. The Fund will be deemed to have received a purchase or
redemption order when an authorized dealer or, if applicable, a dealer's
authorized designee, receives the order. Customer orders will be priced at the
net asset value of the Fund next computed after such orders are received by an
authorized dealer or the dealer's authorized designee.

EXPENSES

The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Funds (other than those assumed by MFS) including but not
limited to: advisory and administrative services; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable
to the Funds; fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar or dividend disbursing agent of the Funds;
expenses of repurchasing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Funds' custodian, for all services to the Funds, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Funds; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Funds and the preparation, printing and mailing
of prospectuses are borne by the Funds except that the Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated between the series in a manner believed by management of the
Trust to be fair and equitable.

Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the expenses (after taking into effect any compensating balance
and offset arrangements) of the Strategic Value Fund, the Small Cap Fund and
the Emerging Markets Debt Fund such that each such Fund's "Other Expenses,"
which are defined to include all Fund expenses except for management fees, Rule
12b-1 fees, taxes, extraordinary expenses, brokerage and transaction costs and
class specific expenses, do not exceed 1.25%, 1.30% and 1.65% per annum,
respectively, of its average daily net assets (the "Maximum Percentage"). The
payments made by MFS on behalf of these Funds under this arrangement are
subject to reimbursement by such Fund to MFS, which will be accomplished by the
payment of an expense reimbursement fee by the Fund to MFS computed and paid
monthly at a percentage of its average daily net assets for its then current
fiscal year, with a limitation that immediately after such payment such Fund's
"Other Expenses" will not exceed the Maximum Percentage. The obligation of MFS
to bear each Fund's "Other Expenses" pursuant to this arrangement, and each
Fund's obligation to pay the reimbursement fee to MFS, terminates on the
earlier of the date on which payments made by the Fund equal the prior payment
of such reimbursable expenses by MFS or July 31, 2002.

DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES

Each Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without
par value). Each Fund also has a class of shares which it offers exclusively to
certain institutional investors, entitled Class I shares. As of the date of
this Prospectus, the Trust has seven series of shares. The Trust has reserved
the right to create and issue additional classes and series of shares, in which
case each class of shares of a series would participate equally in the
earnings, dividends and assets attributable to that class of that particular
series. Shareholders are entitled to one vote for each share held and shares of
each series would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series
would vote together in the election of Trustees and selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in

29
<PAGE>

the fees under the Distribution Plan or on any other matter that affects solely
that class of shares, but will otherwise vote together with all other classes
of shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Trust's Declaration of Trust provides that a
Trustee may be removed from office in certain instances (see "Description of
Shares, Voting Rights and Liabilities" in the SAI).

Each share of a class of each Fund represents an equal proportionate interest
in that Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth in "Purchases--Conversion of Class B shares" above). Shares are fully
paid and non-assessable. Should a Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.

TRS MFS DEF Contribution Plan, c/o Mark Leary, Mass Financial Services, 500
Boylston Street, Boston, MA 02116-3740 owns 99.97% of the Class I shares for
Small Cap Fund, and, therefore, controls the Fund.

PERFORMANCE INFORMATION

From time to time, each Fund may provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as
Lipper Analytical Services, Inc., and Wiesenberger Investment Companies
Service. Yield quotations are based on the annualized net investment income per
share allocated to each class of a Fund over a 30-day period stated as a
percent of the maximum public offering price of that class on the last day of
that period. Yield calculations for Class B and Class C shares assume no CDSC
is paid. The current distribution rate for each class is calculated by (i)
annualizing the distributions (excluding short-term capital gains) of the class
for a stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result by the
maximum offering price or net asset value per share on the last day of the
period. Current distribution rate calculations for Class B and Class C shares
assumes no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains, and return of invested capital, and may be calculated
over a different period of time. Total rate of return quotations will reflect
the average annual percentage change over stated periods in the value of an
investment in each class of shares of a Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested
and which will give effect to the imposition of any applicable CDSC assessed
upon redemptions of the Fund's Class B and Class C shares. Such total rate of
return quotations may be accompanied by quotations which do not reflect the
reduction in value of the initial investment due to the sales charge or the
deduction of the CDSC, and which will therefore be higher. Each Fund offers
multiple classes of shares which were initially offered for sale to, and
purchased by, the public on different dates (the "class inception date"). The
calculation of total rate of return for a class of shares which has a later
class inception date than another class of shares of a Fund is based both on
(i) the performance of the Fund's newer class from its inception date and (ii)
the performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class. See the SAI for further information on
the calculation of total rate of return for share classes with different class
inception dates.

All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only annualized net
portfolio income as of a stated period of time and current distribution rate
reflects only the rate of distributions paid by a Fund over a stated period of
time, while total rate of return reflects all components of investment return.
A Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion
of the manner in which a Fund will calculate its yield, current distribution
rate and total rate of return, see the SAI. For further information about the
Fund's performance for the fiscal year ended July 31, 1998, please see the
Fund's annual report. A copy of the Funds' annual report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover
for address and phone number). In addition to information provided in
shareholder reports, each Fund may, in its discretion, from time to time, make
a list of all or a portion of its holdings available to investors upon request.

PROVISION OF ANNUAL AND SEMIANNUAL REPORTS

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<PAGE>

any shareholder may call the Shareholder Servicing Agent at 1-800-225-2606 to
request that copies of such reports be sent personally to that shareholder.

10. SHAREHOLDER SERVICES

Shareholders with questions concerning the shareholder services described below
or concerning other aspects of a Fund, should contact the Shareholder Servicing
Agent (see back cover for address and phone number). A shareholder whose shares
are held in the name of, or controlled by, a dealer might not receive many of
the privileges and services from a Fund (such as Right of Accumulation, Letter
of Intent and certain recordkeeping services) that a Fund ordinarily provides.

Account and Confirmation Statements--Each shareholder will receive confirmation
statements showing the transaction activity in his account. At the end of each
calendar year, each shareholder will receive information regarding the tax
status of reportable dividends and distributions for that year (see "Tax
Status").

Distribution Options--The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:

-- Dividends and capital gain distributions reinvested in additional shares;
this option will be assigned if no other option is specified;

-- Dividends (including short-term capital gains) in cash; capital gain
distributions reinvested in additional shares; or

-- Dividends and capital gain distributions in cash.

Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of each Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.

Investment and Withdrawal Programs--For the convenience of shareholders, each
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with a Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.

Letter of Intent: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of a Fund alone or in combination with shares of Class B or Class C shares of a
Fund or any of the classes of other MFS Funds or MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or 36-month period for
purchases of $1 million or more), the shareholder may obtain such shares at the
same reduced sales charge as though the total quantity were invested in one
lump sum, subject to escrow agreements and the appointment of an attorney for
redemptions from the escrow amount if the intended purchases are not completed,
by completing the Letter of Intent section of the Account Application.

Right of Accumulation: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class
C shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level.

Distribution Investment Program: Shares of a particular class of a Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by a Fund may be
automatically invested at net asset value in shares of the same class of
another MFS Fund, if shares of such Fund are available for sale (without a
sales charge and not subject to any applicable CDSC).

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<PAGE>

Systematic Withdrawal Plan: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to CDSC.

Dollar Cost Averaging Programs--

Automatic Investment Plan: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.

Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review
its prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated
as a sale of the shares transferred and, therefore, could result in a capital
gain or loss to the shareholder making the exchange. See the SAI for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and
loss consequences of transactions under the Automatic Exchange Plan.

Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal
program would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.

Tax-Deferred Retirement Plans--Except as noted under "Purchases--Class C
Shares" above, shares of each Fund may be purchased by all types of
tax-deferred retirement plans, including IRAs, Simplified Employee Pension
plans, 401(k) plans, 403(b) plans and other corporate pension and
profit-sharing plans. Investors should consult with their tax advisers before
establishing any of the tax-deferred retirement plans described above.

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

The Funds' SAI dated December 1, 1998 contains more detailed information about
each Fund, including, but not limited to, information related to: (i) each
Fund's investment policies and restrictions; (ii) the Trustees, officers and
Adviser; (iii) portfolio trading; (iv) the shares, including rights and
liabilities of shareholders; (v) tax status of dividends and distributions;
(vi) the Distribution Plan; and (vii) various services and privileges provided
by each Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.

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APPENDIX A

WAIVERS OF SALES CHARGES

This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC for
Class A shares are waived (Section II), and the CDSC for Class B and Class C
shares is waived (Section III). Some of the following information will not
apply to certain funds in the MFS Family of Funds depending on which classes of
shares are offered by such Fund. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD.

I. WAIVERS OF ALL APPLICABLE SALES CHARGES

In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:

1. Dividend Reinvestment

o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Funds pursuant to the
Distribution Investment Program.

2. Certain Acquisitions/Liquidations

o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.

3. Affiliates of an MFS Fund/Certain Dealers. Shares acquired by:

o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.

4. Involuntary Redemptions (CDSC waiver only)

o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and
Repurchases--General--Involuntary Redemptions/Small Accounts" in the
Prospectus.

5. Retirement Plans (CDSC waiver only). Shares redeemed on account of
distributions made under the following circumstances:

Individual Retirement Accounts ("IRAs")

o Death or disability of the IRA owner.

Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")

o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan;
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental

A-1
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401(k) Plan or another similar recordkeeping system made available by
MFS Service Center, Inc. (the "Shareholder Servicing Agent"); and
o Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50%
or more of the total value of the 401(a) or ESP Plan's assets in the
MFS Funds, in which case the sales charges will not be waived.

o Shares purchased by certain retirement plans or trust accounts if: (i)
the plan is currently a party to a retirement plan recordkeeping or
administrative services agreement with MFD or one of its affiliates and
(ii) the shares purchased or redeemed represent transfers from or
transfers to plan investments other than the MFS Funds of which
retirement plan recordkeeping services are provided under the terms of
such agreement.

Section 403(b) Salary Reduction Only Plans ("SRO Plans")

o Death or disability of SRO Plan participant.

6. Certain Transfers of Registration (CDSC waiver only). Shares
transferred:

o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.

7. Loan Repayments:

o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).

II. WAIVERS OF CLASS A SALES CHARGES

In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:

1. Wrap Account and Fund "Supermarket" Investments

o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.

2. Investment by Insurance Company Separate Accounts

o Shares acquired by insurance company separate accounts.

3. Retirement Plans

Administrative Services Arrangements

o Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum
size requirements specified from time to time by MFD or one or more of
its affiliates.

Reinvestment of Distributions from Qualified Retirement Plans

o Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.

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Shares redeemed on account of distributions made under the following
circumstances:

IRAs

o Distributions made on or after the IRA owner has attained the age of
59-1/2 years old; and

o Tax-free returns of excess IRA contributions.

401(a) Plans

o Distributions made on or after the 401(a) Plan participant has attained
the age of 59-1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.

ESP Plans and SRO Plans

o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59-1/2 years old.

4. Purchases of at Least $5 Million (CDSC waiver only)

o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases--Class A Shares--Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.

5. Bank Trust Departments and Law Firms

o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.

6. Investment of Proceeds From Certain Redemptions of Class I Shares

o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.

III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES

In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:

1. Systematic Withdrawal Plan

o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.

2. Death of Owner

o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.

3. Disability of Owner

o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).

A-3
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4. Retirement Plans. Shares redeemed on account of distributions made under
the following circumstances:

IRAs, 401(a) Plans, ESP Plans and SRO Plans

o Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70-1/2 years
old, but only with respect to the minimum distribution under Code
rules.

Salary Reduction Simplified Employee Pension Plans ("SAR-SEP Plans")

o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70-1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
o Death or disability of a SAR-SEP Plan participant.

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APPENDIX B

DESCRIPTION OF BOND RATINGS

MOODY'S

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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.

A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.

Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

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

Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
short-comings.

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

Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.

S&P

AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.

AA: An obligation rated AA differs from the higher rated issues only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.

A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.

BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.

BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.

B-1
<PAGE>

CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.

CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.

C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.

D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition or the taking of similar actions of
payments on an obligation are jeopardized.

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

r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risks--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

FITCH

AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.

AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A: High credit quality. A ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.

BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB: Speculative. BB ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category are
not investment grade.

B: Highly speculative. B ratings indicate that signficant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC, C, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.

DDD, DD and D: Default. Securities are not meeting current obligations
and are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50%-90% of such
outstandings, and D the lowest recovery potential, i.e., below 50%.

DUFF & PHELPS

These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle is
a critical determination.

Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. From time to time, Duff & Phelps places issuers
or security classes on Rating Watch. The Rating Watch status results from a
need to notify investors and the issuer that there are conditions present
leading us to re-evaluate the current rating(s).

A listing on Rating Watch, however, does not mean a rating change is
inevitable. The Rating Watch status can either be resolved quickly or over a
longer period of time,

B-2
<PAGE>

depending on the reasons surrounding the placement on Rating Watch. The "up"
designation means a rating may be upgraded; the "down" designation means a
rating may downgraded; and the "uncertain" designation means a rating may be
raised or lowered.

The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of BBB- and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, used this same rating scale. Duff
& Phelps claims paying ability ratings of insurance companies use the same
scale with minor modification in the definitions. Thus, an investor can compare
the credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihoood that aggregate prinicpal and interest will equal or exceed the
rated amount under appropriate stress conditions.

AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA+, AA, A-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.

A+, A, A-; Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.

B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.

CCC: Well below investment-grade securities. Considerable uncertainty
exist as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.

DD: Defaulted debt obligations. Issuers failed to meet scheduled
principal and/or interest payments.

DP: Preferred stock with dividend arrearages.

B-3
<PAGE>

APPENDIX C

PORTFOLIO COMPOSITION CHART

The table below shows the percentages of the Emerging Markets Debt Fund's
assets at July 31, 1998 invested in bonds assigned to the various rating
categories by Moody's, S&P, Fitch and Duff & Phelps and in unrated bonds
determined by MFS to be of comparable quality. The highest of the four rating
services is used with respect to each rating.

MFS Emerging Markets Debt Fund

<TABLE>
<CAPTION>
Compiled Unrated Bonds of
Rating Ratings Comparable Quality Total
- ------------- ------------ -------------------- ----------
<S> <C> <C> <C>
AAA
AA+/AA/AA-
A+/A/A-
BBB+/BBB
BBB- 4.82% % 4.82%
BB+ 11.15 11.15
BB 23.83 23.83
BB- 7.28 6.88 14.16
B+ 12.62 6.97 19.59
B 3.80 4.39 8.19
B- 4.02 4.02
CCC
DD
Default
------- ----- -----
67.5124% 18.25% 85.76%
======= ===== =====
</TABLE>

The chart does not necessarily indicate what the composition of the
Emerging Markets Debt Fund's portfolio will be in subsequent years. Rather, the
Fund's investment objective, policies and restrictions indicate the extent to
which the Fund may purchase securities in the various categories.

C-1
<PAGE>

Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000

Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000

Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110

Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906

Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116

[MFS LOGO]

MFS[RegTM] Strategic Value Fund
MFS[RegTM] Small Cap Value Fund
MFS[RegTM] Emerging Markets Debt Fund

500 Boylston Street, Boston, MA 02116

<PAGE>

MFS(R) GOVERNMENT STATEMENT OF
MORTGAGE FUND ADDITIONAL INFORMATION

(A Member of the MFS Family of Funds(R)) DECEMBER 1, 1998

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

<TABLE>
<CAPTION>
Page
-----
<S> <C>
1. Definitions ................................................... 2
2. Investment Objectives, Policies and Restrictions .............. 2
3. Management of the Fund ........................................ 10
Trustees ........................................................ 10
Officers ........................................................ 10
Trustee Compensation Table ...................................... 11
Investment Adviser .............................................. 12
Administrator ................................................... 12
Custodian ....................................................... 13
Shareholder Servicing Agent ..................................... 13
Distributor ..................................................... 13
4. Portfolio Transactions and Brokerage Commissions .............. 14
5. Shareholder Services .......................................... 14
Investment and Withdrawal Programs .............................. 14
Exchange Privilege .............................................. 16
Tax-Deferred Retirement Plans ................................... 17
6. Tax Status .................................................... 17
7. Determination of Net Asset Value and Performance .............. 18
8. Distribution Plan ............................................. 21
9. Description of Shares, Voting Rights and Liabilities .......... 22
10. Independent Auditors and Financial Statements ................. 22
Appendix A -- Performance Information ........................ A-1
</TABLE>

MFS GOVERNMENT MORTGAGE FUND
A Series of MFS Series Trust X
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000

This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
December 1, 1998. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).

This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.

<PAGE>

1. DEFINITIONS

"Fund" -- MFS Government Mortgage Fund, a diversified series of MFS Series
Trust X (the "Trust"), a Massachusetts business trust. The Trust was known as
MFS Government Mortgage Fund prior to June 2, 1995, MFS Government Income Plus
Fund prior to March 1, 1993 and MFS Government Income Plus Trust prior to
August 3, 1992.

"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a Delaware
corporation.

"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.

"Prospectus" -- The Prospectus of the Fund, dated December 1, 1998, as amended
or supplemented from time to time.

2. INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS

Investment Objectives. The Fund's primary investment objective is to provide a
high level of current income. The secondary objective of the Fund is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve its objectives.

Investment Policies. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.

Repurchase Agreements: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "Exchange") or members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser
has determined to be of comparable creditworthiness. The securities that the
Fund purchases and holds through its agent are U.S. Government securities, the
values of which are equal to or greater than the repurchase price agreed to be
paid by the seller. The repurchase price may be higher than the purchase price,
the difference being income to the Fund, or the purchase and repurchase prices
may be the same, with interest at a standard rate due to the Fund together with
the repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.

The repurchase agreement provides that in the event the seller fails to pay the
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the
time the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the
value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Fund has the right to
make margin calls at any time if the value of the securities falls below the
agreed upon collateral.

Mortgage Pass-Through Securities. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as
securities issued by the Government National Mortgage Association ("GNMA")) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates regardless
of whether the mortgagor actually makes the payment.

The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the U.S. Government, the timely payment of principal
and interest on securities issued by institutions approved by GNMA (such as
savings and loan institutions, commercial banks and mortgage bankers) and
backed by pools of FHA-insured or VA-guaranteed mortgages. These guarantees,
however, do not apply to the market value or yield of mortgage pass-though
securities. GNMA securities are often purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs.

Government-related guarantors (i.e., whose guarantees are not backed by the
full faith and credit of the U.S. Government) include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment by FNMA of principal and interest.

FHLMC was created by Congress in 1970 as a corporate instrumentality of the
U.S. Government for the purpose of increasing the availability of mortgage
credit for residential housing. FHLMC issues Participation Certificates which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.

2
<PAGE>

"When-Issued" Securities: The Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When the Fund commits to purchase U.S.
Government securities on a "when-issued" or "forward delivery" basis, it will
set up procedures consistent with policies promulgated by the Securities and
Exchange Commission (the "SEC"). Since those policies currently recommend that
an amount of the Fund's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, the Fund will always
have liquid assets sufficient to cover any commitments or to limit any
potential risk. The Fund does not intend to make such purchases for speculative
purposes. The Fund will only make commitments to purchase securities on a
when-issued or forward delivery basis with the intention of actually acquiring
the securities. However, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strategy.
When the time comes to pay for when-issued or forward delivery securities, the
Fund will meet its obligations from then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale
of the "when-issued" or forward delivery securities themselves (which may have
a value greater or less than the Fund's payment obligation).

Mortgage "Dollar Roll" Transactions: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund
foregoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated for the lost interest by the difference between the current
sales price and the lower price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment fee.

Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
The Fund may invest a portion of its assets in collateralized mortgage
obligations ("CMOs") which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Collateral underlying CMOs purchased
by the Fund must be issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Typically, CMOs are collateralized by
certificates issued by the GNMA, FNMA or FHLMC (such collateral collectively
hereinafter referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are interests
in a trust composed of Mortgage Assets. These Mortgage Assets must be issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities.

In a CMO, a series of bonds or certificates is usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
of CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.

The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds are always parallel pay CMOs with
the required principal payment on such securities having the highest priority
after interest has been paid to all classes.

Stripped Mortgage-Backed Securities: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities.

SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. The
Fund will only invest in SMBS whose Mortgage Assets are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities. A common
type of SMBS will have one class receiving some of the interest and most of the
principal from the Mortgage Assets, while the other class will receive most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest-only or "IO" class) while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and a rapid rate of principal payments may have a material adverse
effect on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities. The market value of
the class consisting primarily or entirely of principal payments generally is
unusually volatile in response to changes in interest rates. Because SMBS were
only recently introduced, established trading markets for these securities have
not yet devel-

3
<PAGE>

oped, although the securities are traded among institutional investors and
investment banking firms.

Swaps and Related Transactions: The Fund may enter into interest rate swaps
and other types of available swap agreements. Swaps involve the exchange by the
Fund with another party of cash payments based upon different interest rate
indexes and other prices or rates, such as the value of mortgage prepayment
rates. For example, in the typical interest rate swap, the Fund might exchange
a sequence of cash payments based on a floating rate index for cash payments
based on a fixed rate. Payments made by both parties to a swap transaction are
based on a notional principal amount determined by the parties.

The Fund will maintain liquid assets to cover its current obligations under
swap transactions and cap, floor and collar arrangements. If the Fund enters
into a swap agreement on a net basis (i.e., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments), the Fund will maintain cash or liquid assets with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on other
than a net basis, it will maintain cash or liquid assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.

The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate or other factor that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If the counterparty defaults, the
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. The Fund anticipates that it will be able to
eliminate or reduce its exposure under these arrangements by assignment or
other disposition or by entering into an offsetting agreement with the same or
another counterparty.

Options on Fixed Income Securities: The Fund may write (sell) covered call
and put options on fixed income securities and purchase call and put options.
An option provides the purchaser, or "holder," with the right, but not the
obligation, to purchase, in the case of a "call" option, or sell, in the case
of a "put" option, the fixed income security or securities in connection with
which the option was written, for a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. The holder
pays a non-refundable purchase price for the option, known as the "premium."
The maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be
lost. The risk of the seller, or "writer," however, is potentially unlimited,
unless the option is "covered." A call option written by the Fund 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 for additional cash consideration segregated by the Fund) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same fixed income security and in 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 or (b)
is greater than the exercise price of the call written if liquid assets
representing the difference is segregated by the Fund. A put option written by
the Fund is "covered" if the Fund segregated liquid assets or else holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held is (a) equal to or greater than the exercise
price of the put written or (b) is less than the exercise price of the put
written if the difference is maintained by the Fund in assets. Put and call
options written by the Fund may also be covered in such other manner as may be
in accordance with the requirements of the exchange on which, or the
counterparty with which, the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject to the
risk of the full change in value of the underlying security from the time the
option is written until exercise.

The Fund may write options for hedging purposes. In particular, if the Fund
writes an option which expires unexercised or is closed out by the Fund at a
profit, the Fund retains the premium paid for the option less related
transaction costs, which increases its gross income and offsets in part the
reduced value of the portfolio security in connection with which the option is
written, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the security underlying the option moves
adversely to the Fund's position, the option may be exercised and the Fund will
then be required to purchase or sell the security at a disadvantageous price,
which might only partially be offset by the amount of the premium.

The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written.

The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.

In certain instances, the Fund may enter into Options on Treasury securities
which provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of each such Option.
Like other types of Options,

4
<PAGE>

these transactions, which may be referred to as "reset" Options or "adjustable
strike" Options, grant the purchaser the right to purchase (in the case of a
"call") or sell (in the case of a "put"), a specified type and series of U.S.
Treasury security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of Options, however, the
price at which the underlying security may be purchased or sold under a "reset"
Option is determined at various intervals during the term of the Option, and
such price fluctuates from interval to interval based on changes in the market
value of the underlying security. As a result, the strike price of a "reset"
Option, at the time of exercise, may be less advantageous to the Fund than if
the strike price had been fixed at the initiation of the Option. In addition,
the premium paid for the purchase of the Option may be determined at the
termination, rather than the initiation, of the Option. If the premium is paid
at termination, the Fund assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of the
Option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the Option and adjustments made to the
strike price of the Option, and (ii) the Option purchaser may default on its
obligation to pay the premium at the termination of the Option.

The Fund may also write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the options is exercised, the loss on the purchase or
sale of the underlying security may exceed the amount of the premiums received.

By writing a call option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting
in a loss unless the security subsequently appreciates in value. The writing of
options will not be undertaken by the Fund for speculative purposes, but rather
for hedging purposes. Where options are written for hedging purposes, such
transactions will constitute only a partial hedge against declines in the value
of portfolio securities or against increases in the value of securities to be
acquired, up to the amount of the premium.

The Fund may also purchase put and call options on securities. Put options are
purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the
Fund to sell the securities underlying such options at the exercise price, or
to close out the options at a profit. The Fund will purchase call options to
hedge against an increase in the price of securities that the Fund anticipates
purchasing in the future. If such an increase occurs, the call option will
permit the Fund to purchase the securities underlying such option at the
exercise price or to close out the option at a profit. The premium paid for a
call or put option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises or declines sufficiently, the option may expire
worthless to the Fund. In addition, in the event that the price of the security
in connection with which an option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the option and
related transaction costs.

The staff of the SEC 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, cannot exceed a
certain percentage of the Fund's assets (the "SEC illiquidity ceiling").
Although the Adviser disagrees with this position, the Adviser intends to limit
the Fund's writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-counter
options only with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place
with such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based
on a multiple of the premium received by the Fund for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of- the-money. The Fund will treat all or a
portion of the formula as illiquid for purposes of the SEC illiquidity ceiling.
The Fund may also write over-the-counter options with non-primary dealers and
will treat the assets used to cover these options as illiquid for purposes of
such SEC illiquidity ceiling.

Yield Curve Options: The Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.

Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The trading of yield

5
<PAGE>

curve options is subject to all of the risks associated with the trading of
other types of options. In addition, however, such options present risk of loss
even if the yield of one of the underlying securities remains constant, if the
spread moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Fund will be "covered." A call (or put) option is
covered if the Fund holds another call (or put) option on the spread between
the same two securities and segregates sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed. Because these securities are traded over-the-counter, the SEC has
taken the position that yield curve options are illiquid and, therefore, cannot
exceed the SEC illiquidity ceiling. See "Options on Fixed Income Securities"
above for a discussion of the policies the Adviser intends to follow to limit
the Fund's investment in these securities.

Indexed Securities: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity (i.e., principal value) or
coupon rate is determined by reference to a specific instrument or statistic.

The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. At the same time,
indexed securities are subject to the credit risks associated with the issuer
of the security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations, and certain U.S. government agencies.

Futures Contracts: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities ("Futures Contracts"). Such
transactions will be used to hedge (i.e., protect) against anticipated changes
in interest rates which otherwise might either adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of long-term
U.S. Government securities which the Fund intends to purchase at a later date.
The Fund may also enter into such transactions for non-hedging purposes to the
extent permitted by applicable law.

When a Futures Contract is sold, the Fund incurs a contractual obligation to
deliver the securities underlying the contract at a specified price on a
specified date during a specified future month or, in the case of Futures
Contracts on an index of securities, to make or receive a cash settlement. A
"purchase" of a Futures Contract means a contractual obligation by the Fund to
receive delivery of the securities called for by the contract at a specified
price during a specific future month or, in the case of Futures Contracts on an
index of securities, to make or receive cash settlements.

Futures Contracts have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC"), and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures Contracts trade on
these markets, and the exchanges, through their clearing organizations,
guarantee that the contracts will be performed as between the clearing members
of the exchange. The Fund will only enter into Futures Contracts which are
based on U.S. Government securities, including any index of U.S. Government
securities.

While Futures Contracts based on debt securities provide for the delivery of
securities, deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the same time
such a purchase or sale is made, the Fund must provide cash or securities as a
deposit ("initial deposit") known as "margin." The initial deposit varies but
may be as low as 5% or less of the value of the contract. Daily thereafter, the
Futures Contract is valued on a marked-to-market basis and the Fund may be
required to pay or receive additional "variation margin," based on the decline
or increase in the value of the contract. At the time of delivery of securities
pursuant to such a contract, adjustments are made to recognize differences in
value arising from the delivery of securities with a different interest rate
than the specific security that provides the standard for the contract. In some
(but not many) cases, securities called for by a Futures Contract may not have
been issued when the contract was written. A Futures Contract on an index of
U.S. Government securities provides for the payment and receipt of a cash
settlement based on changes in the value of the index. The index underlying
such a Contract is comprised of a broad based portfolio of U.S. Government
securities designed to reflect movements in the market as a whole.

One purpose of the purchase or sale of a Futures Contract for hedging purposes,
in the case of a portfolio such as the Fund's portfolio, which holds or intends
to acquire long-term debt securities, is to protect the Fund against the
adverse effects of fluctuations in interest rates without actually buying or
selling long-term debt securities. For example, since the Fund owns long-term
bonds, if interest rates were expected to increase the Fund might enter into
Futures Contracts for the sale of debt securities. If interest rates did
increase, the value of the debt securities in the portfolio would decline, but
the value of the Fund's Futures Contracts would increase at approximately the
same rate thereby keeping the net asset value of the Fund from declining, or
declining as much as it otherwise would have.

Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of
Futures Contracts should be similar to that of long-term bonds, the Fund could
protect itself against the effects of the anticipated rise in the value of
long-term bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the Futures Contracts
could be liquidated and the Fund could buy long-term bonds on the cash market.
Due to changing market conditions, however, and interest rate forecasts, a
futures position may be terminated without a corresponding purchase of
securities. To the extent the Fund purchases a Futures Con-

6
<PAGE>

tract, it will segregate liquid assets in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the
aggregate value of the initial deposit and variation margin payments made by
the Fund with respect to such Futures Contracts, thereby assuring that the
position is unleveraged.

The liquidity of a market in a futures contract may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges, which
limit the amount of fluctuation in a futures contract price during a single
trading day. Once the daily limit has been reached in the contract, no trades
may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. On any day or days when
the price fluctuation limits have been reached, the Fund may be unable to
liquidate existing futures positions or to implement a hedging strategy through
the purchase or sale of particular futures.

Further, the CFTC and the various contract markets have established limits
referred to as "speculative position limits" on the maximum net long or net
short position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions found to be
in violation of these limits and it may impose other sanctions or restrictions.
The Adviser does not believe that these trading and position limits will have
any adverse impact on the strategies for hedging the portfolio of the Fund. The
trading of Futures Contracts is also subject to the illiquidity risks described
above with respect to options on securities.

Options on Futures Contracts: The Fund may write and purchase options to buy
or sell Futures Contracts ("Options on Futures Contracts"). The writing of a
call Option on a Futures Contract may constitute a partial hedge against
declining prices of the fixed income security underlying the Futures Contract.
If the futures price at expiration of the option is below the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings. The writing of a put Option on
a Futures Contract may constitute a partial hedge against increasing prices of
the security underlying the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium, less related transaction costs,
which provides a partial hedge against any increase in the price of securities
which the Fund intends to purchase. If a put or call option the Fund has
written is exercised, the Fund will incur a loss which will be reduced by the
amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from existing Options on
Futures Contracts may to some extent be reduced or increased by changes in the
value of portfolio securities. The Fund may also enter into such transactions
for non-hedging purposes, to the extent permitted by applicable law, which
involves greater risk.

The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or a rise in interest rates, the
Fund may, in lieu of selling Futures Contracts, purchase put options thereon.
In the event that such decrease in portfolio value occurs, it may be offset, in
whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or a decline in interest rates, the Fund
may purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Fund to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts may require the Fund to forego all or
a portion of such benefits up to the amount of the premium paid and related
transaction costs. The Fund may also enter into transactions in Options on
Futures Contracts for non-hedging purposes to the extent permitted by
applicable law.

The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if
liquid assets representing the difference are segregated by the Fund with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation
of liquid assets in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the
same Futures Contract and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written, or is less than the exercise price of the put written
if liquid assets representing the difference are segregated by the Fund. Put
and call Options on Futures Contracts may also be covered in such other manner
as may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call Option
on a Futures Contract written by the Fund, the Fund will be required to sell
the underlying Futures Contract which, if the Fund has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Fund is exercised, the Fund will be required to purchase the underlying Futures
Contract which, if the Fund has covered its obligation through the sale of such
Contract, will close out its futures position. An Option on a Futures Contract
is traded on the same contract market as the underlying Futures Contract,
subject to regulation by the CFTC and the performance guarantee of the exchange
clearing house.

Risk Factors: Imperfect Correlation of Hedging Instruments with the Fund's
Portfolio -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options and Futures Contracts will depend on
the degree to which price movements in the underlying instruments correlate
with price movements in the relevant portion of the Fund's portfolio. If the
values of fixed income portfolio securities being hedged do not move in the
same amount or direction as the instruments underlying

7
<PAGE>

options or Futures Contracts, the Fund's hedging strategy may not be successful
and the Fund could sustain losses on its hedging strategy which would not be
offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the instrument underlying an option or Futures
Contract and the portfolio securities being hedged, which could result in
losses both on the hedging transaction and the portfolio securities. In such
instances, the Fund's overall return could be less than if the hedging
transaction had not been undertaken. In the case of Futures and options on
fixed income securities, the portfolio securities which are being hedged may
not be the same type of obligation underlying such contract. As a result, the
correlation probably will not be exact. Consequently, the Fund bears the risk
that the price of the fixed income portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation.

The correlation between prices of fixed income securities and prices of options
or Futures Contracts may be distorted due to differences in the nature of the
markets, such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the option and Futures Contract
markets. Due to the possibility of distortion, a correct forecast of general
interest rate trends by the Adviser may still not result in a successful
transaction. The trading of Options on Futures Contracts also entails the risk
that changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity or termination date of the
option or Futures Contract approaches.

The trading of options and Futures Contracts also entails the risk that, if the
Adviser's judgment as to the general direction of interest or exchange rates is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates, and rates instead decline, the
Fund will lose part or all of the benefit of the increased value of the fixed
income securities being hedged, and may be required to meet ongoing daily
variation margin payments.

Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.

It should be noted that the Fund may purchase and write Options, Futures
Contracts and Options on Futures Contracts not only for hedging purposes, but
also for non-hedging purposes to the extent permitted by applicable law. As a
result, the Fund will incur the risk that losses on such transactions will not
be offset by corresponding increases in the value of fixed income portfolio
securities or decreases in the cost of fixed income securities to be acquired.

Risk Factors: Potential Lack of a Liquid Secondary Market -- Prior to
exercise or expiration, a position in an exchange-traded option, Futures
Contract or Option on a Futures Contract can only be terminated by entering
into a closing purchase or sale transaction, which requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered. If no such market exists, it may not be possible to close out a
position, and the Fund could be required to purchase or sell the underlying
instrument or meet ongoing variation margin requirements. The inability to
close out option or futures positions also could have an adverse effect on the
Fund's ability effectively to hedge its portfolio.

The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions,
exchange or clearing corporation equipment failures, government intervention,
insolvency of a brokerage firm, intervening broker or clearing corporation or
other disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.

Risk Factors: Options on Futures Contracts -- In order to profit from the
purchase of an Option on a Futures Contract, it may be necessary to exercise
the option and liquidate the underlying Futures Contract, subject to all of the
risks of futures trading. The writer of an Option on a Futures Contract is
subject to the risks of futures trading, including the requirement of initial
and variation margin deposits.

Additional Policies on the Use of Options and Futures: In order to assure
that the Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts, Options on Futures Contracts and
options on Foreign Currencies traded on a CFTC-regulated exchange only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-bona fide hedging purposes, provided that the aggregate initial margin and
premiums to establish non-bona fide hedging positions does not exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on any such contracts the Fund has entered into,
and excluding, in computing such 5%, the in-the-money amount with respect to an
option that is in-the-money at the time of purchase. In addition, the Fund must
comply with the requirements of various state securities laws in connection
with such transactions.

Lending of Portfolio Securities: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member banks
of the Federal Reserve System and to member firms of the Exchange (and
subsidiaries thereof), and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will not usually exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest paid by
the issuer on the securities loaned. The Fund would also receive a fee from the
borrower. The Fund would receive compensation based on investment of cash
collateral, less a fee paid to the borrower, if the collateral is in the form

8
<PAGE>

of cash. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which could be earned currently from securities
loans of this type justifies the attendant risk. If the Adviser determines to
make securities loans, it is not intended that the value of the securities
loaned would exceed 30% of the value of the Fund's total assets.

Portfolio Trading: The Fund intends to fully manage its portfolio by buying
and selling U.S. Government obligations, as well as holding selected
obligations to maturity, and by engaging in transactions involving related
options, futures and options on futures. In managing its portfolio the Fund
seeks to maximize the return on its portfolio by taking advantage of market
developments and yield disparities, which may include use of the following
strategies:

(1) selling one type of U.S. Government security (e.g., Treasury bonds) and
buying another (e.g., GNMA direct pass-through certificates) when
disparities arise in the relative values of each; and

(2) changing from one U.S. Government obligation to an essentially similar U.S.
Government obligation when their respective yields are distorted due to
market factors.

The Fund will also use the techniques described above under "Repurchase
Agreements," "'When-Issued'" Securities," "Options" and "Futures Contracts" to
manage its portfolio.

These strategies may result in increases or decreases in the Fund's current
income available for distribution to the Fund's shareholders and in the holding
by the Fund of obligations which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
obligations proves to be incorrect, the Fund's income, net asset value per
share and potential capital gain may be decreased or its potential capital loss
may be increased.

The Fund will engage in portfolio trading if it believes a transaction net of
costs will help in attaining its investment objectives. See "Portfolio
Transactions and Brokerage Commissions."

The objectives and the policies described above and the policies with respect
to portfolio trading described above may be changed without shareholder
approval.

Investment Restrictions. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of its
shares (which, as used in this SAI, means the lesser of (i) more than 50% of
the outstanding shares of the Fund or of a class, as applicable, or (ii) 67% or
more of the outstanding shares of the Fund or of a class, as applicable,
present at a meeting at which holders of more than 50% of the outstanding
shares of the Fund or of a class, as applicable, are represented at such
meeting in person or by proxy):

The Fund may not:

(1) borrow money or pledge its assets except as a temporary measure for
extraordinary or emergency purposes (the Fund intends to borrow money only
from banks and only to accommodate requests for the repurchase of shares of
the Fund while effecting an orderly liquidation of portfolio securities)
(for the purpose of this restriction, collateral arrangements with respect
to options, Futures Contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margins are not
considered a pledge of assets); for additional related restrictions, see
paragraphs (i) and (ii) under the caption "State and Federal Restrictions";

(2) purchase any security or evidence of interest therein on margin, except
that the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the Fund may
make deposits on margin in connection with Futures Contracts and related
options;

(3) write, purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the writing, purchasing and selling of
puts, calls or combinations thereof with respect to Government securities
and with respect to Futures Contracts or the purchase, ownership, holding
or sale of contracts for the future delivery of fixed income securities;

(4) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security;

(5) purchase or sell commodities or commodity contracts, except that the Fund
may purchase and sell Futures Contracts and related options;

(6) make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short, and unless not more than 10%
of the Fund's net assets (taken at market value) is held as collateral for
such sales at any one time (it is the present intention of management to
make such sales only for the purpose of deferring realization of gain or
loss for Federal income tax purposes; such sales would not be made of
securities subject to outstanding options);

(7) make loans to other persons except through the lending of its portfolio
securities not in excess of 30% of its total assets (taken at market value)
and except through the use of repurchase agreements and provided that not
more than 10% of the Fund's assets will be invested in repurchase
agreements maturing in more than seven days (for these purposes the
purchase of all or a portion of an issue of debt securities in accordance
with the Fund's investment objectives and policies shall not be considered
the making of a loan);

(8) knowingly invest in securities which are restricted securities under the
Securities Act of 1933 if, as a result thereof, more than 10% of the Fund's
total assets (taken at market value) would be so invested;

9
<PAGE>

(9) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be
held by the Fund;

(10) purchase securities of any issuer if such purchase at the time thereof
would cause more than 5% of the Fund's assets (taken at market value) to be
invested in the securities of such issuer (other than securities or
obligations issued or guaranteed by the United States, any state or
political subdivision thereof, or any political subdivision of any such
state, or any agency or instrumentality of the United States or of any
state or of any political subdivision of any state or the United States);
or

(11) issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder (for the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts and
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be the issuance of a senior
security).

The Fund has also adopted a policy which is fundamental and which provides that
the Fund's assets will be invested in Government securities and related
options, futures, options on futures and repurchase agreements.

State and Federal Restrictions: In order to comply with certain state and
federal statutes and policies, the Fund will not, as a matter of operating
policy, (i) borrow money for any purpose in excess of 10% of its assets (taken
at market value) moreover, the Fund will not purchase any securities for its
portfolio at any time at which borrowings exceed 5% of its assets (taken at
market value), (ii) pledge for any purpose in excess of 15% of its assets
(taken at market value) (for the purpose of this restriction, collateral
arrangements with respect to the writing of options, Futures Contracts, Options
on Futures Contracts and collateral arrangements with respect to initial and
variation margins are not considered a pledge of assets), (iii) invest more
than 5% of its total assets at the time of investment in companies which,
including predecessors, have a record of less than three years' continuous
operation, (iv) purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Trust, or is an officer or Director of the Adviser
if, after the purchase of the securities of such issuer by the Fund one or more
of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, of such issuer and such persons owning more than 1/2 of 1%
of such shares or securities together own beneficially more than 5% of such
shares or securities, or both, (v) invest for the purpose of exercising control
or management, (vi) invest more than 10% of its assets (taken at market value)
in securities (including repurchase agreements maturing in more than seven
days) for which there are no readily available market quotations. These
policies are not fundamental and may be changed by the Fund without shareholder
approval in response to changes in the various state and federal requirements.

Percentage Restriction: Except with respect to the Fund's policy on borrowing
and investing in illiquid securities, these investment restrictions are adhered
to at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.

3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. The Adviser is responsible for the management of the Fund's assets,
and the officers of the Fund are responsible for its operations. The Trustees
and officers are listed below, together with their principal occupations during
the past five years. (Their titles may have varied during that period.)

Trustees

RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director

PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts

J. ATWOOD IVES (born 5/1/36)

Eastern Enterprises (diversified services company), Chairman, Trustee and
Chief Executive Officer

Address: 9 Riverside Road, Weston, Massachusetts

LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts

WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993) Address:
Harvard Business School, Soldiers Field Road, Cam bridge, Massachusetts

CHARLES W. SCHMIDT (born 3/18/28)

Private Investor; International Technology Corporation, Director; Mohawk Paper
Company, Director

Address: 30 Colpitts Road, Weston, Massachusetts

ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director

JEFFREY L. SHAMES* (born 6/2/55)

Massachusetts Financial Services Company, Chairman and Chief Executive Officer

ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts

DAVID B. STONE (born 9/2/27)

North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director

Address: Ten Post Office Square, Suite 300, Boston,
Massachusetts

10
<PAGE>

Officers

W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice
President

JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President

MARK E. BRADLEY*, Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (until September 1994).

ELLEN MOYNIHAN*, Assistant Treasurer (born 11/13/57)

Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996).

STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, Assistant
Secretary and General Counsel

JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ------------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.

Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Messrs. Shames, Scott and Cavan are the
Chairman, a Director and the Secretary, respectively, of MFD and hold similar
positions with certain other MFS affiliates. Mr. Bailey is a director of Sun
Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life Assurance
Company of Canada ("Sun Life").

The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $2,500 per year plus $135 per meeting and $100 per
committee meeting attended, together with such Trustee's out-of-pocket
expenses) and has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the
Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 73
and receive reduced payments if he has completed at least 5 years of service.
Under the plan, a Trustee (or his beneficiaries) will also receive benefits for
a period of time in the event the Trustee is disabled or dies. These benefits
will also be based on the Trustee's average annual compensation and length of
service. There is no retirement plan provided by the Fund for Messrs. Brodkin,
Scott and Shames. The Fund will accrue compensation expenses each year to cover
current years service and amortize past service cost.

Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable under the
retirement plan.

Trustee Compensation Table

<TABLE>
<CAPTION>
Retirement Total Trustee
Trustee Benefit Estimated Fees from
Fees Accrued as Credited Fund and
from part of Years of Fund
Trustee Fund(1) Fund Expense(1) Service(2) Complex(3)
- ------------------------ --------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Richard B. Bailey ...... $4,574 $2,006 8 $242,022
Peter G. Harwood ....... 5,474 1,574 5 121,105
J. Atwood Ives ......... 4,609 2,020 17 108,720
Lawrence T. Perera ..... 4,704 3,043 22 127,055
William J. Poorvu ...... 5,069 3,120 22 121,105
Charles W. Schmidt...... 4,664 3,100 15 121,105
Arnold D. Scott ........ -0- -0- N/A -0-
Jeffrey L. Shames ...... -0- -0- N/A -0-
Elaine R. Smith ........ 5,439 2,223 27 132,035
David B. Stone ......... 5,499 2,933 11 127,055
</TABLE>

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

(1) For fiscal year ended July 31, 1998.

(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.

(3) For calendar year 1997. All Trustees receiving compensation served as
Trustees of 27 funds within the MFS fund complex (having aggregate net
assets at December 31, 1997, of approximately $29 billion) except Mr.
Bailey, who served as Trustee of 69 funds within the MFS fund complex
(having aggregate net assets at December 31, 1997, of approximately $48
billion).

Estimated Annual Benefits
Payable By Fund Upon Retirement(4)

<TABLE>
<CAPTION>
Years of Service
---------------------------------------------
Average Trustee Fees 3 5 7 10 or more
- ---------------------- ------- --------- --------- -----------
<S> <C> <C> <C> <C>
$4,117.............. $617 $1,029 $1,441 $2,058
4,503 .............. 675 1,126 1,576 2,252
4,890 .............. 733 1,222 1,711 2,445
5,276 .............. 791 1,319 1,847 2,638
5,662 .............. 849 1,416 1,982 2,831
6,049 .............. 907 1,512 2,117 3,024
</TABLE>

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

(4) Other funds in the MFS complex provide similar retirement benefits to the
Trustees.

As of October 31, 1998, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund. As of October 31, 1998, Merrill Lynch,
Pierce, Fenner & Smith, Inc. for the sole benefit of its customers, Attn: Fund
Administration, 4800 Deer Lake Drive E FL3, Jacksonville, FL., 32246-6484, was
the record owner of approximately 8.0% of the outstanding Class A shares of the
Fund. Merrill Lynch, Pierce, Fenner & Smith, Inc. for the sole benefit of its
customers, Attn: Fund Administration, 4800 Deer Lake Drive E FL3, Jacksonville,
FL., 32246-6484, was the record owner of approximately 7.30% of the outstanding
Class B shares of the Fund. As of October 31, 1998, Trustees of the MFS Defined
Contribution Plan, c/o Mark Leary, Massachusetts Financial Services, 500
Boylston Street, Boston, MA was the

11
<PAGE>

record owner of approximately 99.78% of the outstanding shares of Class I
shares of the Fund.

The Fund's Declaration of Trust provides that it will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Fund, unless, as to liabilities to the Fund or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, ban faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Fund. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving
the settlement or other disposition or by reasonable determination by
non-interested Trustees or in a written opinion of independent counsel based
upon a review of readily available facts, that such officers or Trustees have
not engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.

Investment Adviser

MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun
Life.

The Adviser manages the Fund pursuant to an Investment Advisory Agreement,
dated December 19, 1985, as amended (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For its services and
facilities, the Adviser receives a management fee, computed and paid monthly,
equal to, 0.45% of the Fund's average daily net asset value. Effective November
1, 1998, the Adviser voluntarily reduced the Management Fee to 0.40% of the
Fund's average daily net asset value.

For the Fund's fiscal year ended July 31, 1998, MFS received $3,929,806,
equivalent on an annual cash basis to 0.45% of the Fund's average daily net
assets. For the Fund's fiscal year ended July 31, 1997, MFS received management
fees of $4,551,885, equivalent, on an annualized basis, to 0.45% of the Fund's
average daily net assets. For the Fund's fiscal year ended July 31, 1996, MFS
received management fees of $6,612,086, equivalent, on an annualized basis, to
0.54% of the Fund's average daily net assets.

The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustees fees discussed above; governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar and dividend disbursing agent of the Fund; expenses
of repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing share certificates, shareholder
reports, notices, proxy statements to shareholders and reports to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing
of prospectuses for such purposes are borne by the Fund except that the Fund's
Distribution Agreement with MFD requires MFD to pay for prospectuses that are
to be used for sales purposes. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of the Adviser, during
its fiscal year ended July 31, 1998, see "Financial Statements -- Statement of
Operations" in the Annual Report to shareholders incorporated by reference into
this SAI. Payment by the Fund of brokerage commissions for brokerage and
research services of value to the Adviser in serving its clients is discussed
under the caption "Portfolio Transactions and Brokerage Commissions" below.

The Adviser pays the compensation of the Fund's officers and of any Trustee who
is an officer of MFS. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting the Fund's
portfolio transactions.

The Advisory Agreement will remain in effect until August 1, 1999, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities and, in either case, by a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party. The Advisory Agreement terminates automatically if it is
assigned and may be terminated without penalty by vote of a majority of the
Fund's outstanding voting securities or by either party on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement provides
that if MFS ceases to serve as the Adviser to the Fund, the Fund will change
its name so as to delete the initials "MFS". The Advisory Agreement further
provides that MFS may render services to others and may permit fund clients in
addition to the Fund to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management of
the Fund. Except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.

Administrator

MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the

12
<PAGE>

period from March 1, 1997 through July 31, 1997, MFS received fees under the
Administrative Services Agreement of $60,480. For the year ended July 31, 1998,
MFS received fees totaling $123,099.

Custodian

State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the
dividend disbursing agent of the Fund.

Shareholder Servicing Agent

MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, dated September 1, 1995 as amended (the
"Agency Agreement") with the Fund. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the Fund.
For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of the Fund at an
effective annual rate of 0.1125%. In addition, the Shareholder Servicing Agent
is reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. State Street Bank and Trust Company, the
dividend and distribution disbursing agent of the Fund has contracted with the
Shareholder Servicing Agent to administer and perform certain dividend
disbursing agent functions for the Fund.

Distributor

MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement,
dated September 1, 1995 (the "Distribution Agreement"), with the Fund. Prior to
January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or periods
prior to January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD.

Class A Shares: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of
the Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other Funds (as noted under Right of Accumulation). A group might qualify
to obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" in this SAI).

Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.

MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases"). The commission paid to the
underwriter is the difference between the total amount invested and the sum of
(a) the net proceeds to the Fund and (b) the dealer commission. Because of
rounding in the computation of offering price, the portion of the sales charge
paid to the underwriter may vary and the total sales charge may be more or less
than the sales charge calculated using the sales charge expressed as a
percentage of offering price or as a percentage of the net amount invested as
listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 4% and MFD retains approximately 3/4 of 1% of the public offering
price. In addition, MFD pays a commission to dealers who initiate and are
responsible for purchases of $1 million or more as described in the Prospectus.

Class B Shares and Class I Shares: MFD acts as agent in selling Class B and
Class I shares of the Fund. The public offering price of Class B and Class I
shares is their net asset value next computed after the sale (see "Purchases"
in the Prospectus) and the Prospectus Supplement pursuant to which Class I
shares are offered.

General: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers
for the purchase of Fund shares.

During the Fund's fiscal year ended July 31, 1998, MFD and certain other
financial institutions received net commissions on Class A shares of $35,510
and $173,077, respectively (as their concession on gross commissions of
$208,587). The Fund received $8,432,438, representing the aggregate net asset
value of such shares. During the fiscal year ended July 31, 1997, MFD and
certain other financial institutions received net commissions on Class A shares
of $22,649 and $114,631, respectively (as their concession on gross commissions
of $137,280). The Fund received $26,136,507, representing the aggregate net
asset value of such shares. During the Fund's fiscal year ended July 31, 1996,
MFD and certain other financial institutions received net commis-

13
<PAGE>

sions on Class A shares of $32,084 and $150,948, respectively (as their
concession on gross commissions of $183,032). The Fund received $21,904,099,
representing the aggregate net asset value of such shares.

For the fiscal years ended July 31, 1996, 1997 and 1998 the contingent deferred
sales charges ("CDSC") imposed on redemption of Class A shares were $27, $127
and $283 respectively. For the fiscal years ended July 31, 1996, 1997 and 1998
the CDSC imposed on redemption of Class B shares were $487,099, $301,436 and
$116,843 respectively.

The Distribution Agreement will remain in effect until September 1, 1999, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Restrictions") and, in either
case, by a majority of the Trustees who are not parties to the Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.

4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS

Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser and who is appointed and
supervised by its senior officers. Changes in the Fund's investments are
reviewed by the Board of Trustees. The Fund's portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.

The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. U.S.
Government securities are traded principally in the over-the-counter market on
a net basis through dealers acting for their own account and not as brokers.
The cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased and
sold from and to dealers include a dealer's mark-up or mark-down. The Adviser
attempts to negotiate with underwriters to decrease the commission or
concession for the benefit of the Fund. The Adviser normally seeks to deal
directly with the primary market makers unless, in its opinion, better prices
are available elsewhere. Subject to the requirement of seeking execution at the
most favorable price, securities may, as authorized by the Advisory Agreement,
be bought from or sold to dealers who have furnished statistical, research and
other information or services to the Adviser. At present no arrangements for
the recapture of commission payments are in effect.

Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers and such other policies as the
Trustees may determine, the Adviser may consider sales of shares of the Fund
and of the other investment company clients of MFD as a factor in the selection
of broker-dealers to execute the Fund's portfolio transactions.

During the fiscal year ended July 31, 1998, the Fund acquired and owned
securities issued by Goldman Sachs in the amount of $1,814,000 as of July 31,
1998. In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In some cases, however, the Fund
believes that its ability to participate in volume transactions will produce
better executions for the Fund. For the fiscal years ended July 31, 1996, 1997
and 1998, the Fund did not pay any commissions.

5. SHAREHOLDER SERVICES

Investment and Withdrawal Programs -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Fund's Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.

Letter of Intent: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with the current offering price value of all holdings
of all classes of shares of other MFS Funds or the MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or 36-month period, in
the case of purchases of $1 million or more), the shareholder may obtain Class
A shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum by completing the Letter of Intent
section of the Fund's Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36-months in the case of purchases of $1 million or more) plus
the value of shares credited toward completion of the Letter of Intent do not
total the sum specified, he will pay the increased amount of the sales charge
as described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that

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<PAGE>

the shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter of Intent. Dividends and distributions of
other MFS Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.

Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.

If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.

Right of Accumulation: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when the shareholder's new
investment, together with the current offering price value of all holdings of
Class A, B and C shares of that shareholder in the MFS Funds or the MFS Fixed
Fund (a bank collective investment fund) reaches a discount level. See
"Purchases" in the Prospectus for the sales charges on quantity discounts. For
example, if a shareholder owns shares valued at $75,000 and purchases an
additional $25,000 of Class A shares of the Fund, the sales charge for the
$25,000 purchase would be at the rate of 4% (the rate applicable to single
transactions of $100,000). A shareholder must provide the Shareholder Servicing
Agent (or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the
investment is made.

Distribution Investment Program: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions invested in shares of
one of the other MFS Funds will be invested at net asset value (exclusive of
any sales charge) and will not be subject to any contingent deferred sales
charge. Distributions will be invested at the close of business on the payable
date for the distribution. A shareholder considering the Distribution
Investment Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.

Systematic Withdrawal Plan: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B shares in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of the
establishment of the SWP. SWP are drawn from the proceeds of the redemption of
shares held in the shareholder's account (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B shares
will be made in the following order: (i) any "Free Amount"; (ii) to the extent
necessary, any "Reinvested Shares"; and (iii) to the extent necessary, the
"Direct Purchase" subject to the lowest CDSC (as such terms are defined in
"Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be waived
in the case of redemptions of Class B shares pursuant to a SWP but will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
reinvested in additional full and fractional shares of the Fund at the net
asset value in effect at the close of business on the record date for such
distributions. To initiate this service, shares having an aggregate value of at
least $5,000 either must be held on deposit by, or certificates for such shares
must be deposited with, the Shareholder Servicing Agent. With respect to Class
A shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee or
change the dollar amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted
by the Shareholder Servicing Agent on 60 days' notice in writing to the
shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for

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<PAGE>

an account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Fund.

Invest by Mail: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.

Group Purchases: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups; and
(4) agrees to provide certification of membership of those members investing
money in the MFS Funds upon the request of MFD.

Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of other
MFS Funds (if available for sale) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account from any MFS Fund as long as the balance of the account
is sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.

No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of transfers (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.

The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.

Reinstatement Privilege: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund in the case where such shares of
the money market funds are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange the acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must be
made within (90) days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then redeemed
within six years of the initial purchase in the case of Class B shares or 12
months of the initial purchase in the case of certain Class A shares, a CDSC
will be imposed upon redemption. Although redemptions and repurchases of shares
are taxable events, a reinvestment within a certain period of time in the same
fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.

Exchange Privilege -- Subject to the requirements set forth below, some or all
of the shares in an account with the Fund for which payment has been received
by the Fund (i.e., an established account) may be exchanged for shares of the
same class of any of the other MFS Funds (if available for sale and if the
purchaser is eligible to purchase such shares) at their net asset value.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent.

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<PAGE>

Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at net asset value (i.e., without a sales charge) of the shares of
the other MFS Fund. Any gain or loss on the redemption of the shares exchanged
is reportable on the shareholder's federal income tax return, unless such
shares were and the shares received in the exchange are held in a tax-deferred
retirement plan. If the Exchange Request is received by the Shareholder
Servicing Agent prior to the close of regular trading on the Exchange, the
exchange usually will occur on that day if all the requirements set forth above
have been complied with at that time. However, payment of the redemption
proceeds by the Fund, and thus the purchase of shares of the other MFS Fund,
may be delayed for up to seven days if the Fund determines that such a delay
would be in the best interest of all its shareholders. Investment dealers which
have satisfied criteria established by MFD may also communicate a shareholder's
Exchange Request to MFD by facsimile subject to the requirements set forth
above.

No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating
the CDSC upon redemption of shares acquired in an exchange, the purchase of
shares acquired in one or more exchanges is deemed to have occurred at the time
of the original purchase of the exchanged shares.

Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange. Shareholders
of the other MFS Funds (except shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund acquired through
direct purchase and dividends reinvested prior to June 1, 1992) have the right
to exchange their shares for shares of the MFS Funds, subject to the
conditions, if any, set forth in their respective prospectuses. In addition,
unit holders of the MFS Fixed Fund have the right to exchange their units
(except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unit holders by the MFS
Fixed Fund.

The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).

Tax-Deferred Retirement Plans -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available, through investment
dealers, plans and/or custody agreements for the following:

o Traditional Individual Retirement Accounts (IRA) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);

o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);

o Simplified Employee Pension (SEP-IRA) Plans; Retirement Plans Qualified
under Section 401(k) of the Internal Revenue Code of 1986, as amended;

o 403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and

o Certain other qualified pension and profit-sharing plans.

The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.

Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.

6. TAX STATUS

The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition of the Fund's
portfolio assets. Because the Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in accordance
with the timing requirements imposed by the Code, it is not expected that the
Fund will be required to pay any federal income or excise taxes. If the Fund
should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income
to the shareholders.

Shareholders of the Fund normally will have to pay federal income taxes on the
dividends and capital gain distributions they receive from the Fund. Dividends
from ordinary income and any distributions from net short-term capital gains
are taxable to the Fund's shareholders as ordinary income for federal income
tax

17
<PAGE>

purposes whether the distributions are paid in cash or reinvested in additional
shares. Because the Fund expects to earn primarily interest income, it is
expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e., the
excess of net long-term capital gains over net short-term capital losses),
whether paid in cash or reinvested in additional shares, are taxable to
shareholders as long-term capital gains for federal income tax purposes without
regard to the length of time the shareholders have held their shares. Any Fund
dividend that is declared in October, November, or December of any calendar
year, that is payable to shareholders of record in such a month, and that is
paid the following January, will be treated as if received by the shareholders
on December 31 of the year in which the dividend is declared. The Fund will
notify shareholders regarding the federal tax status of its distributions after
the end of each calendar year.

Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.

In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their
purchase followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).

The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds, certain stripped
securities and certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund. An investment in residual interests of a CMO that has
elected to be treated as a real estate mortgage investment conduit, or "REMIC",
can create complex tax problems, especially if the Fund has state or local
governments or other tax-exempt organizations as shareholders.

The Fund's transactions in options, Futures Contracts, and swaps and related
transactions will be subject to special tax rules that may affect the amount,
timing and character of Fund income and distributions to shareholders. For
example, certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on that
day, and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by
the Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute "straddles," and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of Fund securities, and conversion of short-term into long-term
capital losses. Certain tax elections exist for straddles that may alter the
effects of these rules. The Fund will limit its activities in options, Futures
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.

Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. Federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.

As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.

Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. The Fund intends to
advise shareholders of the extent, if any, to which its distributions consist
of such interest. Shareholders are urged to consult their tax advisers
regarding the possible exclusion of a portion of their dividends for state and
local income tax purposes as well as regarding the tax consequences of an
investment in the Fund.

7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE

Net Asset Value -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination is made once during each such day as of the close of regular
trading on the Exchange by deducting the amount of the liabilities

18
<PAGE>

attributable to the class from the value of the Fund's assets attributable to
the class and dividing the difference by the number of shares of the class
outstanding. Debt securities (other than short-term obligations) in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices,
since such valuations are believed to reflect the fair value of such
securities. Use of the pricing service has been approved by the Board of
Trustees. Positions in listed options, Future Contracts and Options on Futures
Contracts will normally be valued at the settlement price on the exchange on
which they are primarily traded. Positions in over-the-counter options will be
valued using dealer supplied valuations. Short-term obligations with a
remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Other short-term obligations in the Fund's portfolio are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio securities and other assets for which there are no
such quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees. A share's net asset
value is effective for orders received by the dealer prior to its calculation
and received by MFD, the Fund's principal underwriter or its agent, the
Shareholder Servicing Agent, prior to the close of that business day.

Total Rate of Return: The Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment of
$1,000 (made with all distributions reinvested and reflecting the CDSC or the
maximum public offering price) to reach the value of that investment at the end
of the periods. The Fund may also calculate (i) a total rate of return, which
is not reduced by the CDSC (4% maximum for Class B shares) and therefore may
result in a higher rate of return, (ii) with respect to Class A shares, a total
rate of return assuming an initial account value of $1,000, which will result
in a higher rate of return since the value of the initial account will not be
reduced by the sales charge (4.75% maximum), and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC. Effective March 1, 1993, the Fund revised its
investment policy of investing in securities issued or guaranteed by the U.S.
Government and its agencies, authorities and instrumentalities and engaging in
transactions involving related options, to its current policy of investing at
least 65% of its assets, under normal circumstances, in GNMA securities and
obligations fully collateralized by GNMAs.

The Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.

As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable
to Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would
have been quoted had the newer class of shares been outstanding for the entire
period over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the oldest
class, and the total rate of return quoted for the newer class will be lower
than the return that would be quoted had the newer class of shares been
outstanding for this entire period if the class specific expenses for the newer
class are lower than the class specific expenses of the oldest class).

Total rate of return quotations for each class are presented in Appendix A
attached hereto.

Performance Results: Any yield or total rate of return quotation provided by
the Fund, should not be considered as representative of the performance of the
Fund in the future since the net asset value and public offering price of
shares of the Fund will vary based not only on the type, quality and maturities
of the securities held in the Fund's portfolio, but also on changes in the
current value of such securities and on changes in the expenses of the Fund.
These factors and possible differences in the methods used to calculate yields
and total rates of return should be considered when comparing the yield and
total rate of return of the Fund to yields and total rates of return published
for other investment companies or other investment vehicles. Total rate of
return reflects the performance of both principal and income. Current net asset
value and account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).

Yield: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield is calculated by dividing the net investment income per share
allocated to a particular class of the Fund earned during the period by the
maximum offering price per share of such class on the last day of that period.
The resulting figure is then annualized. Net investment income per share of a
class is determined by dividing (i) the dividends and interest earned by the
Fund allocated to the class during the period, minus accrued expenses of such
class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The
Fund's yield calculations assume a maximum sales charge of 4.75% in the case of
Class A shares and

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<PAGE>

no payment of any CDSC in the case of Class B shares. The yield calculations
assume no CDSC is paid. Yield quotations for each class of shares are presented
in Appendix A attached hereto.

Current Distribution Rate: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
(i) annualizing the distributions (excluding short-term capital gains) of the
class for a stated period; (ii) adding any short-term capital gains paid within
the immediately preceding twelve-month period; and (iii) dividing the result by
the maximum offering price or net asset value per share on the last day of the
period. The current distribution rate differs from the yield computation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income for option writing, short-term
capital gains and return of invested capital, and may be calculated over a
different period of time. The Fund's current distribution rate calculation for
Class B shares and Class C shares assumes no CDSC is paid. Current distribution
rate quotations for each class of shares are presented in Appendix A attached
hereto.

General: From time to time the Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions
and Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street,
Standard and Poor's, Individual Investor, The 100 Best Mutual Funds You Can
Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein &
Co. Fund performance may also be compared to the performance of other mutual
funds tracked by financial or business publications or periodicals.

From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.

The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.

From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may also use charts, graphs or other presentation
formats to illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.

From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding the following: retirement planning; tax
management strategies; estate planning; general investment techniques (e.g.,
asset allocation and disciplined saving and investing); business succession;
ideas and information provided through the MFS Heritage Planningsm program, an
inter-generational financial planning assistance program; issues with respect
to insurance (e.g., disability and life insurance and Medicare supplemental
insurance); issues regarding financial and health care management for elderly
family members; and other similar or related matters.

The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.

From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the fund in various amounts over
specified periods, with capital gain and dividend distributions invested in
additional shares or taken in cash, and with no adjustment for any income taxes
(if applicable) payable by shareholders.

MFS Firsts: MFS has a long history of innovations.

- -- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.

- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.

- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment
management firm.

- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").

- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in
additional shares or cash.

- -- 1976 -- MFS[RegTM] Municipal Bond Fund is among the first municipal bond
funds established.

20
<PAGE>

- -- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.

- -- 1981 -- MFS[RegTM] Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.

- -- 1984 -- MFS[RegTM] Municipal High Income Fund is the first open-
end mutual fund to seek high tax-free income from lower-rated
municipal securities.

- -- 1986 -- MFS[RegTM] Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for
shareholders.

- -- 1986 -- MFS[RegTM] Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.

- -- 1987 -- MFS[RegTM] Multimarket Income Trust is the first closed-
end, multimarket high income fund listed on the New York Stock
Exchange.

- -- 1989 -- MFS[RegTM] Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.

- -- 1990 -- MFS[RegTM] Global Total Return Fund is the first global balanced
fund.

- -- 1993 -- MFS[RegTM] Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.

- -- 1993 -- MFS[RegTM] becomes money manager of MFS[RegTM] Union Standard[RegTM]
Equity Fund, the first Fund to invest in companies deemed to
be union-friendly by an Advisory Board of senior labor
officials, senior managers of companies with significant
labor contracts, academics and other national labor leaders
or experts.

8. DISTRIBUTION PLAN

The Trustees have adopted a Distribution Plan for Class A and Class B shares
(the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule
12b-1 thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent that the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet redemptions.
There is, however, no assurance that the net assets of the Fund will increase
or that the other benefits referred to above will be realized.

The Distribution Plan is described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.

Service Fees: With respect to Class A shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time if the dealer satisfies
certain criteria); or (ii) to any insurance company which has entered into an
agreement with the Fund and MFD that permits such insurance company to purchase
Class A shares from the Fund at their net asset value in connection with
annuity agreements issued in connection with the insurance company's separate
accounts. Dealers may from time to time be required to meet certain other
criteria in order to receive service fees.

With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time if the dealer satisfies certain criteria. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.

MFD or its affiliates shall be entitled to receive any service fee payable
under the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.

Distribution Fees: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.

Distribution and Service Fees Paid During the Fund's Last Fiscal Year: During
the fiscal year ended July 31, 1998, the Fund paid the following Distribution
Plan expenses:

<TABLE>
<CAPTION>
Amount of
Amount of Distribution Amount of
Distribution and Distribution and
and Service Service Service Fees
Fees Paid Fees Retained Received
Class of Shares By Fund By MFD By Dealers
- ------------------------ -------------- --------------- -----------------
<S> <C> <C> <C>
Class A Shares ......... $1,645,486 $ 144,624 $1,500,862
Class B Shares ......... $2,150,242 $1,676,210 $ 474,032
</TABLE>

General: The Distribution Plan will remain in effect until August 1, 1999,
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of

21
<PAGE>

the Fund's shares (as defined in "Investment Restrictions"). All agreements
relating to the Distribution Plan entered into between the Fund or MFD and
other organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under the
Distribution Plan must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. The
Distribution Plan may not be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment Restrictions")
or may not be materially amended in any case without a vote of the Trustees and
a majority of the Distribution Plan Qualified Trustees. The selection and
nomination of Distribution Plan Qualified Trustees shall be committed to the
discretion of the non-interested Trustees then in office. No Trustee who is not
an "interested person" has any financial interest in the Distribution Plan or
in any related agreement.

9. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES

The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify the shares of the
Fund into one or more classes. Pursuant thereto, the Trustees of the Trust have
authorized the issuance of three classes of shares of the Fund (Class A, Class
B and Class I shares) and four classes of shares (Class A, B, C, and I shares)
for the six other series of the Trust's other series. Each share of a class of
the Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund allocable to
such class available for distribution to shareholders. The Fund has reserved
the right to create and issue series and additional classes of shares, in which
case the shares of each class would participate equally in the earnings,
dividends and assets allocable to that class of the particular series.

Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
the Declaration of Trust provides that a Trustee may be removed from office at
a meeting of shareholders by a vote of two-thirds of the outstanding shares of
the Fund. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Fund. No material amendment may be made to
the Declaration of Trust without the affirmative vote of a majority of the
Trust's outstanding shares (as defined in "Investment Objectives, Policies and
Restrictions -- Investment Restrictions"). Shares have no pre-emptive or
conversion rights (except as described in "Purchases -- Conversion of Class B
Shares" in the Prospectus). Shares when issued are fully paid and
non-assessable. The Trust may enter into a merger or consolidation, or sell all
or substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of the
holders of two-thirds of its outstanding shares, or (ii) by the Trustees by
written notice to the shareholders of the Trust or the affected series. If not
so terminated the Trust will continue indefinitely.

The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Fund and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that it shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Trust. Its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.

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

10. INDEPENDENT AUDITORS AND FINANCIAL
STATEMENTS

Deloitte & Touche LLP are the Fund's independent auditors providing audit
services, tax preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.

The Portfolio of Investments at July 31, 1998, the Statement of Assets and
Liabilities at July 31, 1998, the Statement of Operations for the year ended
July 31, 1998, the Statement of Changes in Net Assets for each of the two years
in the period ended July 31, 1998, the Notes to Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Report to
shareholders of the Fund, are incorporated by reference into this SAI and have
been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.

22
<PAGE>

APPENDIX A

PERFORMANCE INFORMATION

The performance quotations below should not be considered as representative of
the performance of the Fund in the future since the net asset value and public
offering price of shares of the Fund will vary. See "Determination of Net Asset
Value and Performance" in the SAI.

All performance quotations are as of July 31, 1998.

Average Annual Total Returns

<TABLE>
<CAPTION>
Actual
30-Day 30-Day
Yield Yield
(Including (Without Current
Any Any Distribution
1 Year 5 Year 10 Years Waivers) Waivers) Rate(3)
---------- --------------- --------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares
with sales charge ........ 1.12% 4.86% 7.11% N/A 5.52% 5.84%
Class A Shares
without sales charge ..... 6.17% 5.88% 7.64% N/A N/A N/A
Class B Shares
with CDSC ................ 1.41% 4.84%(1) 7.28%(1) N/A N/A N/A
Class B Shares
without CDSC ............. 5.40% 5.17%(1) 7.28%(1) N/A 5.07% 5.22%
Class I Shares ............ 6.47% 5.99%(2) 7.69%(2) N/A 6.04% 6.43%
</TABLE>

- ----------

(1) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class B shares on September 7,
1993. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been
adjusted to reflect that Class B shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class B
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.

(2) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and A shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class I shares.

(3) Annualized based on last distribution.

A-1
<PAGE>

Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000

Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000

Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110

Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606

Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906

Independent Auditors
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110

MFS[RegTM] Government
Mortgage Fund
500 Boylston Street
Boston, MA 02116

[MFS LOGO](R)

<PAGE>

[MFS LOGO](R)

STATEMENT OF ADDITIONAL
INFORMATION
MFS[RegTM] Strategic Value Fund
MFS[RegTM] Small Cap Value Fund
MFS[RegTM] Emerging Markets Debt Fund December 1, 1998

(Members of the MFS Family of Funds(R))
Each a series of MFS Series Trust X
500 Boylston Street, Boston, MA 02116
(617) 954-5000

<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
1. Definitions ................................................... 1
2. Investment Objectives, Policies and Restrictions .............. 1
3. Management of the Funds ....................................... 18
Trustees .................................................... 18
Officers .................................................... 18
Trustee Compensation Table .................................. 19
Investment Adviser .......................................... 20
Administrator ............................................... 21
Custodian ................................................... 21
Shareholder Servicing Agent ................................. 21
Distributor ................................................. 21
4. Portfolio Transactions and Brokerage Commissions .............. 22
5. Shareholder Services .......................................... 23
Investment and Withdrawal Programs .......................... 23
Exchange Privilege .......................................... 26
Tax-Deferred Retirement Plans ............................... 26
6. Tax Status .................................................... 27
7. Distribution Plan ............................................. 28
8. Determination of Net Asset Value and Performance .............. 29
9. Description of Shares, Voting Rights and Liabilities .......... 32
10. Independent Auditors and Financial Statements ................. 33
Appendix A--Performance Information ........................... A-1
</TABLE>

This Statement of Additional Information, as amended or supplemented from time
to time ("SAI"), sets forth information which may be of interest to investors
but which is not necessarily included in the Funds' Prospectus dated December
1, 1998. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number).

This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.

<PAGE>

I. DEFINITIONS

<TABLE>
<S> <C>
Strategic Value MFS[RegTM] Strategic Value Fund, a
Fund diversified series of the Trust.

Small Cap Fund MFS[RegTM] Small Cap Value Fund, a
diversified series of the Trust.

Emerging MFS[RegTM] Emerging Markets Debt
Markets Debt Fund, a non-diversified series of
Fund the Trust.

"Fund(s)" Strategic Value Fund, Small Cap
Fund and Emerging Markets Debt
Fund.

"Trust" MFS Series Trust X, a
Massachusetts business Trust,
organized in 1985. The Trust has
changed its name several times
during the past five years. The
Trust was previously known as
MFS Government Mortgage Fund
(prior to June 2, 1995), MFS
Government Income Plus Fund
(prior to March 1, 1993), and
MFS Government Income Plus
Trust (prior to August 3, 1992).

"MFS" or the Massachusetts Financial Services
"Adviser" Company, a Delaware corporation.

"MFD" MFS Fund Distributors, Inc., a
Delaware corporation.

"Prospectus" The prospectus of the Funds, dated
December 1, 1998, as amended or
supplemented from time to time.
</TABLE>

2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

Investment Objectives and Policies. The investment objective and policies of
each Fund are described in the Prospectus and below. The following discussion
of each Fund's investment techniques and restrictions supplements, and should
be read in conjunction with, the information set forth in the "Investment
Objectives and Policies," "Certain Securities and Investment Techniques" and
"Additional Risk Factors" sections of the Prospectus.

Certain Securities and Investment Techniques.

Lending of Portfolio Securities: Each Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms of the New York Stock Exchange (the "Exchange") (and subsidiaries
thereof) and member banks of the Federal Reserve System, and would be required
to be secured continuously by collateral in cash, an irrevocable letter of
credit or U.S. Treasury securities maintained on a current basis at an amount
at least equal to the market value of the securities loaned. A Fund would have
the right to call a loan and obtain the securities loaned at any time on
customary industry settlement notice (which will not usually exceed five
business days). For the duration of a loan, the Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer on the
securities loaned. The Fund would also receive a fee from the borrower or
compensation from the investment of the collateral, less a fee paid to the
borrower if the collateral is in the form of cash. A Fund would not, however,
have the right to vote any securities having voting rights during the existence
of the loan, but the Fund would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser determines to make securities
loans, it is intended that the value of the securities loaned would not exceed
30% of the value of a Fund's net assets.

Repurchase Agreements: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that a Fund purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Government securities.

The repurchase agreement provides that in the event the seller fails to pay the
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. Each Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, a Fund
only enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the
value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Fund has the right

1
<PAGE>

to make margin calls at any time if the value of the securities falls below the
agreed upon collateral.

"When-Issued" Securities: Each Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When a Fund commits to purchase these
securities on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the Securities
and Exchange Commission (the "SEC") concerning such purchases. Since that
policy currently recommends that an amount of each Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, a Fund will always have liquid assets sufficient to cover any
commitments or to limit any potential risk. Although no Fund intends to make
such purchases for speculative purposes and intends to adhere to the provisions
of the SEC policy, purchases of securities on such bases may involve more risk
than other types of purchases. For example, a Fund may have to sell assets
which have been set aside in order to meet redemptions. Also, if a Fund
determines it is necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.

Foreign Securities: Each Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. As discussed in the Prospectus,
investing in foreign securities generally represents a greater degree of risk
than investing in domestic securities due to possible exchange rate
fluctuations, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. As
a result of its investments in foreign securities, a Fund may receive interest
or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
Under certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser anticipates, for any other reason, that the exchange rate will
improve, a Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could
reduce the dollar value of interest or dividend payments received.

American Depositary Receipts: Each Fund except the Emerging Markets Debt Fund
may invest in American Depositary Receipts ("ADRs") which are certificates
issued by a U.S. depository (usually a bank) and represent a specified quantity
of shares of an underlying non-U.S. stock on deposit with a custodian bank as
collateral. ADRs may be sponsored or unsponsored. A sponsored ADR is issued by
a depository which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. Each Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the U.S. can reduce costs
and delays as well as potential currency exchange and other difficulties. Each
Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. Each Fund may also execute trades on the
U.S. markets using existing ADRs. A foreign issuer of the security underlying
an ADR is generally not subject to the same reporting requirements in the U.S.
as a domestic issuer. Accordingly the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose
in its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
denominated in foreign currency.

Emerging Market Securities: The Emerging Markets Debt Fund invests primarily in
fixed income securities of government, government-related, supranational and
corporate issuers located or primarily conducting their business in emerging
markets. Consistent with each Fund's respective investment objective and
policies, each Fund may also invest in emerging market securities. Such
investments entail significant risks as described in the Prospectus under the
caption "Additional Risk Factors -- Emerging Market Securities" and as more
fully described below.

Company Debt -- Governments of many emerging market countries have exercised
and continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of
the largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in a
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect a Fund's assets should these conditions recur.

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Sovereign Debt -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund, and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest averages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt
(including a Fund) may be requested to participate in the rescheduling of such
debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.

Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations
and other financial institutions. Certain emerging market governmental issuers
have not been able to make payments of interest on or principal of debt
obligations as those payments have come due. Obligations arising from past
restructuring agreements may affect the economic performance and political and
social stability of those issuers.

The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance
of payments, including export performance, and its access to international
credits and investments. An emerging market whose exports are concentrated in a
few commodities could be vulnerable to a decline in the international prices of
one or more of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent that
emerging markets receive payment for their exports in currencies other than
dollars or non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be affected.

To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign
governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In
addition, the cost of servicing emerging market debt obligations can be
affected by a change in international interest rates since the majority of
these obligations carry interest rates that are adjusted periodically based
upon international rates.

Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.

Liquidity; Trading Volume; Regulatory Oversight -- The securities markets of
emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.

The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's securities in such markets may
not be readily available. The Trust may suspend redemption of its shares for
any period during which an emergency exists, as determined by the SEC.
Accordingly, if a Fund believes that appropriate circumstances exist, it will
promptly apply to the SEC for a determination that an emergency is present.
During the period commencing from a Fund's identification of such condition
until the date of the SEC action, a Fund's securities in the affected markets
will be valued at fair value determined in good faith by or under the direction
of the Board of Trustees.

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Default; Legal Recourse -- A Fund may have limited legal recourse in the event
of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by a Fund defaults, that Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging
market governments differ from debt obligations of private entities; remedies
from defaults on debt obligations issued by emerging market governments, unlike
those on private debt, must be pursued in the courts of the defaulting party
itself. A Fund's ability to enforce its rights against private issuers may be
limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt
may not contest payments to the holders of debt obligations in the event of
default under commercial bank loan agreements.

Inflation -- Many emerging markets have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have
been imposed in certain countries. Of these countries, some, in recent years,
have begun to control inflation through prudent economic policies.

Withholding -- Income from securities held by a Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. A Fund's net asset value may
also be affected by changes in the rates or methods of taxation applicable to
the Fund or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will not be subject to
change.

Foreign Currencies -- The Emerging Markets Debt Fund may invest up to 100% of
its assets in securities denominated in foreign currencies and international
currency units and each other Fund may invest a portion of its assets in
foreign currencies. Accordingly, changes in the value of these currencies and
units against the U.S. dollar may result in corresponding changes in the U.S.
dollar value of the Fund's assets denominated in those currencies and units.

Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which a Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.

Loans and Other Direct Indebtedness: The Emerging Markets Debt Fund may
purchase loans and other direct indebtedness. In purchasing a loan, the Fund
acquires some or all of the interest of a bank or other lending institution in
a loan to a corporate, governmental or other borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated.

These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan or
as an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a time
when the company is in default.

Certain of the loans and the other direct indebtedness acquired by the Fund may
involve revolving credit facilities or other standby financing commitments
which obligate the Fund to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the Fund to increase its
investment in a company at a time when the Fund might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the Fund is
committed to advance additional funds, it will at all times hold and maintain
in a segregated account liquid assets in an amount sufficient to meet such
commitments.

The Fund's ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans and other direct indebtedness
which the Fund will purchase, the Adviser will rely upon its

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own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending institution
to collect and pass onto the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan and other direct indebtedness, an
insolvency, bankruptcy or reorganization of the lending institution may delay
or prevent the Fund from receiving such amounts. In such cases, the Fund will
evaluate as well the creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the diversification
of the Fund's portfolio investments. The highly leveraged nature of many such
loans and other direct indebtedness may make such loans and other direct
indebtedness especially vulnerable to adverse changes in economic or market
conditions. Investments in such loans and other direct indebtedness may involve
additional risk to the Fund.

Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each Fund may invest
in zero coupon bonds, deferred interest bonds and bonds on which the interest
is payable in kind ("PIK bonds"). Zero coupon and deferred interest bonds are
debt obligations which are issued at a significant discount from face value.
The discount approximates the total amount of interest the bonds will accrue
and compound over the period until maturity or the first interest payment date
at a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which
provide that the issuer may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer receipt of
such cash. Such investments may experience greater volatility in market value
than debt obligations which make regular payments of interest. Each Fund will
accrue income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy each Fund's distribution obligations.

Short Sales: Each Fund, except the Emerging Markets Debt Fund, may seek to
hedge investments or realize additional gains through short sales. Short sales
are transactions in which a Fund sells a security it does not own, in
anticipation of a decline in the market value of that security. To complete
such a transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to repay the lender
any dividends or interest which accrue during the period of the loan. To borrow
the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund also will incur transaction
costs in effecting short sales.

A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the price
of the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends or interest the Fund may be required to pay in connection
with a short sale.

Each such Fund may make short sales "against the box," i.e., when a security
identical to or convertible or exchangeable into one owned by the Fund is
borrowed and sold short. Such Funds may also enter into so called "naked" short
sales, i.e., when a security identical to or exchangeable into the security
borrowed and sold short is not owned by the Fund.

A Fund will not sell short securities whose underlying value, minus any amounts
pledged by the Fund as collateral (which does not include the proceeds from the
short sale), exceeds 40% of the value of the Fund's net assets.

Whenever a Fund engages in short sales, it segregates liquid securities in an
amount that, when combined with the amount of collateral deposited with the
broker in connection with the short sale, equals the current market value of
the security sold short. The segregated assets are marked to market daily.

Investment in Other Investment Companies: The Funds' investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act") and the SEC.
The Emerging Market Debt Fund's investment in other investment companies may
involve the payment of substantial premiums above the value of such investment
companies' portfolio securities, and the total return on such investment will
be reduced by the operating expenses and fees of such other investment
companies, including advisory fees.

Indexed Securities: Each Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities

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typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed

securities may be positively or negatively indexed; that is, their principal
value or interest rates may increase when the specified currency value
increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline when
foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion of the
principal amount of its investment and/or the interest that might otherwise
have been earned on the amount invested.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations and certain U.S.
Government agencies.

Swaps and Related Transactions: Each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.

Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Fund is not limited
to any particular form or variety of swap agreement if MFS determines it is
consistent with the Fund's investment objective and policies.

Each Fund will maintain cash or appropriate liquid assets to cover its current
obligations under swap transactions. If a Fund enters into a swap agreement on
a net basis (i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments), the Fund will maintain cash or liquid assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under
the agreement. If a Fund enters into a swap agreement on other than a net
basis, it will maintain cash or liquid assets with a value equal to the full
amount of the Fund's accrued obligations under the agreement.

The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of a Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by a Fund, the Fund must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses.

If the counterparty defaults, a Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. Each Fund
anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.

Options on Securities: Each Fund may write (sell) covered put and call options,
and purchase put and call options, on securities. Call and put options written
by a Fund may be covered in the manner set forth below.

A call option written by a Fund 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 for additional cash
consideration segregated by the Fund) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if a Fund holds
a call on the same security and in 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 or (b) is greater than the exercise
price of the call written if liquid assets representing the difference is
segregated by the Fund. A put option written by a Fund is "covered" if the Fund
segregates liquid assets with a value equal to the exercise price, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than
the exercise price of the put written or where the exercise price of the put
held is less than the exercise price of the put written if the difference is
segregated by the Fund in assets. Put and call options written by a Fund may
also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.

Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price or

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expiration date or both, or in the case of a written put option will permit the
Fund to write another put option to the extent that the exercise price thereof
is secured by deposited liquid assets. Such transactions permit a Fund to
generate additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other investments of a Fund, provided that another option on such
security is not written. If a Fund desires to sell a particular security from
its portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the sale
of the security.

A Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by a Fund is more than the
premium paid for the original purchase. Conversely, a Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is
more or less, respectively, than the premium received or paid in establishing
the option position. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option previously
written by a Fund is likely to be offset in whole or in part by appreciation of
the underlying security owned by the Fund.

The Fund may write options in connection with buy-and-write transactions; that
is, a Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
will depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, a Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price, less related
transaction costs. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.

The writing of covered put options is similar in terms of risk/
return characteristics to buy-and-write transactions. If the market price of
the underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Fund's gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, a Fund may elect to
close the position or retain the option until it is exercised, at which time
the Fund will be required to take delivery of the security at the exercise
price; a Fund's return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by a Fund in the same market environments
that call options are used in equivalent buy-and-write transactions.

Each Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, a Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs,
the call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security remains stable and
neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.

By writing a call option, a Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price above
its then-current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will
not be undertaken by a Fund solely for hedging purposes, and could involve
certain risks which are not present in the case of hedging transactions.
Moreover, even where options are written for hedging purposes, such
transactions constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to be
acquired, up to the amount of the premium.

Each Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, a Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.

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Each Fund may also purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.

Reset Options: In certain instances, each Fund may enter into options on U.S.
Treasury securities which provide for periodic adjustment of the strike price
and may also provide for the periodic adjustment of the premium during the term
of each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the case of
a put), a specified type of U.S. Treasury security at any time up to a stated
expiration date (or, in certain instances, on such date). In contrast to other
types of options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various intervals
during the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying security. As a
result, the strike price of a "reset" option, at the time of exercise, may be
less advantageous than if the strike price had been fixed at the initiation of
the option. In addition, the premium paid for the purchase of the option may be
determined at the termination, rather than the initiation, of the option. If
the premium is paid at termination, the Fund assumes the risk that (i) the
premium may be less than the premium which would otherwise have been received
at the initiation of the option because of such factors as the volatility in
yield of the underlying Treasury security over the term of the option and
adjustments made to the strike price of the option, and (ii) the option
purchaser may default on its obligation to pay the premium at the termination
of the option.

Options on Indices: Each Fund may write (sell) covered call and put options and
purchase call and put options on indices. In contrast to an option on a
security, an option on an index provides the holder with the right but not the
obligation to make or receive a cash settlement upon exercise of the option,
rather than the right to purchase or sell a security. The amount of this
settlement is equal to (i) the amount, if any, by which the fixed exercise
price of the option exceeds (in the case of a call) or is below (in the case of
a put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier."

Each Fund may cover call options on indices by owning securities whose price
changes, in the opinion of the Adviser, are expected to be similar to those of
the underlying index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities in its portfolio. Where a Fund covers a call
option on an index through ownership of securities, such securities may not
match the composition of the index and, in that event, the Fund will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. Each Fund may also cover call options on
indices by holding a call on the same index and in 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 or (b) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in liquid assets in a segregated account. Each Fund may cover put options on
stock indices by maintaining liquid assets with a value equal to the exercise
price in a segregated account, or by holding a put on the same index and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written or where
the exercise price of the put held is less than the exercise price of the put
written if the difference is maintained by the Fund in liquid assets in a
segregated account. Put and call options on indices may also be covered in such
other manner as may be in accordance with the rules of the exchange on which,
or the counterparty with which, the option is traded and applicable laws and
regulations.

Each Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation
in the Fund's stock investments. By writing a put option, a Fund assumes the
risk of a decline in the index. To the extent that the price changes of
securities owned by a Fund correlate with changes in the value of the index,
writing covered put options on indices will increase a Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.

Each Fund may also purchase put options on indices to hedge its investments
against a decline in value. By purchasing a put option on an index, a Fund will
seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.

The purchase of call options on indices may be used by a Fund to attempt to
reduce the risk of missing a broad market advance, or an advance in an industry
or market segment, at a time when the Fund holds uninvested cash or short-term
debt securities awaiting investment. When purchasing call

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<PAGE>

options for this purpose, a Fund will also bear the risk of losing all or a
portion of the premium paid if the value of the index does not rise. The
purchase of call options on indices when a Fund is substantially fully invested
is a form of leverage, up to the amount of the premium and related transaction
costs, and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Fund owns.

The index underlying an index option may be a "broad-based" index, such as the
Standard & Poor's 500 Index or the New York Stock Exchange Composite Index, the
changes in value of which ordinarily will reflect movements in the market in
general. In contrast, certain options may be based on narrower market indices,
such as the Standard & Poor's 100 Index, or on indices of securities of
particular industry groups, such as those of oil and gas or technology
companies. An index assigns relative values to the securities included in the
index and the index fluctuates with changes in the market values of the
securities so included. The composition of the index is changed periodically.

"Yield Curve" Options: Each Fund may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.

Yield curve options may be used for the same purposes as other options on
securities. Specifically, a Fund may purchase or write such options for hedging
purposes. For example, a Fund may purchase a call option on the yield spread
between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated. Yield curve options written by a Fund
will be "covered." A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and liquid
assets sufficient to cover the Fund's net liability under the two options.
Therefore, a Fund's liability for such a covered option is generally limited to
the difference between the amount of the Fund's liability under the option
written by the Fund less the value of the option held by the Fund. Yield curve
options may also be covered in such other manner as may be in accordance with
the requirements of the counterparty with which the option is traded and
applicable laws and regulations. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
Because these securities are traded over-the-counter, the SEC has taken the
position that yield curve options are illiquid and, therefore, cannot exceed
the SEC illiquidity ceiling.

Options: The staff of the SEC 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,
cannot exceed a certain percentage of the Fund's assets (the "SEC illiquidity
ceiling"). Although the Adviser disagrees with this position, the Adviser
intends to limit each Fund's writing of over-the-counter options in accordance
with the following procedure. Except as provided below, the Fund intends to
write over-the-counter options only with primary U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York. Also, the contracts
which the Fund has in place with such primary dealers will provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by a Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written
out-of-the-money. Each Fund will treat all or a part of the formula price as
illiquid for purposes of the SEC illiquidity ceiling. Each Fund may also write
over-the-counter options with non-primary dealers, including foreign dealers,
and will treat the assets used to cover these options as illiquid for purposes
of such SEC illiquidity ceiling.

Futures Contracts: Each Fund may purchase and sell futures contracts on stock
indices, and may purchase and sell futures contracts on foreign currencies or
indices of foreign currencies ("Futures Contracts"). Consistent with each
Fund's respective investment objective and policies, each Fund may purchase and
sell futures contracts on foreign or domestic fixed income securities or
indices of such securities including municipal bond indices and any other
indices of foreign or domestic fixed income securities that may become
available for trading. Such investment strategies will be used for hedging
purposes and for non-hedging purposes, subject to applicable law.

A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a

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<PAGE>

financial instrument or foreign currency, or for the making and acceptance of a
cash settlement, at a stated time in the future for a fixed price. By its
terms, a Futures Contract provides for a specified settlement date on which, in
the case of the majority of interest rate and foreign currency futures
contracts, the fixed income securities or currency are delivered by the seller
and paid for by the purchaser, or on which, in the case of stock index futures
contracts and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures Contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. Futures Contracts call for settlement only on the expiration date
and cannot be "exercised" at any other time during their term.

The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with
the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of
the index or instrument underlying the Futures Contract fluctuates, making
positions in the Futures Contract more or less valuable--a process known as
"mark-to-market."

Purchases or sales of stock index futures contracts are used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, a Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset,
in whole or part, by gains on the futures position. When a Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related
purchase of securities.

Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on a Fund's current or intended
investments in fixed income securities. For example, if a Fund owned long-term
bonds and interest rates were expected to increase, that Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Fund's
interest rate futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of that Fund from declining as much as it
otherwise would have.

Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds, a
Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and that Fund's cash reserves could then
be used to buy long-term bonds on the cash market. A Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows a Fund to hedge
its interest rate risk without having to sell its portfolio securities.

As noted in the Prospectus, a Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities
to be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. A Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.

Conversely, a Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. Where a Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.

Forward Contracts: Each Fund may enter into contracts for the purchase or sale
of a specific currency at a future date at a price set at the time the contract
is entered into (a "Forward Contract"), for hedging purposes as well as for

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<PAGE>

non-hedging purposes. Each Fund may also enter into Forward Contracts for
"cross-hedging" purposes as noted in the Prospectus. The Fund will enter into
Forward Contracts for the purpose of protecting its current or intended
investments from fluctuations in currency exchange rates.

A Forward Contract to sell a currency may be entered into where a Fund seeks to
protect against an anticipated increase in the exchange rate for a specific
currency which could reduce the dollar value of portfolio securities
denominated in such currency. Conversely, the Fund may enter into a Forward
Contract to purchase a given currency to protect against a projected increase
in the dollar value of securities denominated in such currency which the Fund
intends to acquire.

If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or the increase in the cost of securities to be
acquired may be offset, at least in part, by profits on the Forward Contract.
Nevertheless, by entering into such Forward Contracts, the Fund may be required
to forego all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. Each Fund does not
presently intend to hold Forward Contracts entered into until the Value Date,
at which time it would be required to deliver or accept delivery of the
underlying currency, but will seek in most instances to close out positions in
such Contracts by entering into offsetting transactions, which will serve to
fix the Fund's profit or loss based upon the value of the Contracts at the time
the offsetting transaction is executed.

Each Fund has established procedures which require the use of segregated assets
or "cover" in connection with the purchase and sale of such Contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets which will be
marked to market on a daily basis, in an amount equal to the value of its
commitments under Forward Contracts.

Options on Futures Contracts: Each Fund also may purchase and write options to
buy or sell those Futures Contracts in which it may invest ("Options on Futures
Contracts") as described above under "Futures Contracts." Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.

An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract in the case of a call
option, or a "short" position in the underlying Futures Contract in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.

A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same Fund (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the Fund's profit
or loss on the transaction.

Options on Futures Contracts that are written or purchased by a Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. A Fund may cover the writing of
call Options on Futures Contracts (a) through purchases of the underlying
Futures Contract, (b) through ownership of the instrument, or instruments
included in the index, underlying the Futures Contract, or (c) through the
holding of a call on the same Futures Contract and in the same principal amount
as the call written where the exercise price of the call held (i) is equal to
or less than the exercise price of the call written or (ii) is greater than the
exercise price of the call written if the difference is segregated by the Fund
in liquid assets. A Fund may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through
segregation of liquid assets in an amount equal to the value of the security or
index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
segregated by the Fund in liquid assets. Put and call Options on Futures
Contracts may also be covered in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written
by a Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by a Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.

The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices

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<PAGE>

of the securities or other instruments required to be delivered under the terms
of the Futures Contract. If the futures price at expiration of the option is
below the exercise price, a Fund will retain the full amount of the option
premium, less related transaction costs, which provides a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings. The
writing of a put option on a Futures Contract constitutes a partial hedge
against increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, a Fund will retain
the full amount of the option premium which provides a partial hedge against
any increase in the price of securities which the Fund intends to purchase. If
a put or call option a Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it receives. Depending
on the degree of correlation between changes in the value of its portfolio
securities and the changes in the value of its futures positions, a Fund's
losses from existing Options on Futures Contracts may to some extent be reduced
or increased by changes in the value of portfolio securities.

Each Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a
result of a projected market-wide decline or changes in interest or exchange
rates, a Fund could, in lieu of selling Futures Contracts, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
in part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by a Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
a Fund could purchase call Options on Futures Contracts, rather than purchasing
the underlying Futures Contracts.

Options on Foreign Currencies: Each Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or Forward Contracts, will be
utilized. 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,
a Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole in part, the adverse
effect on its portfolio which otherwise would have resulted.

Conversely, where 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, each Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Fund deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, where 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 require it to forego a portion or all of the
benefits of advantageous changes in such rates. Each Fund may write options on
foreign currencies for the same types of hedging purposes. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in 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 less related transaction costs. As in the case of other types
of options, therefore, the writing of Options on Foreign Currencies will
constitute only a partial hedge.

Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, each Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by a
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, 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
this does not occur, the option may be exercised and a Fund would be required
to purchase or sell the underlying currency at a loss which may not be offset
by the amount of the premium. Through the writing of options on foreign
currencies, a Fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.

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ADDITIONAL RISK FACTORS:

Options, Futures and Forward Transactions

Risk of imperfect correlation of hedging instruments with a Fund's portfolio. A
Fund's ability effectively to hedge all or a portion of its portfolio through
transactions in options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies depends on the degree to
which price movements in the underlying index or instrument correlate with
price movements in the relevant portion of the Fund's portfolio. In the case of
futures and options based on an index, the portfolio will not duplicate the
components of the index, and in the case of futures and options on fixed income
securities, the portfolio securities which are being hedged may not be the same
type of obligation underlying such contract. The use of Forward Contracts for
"cross hedging" purposes may involve greater correlation risks. As a result,
the correlation probably will not be exact. Consequently, the Fund bears the
risk that the price of the portfolio securities being hedged will not move in
the same amount or direction as the underlying index or obligation.

For example, if a Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, a Fund may enter into transactions in Forward Contracts or options on
foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Fund will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged. It should be noted that stock index
futures contracts or options based upon a narrower index of securities, such as
those of a particular industry group, may present greater risk than options or
futures based on a broad market index. This is due to the fact that a narrower
index is more susceptible to rapid and extreme fluctuations as a result of
changes in the value of a small number of securities. Nevertheless, where a
Fund enters into transactions in options, or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the hedge
is successful, correlate closely with the portion of the Fund's portfolio or
the intended acquisitions being hedged.

The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and Forward Contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.

The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contracts will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.

Further, with respect to options on securities, options on indices, options on
currencies and Options on Futures Contracts, a Fund is subject to the risk of
market movements between the time that the option is exercised and the time of
performance thereunder. This could increase the extent of any loss suffered by
a Fund in connection with such transactions.

In writing a covered call option on a security, index or futures contract, a
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where a Fund covers a
call option written on an index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.

The writing of options on securities, options on indices or Options on Futures
Contracts constitutes only a partial hedge against fluctuations in the value of
a Fund's portfolio. When a Fund writes an option, it will receive premium
income in return for the holder's purchase of the right to acquire or dispose
of the underlying obligation. In the event that the price of such obligation
does not rise sufficiently above the exercise price of the option, in the case
of a call, or fall below the exercise price, in the case of a put, the option
will not be exercised and the Fund will retain the amount of the premium, less
related transaction costs, which will constitute a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings or any increase
in the cost of the instruments to be acquired.

Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received.

Moreover, by writing an option, a Fund may be required to forego the benefits
which might otherwise have been obtained from an increase in the value of
portfolio securities

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<PAGE>

or other assets or a decline in the value of securities or assets to be
acquired. In the event of the occurrence of any of the foregoing adverse market
events, a Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may make
it economically infeasible for the Funds to engage in such transactions.

The Funds may enter transactions in options (except for Options on Foreign
Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Funds will only write
covered options, such that liquid assets necessary to satisfy an option
exercise will be segregated at all times, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which
the option is traded and applicable laws and regulations. Nevertheless, the
method of covering an option employed by a Fund may not fully protect it
against risk of loss and, in any event, the Fund could suffer losses on the
option position which might not be offset by corresponding portfolio gains.
Entering into transactions in Futures Contracts, Options on Futures Contracts
and Forward Contracts for other than hedging purposes could expose the Fund to
significant risk of loss if foreign currency exchange rates do not move in the
direction or to the extent anticipated.

With respect to the writing of straddles on securities, a Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing a Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the
price of the security increases or decreases.

Risk of a potential lack of a liquid secondary market. Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Funds will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by a Fund, and the Fund could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Fund
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Fund's ability
effectively to hedge its portfolio, and could result in trading losses.

The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved to
the daily limit on a number of consecutive trading days.

The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

Margin. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where a Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or
other assets held by the Fund or decreases in the prices of securities or other
assets the Fund intends to acquire. Where a Fund enters into such transactions
for other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.

Trading and position limits. The exchange on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolios of the Fund.

Risks of Options on Futures Contracts. The amount of risk a Fund assumes when
it purchases an Option on a Futures

14
<PAGE>

Contract is the premium paid for the option, plus related transaction costs. In
order to profit from an option purchased, however, it may be necessary to
exercise the option and to liquidate the underlying Futures Contract, subject
to the risks of the availability of a liquid offset market described herein.
The writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and variation
margin payments, as well as the additional risk that movements in the price of
the option may not correlate with movements in the price of the underlying
security, index, currency or Futures Contract.

Risks of transactions related to foreign currencies and transactions not
conducted on U.S. exchanges.
Transactions in Forward Contracts on foreign currencies, as well as futures and
options on foreign currencies and transactions executed on foreign exchanges,
are subject to all of the correlation, liquidity and other risks outlined
above. In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and could
have a substantial adverse effect on the value of positions held by a Fund.
Further, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries
issuing the underlying currencies.

Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which a Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, events could occur in that market which will not be reflected
in the forward, futures or options market until the following day, thereby
making it more difficult for the Fund to respond to such events in a timely
manner.

Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or
other charges.

Unlike transactions entered into by a Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.

In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a Fund could be required to retain
options purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the Fund's ability
to profit from open positions or to reduce losses experienced, and could result
in greater losses.

Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and a Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. A
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.

Options on securities, options on indices, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.

Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid

15
<PAGE>

secondary market in options traded on a national securities exchange may be
more readily available than in the over-the-counter market, potentially
permitting a Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.

The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.

Policies on the use of futures and options on futures contracts. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that a Fund
enter into transactions in Futures Contracts, Options on Futures Contracts
including Options on Futures on Foreign Currencies, traded on a CFTC-regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish positions does not
exceed 5% of the liquidation value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts the Fund
has entered into, and excluding, in computing such 5%, the in-the-money amount
with respect to an option that is in-the-money at the time of purchase.

Risks of investing in Lower Rated Bonds

Each Fund may invest in fixed income securities, and may invest in convertible
securities, rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Services ("S&P"), Fitch IBCA ("Fitch") or Duff &
Phelps Credit Rating Co. ("Duff & Phelps"), and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters,
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.

Each Fund may also invest in fixed income securities rated Ba or lower by
Moody's or BB or lower by S&P, Fitch or Duff & Phelps, and comparable unrated
securities (commonly known as "junk bonds") to the extent described in the
Prospectus. No minimum rating standard is required by a Fund. These securities
are considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers
of such securities) and may involve greater volatility of price (especially
during periods of economic uncertainty or change) than securities in the higher
rating categories and because yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default
by the issuers of these securities and may do so in the future, especially in
the case of highly leveraged issuers. The prices for these securities may be
affected by legislative and regulatory developments. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, the Adviser's judgment may at times play a greater role in valuing
these securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities to meet redemption requests or
to respond to changes in the market.

While the Adviser may refer to ratings issued by established credit rating
agencies, it is not a Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent a Fund
invests in these lower rated securities, the achievement of its investment
objectives may be a more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.

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

The policies stated above are not fundamental and may be changed without
shareholder approval, as may each Fund's investment objective.

16
<PAGE>

Investment Restrictions.

Except for Investment Restriction (1) regarding borrowing and non-fundamental
investment policy regarding illiquid investments, these investment restrictions
and policies are adhered to at the time of purchase of utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.

Each Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of a Fund's shares (which, as
used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a series or class, as applicable or (ii) 67% or more of
the outstanding shares of the Trust or a series or class, as applicable,
present at a meeting at which holders of more than 50% of the outstanding
shares of the Trust or a series or class, as applicable are represented in
person or by proxy).

Each Fund may not:

(1) borrow amounts in excess of 33-1/3% of its total assets including amounts
borrowed;

(2) underwrite securities issued by other persons except insofar as a Fund may
technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;

(3) issue any senior securities except as permitted by the 1940 Act; for
purposes of this restriction, collateral arrangements with respect to any
type of option (including Options on Futures Contracts, Options, Options on
Indices and Options on Foreign Currencies), short sale, Forward Contracts,
Futures Contracts, any other type of futures contract, and collateral
arrangements with respect to initial and variation margin, are not deemed to
be the issuance of a senior security;

(4) make loans to other persons; for these purposes, the purchase of short-term
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of a
Fund's assets in repurchase agreements, shall not be considered the making
of a loan;

(5) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding Options, Options on
Futures Contracts, Options on Stock Indices, Options on Foreign Currency and
any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business.
Each Fund reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including Options,
Options on Futures Contracts, Options on Stock Indices, Options on Foreign
Currency and any other type of option, Futures Contracts, any other type of
futures contract, and Forward Contracts) acquired as a result of the
ownership of securities; or

(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).

In addition, each Fund has the following nonfundamental policies which may be
changed without shareholder approval:

Each Fund will not:

(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists), if more than 15% of a
Fund's net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of a Fund's limitation on investment in
illiquid securities. Securities that are not registered under the 1933 Act
and sold in reliance on Rule 144A thereunder, but are determined to be
liquid by the Trust's Board of Trustees (or its delegee), will not be
subject to this 15% limitation;

(2) invest for the purpose of exercising control or management;

(3) pledge, mortgage or hypothecate in excess of 33-1/3% of its total assets;
for purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options, Options
on Indices and Options on Foreign Currencies), any short sale, any type of
futures contract (including Futures Contracts), Forward Contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets; or

(4) purchase any securities of an issuer of a particular industry, if as a
result, 25% or more of its total assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).

17
<PAGE>

3. MANAGEMENT OF THE FUNDS

The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of each
Fund's assets, and the officers of the Trust are responsible for its
operations. The Trustees and officers are listed below, together with their
ages and principal occupations during the past five years. (Their titles may
have varied during that period.)

Trustees

RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
and Director (prior to September 30, 1991); Cambridge Bancorp, Director;
Cambridge Trust Company, Director

PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts

J. ATWOOD IVES (born 5/1/36)

Eastern Enterprises (diversified services company), Chairman, Trustee and
Chief Executive Officer
Address: 9 Riverside Road, Weston, Massachusetts

LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts

WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts

CHARLES W. SCHMIDT (born 3/18/28)

Private Investor; International Technology Corporation, Director; Mohawk Paper
Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts

ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary

JEFFREY L. SHAMES* (born 6/2/55)

Massachusetts Financial Services Company, Chairman and Chief Executive Officer

ELAINE R. SMITH (born 4/25/46)
Independent Consultant
Address: Weston, Massachusetts

DAVID B. STONE (born 9/2/27)

North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Director
Address: Ten Post Office Square, Suite 300, Boston, Massachusetts

Officers

W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President

JAMES O. YOST,* Assistant Treasurer (born 6/12/60) Massachusetts Financial
Services Company, Vice President

MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59) Massachusetts Financial
Services Company, Vice President (since March 1997); Putnam Investments, Vice
President (from September 1994 until March 1997); Ernst & Young, Senior Tax
Manager (prior to September 1994).

ELLEN MOYNIHAN,* Assistant Treasurer
(born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche, LLP, Senior Manager (prior to September 1996).

STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53) Massachusetts Financial
Services Company, Senior Vice President, General Counsel and Assistant
Secretary

JAMES R. BORDEWICK, JR.,* Assistant Secretary
(born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel

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

* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.

Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Messrs. Shames and Scott, Directors of MFD, and Mr.
Cavan, the Secretary of MFD, hold similar positions with certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.), a subsidiary of Sun Life Assurance Company of Canada ("Sun Life").

While each Fund pays the compensation of the non-interested Trustees and Mr.
Bailey, the Trustees are currently waiving their rights to receive such fees.

Each Fund has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the
Trustee has completed at least 5 years of service, he would be entitled to
annual payments

18
<PAGE>

during his lifetime of up to 50% of such Trustee's average annual compensation
(based on the three years prior to his retirement) depending on his length of
service. A Trustee may also retire prior to age 73 and receive reduced payments
if he has completed at least 5 years of service. Under the plan, a Trustee (or
his beneficiaries) will also receive benefits for a period of time in the event
the Trustee is disabled or dies. These benefits will also be based on the
Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Scott and Shames. Each Fund
will accrue its allocable portion of compensation expenses under the retirement
plan each year to cover the current year's service and amortize past service
cost.

TRUSTEE COMPENSATION TABLE

<TABLE>
<CAPTION>
Retirement Total
Trustee Benefit Trustee
Fees Accrued Estimated Fees from
from as Part Credited Fund and
the of Fund Years of Fund
Trustee Fund(1) Expense(1) Service(2) Complex(3)
- -------------------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Richard B. Bailey $ $ 5 $242,022
Peter G. Harwood 5 121,105
J. Atwood Ives 13 108,720
Lawrence T. Perera 12 127,055
William J. Poorvu 12 121,105
Charles W. Schmidt 5 121,105
Arnold D. Scott N/A 0
Jeffrey L. Shames N/A 0
Elaine R. Smith 23 132,035
David B. Stone 5 127,055
</TABLE>

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

(1) For the fiscal year ending July 31, 1998.

(2) Based upon normal retirement age (73).

(3) Information provided is for calendar year 1997. All Trustees receiving
compensation served as Trustees of 27 funds within the MFS fund complex
(having aggregate net assets at December 31, 1997 of approximately $29
billion) except Mr. Bailey, who served as Trustee of 69 funds within the MFS
fund complex (having aggregate net assets at December 31, 1997, of
approximately $48 billion).

As of October 31, 1998, all Trustees and officers as a group owned less than 1%
of the Strategic Value Fund's shares outstanding, not including 17,298 shares
(which represent approximately 23.9% of the outstanding shares of this Fund),
as of October 31, 1998, all Trustees and officers as a group owned less than 1%
of the Small Cap Fund's shares outstanding, not including 55,236 shares (which
represent approximately 60.9% of the outstanding shares of this Fund), and as
of October 31, 1998, all Trustees and officers as a group owned less than 1% of
the Emerging Markets Debt Fund's shares outstanding, not including 1,435 shares
(which represent approximately 0.01% of the outstanding shares of this Fund)
owned of record by certain employee benefit plans of MFS of which Messrs. Scott
and Shames are Trustees.

As of October 31, 1998 the following shareholders owned more than 5% of the
outstanding shares of the Funds indicated:

<TABLE>
<CAPTION>
APPROXIMATE %
OF OUTSTANDING
FUND SHAREHOLDER CLASS SHARES OWNED
- ---------------------- -------------------------------------- ------- ---------------
<S> <C> <C> <C>
Strategic Value Fund MFS Fund Distributors, Inc. A 84.73%
c/o Mass Financial Services Company
Attn: Thomas B. Hastings
500 Boylston St., 15th Floor
Boston, MA 02116-3740

Strategic Value Fund Kenneth J. Enright A 8.61%
10 Acorn Circle
Medfield, MA 02052-1133

Strategic Value Fund TRS MFS DEF Contribution Plan I 99.91%
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740

Small Cap Fund Wayne I. Brooks & Margaret A. Brooks A 5.54%
JT WROS
990 Massachusetts Ave, Unit 81
Arlington, MA 02174-4542

Small Cap Fund Kathleen M. Dello Russo A 14.15%
14 Longmeadow Drive
Westwood, MA 02090-1079
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
APPROXIMATE %
OF OUTSTANDING
FUND SHAREHOLDER CLASS SHARES OWNED
- ------------------ ------------------------------------ ------- ---------------
<S> <C> <C> <C>
Small Cap Fund Maura A. Shaughnessy A 6.96%
295 Beacon St., Apt. 63
Boston, MA 02116

Small Cap Fund MFS Fund Distributors, Inc. A 35.08%
c/o Mass Financial Services Company
Attn: Thomas B. Hastings
500 Boylston St., 15th Floor
Boston, MA 02116-3740

Small Cap Fund Brooks Andrew Taylor A 6.95%
185 Beacon St., Apt. 2R
Boston, MA 02116-1429

Small Cap Fund TRS MFS DEF Contribution Plan I 99.97%
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740

Emerging Markets MFS Fund Distributors, Inc. A 99.98%
Debt Fund c/o Mass Financial Services Company
Attn: Thomas B. Hastings
500 Boylston St., 15th Floor
Boston, MA 02116-3740

Emerging Markets TRS MFS DEF Contribution Plan I 98.90%
Debt Fund c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</TABLE>

The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities of the Trust or its shareholders, it is
determined that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will not
be provided unless it has been determined pursuant to the Declaration of Trust,
that they have not engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of their duties.

Investment Adviser

MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Holdings,
Inc., which is an indirect wholly owned subsidiary of Sun Life.

Investment Advisory Agreement--The Adviser manages each Fund pursuant to
separate Investment Advisory Agreements, each dated March 16, 1998 (the
"Advisory Agreements"). Under the Advisory Agreements, the Adviser provides
each Fund with overall investment advisory services. Subject to such policies
as the Trustees may determine, the Adviser makes investment decisions for each
Fund. For these services, the Adviser receives an annual management fee,
computed and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Funds."

The Adviser is currently waiving its right to receive its management fee from
each Fund. The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser.

If the Management Fees had not been waived, they would have been $1,885, $2,696
and $3,144, equivalent on annualized basis to 0.75%, 0.90% and 0.85% of average
daily net assets of the Strategic Value Fund, Small Cap Fund and Emerging
Markets Debt Fund, respectively.

Each Advisory Agreement will remain in effect until August 1, 1999, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party.

20
<PAGE>

Each Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of a majority of the Fund's shares (as
defined in "Investment Objectives, Policies and Restrictions"), or by either
party on not more than 60 days' nor less than 30 days' written notice. Each
Advisory Agreement provides that if MFS ceases to serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS" and that
MFS may render services to others and may permit other fund clients to use the
initials "MFS" in their names. Each Advisory Agreement also provides that
neither the Adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and
duties under the Advisory Agreement.

Administrator

MFS provides each Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee of up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the period from March 17,
1998, the date on which each Fund commenced investment operations, through the
period ended July 31, 1998, MFS received fees under the Administrative Services
Agreement as follows:

<TABLE>
<CAPTION>
Strategic Emerging Markets
Value Fund Small Cap Fund Debt Fund
- ------------ ---------------- -----------------
<S> <C> <C>
$ 37 $45 $54
</TABLE>

Custodian

State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on each
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of each Fund. The Custodian does not
determine the investment policies of each Fund or decide which securities a
Fund will buy or sell. Each Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of each
Fund.

Shareholder Servicing Agent

MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is each Fund's shareholder servicing agent, pursuant to
Shareholder Servicing Agreement dated September 1, 1995, as amended (the
"Agency Agreement"), with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of each
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of each Fund at an
effective annual rate of 0.1125%. In addition, the Shareholder Servicing Agent
will be reimbursed by each Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. The Custodian has contracted
with the Shareholder Servicing Agent to perform certain dividend disbursing
agent functions for the Fund.

Distributor

MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of each Fund pursuant to a Distribution Agreement with the
Trust dated as of January 1, 1995 (the "Distribution Agreement").

Class A Shares: MFD acts as agent in selling Class A shares of each Fund to
dealers. The public offering price of Class A shares of each Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of
each Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of each Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below).

Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or a Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.

21
<PAGE>

difference between the total amount invested and the sum of (a) the net
proceeds to a Fund and (b) the dealer commission, is the commission paid to the
distributor. Because of rounding in the computation of offering price, the
portion of the sales charge paid to the distributor may vary and the total
sales charge may be more or less than the sales charge calculated using the
sales charge expressed as a percentage of the offering price or as a percentage
of the net amount invested as listed in the Prospectus. In the case of the
maximum sales charge, the dealer retains 5.00% and MFD retains approximately
3/4 of 1% of the public offering price. MFD, on behalf of each Fund, pays a
commission to dealers who initiate and are responsible for purchases of $1
million or more as described in the Prospectus.

Class B Shares, Class C Shares and Class I Shares: MFD acts as agent in selling
Class B, Class C shares and Class I shares of each Fund. The public offering
price of Class B, Class C and Class I shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus and the Prospectus
supplement pursuant to which Class I shares are offered).

GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of a Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers
for the purchase of Fund shares.

For the period from the inception date of Class A shares on March 17, 1998
through the period ended July 31, 1998, MFD did not receive any sales charges
on sales of Class A shares of each Fund.

There were no contingent deferred sales charges imposed from March 17, 1998
through the period ended July 31, 1998 for each Fund.

The Distribution Agreement will remain in effect until August 1, 1999 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Objective, Policies and Restrictions
- --Investment Restrictions") and in either case, by a majority of the Trustees
who are not parties to the Distribution Agreement or interested persons of any
such party. The Distribution Agreement terminates automatically if it is
assigned and may be terminated without penalty by either party on not more than
60 days' nor less than 30 days' notice.

4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS

Specific decisions to purchase or sell securities for the Funds are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser, in a similar capacity. Changes
in each Fund's investments are reviewed by the Board of Trustees.

The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in effect.

Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. ("NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of
shares of a Fund and of the other investment company clients of MFD as a factor
in the selection of broker-dealers to execute the Fund's portfolio
transactions. Under an Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934, the Adviser may cause a Fund to pay a
broker-dealer which provides brokerage and research services to the Adviser, an
amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the
transaction, if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or their respective overall responsibilities to the Fund
or to their other clients. Not all of such services are useful or of value in
advising a Fund.

The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.

Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the

22
<PAGE>

value of the brokerage services provided, commissions exceeding those which
another broker might charge may be paid to broker-dealers who were selected to
execute transactions on behalf of a Fund and the Adviser's other clients in
part for providing advice as to the availability of securities or of purchasers
or sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.

Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers on behalf of a
Fund. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser to allocate a total of $54,160 of commission business from
the MFS Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by Lipper
Analytical Securities Corporation (which provides information useful to the
Trustees in reviewing the relationship between a Fund and the Adviser).

The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. The Adviser sometimes uses evaluations
resulting from this effort as a consideration in the selection of brokers to
execute portfolio transactions.

The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent a Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise
be paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services
would be useful and of value to the Adviser in serving both a Fund and other
clients and, conversely, such services obtained by the placement of brokerage
business of other clients would be useful to the Adviser in carrying out its
obligations to the Fund. While such services are not expected to reduce the
expenses of the Adviser, the Adviser would, through use of the services, avoid
the additional expenses which would be incurred if it should attempt to develop
comparable information through its own staff.

In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for a Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as a Fund is concerned. In other cases, however, a Fund
believes that its ability to participate in volume transactions will produce
better executions for the Fund.

5. SHAREHOLDER SERVICES

Investment and Withdrawal Programs--Each Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.

Letter of Intent: If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares of a
Fund alone or in combination with shares of any class of MFS Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month period (or 36-month
period, in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus
the value of shares credited toward completion of the Letter of Intent do not
total the sum specified, he will pay the increased amount of the sales charge
as described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of a Fund pursuant to the Distribution
Investment

23
<PAGE>

Program will also not apply toward completion of the Letter of Intent.

Right of Accumulation: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level. See "Purchases" in the Prospectus for the sales charges on
quantity discounts. For example, if a shareholder owns shares with a current
offering price value of $37,500 and purchases an additional $12,500 of Class A
shares of a Fund, the sales charge for the $12,500 purchase would be at the
rate of 4.75% (the rate applicable to single transactions of $50,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.

Subsequent Investment by Telephone: Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing
Agent toll-free at (800) 225-2606. The minimum purchase amount is $50 and the
maximum purchase amount is $100,000. Shareholders wishing to avail themselves
of this telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will be
made. If a telephone purchase request is received by the Shareholder Servicing
agent on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify the
identity of the caller. The Shareholder Servicing agent will request personal
or other information from the caller, and will normally also record calls.
Shareholders should verify the accuracy of confirmation statements immediately
after their receipt.

Distribution Investment Program: Distributions of dividends and capital
gains made by a Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.

Systematic Withdrawal Plan: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in
the following order: (i) any "Reinvested Shares"; (ii) to the extent necessary,
any "Free Amount"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP, but will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of a Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of a Fund, change the payee or
change the dollar amount of each payment. The Shareholder

24
<PAGE>

Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by a Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice
in writing to the shareholder in the event that a Fund ceases to assume the
cost of these services. Each Fund may terminate any SWP for an account if the
value of the account falls below $5,000 as a result of share redemptions (other
than as a result of a SWP) or an exchange of shares of the Fund for shares of
another MFS Fund. Any SWP may be terminated at any time by either the
shareholder or the Fund.

Invest by Mail: Additional investments of $50 or more may be made at any
time by mailing a check payable to a Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.

Group Purchases: A bona fide group and all its members may be treated as
a single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment Adviser or other similar groups; and
(4) agrees to provide certification of membership of those members investing
money in the MFS Funds upon the request of MFD.

Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if available for sale). Under
the Automatic Exchange Plan, exchanges of at least $50 each may be made to up
to six different funds effective on the seventh day of each month or of every
third month, depending whether monthly or quarterly exchanges are elected by
the shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
transfer will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from
a shareholder's account in any MFS Fund, as long as the balance of the account
is sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.

No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the Funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing--signed by the
record owner(s) exactly as shares are registered; if by telephone--proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.

A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.

Reinstatement Privilege: Shareholders of each Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
shares of such funds are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange the acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must be
made within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then redeemed
within six

25
<PAGE>

years of the initial purchase in the case of Class B shares or 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in
the same fund may be considered a "wash sale" and may result in the inability
to recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.

Exchange Privilege--Subject to the requirements set forth below, some or all of
the shares of the same class in an account with a Fund for which payment has
been received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if purchaser is eligible to purchase the Class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by
the Shareholder Servicing Agent.

Each Exchange Request must be in proper form (i.e., if in writing--signed by
the record owner(s) exactly as the shares are registered; if by
telephone--proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred
retirement plan or other tax-exempt account. No more than five exchanges may be
made in any one Exchange Request by telephone. If the Exchange Request is
received by the Shareholder Servicing Agent prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by a Fund, and thus the purchase of shares
of the other MFS Fund, may be delayed for up to seven days if the Fund
determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to MFD by facsimile
subject to the requirements set forth above.

Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other fund and consider the differences
in objectives and policies before making any exchange. Shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of each Fund, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unitholders of
the MFS Fixed Fund have the right to exchange their units (except units
acquired through direct purchases) for shares of a Fund, subject to the
conditions, if any, imposed upon such unitholders by the MFS Fixed Fund.

Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws. The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations (see "Purchases" in the
Prospectus).

Tax-Deferred Retirement Plans--Shares of each Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available, through investment
dealers, plans and/or custody agreements for the following:

o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a Tax-deferred retirement program
and, if eligible, to receive a federal Income tax deduction for amounts
contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of public
School systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.

26
<PAGE>

charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.

An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.

Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code Section 401(a) or 403(b) if the
retirement plan and/or the sponsoring organization subscribe to the MFS
FUNDamental 401(k) Plan or another similar Section 401(a) or 403(b)
recordkeeping program made available by the Shareholder Servicing Agent.

6. TAX STATUS

Each Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because each Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that any Fund will be required to pay any federal income or
excise taxes, although a Fund's foreign-source income may be subject to foreign
withholding taxes. If a Fund should fail to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable
as ordinary dividend income to the shareholders.

Shareholders of each Fund normally will have to pay federal income taxes and
any state or local taxes on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions
from net short-term capital gains are taxable to shareholders as ordinary
income for federal income tax purposes, whether the distributions are paid in
cash or reinvested in additional shares. A portion of the ordinary income
dividends of the Strategic Value Fund, and the Small Cap Fund is normally
eligible for the dividends-received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular corporate shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax and may result in certain basis adjustments. Because
the Emerging Markets Debt Fund expects to earn primarily interest income, it is
expected that none of this Fund's dividends will qualify for the dividends
received deduction for corporations. Distributions of net capital gains (i.e.,
the excess of net long-term capital gains over net short-term capital losses),
whether paid in cash or reinvested in additional shares, are taxable to
shareholders as long-term capital gains for federal income tax purposes without
regard to the length of time shareholders have held their shares. Any Fund
dividend that is declared in October, November or December of any calendar
year, that is payable to shareholders of record in such a month, and that is
paid the following January will be treated as if received by the shareholders
on December 31 of the year in which the dividend is declared. Each Fund will
notify shareholders regarding the federal tax status of its distributions after
the end of each calendar year.

Any Fund distribution will have the effect of reducing the per share net asset
value of shares in a Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.

In general, any gain or loss realized upon a taxable disposition of shares of a
Fund by a shareholder that holds such shares as a capital asset will be treated
as a long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in a Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of a Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of that Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).

Each Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. An
investment in zero coupon bonds, deferred interest bonds, payment-in-kind
bonds, certain stripped securities, and certain securities purchased at a
market discount will cause that Fund to recognize income prior to the receipt
of cash payments with respect to those securities. In order to distribute this
income and avoid a tax on the Fund, the Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund.

Each Fund's transactions in options, Futures Contracts, Forward Contracts,
short sales "against the box," and swaps

27
<PAGE>

and related transactions will be subject to special tax rules that may affect
the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by a Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions
will be treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by a Fund that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute "straddles,"
and may be subject to special tax rules that would cause deferral of Fund
losses, adjustments in the holding periods of Fund securities and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles which could alter the effects of these rules. Each Fund will limit
its activities in options, Futures Contracts, Forward Contracts, and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.

Special tax considerations apply with respect to foreign investments of a Fund.
Foreign exchange gains or losses realized by a Fund will generally be treated
as ordinary income or losses. Use of foreign currencies for non-hedging
purposes and investment by the Funds in certain "passive foreign investment
companies" may be limited in order to avoid imposition of a tax on the Funds. A
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund,
the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold.

Investment income received by a Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Strategic Value Fund and the
Small Cap Fund do not expect to be able to pass through to their shareholders
foreign tax credits with respect to foreign income taxes paid by the Funds. The
United States has entered into tax treaties with many foreign countries that
may entitle a Fund to a reduced rate of tax or an exemption from tax on such
income; each Fund intends to qualify for treaty reduced rates where available.
It is not possible, however, to determine a Fund's effective rate of foreign
tax in advance since the amount of the Fund's assets to be invested within
various countries is not known. If the Emerging Markets Debt Fund holds more
than 50% of its assets in foreign stock and securities at the close of its
taxable year, the Fund may elect to "pass through" to the Fund's shareholders
foreign income taxes paid. If this Fund so elects, shareholders will be
required to treat their pro rata portions of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be allowed to claim a deduction or credit
(but not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would (subject
to such limitations) be able to claim a credit but not a deduction. No
deduction for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Emerging Markets Debt Fund does not
qualify or elect to "pass through" to the Fund's shareholders foreign income
taxes paid by it, shareholders will not be able to claim any deduction or
credit for any part of the foreign taxes paid by the Fund.

Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. Each Fund intends
to withhold U.S. federal income tax payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from a Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. Each Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.

A Fund will not be required to pay Massachusetts income or excise taxes as long
as it qualifies as a regulated investment company under the Code.

Distributions of a Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. Each Fund intends to
advise shareholders of the extent, if any, to which its distributions consist
of such interest. Shareholders are urged to consult their tax advisers
regarding the possible exclusion of such portion of their dividends for state
and local income tax purposes as well as regarding the tax consequences of an
investment in a Fund.

7. DISTRIBUTION PLAN

The Trustees have adopted a Distribution Plan for each Fund (the "Distribution
Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Rule") after having concluded that there is a reasonable likelihood that the
Distribution Plan would benefit each Fund and each respective class of
shareholders. The provisions of the Distribution Plan are severable with
respect to each Class of shares offered by each Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of each Fund. Such
an increase may reduce the expense ratio to the extent a Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net

28
<PAGE>

assets may lessen the adverse effect that could result were a Fund required to
liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of a Fund will increase or that the other
benefits referred to above will be realized.

The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.

SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer or record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from a Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.

With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.

DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to a Fund.
MFD pays commissions to dealers as well as expenses of printing prospectuses
and reports used for sales purposes, expenses with respect to the preparation
and printing of sales literature and other distribution related expenses,
including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.

GENERAL: The Distribution Plan will remain in effect until August 1, 1999, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements
relating to any of the Distribution Plan entered into between the Fund or MFD
and other organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under the
Distribution Plan must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of a Fund's shares. The
Distribution Plan may not be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment Restrictions")
or may not be materially amended in any case without a vote of the Trustees and
a majority of the Distribution Plan Qualified Trustees. The selection and
nomination of Distribution Plan Qualified Trustees shall be committed to the
discretion of the non-interested Trustees then in office. No Trustee who is not
an "interested person" has any financial interest in the Distribution Plan or
in any related agreement.

8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE

Net Asset Value: The net asset value per share of each class of each Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in a Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the Nasdaq stock market for unlisted
national market issues, or at the last quoted bid price for listed securities
in which there were no sales during the day or for unlisted securities not
reported on the Nasdaq stock market. Bonds and other fixed income securities
(other than short-term obligations) of U.S. issuers in a Fund's portfolio are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data without exclusive reliance

29
<PAGE>

upon quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Forward Contracts will be valued using a pricing model taking into
consideration market data from an external pricing source. Use of the pricing
services has been approved by the Board of Trustees. All other securities,
futures contracts and options in a Fund's portfolio (other than short-term
obligations) for which the principal market is one or more securities or
commodities exchanges (whether domestic or foreign) will be valued at the last
reported sale price or at the settlement price prior to the determination (or
if there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq stock
market, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations
in a Fund's portfolio are valued at amortized cost, which constitutes fair
value as determined by the Board of Trustees. Short-term obligations with a
remaining maturity in excess of 60 days will be valued upon dealer supplied
valuations. Portfolio investments for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.

Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of a Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.

All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD prior to
the close of that business day.

PERFORMANCE INFORMATION

Total Rate of Return: Each Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment of
$1,000 (made with all distributions reinvested and reflecting the CDSC or the
maximum public offering price) to reach the value of that investment at the end
of the periods. Each Fund may also calculate (i) a total rate of return, which
is not reduced by the CDSC (4% maximum for Class B shares and 1% maximum for
Class C shares) and therefore may result in a higher rate of return, (ii) a
total rate of return assuming an initial account value of $1,000, which will
result in a higher rate of return since the value of the initial account will
not be reduced by the sales charge (5.75% maximum with respect to Class A
shares) and/or (iii) a total rate of return which represents aggregate
performance over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC.

Each Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the "class inception
date"). The calculation of total rate of return for a class of shares which has
a later inception date than another class of shares of a Fund is based both on
(i) the performance of the Fund's newer class from its inception date and (ii)
the performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.

As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of a Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable
to Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would
have been quoted had the newer class of shares been outstanding for the entire
period over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the oldest
class, and the total rate of return quoted for the newer class will be lower
than the return that would be quoted had the newer class of shares been
outstanding for this entire period if the class specific expenses for the newer
class are lower than the class specific expenses of the oldest class).

Total rate of return quotations for each Fund are presented in Appendix A
attached hereto.

Total rate of return figures would have been lower if fee reductions were not
in place. These figures are not calculated on an annualized basis. The
aggregate total return represents a limited time frame and may not be
indicative of future performance.

Yield: Any yield quotation for a class of shares of a Fund is based on the
annualized net investment income per share of that class for the 30-day period.
The yield for each class of the Fund is calculated by dividing the net
investment

30
<PAGE>

income allocated to that class earned during the period by the maximum offering
price per share of that class of the Fund on the last day of the period. The
resulting figure is then annualized. Net investment income per share of a class
is determined by dividing (i) the dividends and interest allocated to that
class during the period, minus accrued expense of that class for the period by
(ii) the average number of shares of the class entitled to receive dividends
during the period multiplied by the maximum offering price per share on the
last day of the period. The Fund's yield calculations assume a maximum sales
charge of 4.75% in the case of Class A shares and no payment of any CDSC in the
case of Class B and Class C shares.

General: From time to time each Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions
and Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson
Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates,
Media General, Investment Company Data, The New York Times, Your Money,
Strangers Investment Advisor, Financial Planning on Wall Street, Standard and
Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon
K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. Each Fund may
also quote evaluations mentioned in independent radio or television broadcasts
and use charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. Each Fund may
advertise examples of the effects of periodic investment plans, including the
principle of dollar cost averaging. In such a program, an investor invests a
fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer
shares when prices are high and more shares when prices are low. While such a
strategy does not assure a profit or guard against a loss in a declining
market, the investor's average cost per share can be lower than if fixed
numbers of shares are purchased at the same intervals.

From time to time, each Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.

The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.

The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund categories
established by Morningstar (or other nationally recognized statistical ratings
organizations) and to other MFS Funds.

From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planningsm program, an intergenerational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
other similar or related matters.

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<PAGE>

shares when prices are low. While such a strategy does not assure a profit or
guard against a loss in a declining market, the investor's average cost per
share can be lower than if fixed numbers of shares are purchased at the same
intervals.

From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts over
specified periods, with capital gain and dividend distributions invested in
additional shares or taken in cash, and with no adjustment for any income taxes
(if applicable) payable by shareholders.

MFS Firsts: MFS has a long history of innovations.

<TABLE>
<S> <C>
1924 Massachusetts Investors Trust is established as
the first open-end mutual fund in America.

1924 Massachusetts Investors Trust is the first mutual
fund to make full public disclosure of its
operations in shareholder reports.

1932 One of the first internal research departments is
established to provide in-house analytical
capability for an investment management firm.

1933 Massachusetts Investors Trust is the first mutual
fund to register under the Securities Act of 1933
("Truth in Securities Act" or "Full Disclosure Act").

1936 Massachusetts Investors Trust is the first mutual
fund to allow shareholders to take capital gain
distributions either in additional shares or in cash.

1976 MFS[RegTM] Municipal Bond Fund is among the first
municipal bond funds established.

1979 Spectrum becomes the first combination fixed/
variable annuity with no initial sales charge.

1981 MFS[RegTM] Global Governments Fund is established
as America's first globally diversified fixed-
income mutual fund.

1984 MFS[RegTM] Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free
income from lower-rated municipal securities.

1986 MFS[RegTM] Managed Sectors Fund becomes the first
mutual fund to target and shift investments
among industry sectors for shareholders.

1986 MFS[RegTM] Municipal Income Trust is the first closed-
end, high-yield municipal bond fund traded on
the New York Stock Exchange.

1987 MFS[RegTM] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed
on the New York Stock Exchange.

1989 MFS[RegTM] Regatta becomes America's first non-
qualified market value adjusted fixed/variable
annuity.

1990 MFS[RegTM] Global Total Return Fund is the first
global balanced fund.

1993 MFS[RegTM] Global Growth Fund is the first global
emerging markets fund to offer the expertise of
two sub-advisers.

</TABLE>
<TABLE>
<S> <C>
1993 MFS[RegTM] becomes money manager of MFS[RegTM] Union
Standard[RegTM] Equity Fund, the first Fund to invest
solely in companies deemed to be union-friendly
by an advisory board of senior labor officials,
senior managers of companies with significant
labor contracts, academics and other national
labor leaders or experts.
</TABLE>

9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of each Fund and four other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each Fund and three of the Trust's other series
(Class A, Class B, Class C and Class I shares) as well as Class A, B and I
shares for one of the Trust's other series. Each share of a class of a Fund
represents an equal proportionate interest in the assets of the Fund allocable
to that class. Upon liquidation of a Fund, shareholders of each class of the
Fund are entitled to share pro rata in the Fund's net assets allocable to such
class available for distribution to shareholders. The Trust reserves the right
to create and issue a number of series and additional classes of shares, in
which case the shares of each class of a series would participate equally in
the earnings, dividends and assets allocable to that class of the particular
series.

Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
the Declaration of Trust provides that a Trustee may be removed from office at
a meeting of shareholders by a vote of two-thirds of the outstanding shares of
the Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
Trust's outstanding shares (as defined in "Investment Restrictions"). The Trust
or any series of the Trust may be terminated (i) upon the merger or
consolidation of the Trust or any series of the Trust with another organization
or upon the sale of all or substantially all of its assets (or all or
substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's or the
affected series' outstanding shares voting as a single class, or of the
affected series of the Trust, except that if the Trustees recommend such
merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares will be
sufficient, or (ii) upon liquidation and distribution of the assets of a Fund,
if

32
<PAGE>

approved by the vote of the holders of two-thirds of its outstanding shares of
the Trust, or (iii) by the Trustees by written notice to its shareholders. If
not so terminated, the Trust will continue indefinitely.

The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust and its shareholders and the Trustees,
officers, employees and agents of the Trust covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.

The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.

10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS

Ernst & Young LLP are each Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the SEC.

The Portfolios of Investments and the Statements of Assets and Liabilities at
July 31, 1998, the Statements of Operations for the period ended July 31, 1998,
the Statements of Changes in Net Assets for the period ended July 31, 1998, the
Notes to Financial Statements and the Report of Independent Auditors, each of
which is included in the Annual Report to shareholders of the Funds, are
incorporated by reference into this SAI in reliance upon the report of Ernst &
Young LLP, independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this SAI.

33
<PAGE>

APPENDIX A

PERFORMANCE INFORMATION

The performance quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value" in the SAI.

All performance quotations are as of July 31, 1998

<TABLE>
<CAPTION>
Aggregate Total Returns(1) Current
Life of Fund(2) Distribution Rate(3)
---------------------------- ---------------------
<S> <C> <C>
MFS Strategic Value Fund
Class A Shares with sales charge 0.56% N/A
Class A Shares without sales charge 6.70% N/A
Class I Shares 6.50% N/A
MFS Small Cap Value
Class A Shares with sales charge -5.66% N/A
Class A Shares without sales charge 0.10% N/A
Class I Shares 0.10% N/A
MFS Emerging Markets Debt Fund
Class A Shares with sales charge -9.71% 0%
Class A Shares without sales charge -4.20% 0%
Class I Shares -4.20% 0%
</TABLE>

Class B and Class C shares were not available for sale during the period.

- -----------
(1) Total rate of return figures would have been lower if certain fee waivers
were not in place.

(2) Aggregate total return from inception of Class A and Class I shares on
March 17, 1998.

(3) Annualized based on last distribution.

A-1
<PAGE>

Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000

Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000

Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110

Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906

Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116

MFS[RegTM] Strategic Value Fund
MFS[RegTM] Small Cap Value Fund
MFS[RegTM] Emerging Markets Debt Fund

500 BOYLSTON STREET,
BOSTON, MA 02116

[MFS LOGO](R)

<PAGE>

PART C

Item 24 Financial Statements and Exhibits

MFS Government Mortgage Fund

(a) Financial Statements Included in Part A:

For the six years ended November 30, 1993, for the period from
November 30, 1993 to July 31, 1994 and for the four years ended
July 31, 1998:
Financial Highlights

Financial Statements Included in Part B:

At July 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*

For the year ended July 31, 1998:
Statement of Operations*

For the two years ended July 31, 1998:
Statement of Changes in Net Assets*

MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund

(a) Financial Statements Included in Part A:

For the period from the commencement of
investment operations, March 17, 1998 to July
31, 1998:
Financial Highlights

Financial Statements Included in Part B:

At July 31, 1998:
Portfolio of Investments**
Statement of Assets and Liabilities**

For the period ended July 31, 1998:
Statement of Operations**
Statement of Changes in Net Assets**

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

* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated July 31, 1998, filed with the SEC via EDGAR on September 23, 1998.
** Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated July 31, 1998, filed with the SEC via EDGAR on September 25, 1998.

<PAGE>

(b) Exhibits

1 (a) Amended and Restated Declaration of Trust,
dated January 19, 1995. (3)

(b) Amendment to the Declaration of Trust dated June 2, 1995
to change the name of the Trust and for the establishment
and designation of series and classes. (4)

(d) Amendment to the Declaration of Trust Designation of Class
P shares, dated June 20, 1996. (10)

(e) Amendment to Declaration of Trust, dated December 19, 1996
to redesignate Class P shares as Class I shares. (15)

(f) Amendment to Declaration of Trust - Redesignation of
Series dated September 19, 1997. (17)

(g) Amendment to Declaration of Trust Establishment and
Designation of Series and Classes, dated January 14, 1998.
(20)

(h) Amendment to Declaration of Trust (for termination of
series) dated March 16, 1998. (24)

2 Amended and Restated By-Laws, dated May 15, 1996. (18)

3 Not Applicable.

4 Form of Share Certificate for Classes of Shares. (9)

5 (a) Investment Advisory Agreement for MFS Government Mortgage
Fund, dated December 19, 1985. (7)

(b) Amendment to Investment Advisory Agreement for MFS
Government Mortgage Fund, dated January 1, 1996. (7)

(c) Investment Advisory Agreement for MFS Series Trust X (the
"Trust") on behalf of MFS/Foreign & Colonial International
Growth Fund, dated September 1, 1995. (7)

(d) Investment Advisory Agreement for the Trust on behalf of
MFS/Foreign & Colonial International Growth and Income
Fund, dated September 1, 1995. (7)

<PAGE>

(e) Investment Advisory Agreement for the Trust on behalf of
MFS/Foreign & Colonial Emerging Markets Equity Fund, dated
September 1, 1995. (7)

(f) Investment Advisory Agreement for the Trust on behalf of
MFS Strategic Value Fund, dated March 16, 1998. (24)

(g) Investment Advisory Agreement for the Trust on behalf of
MFS Small Cap Value Fund, dated March 16, 1998. (24)

(h) Investment Advisory Agreement for the Trust on behalf of
MFS Emerging Markets Debt Fund, dated March 16, 1998. (24)

(i) Sub-Advisory Agreement between Massachusetts Financial
Services Company (the "Adviser" or "MFS") and Foreign &
Colonial Management Ltd. (the "Sub-Adviser") with respect
to MFS/Foreign & Colonial International Growth Fund, dated
September 1, 1995. (7)

(j) Sub-Advisory Agreement between the Adviser and the
Sub-Adviser with respect to MFS/Foreign & Colonial
Emerging Markets Equity Fund, dated September 1, 1995. (7)

(k) Sub-Advisory Agreement between the Sub-Adviser and Foreign
& Colonial Emerging Markets Limited ("FCEM") with respect
to the MFS/Foreign & Colonial International Growth Fund,
dated September 1, 1995. (7)

(l) Sub-Advisory Agreement between the Sub-Adviser and FCEM
with respect to the MFS/Foreign & Colonial Emerging
Markets Equity Fund, dated September 1, 1995. (7)

6 (a) Distribution Agreement between MFS Series Trust X and
MFS Fund Distributors, Inc., dated September 1, 1995. (7)

(b) Dealer Agreement between MFS Funds Distributors, Inc. and
a dealer, dated December 28, 1994 and the Mutual Funds
Agreement between MFD and a bank or NASD affiliate, as
amended on April 11, 1997. (14)

7 Retirement Plan for Non-Interested Person Trustees, dated
January 1, 1991. (7)

8 (a) Custodian Agreement, dated February 19, 1988. (7)

<PAGE>

(b) Amendment No. 1 to Custodian Agreement, dated February 29,
1988. (7)

(d) Amendment No. 3 to Custodian Agreement, dated September
17, 1991. (7)

9 (a) Shareholder Servicing Agent Agreement, dated September 1,
1995. (7)

(b) Amendment to Shareholder Servicing Agent Agreement to
amend Fee Schedule, dated January 1, 1998. (20)

(d) Loan Agreement by and among the Banks named therein, the
MFS Funds named therein, and the First National Bank of
Boston dated as of February 21, 1995. (2)

(e) Third Amendment dated February 14, 1997 to Loan Agreement
dated February 21, 1995 by and among the Banks named
therein and The First National Bank of Boston. (11)

(f) Dividend Disbursing Agency Agreement, dated February 1,
1986. (5)

(g) Master Administrative Services Agreement, dated March 1,
1998, as amended. (22)

10 Opinion and Consent of Counsel dated November 20, 1998;
filed herewith.

11 (a) Consent of Ernst & Young, LLP on behalf of MFS/Foreign
and Colonial International Emerging Markets Equity Fund,
MFS International Growth Fund and MFS International Growth
and Income Fund. (24)

(b) Consent of Deloitte & Touche, LLP on behalf of MFS
Government Mortgage Fund; filed herewith.

(c) Consent of Ernst & Young, LLP on behalf of MFS Strategic
Value Fund, MFS Small Cap Fund and MFS Emerging Markets
Debt Fund; filed herewith.

12 Not Applicable.

<PAGE>

13 Investment Representation Letter for MFS Government
Mortgage Fund. (7)

14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (6)

(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (6)

(d) Forms for Roth Individual Retirement Account Disclosure
Statement and Trust Agreement as currently in effect. (19)

15 (a) Master Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940, effective January 1,
1997. (13)

(b) Exhibits as revised October 21, 1998 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those exhibits
to the Master Distribution Plan contained in Exhibit 15(a)
above. (25)

16 Schedule for Computation of Performance Quotations -
Average Annual Total Rate of Return, Aggregate Total Rate
of Return, Standardized Yield and Distribution Rate. (1)

17 Financial Data Schedules for each class of MFS Government
Mortgage Fund, MFS Strategic Value Fund, MFS Small Cap
Value Fund and MFS Emerging Markets Debt Fund;
filed herewith.

18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940 effective September 6, 1996, as
amended and restated (Exhibit A dated May 27, 1998). (21)

<PAGE>

Power of Attorney, dated September 21, 1994. (3)
Power of Attorney, dated February 19, 1998. (20)

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

(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.

(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.

(3) Incorporated by reference to Post-Effective Amendment No. 11 filed with the
SEC via EDGAR on March 30, 1995.

(4) Incorporated by reference to Post-Effective Amendment No. 12 filed with the
SEC via EDGAR on June 16, 1995.

(5) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.

(6) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.

(7) Incorporated by reference to Post-Effective Amendment No. 13 filed with the
SEC via EDGAR on November 28, 1995.

(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 15
filed with the SEC via EDGAR on May 28, 1996.

(9) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on
August 27, 1996.

(10) Incorporated by reference to Registrant's Post-Effective Amendment No. 16
filed with the SEC via EDGAR on August 29, 1996.

(11) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.

(12) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19 filed with the SEC via EDGAR
on March 18, 1997.

(13) Incorporated by reference to MFS Series Trust IV (File Nos. 33-7638 and
811-2594) Post-Effective Amendment No. 30 filed with the SEC via EDGAR on
December 29, 1996.

(14) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.

(15) Incorporated by reference to Registrant's Post-Effective Amendment No. 20
filed with the SEC via EDGAR on July 29, 1997.

(16) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC on October 29, 1997.

(17) Incorporated by reference to Registrant's Post-Effective Amendment No. 20
filed with the SEC via EDGAR on November 26, 1997.

(18) Incorporated by reference to Registrant's Post-Effective Amendment No. 21
filed with the SEC via EDGAR on December 30, 1997.

(19) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and
811-5262) Post-Effective Amendment No. 14 filed with the SEC via EDGAR on
February 26, 1998.

(20) Incorporated by reference to Registrant's Post-Effective Amendment No. 22
filed with the SEC via EDGAR on March 13, 1998.

(21) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.

(22) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.

(23) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
September 17, 1998.

(24) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
filed with the SEC via EDGAR on September 25, 1998.

(25) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 36 filed with the SEC via EDGAR on
October 15, 1998.

<PAGE>

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

Not Applicable.

Item 26. Number of Holders of Securities
-------------------------------

Not Required.

Item 27. Indemnification
---------------

Reference is hereby made to (a) Article V of the Registrant's
Declaration of Trust, incorporated by reference to the Registrant's
Post-Effective Amendment No. 11, filed with the SEC via EDGAR on March 30, 1995;
and (b) Section 9 of the Shareholder Servicing Agent Agreement, filed with the
Registrant's Post-Effective Amendment No. 13 with the SEC via EDGAR on November
28, 1995.

The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.

Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------

MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has four series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund, MFS
Intermediate Income Fund and MFS Charter Income Fund), MFS Series Trust III
(which has three series: MFS High Income Fund, MFS Municipal High Income Fund
and MFS High Yield Opportunities Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has five
series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund and MFS
International Value Fund), MFS Series Trust VI (which has three series: MFS
Global Total Return Fund, MFS Utilities Fund and MFS Global Equity Fund), MFS
Series Trust VII (which has two series: MFS Global Governments Fund and MFS
Capital Opportunities Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS Global Growth Fund), MFS Series Trust IX (which
has five series: MFS Bond Fund, MFS Limited Maturity Fund, MFS Municipal Limited
Maturity Fund, MFS Research Bond Fund and MFS Intermediate Investment Grade Bond
Fund), MFS Series Trust X (which has seven series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial

<PAGE>

Emerging Markets Equity Fund, MFS International Growth Fund, MFS International
Growth and Income Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has four series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex U.S. All Cap Fund and
Vertex Contrarian Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.

MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has ten series) and MFS Variable
Insurance Trust ("MVI") (which has thirteen series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.

In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.

Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.

Vertex Investment Management, Inc., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.

MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth

<PAGE>

Fund, Global Equity Fund, European Equity Fund and European Corporate Bond Fund)
(the "MIL Funds"). The MIL Funds are organized in Luxembourg and qualify as an
undertaking for collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.

MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS
Meridian Research International Fund (collectively the "MFS Meridian Funds").
Each of the MFS Meridian Funds is organized as an exempt company under the laws
of the Cayman Islands. The principal business address of each of the MFS
Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands, British West
Indies.

MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.

MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.

MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve
primarily as a holding company.

MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.

MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.

MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.

<PAGE>

MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.

Massachusetts Investment Management Co., Ltd. (MIMCO), a wholly owned
subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose address
is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.

MIMCO

Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.

MFS

The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman and
Chief Executive Officer, Mr. Ballen is President and Chief Investment Officer,
Mr. Arnold Scott is a Senior Executive Vice President and Secretary, Mr. William
Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice Presidents
(Mr. Parke is also Chief Equity Officer), Stephen E. Cavan is a Senior Vice
President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.

Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund

Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.

MFS Series Trust II

Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.

<PAGE>

Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.

MFS Government Markets Income Trust
MFS Intermediate Income Trust

Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.

MFS Series Trust III

James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior
Vice Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.

MFS Series Trust IV
MFS Series Trust IX

Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.

MFS Series Trust VII

Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.

MFS Series Trust VIII

Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.

MFS Municipal Series Trust

Robert A. Dennis is Vice President, Geoffrey L. Schechter, Vice
President of MFS, is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.

<PAGE>

MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust

Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.

MFS Municipal Income Trust

Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.

MFS Multimarket Income Trust
MFS Charter Income Trust

Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.

MFS Special Value Trust

MFS/Sun Life Series Trust

John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.

Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account

John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr. is the Assistant Secretary.

<PAGE>

MIL Funds

Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.

MFS Meridian Funds

Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr. is
the Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers.

Vertex

Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.

MIL

Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey
L. Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.

MIL-UK

Peter D. Laird is President and a Director, Thomas J. Cashman, Arnold
D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.

MFSI - Australia

Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.

<PAGE>

MFS Holdings - Australia

Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.

MFD

Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.

MFSC

Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.

MFSI

Thomas J. Cashman, Jr., Jeffrey L. Shames, and Arnold D. Scott are
Directors, Joseph J. Trainor is the President and a Director, Leslie J. Nanberg
is a Senior Vice President, a Managing Director and a Director, Kevin R. Parke
is the Executive Vice President and a Managing Director, George F. Bennett, Jr.,
John A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are
Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is
the Secretary.

RSI

Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.

In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:

Donald A. Stewart President and a Director, Sun
Life Assurance Company of
Canada, Sun Life Centre, 150
King Street West, Toronto,
Ontario, Canada (Mr. Stewart
is also an officer and/or
Director of various
subsidiaries and affiliates of
Sun Life)

<PAGE>

John D. McNeil Chairman, Sun Life Assurance
Company of Canada, Sun Life
Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr.
McNeil is also an officer
and/or Director of various
subsidiaries and affiliates of
Sun Life)

Joseph W. Dello Russo Director of Mutual Fund
Operations, The Boston
Company, Exchange Place,
Boston, Massachusetts (until
August, 1994)

Item 29. Distributors
- -------- ------------

(a) Reference is hereby made to Item 28 above.

(b) Reference is hereby made to Item 28 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.

Item 30. Location of Accounts and Records
- -------- --------------------------------

The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant at the following locations:

NAME ADDRESS
---- -------

Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116

MFS Funds Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116

State Street Bank and Trust Company State Street South
(custodian) 5 - West
North Quincy, MA 02171

MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116

Item 31. Management Services
- -------- -------------------

Not Applicable.

Item 32. Undertakings
- -------- ------------

(a) Not applicable.

<PAGE>

(b) Not applicable.

(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of its latest annual report to shareholders upon
request and without charge.

(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 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 trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or 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>

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 the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 20th day of November, 1998.

MFS SERIES TRUST X

By: /s/ JAMES R. BORDEWICK, JR.
---------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on November 20, 1998.

SIGNATURE TITLE
--------- -----
<S> <C>
STEPHEN E. CAVAN* Principal Executive Officer
- -----------------------------
Stephen E. Cavan

W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ----------------------------- and Principal Accounting Officer)
W. Thomas London

RICHARD B. BAILEY* Trustee
- -----------------------------
Richard B. Bailey

PETER G. HARWOOD* Trustee
- -----------------------------
Peter G. Harwood

J. ATWOOD IVES* Trustee
- -----------------------------
J. Atwood Ives

LAWRENCE T. PERERA* Trustee
- -----------------------------
Lawrence T. Perera
</TABLE>

<PAGE>

WILLIAM J. POORVU* Trustee
- -----------------------------
William J. Poorvu

CHARLES W. SCHMIDT* Trustee
- -----------------------------
Charles W. Schmidt

ARNOLD D. SCOTT* Trustee
- -----------------------------
Arnold D. Scott

JEFFREY L. SHAMES* Trustee
- -----------------------------
Jeffrey L. Shames

ELAINE R. SMITH* Trustee
- -----------------------------
Elaine R. Smith

DAVID B. STONE* Trustee
- -----------------------------
David B. Stone

*By: /s/ JAMES R. BORDEWICK, JR.
---------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact

Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to (i) a Power of Attorney dated
September 21, 1994, incorporated
by reference to the Registrant's
Post-Effective Amendment No. 11
filed with the Securities and
Exchange Commission via EDGAR
on March 30, 1995 and (ii) a
Power of Attorney dated February 19,
1998, incorporated by reference to
the Registrant's Post-Effective
Amendment No. 22 filed with the
Securities and Exchange Commission
via EDGAR on March 13, 1998.

<PAGE>

INDEX TO EXHIBITS
-----------------

EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
10 Opinion and Consent of Counsel dated November 20, 1998.

11 (b) Consent of Deloitte & Touche, LLP on behalf of MFS
Government Mortgage Fund.

(c) Consent of Ernst & Young, LLP on behalf of
MFS Strategic Value Fund, MFS Small Cap
Fund and MFS Emerging Markets
Debt Fund.

17 (a) Financial Data Schedules for each class of MFS Government
Mortgage Fund, MFS Strategic Value Fund, MFS Small Cap
Value Fund and MFS Emerging Markets Debt Fund.

</TABLE>

EXHIBIT NO. 99.B10

MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street, Boston, Massachusetts 02116-3741
617-954-5182/facsimile 617-954-7760 [email protected]

JAMES R. BORDEWICK, JR.
Senior Vice President and
Associate General Counsel

November 20, 1998

MFS Series Trust X
500 Boylston Street
Boston, MA 02116

Gentlemen:

I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Series Trust X (the "Trust"), and the Assistant Secretary of the Trust. I am
admitted to practice law in The Commonwealth of Massachusetts. The Trust was
created under a written Declaration of Trust dated January 19, 1995, as amended
and restated, executed and delivered in Boston, Massachusetts (the "Declaration
of Trust"). The beneficial interest thereunder is represented by transferable
shares without par value. The Trustees have the powers set forth in the
Declaration of Trust, subject to the terms, provisions and conditions therein
provided.

I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.

Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.

<PAGE>

MFS Series Trust X
Page Two
November 20, 1998

By vote adopted on January 18, 1995, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale.

The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933.

I am of the opinion that all necessary Trust action precedent to the
issue of all the authorized but unissued shares of beneficial interest of the
Trust, including the Shares, has been duly taken, and that all the Shares were
legally and validly issued, and when sold, will be fully paid and
non-assessable, assuming the receipt by the Trust of the cash consideration
therefor in accordance with the terms of the January 18, 1995 vote of the
Trustees, described above, except as described below. I express no opinion as to
compliance with the Securities Act of 1933, the Investment Company Act of 1940,
or applicable state "Blue Sky" or securities laws in connection with the sale of
the Shares.

The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of the Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.

I consent to your filing this opinion with the Securities and Exchange
Commission.

Very truly yours,

/s/ JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.

EXHIBIT NO. 99.11(b)

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Post-Effective
Amendment No. 24 to Registration Statement No. 33-1657 of MFS Series Trust X on
our report dated September 11, 1998 appearing in the annual report to
shareholders for the year ended July 31, 1998 of MFS Government Mortgage Fund, a
series of MFS Series Trust X, and to the references to us under the headings
"Condensed Financial Information" in the Prospectus, and "Independent Auditors
and Financial Statements" in the Statement of Additional Information, both of
which are part of such Registration Statement.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP

Boston, Massachusetts
November 23, 1998

EXHIBIT NO. 99.11(c)

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference made to our firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No. 24 to
Registration Statement No. 33-1657 on Form N-1A of our reports dated September
8, 1998, on the financial statements and financial highlights of MFS Strategic
Value Fund, MFS Small Cap Value Fund and MFS Emerging Markets Debt Fund included
in the 1998 Annual Report to Shareholders.

/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP

Boston, Massachusetts
November 23, 1998

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<OVERDISTRIBUTION-GAINS> (3546)
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</TABLE>

<ARTICLE> 6
<CIK> 0000783740
<NAME> SERIES TRUST X
<SERIES>
<NUMBER> 022
<NAME> EMERGING MARKETS DEBT FUND CLASS I
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<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000783740
<NAME> MFS SMALL CAP VALUE FUND-CLASS A
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<NUMBER> 031
<NAME> MFS SERIES TRUST X
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<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000783740
<NAME> MFS SMALL CAP VALUE FUND-CLASS I
<SERIES>
<NUMBER> 032
<NAME> MFS SERIES TRUST X
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<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000783740
<NAME> MFS SERIES TRUST X
<SERIES>
<NUMBER> 042
<NAME> MFS STRATEGIC VALUE FUND I
<MULTIPLIER> 1

<S> <C>
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</TABLE>

<ARTICLE> 6
<CIK> 0000783740
<NAME> MFS SERIES TRUST X
<SERIES>
<NUMBER> 041
<NAME> MFS STRATEGIC VALUE FUND A
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<S> <C>
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</TABLE>