STEIN ROE INCOME TRUST, 497, 1996-11-01

STEIN ROE INCOME TRUST
497, 1996-11-01

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Rule 497(e)
File No. 33-02633
<PAGE>

CASH RESERVES FUND. The Fund seeks to obtain maximum current
income consistent with capital preservation and maintenance of
liquidity. The Fund invests solely in money market instruments
maturing in thirteen months or less from the time of investment.

GOVERNMENT RESERVES FUND. The Fund seeks to obtain maximum
current income consistent with safety of capital and maintenance
of liquidity. The Fund invests in U.S. Government Securities
maturing in thirteen months or less from the date of purchase and
repurchase agreements for U.S. Government Securities regardless of
the maturities of such securities. U.S. Government Securities
include securities issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities.

Each Fund is a "no-load" money market fund and attempts to
maintain its net asset value at $1.00 per share. SHARES OF THE
FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT
AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.

There are no sales or redemption charges, and the Funds have no
12b-1 plans. The Funds are series of the STEIN ROE INCOME TRUST.

This prospectus contains information you should know before
investing in the Funds. Please read it carefully and retain it
for future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. This
prospectus is available electronically by using Stein Roe's
Internet address: http://www.steinroe.com. You can get a free
paper copy of the prospectus, the Statement of Additional
Information, and the most recent financial statements by calling
800-338-2550 or by writing to Stein Roe Funds, Suite 3200, One
South Wacker Drive, Chicago, Illinois 60606.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is November 1, 1996.

<PAGE>

TABLE OF CONTENTS
Page
Summary .........................2
Fee Table .......................4
Financial Highlights.............5
The Funds........................8
How the Funds Invest ............9
Cash Reserves.................9
Government Reserves..........10
Restrictions on the Funds'
Investments ..................11
Risks and Investment Con-
siderations ..................12
How to Purchase Shares..........14
By Check ....................14
By Wire......................15
By Electronic Transfer ......15
By Exchange .................16
Conditions of Purchase ......16
Purchases Through Third
Parties......................16
Purchase Price and Effective
Date ......................17
How to Redeem Shares ...........17
By Written Request ..........17
By Exchange..................18
Special Redemption
Privileges ...............18
General Redemption Policies..20
Shareholder Services............22
Net Asset Value.................24
Distributions and Income Taxes..25
Management of the Funds.........26
Organization and Description
of Shares ...................28
Certificate of Authorization ...29

SUMMARY

Stein Roe Government Reserves Fund ("Government Reserves") and
Stein Roe Cash Reserves Fund ("Cash Reserves") are series of the
Stein Roe Income Trust, an open-end diversified management
investment company organized as a Massachusetts business trust.
The Funds are "no-load" funds--there are no sales or redemption
charges. (See The Funds and Organization and Description of
Shares.) This prospectus is not a solicitation in any
jurisdiction in which shares of the Funds are not qualified for
sale.

NET ASSET VALUE. Each Fund attempts to maintain its price per
share at $1.00. There is no assurance that the Funds will always
be able to do so. (See Net Asset Value.)

INVESTMENT OBJECTIVES AND POLICIES. Each Fund is a money market
fund with the objective of seeking maximum current income
consistent with safety of capital and maintenance of liquidity.
Government Reserves pursues its objective by investing in U.S.
Government Securities maturing in thirteen months or less from the
date of purchase and repurchase agreements for U.S. Government
Securities (regardless of the maturities of such securities).
U.S. Government Securities include securities issued or guaranteed
by the U.S. Government or by its agencies or instrumentalities.
Cash Reserves pursues its objective by investing in a wide range
of high-quality U.S. dollar-denominated money market instruments
maturing in thirteen months or less from the date of purchase.
Under normal market conditions, Cash Reserves will invest at least
25% of its total assets in securities of issuers in the financial
services industry. The securities in which Cash Reserves may
invest generally yield more than the securities in which
Government Reserves may invest. (See How the Funds Invest.)

INVESTMENT RISKS. Cash Reserves' policy of normally investing at
least 25% of its assets in securities of issuers in the financial
services industry may cause the Fund to be more adversely affected
by changes in market or economic conditions and other
circumstances affecting the financial services industry. In
addition, since Cash Reserves' investment policy permits it to
invest in securities of foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign banks and their foreign
branches, such as negotiable certificates of deposit (Eurodollar
CDs), and securities of foreign governments, investment in that
Fund might involve risks that are different in some respects from
an investment in a fund that invests only in debt obligations of
U.S. domestic issuers. Because Government Reserves' investment
policy permits it to invest in U.S. Government Securities that are
not backed by the full faith and credit of the U.S. Treasury,
investment in that Fund might involve risks that are different in
some respects from an investment in a fund that invests only in
securities that are backed by the full faith and credit of the
U.S. Treasury. (For a discussion of risks, see Risks and
Investment Considerations.)

PURCHASES. The minimum initial investment for each Fund is
$2,500, and additional investments must be at least $100 (only $50
for purchases by electronic transfer). Shares may be purchased by
check, by bank wire, by electronic transfer, or by exchange from
another Stein Roe Fund. For more detailed information, see How to
Purchase Shares.

REDEMPTIONS. For information on redeeming Fund shares, including
the special redemption privileges, see How to Redeem Shares.

DISTRIBUTIONS. Dividends are declared each business day and are
paid monthly. Dividends will be reinvested in additional Fund
shares unless you elect to have them paid in cash, deposited by
electronic transfer into your bank account, or invested in shares
of another Stein Roe Fund. (See Distributions and Income Taxes
and Shareholder Services.)

ADVISER AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") provides administrative, management, and investment
advisory services to the Funds. For a description of the Adviser
and the advisory fees paid by the Funds, see Management of the
Funds.

If you have any additional questions about the Funds, please feel
free to discuss them with an account representative by calling
800-338-2550.

FEE TABLE
CASH GOVERNMENT
RESERVES RESERVES
SHAREHOLDER TRANSACTION EXPENSES

Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fees None* None*
Exchange Fees None None
ANNUAL FUND OPERATING EXPENSES (after
fee waiver in the case of Government
Reserves; as a percentage of average
net assets)
Management and Administrative Fees (after
fee waiver in the case of Government
Reserves) 0.50% 0.38%
12b-1 Fees None None
Other Expenses 0.28% 0.32%
----- -----
Total Fund Operating Expenses (after
fee waiver in the case of Government
Reserves) 0.78% 0.70%
===== ======
____________________

*There is a $3.50 charge for wiring redemption proceeds to your
bank. This fee will be changed to $7.00 effective February 1, 1997.

EXAMPLES. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the
end of each time period:

1 year 3 years 5 years 10 years
------ ------- ------- --------
Cash Reserves $8 $25 $43 $97
Government Reserves 7 22 39 87

The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in a Fund. The table is based upon
actual expenses incurred in the last fiscal year. (Also see
Management of the Funds--Fees and Expenses.) From time to time,
the Adviser may voluntarily waive a portion of its fees payable by
a Fund. The Adviser has agreed to voluntarily waive such fees for
Government Reserves to the extent that its ordinary operating
expenses exceed 0.7 of 1% of its annual average net assets through
October 31, 1997, subject to earlier termination by the Adviser on
30 days' notice to the Fund. Any such reimbursement will lower
the Fund's overall expense ratio and increase its overall return
to investors. Absent such expense undertaking, Management Fees
and Total Fund Operating Expenses for Government Reserves would
have been 0.50% and 0.82%, respectively.

For purposes of the Examples above, the figures assume that the
percentage amounts for the respective Funds listed under Annual
Fund Operating Expenses remain the same during each of the
periods, that all income dividends and capital gain distributions
are reinvested in additional Fund shares, and that, for purposes
of management fee breakpoints, the Funds' respective net assets
remain at the same levels as in the most recently completed fiscal
year.

The figures in the Examples are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less
than those shown. Although information such as that shown in the
Fee Table and Examples is useful in reviewing the Funds' expenses
and in providing a basis for comparison with other mutual funds,
it should not be used for comparison with other investments using
different assumptions or time periods.

FINANCIAL HIGHLIGHTS

The tables below reflect the results of operations of the Funds on
a per-share basis and have been audited by Ernst & Young LLP,
independent auditors. These tables should be read in conjunction
with the financial statements and notes thereto, which may be
obtained from the Trust without charge upon request.

CASH RESERVES
<TABLE>
<CAPTION>

Six
Years Months
Ended Ended
December 31, June 30, Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income... 0.061 0.060 0.032 0.081 0.079 0.068 0.044 0.028 0.028 0.048 0.050
Distributions from net
investment income..... (0.061) (0.060) (0.032) (0.081) (0.079) (0.068) (0.044) (0.028) (0.028) (0.048) (0.050)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets..... 0.72% 0.72% *0.70% 0.75% 0.76% 0.78% 0.78% 0.79% 0.79% 0.76% 0.78%
Ratio of net investment
income to average
net assets............ 6.05% 6.02% *6.36% 8.13% 7.94% 6.81% 4.40% 2.81% 2.77% 4.83% 4.98%
Total return............ 6.25% 6.15% *6.43% 8.41% 8.20% 6.98% 4.49% 2.83% 2.81% 4.96% 5.07%
Net assets, end of
period (000 omitted).$814,544 $962,901 $930,074 $948,018 $949,803 $840,525 $711,087 $627,110 $554,713 $498,163 $476,840
<FN>
*Annualized.
</TABLE>

GOVERNMENT RESERVES
<TABLE>
<CAPTION>
Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

NET ASSET VALUE, BEGINNING
OF PERIOD................ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income..... 0.050 0.058 0.080 0.078 0.066 0.044 0.027 0.027 0.047 0.050
Distributions from net
investment income........ (0.050) (0.058) (0.080) (0.078) (0.066) (0.044) (0.027) (0.027) (0.047) (0.050)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of net expenses to
average net assets (a)... 1.03% 0.87% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment
income to average net
assets (b)................ 4.97% 5.75% 8.02% 7.79% 6.41% 4.27% 2.75% 2.71% 4.65% 4.94%
Total return............... 5.11% 5.90% 8.27% 8.05% 6.74% 4.45% 2.78% 2.74% 4.78% 5.01%
Net assets, end of
period (000 omitted).... $34,799 $41,787 $50,185 $53,400 $102,860 $132,982 $104,220 $105,488 $93,318 $66,928
<FN>
(a) If Government Reserves had paid all of its expenses and there
had been no reimbursement of expenses by the Adviser, this
ratio would have been 1.04%, 0.93%, 0.98%, 0.83%, 0.79%,
0.76%, 0.75% 0.75%, and 0.82% for the years ended June 30,
1988 through 1996, respectively.
(b) Computed giving effect to the Adviser's fee waiver.
</TABLE>

THE FUNDS

STEIN ROE CASH RESERVES FUND ("Cash Reserves") and STEIN ROE
GOVERNMENT RESERVES FUND ("Government Reserves") (collectively,
the "Funds") are no-load, diversified "mutual funds." Mutual
funds sell their own shares to investors and use the money they
receive to invest in a portfolio of securities. A mutual fund
allows you to pool your money with that of other investors in
order to obtain professional investment management. Mutual funds
generally make it possible for you to obtain greater
diversification of your investments and simplify your
recordkeeping. Because the Funds invest only in money market
instruments, they are called "money market funds." No-load funds
do not impose commissions or charges when shares are purchased or
redeemed.

The Funds are series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.

Although there can be no assurance that it will always be able to
do so, each Fund follows procedures designed to stabilize its
price per share at $1.00. The Statement of Additional Information
describes these procedures.

Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory, administrative, and recordkeeping and
accounting services to the Funds. The Adviser also manages
several other mutual funds with different investment objectives,
including international funds, equity funds and taxable and tax-
exempt bond funds. To obtain prospectuses and other information
on any of those mutual funds, please call 800-338-2550.

Because the Funds strive to maintain a $1.00 per share value,
their return is usually quoted either as a current seven-day
yield, calculated by totaling the dividends on a Fund share for
the previous seven days and restating that yield as an annual
rate, or as an effective yield, calculated by adjusting the
current yield to assume daily compounding. Cash Reserves' current
and effective yields for the seven-day period ended September 30,
1996, were 4.78% and 4.90%, respectively. Government Reserves'
current and effective yields for the seven-day period ended
September 30, 1996, were 4.53% and 4.69%, respectively. Absent
the expense limitation referred to above, current and effective
yields for Government Reserves for the seven-day period ended
September 30, 1996, would have been 4.38% and 4.54%, respectively.
To obtain current yield information, you may call 800-338-2550.

From time to time, the Funds may also quote total return figures.
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.

Comparison of a Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. Past performance is not
necessarily indicative of future results.

HOW THE FUNDS INVEST

CASH RESERVES. The Fund seeks to obtain maximum current income
consistent with the preservation of capital and the maintenance of
liquidity by investing all of its assets in U.S. dollar-
denominated money market instruments maturing in thirteen months
or less from time of investment. Each security must be rated (or
be issued by an issuer that is rated with respect to its short-
term debt) within the highest rating category for short-term debt
by at least two nationally recognized statistical rating
organizations ("NRSRO") (or, if rated by only one NRSRO, by that
rating agency), or, if unrated, determined by or under the
direction of the Board of Trustees to be of comparable quality.
These securities may include:

(1) Securities issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or better
(or equivalent rating) by at least one NRSRO; /1/
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries (U.S.
or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term obligations.
- ---------------------
/1/For a description of certain NRSRO commercial paper, note, and
bond ratings, see the Appendix to the Statement of Additional
Information.
/2/A sale of securities to the Fund in which the seller (a bank or
securities dealer that the Adviser believes to be financially
sound) agrees to repurchase the securities at a higher price,
which includes an amount representing interest on the purchase
price, within a specified time.
- ---------------------

In accordance with its investment objectives and policies, the
Fund may invest in variable and floating rate money market
instruments which provide for periodic or automatic adjustment in
coupon interest rates that are reset based on changes in amount
and directions of specified short-term interest rates.

Under normal market conditions, the Fund will invest at least 25%
of its total assets in securities of issuers in the financial
services industry (which includes, but is not limited to, banks,
personal credit and business credit institutions, and other
financial services institutions).

The Fund maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset
value per share, and not in excess of 90 days. It is a
fundamental policy /3/ that the maturity of any instrument that
grants the holder an optional right to redeem at par plus interest
and without penalty will be deemed at any time to be the next date
provided for payment on exercise of such optional redemption
right.
- ------------
/3/ A fundamental policy may be changed only with the approval of
a "majority of the outstanding voting securities" of a Fund as
defined in the Investment Company Act of 1940.
- --------------

GOVERNMENT RESERVES. The Fund seeks to obtain maximum current
income consistent with safety of capital and maintenance of
liquidity by investment in U.S. Government Securities maturing in
thirteen months or less from the date of purchase. These
securities include:

(1) Securities issued by the U.S. Treasury;
(2) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are backed by the full faith and credit guarantee of the U.S.
Government;
(3) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are not backed by the full faith and credit guarantee of the
U.S. Government;
(4) Repurchase agreements for securities listed in (1), (2), and
(3) above, regardless of the maturities of such underlying
securities.

The U.S. Government Securities in which the Fund is permitted to
invest include: (i) bills, notes, bonds, and other debt
securities, differing as to maturity and rates of interest, that
are issued by and are direct obligations of the U.S. Treasury; and
(ii) other securities that are issued or guaranteed as to
principal and interest by agencies or instrumentalities of the
U.S. Government and that include, but are not limited to, Federal
Farm Credit Banks, Federal Home Loan Banks, Government National
Mortgage Association, Farmers Home Administration, Federal Home
Loan Mortgage Corporation, and Federal National Mortgage
Association.

RESTRICTIONS ON THE FUNDS' INVESTMENTS

Neither Fund will: (1) invest more than 10% of its net assets in
illiquid securities, including repurchase agreements maturing in
more than seven days (however, there is otherwise no limitation on
the percentage of a Fund's assets which may be invested in
repurchase agreements); or (2) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities
of any one issuer--this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities./4/ Notwithstanding the limitation on investment in a
single issuer, each Fund may invest all or substantially all of
its assets in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund.
- -------------
/4/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Cash
Reserves and Government Reserves will not, immediately after the
acquisition of any security (other than a Government Security or
certain other securities as permitted under the Rule), invest more
than 5% of its total assets in the securities of any one issuer;
provided, however, that each may invest up to 25% of its total
assets in First Tier Securities (as that term is defined in the
Rule) of a single issuer for a period of up to three business days
after the purchase thereof.
- -------------

Neither Fund may make loans except that each Fund may (1)
purchase money market instruments and enter into repurchase
agreements; (2) acquire publicly-distributed or privately-placed
debt securities; and (3) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither a Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of the value of its
total assets. Additional securities may not be purchased when
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.

The policies described in the preceding two paragraphs, which
summarize certain important investment restrictions of the Funds,
and Cash Reserves' policy with respect to concentration of
investment in the financial services industry, can be changed only
with the approval of a "majority of the outstanding voting
securities" of a Fund, as defined in the Investment Company Act of
1940. All of the investment restrictions are set forth in the
Statement of Additional Information.

RISKS AND INVESTMENT CONSIDERATIONS

All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that a Fund will achieve its objective or be able at all
times to maintain its net asset value per share at $1.00.

In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Fund could experience both delays in
liquidating the underlying securities and losses, including: (a)
possible decline in the value of the collateral during the period
in which the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.

Each Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in a Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.

Cash Reserves' policy of investing at least 25% of its assets in
securities of issuers in the financial services industry may cause
the Fund to be more adversely affected by changes in market or
economic conditions and other circumstances affecting the
financial services industry. Because Cash Reserves' investment
policy permits it to invest in: securities of foreign branches of
U.S. banks (Eurodollars), U.S. branches of foreign banks (Yankee
dollars), and foreign banks and their foreign branches, such as
negotiable certificates of deposit; securities of foreign
governments; and securities of foreign issuers, such as commercial
paper and corporate notes, bonds and debentures, investment in
that Fund might involve risks that are different in some respects
from an investment in a fund that invests only in debt obligations
of U.S. domestic issuers. Such risks may include future political
and economic developments; the possible imposition of foreign
withholding taxes on interest income payable on securities held in
the portfolio; possible seizure or nationalization of foreign
deposits; the possible establishment of exchange controls; or the
adoption of other foreign governmental restrictions that might
adversely affect the payment of principal and interest on
securities in the portfolio. Additionally, there may be less
public information available about foreign banks and their
branches. Foreign banks and foreign branches of foreign banks are
not regulated by U.S. banking authorities, and generally are not
bound by accounting, auditing, and financial reporting standards
comparable to U.S. banks.

Because Government Reserves' investment policy permits it to
invest in U.S. Government Securities that are not backed by the
full faith and credit of the U.S. Treasury, investment in that
Fund may involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and interest
on the securities in the Fund's portfolio that are supported only
by the issuing or guaranteeing U.S. Government agency or
instrumentality, since the Fund must look principally or solely to
that entity for ultimate repayment.

Each Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these
securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed and the yields then available in the market may be
greater. The Funds will make such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for
investment reasons.

Each Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.

The securities in which Cash Reserves may invest generally yield
more than the securities in which Government Reserves may invest.

MASTER FUND/FEEDER FUND OPTION. Rather than invest in money
market securities directly, each Fund may in the future seek to
achieve its investment objective by pooling its assets with assets
of other investment companies and/or institutional investors for
investment in another investment company having the same
investment objective and substantially the same investment
policies and restrictions as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and to
reduce costs. It is expected that any such investment company
would be managed by the Adviser in substantially the same manner
as the Fund. Shareholders of a Fund will be given at least 30
days' prior notice of any such investment. Such investment would
be made only if the Trustees determine it to be in the best
interests of the Fund and its shareholders.

HOW TO PURCHASE SHARES

You may purchase shares of either Fund by check, by wire, by
electronic transfer, or by exchange from your account with another
Stein Roe Fund. The initial purchase minimum per Fund account is
$2,500; the minimum for Uniform Gifts/Transfers to Minors Act
("UGMA") accounts is $1,000; the minimum for accounts established
under an automatic investment plan (i.e., Regular Investments,
Dividend Purchase Option, or the Automatic Exchange Plan) is
$1,000 for regular accounts and $500 for UGMA accounts; and the
minimum per account for Stein Roe IRAs is $500. The initial
purchase minimum is waived for shareholders who participate in the
Stein Roe Counselor [SERVICE MARK] or Personal Counselor [SERVICE
MARK] Programs and for clients of the Adviser. Subsequent
purchases must be at least $100, or at least $50 if you purchase
by electronic transfer. If you wish to purchase shares to be held
by a tax-sheltered retirement plan sponsored by the Adviser, you
must obtain special forms for those plans. (See Shareholder
Services.)

BY CHECK. To make an initial purchase of shares of a Fund by
check, please complete and sign the Application and mail it,
together with a check made payable to Stein Roe Mutual Funds, to
SteinRoe Services Inc. at P.O. Box 8900, Boston, Massachusetts
02205. Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should send orders to
SteinRoe Services Inc. at P.O. Box 803938, Chicago, Illinois
60680.

You may make subsequent investments by submitting a check along
with either the stub from your Fund account confirmation statement
or a note indicating the amount of the purchase, your account
number, and the name in which your account is registered. Each
individual check submitted for purchase must be at least $100, and
the Trust generally will not accept cash, drafts, third party
checks, or checks drawn on banks outside of the United States.
Should an order to purchase shares of a Fund be cancelled because
your check does not clear, you will be responsible for any
resulting loss incurred by that Fund.

BY WIRE. You also may pay for shares by instructing your bank to
wire federal funds (monies of member banks within the Federal
Reserve System) to First National Bank of Boston. Your bank may
charge you a fee for sending the wire. If you are opening a new
account by wire transfer, you must first call 800-338-2550 to
request an account number and furnish your social security or
other tax identification number. Neither the Funds nor the Trust
will be responsible for the consequences of delays, including
delays in the banking or Federal Reserve wire systems. Your bank
must include the full name(s) in which your account is registered
and your Fund account number, and should address its wire as
follows:

First National Bank of Boston
Boston, Massachusetts
ABA Routing No. 011000390
Attention: SteinRoe Services Inc.
Fund No. ___; Stein Roe _____ Fund
Account of (exact name(s) in registration)
Shareholder Account No. ________

Fund Numbers:
36--Cash Reserves
39--Government Reserves

Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should address their
wires as follows:

BY ELECTRONIC TRANSFER. You may also make subsequent investments
by an electronic transfer of funds from your bank account.
Electronic transfer allows you to make purchases at your request
("Special Investments") by calling 800-338-2550 or at pre-
scheduled intervals ("Regular Investments") elected on your
application. (See Shareholder Services.) Electronic transfer
purchases are subject to a $50 minimum and a $100,000 maximum.
You may not open a new account through electronic transfer.
Should an order to purchase shares of a Fund be cancelled because
your electronic transfer does not clear, you will be responsible
for any resulting loss incurred by that Fund.

BY EXCHANGE. You may purchase shares by exchange of shares from
another Stein Roe Fund account either by phone (if the Telephone
Exchange Privilege has been established on the account from which
the exchange is being made), by mail, in person, or automatically
at regular intervals (if you have elected Automatic Exchanges).
Restrictions apply; please review the information under How to
Redeem Shares--By Exchange.

CONDITIONS OF PURCHASE. Each purchase order for a Fund must be
accepted by an authorized officer of the Trust or its authorized
agent and is not binding until accepted and entered on the books
of that Fund. Once your purchase order has been accepted, you may
not cancel or revoke it; you may, however, redeem the shares. The
Trust reserves the right not to accept any purchase order that it
determines not to be in the best interest of the Trust or of a
Fund's shareholders. The Trust also reserves the right to waive
or lower its investment minimums for any reason. The Trust does
not issue certificates for shares.

PURCHASES THROUGH THIRD PARTIES. You may purchase (or redeem)
shares through broker-dealers, banks, or other intermediaries
("Intermediaries"). These Intermediaries may charge for their
services or place limitations on the extent to which you may use
the services offered by the Trust. There are no charges or
limitations imposed by the Trust (other than those described in
this prospectus) if shares are purchased (or redeemed) directly
from the Trust.

Some Intermediaries that maintain nominee accounts with the Funds
for their clients who are Fund shareholders charge an annual fee
of up to 0.25% of the average net assets held in such accounts for
accounting, servicing, and distribution services they provide with
respect to the underlying Fund shares. The Adviser and the Funds'
transfer agent share in the expense of these annual fees, and the
Adviser pays all sales and promotional expenses.

PURCHASE PRICE AND EFFECTIVE DATE. Each purchase of a Fund's
shares made directly with the Fund is made at that Fund's net
asset value (see Net Asset Value) next determined after receipt of
an order in good form, including receipt of payment as follows:

Check purchases--net asset value next determined after your check
is converted into federal funds (currently one business day after
receipt of your check). Your investment will begin earning
dividends on the day of purchase.

Wire purchases--net asset value next determined after receipt of
the wire. If your wire is received before 11:00 a.m., central
time, your investment will begin earning dividends on the day of
purchase. If your wire is received at or after 11:00 a.m.,
central time, your investment will begin earning dividends on the
following day.

Electronic transfer--net asset value next determined after the
Fund receives the electronic transfer from your bank. A Special
Electronic Transfer Investment instruction received by telephone
on a business day before 3:00 p.m., central time, is effective on
the next business day. Your investment will begin earning
dividends on the day following the date of purchase.

Each purchase of Fund shares through an Intermediary that is an
authorized agent of the Trust for the receipt of orders is made at
the net asset value next determined after the receipt of the order
by the Intermediary.

HOW TO REDEEM SHARES

BY WRITTEN REQUEST. You may redeem all or a portion of your
shares of a Fund by submitting a written request in "good order"
to SteinRoe Services Inc. at P.O. Box 8900, Boston, Massachusetts
02205. Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should send redemption
requests to SteinRoe Services Inc. at P.O. Box 803938, Chicago,
Illinois 60680. A redemption request will be considered to have
been received in good order if the following conditions are
satisfied:

(1) The request must be in writing and must indicate the number of
shares or dollar amount to be redeemed and identify the
shareholder's account number;

(2) The request must be signed by the shareholder(s) exactly as
the shares are registered;

(3) The request must be accompanied by any certificates for the
shares, either properly endorsed for transfer, or accompanied
by a stock assignment properly endorsed exactly as the shares
are registered;

(4) The signatures on either the written redemption request or the
certificates (or the accompanying stock power) must be
guaranteed (a signature guarantee is not a notarization, but
is a widely accepted way to protect you and the Funds by
verifying your signature);

(5) Corporations and associations must submit with each request a
completed Certificate of Authorization included in this
prospectus (or a form of resolution acceptable to the Trust);
and
(6) The request must include other supporting legal documents as
required from organizations, executors, administrators,
trustees, or others acting on accounts not registered in their
names.

BY EXCHANGE. You may redeem all or any portion of your Fund
shares and use the proceeds to purchase shares of any other Stein
Roe Fund offered for sale in your state if your signed, properly
completed Application is on file. AN EXCHANGE TRANSACTION IS A
SALE AND PURCHASE OF SHARES FOR FEDERAL INCOME TAX PURPOSES AND
MAY RESULT IN CAPITAL GAIN OR LOSS. Before exercising the
Exchange Privilege, you should obtain the prospectus for the Stein
Roe Fund in which you wish to invest and read it carefully. The
registration of the account to which you are making an exchange
must be exactly the same as that of the Fund account from which
the exchange is made and the amount you exchange must meet any
applicable minimum investment of the Stein Roe Fund being
purchased. Unless you have elected to receive your dividends in
cash, on an exchange of all shares, any accrued unpaid dividends
will be invested in the Stein Roe Fund to which you exchange on
the next business day. An exchange may be made by following the
redemption procedure described above under By Written Request and
indicating the Stein Roe Fund to be purchased--a signature
guarantee normally is not required. (See also the discussion
below of the Telephone Exchange Privilege and Automatic
Exchanges.)

SPECIAL REDEMPTION PRIVILEGES. The Telephone Exchange Privilege
and the Telephone Redemption by Check Privilege will be
established automatically for you when you open your account
unless you decline these Privileges on your Application. Other
Privileges must be specifically elected. If you do not want the
Telephone Exchange and Redemption Privileges, check the box(es)
under the section "Telephone Redemption Options" when completing
your Application. In addition, a signature guarantee may be
required to establish a Privilege after you open your account. If
you establish both the Telephone Redemption by Wire Privilege and
the Electronic Transfer Privilege, the bank account that you
designate for both Privileges must be the same.

You may not use any of the Special Redemption Privileges if you
hold certificates for any of your Fund shares. The Telephone
Redemption by Check, Telephone Redemption by Wire and Check-
Writing Privileges, and Special Electronic Transfer Redemptions
are not available to redeem shares held by a tax-sheltered
retirement plan sponsored by the Adviser. (See also General
Redemption Policies.)

Telephone Exchange Privilege. You may use the Telephone Exchange
Privilege to exchange an amount of $50 or more from your account
by calling 800-338-2550 or by sending a telegram; new accounts
opened by exchange are subject to the $2,500 initial purchase
minimum. GENERALLY, YOU WILL BE LIMITED TO FOUR TELEPHONE
EXCHANGE ROUND-TRIPS PER YEAR AND THE FUNDS MAY REFUSE REQUESTS
FOR TELEPHONE EXCHANGES IN EXCESS OF FOUR ROUND-TRIPS (A ROUND-
TRIP BEING THE EXCHANGE OUT OF A FUND INTO ANOTHER STEIN ROE FUND,
AND THEN BACK TO THAT FUND). In addition, the Trust's general
redemption policies apply to redemptions of shares by Telephone
Exchange. (See General Redemption Policies.)

The Trust reserves the right to suspend or terminate at any time
and without prior notice the use of the Telephone Exchange
Privilege by any person or class of persons. The Trust believes
that use of the Telephone Exchange Privilege by investors
utilizing market-timing strategies adversely affects the Funds.
THEREFORE, THE TRUST GENERALLY WILL NOT HONOR REQUESTS FOR
TELEPHONE EXCHANGES BY SHAREHOLDERS IDENTIFIED BY THE TRUST AS
"MARKET-TIMERS." Moreover, the Trust reserves the right to
suspend, limit, modify, or terminate at any time and without prior
notice the Telephone Exchange Privilege in its entirety. Because
such a step would be taken only if the Board of Trustees believes
it would be in the best interests of the Funds, the Trust expects
that it would provide shareholders with prior written notice of
any such action unless it appears that the resulting delay in the
suspension, limitation, modification, or termination of the
Telephone Exchange Privilege would adversely affect the Funds. IF
THE TRUST WERE TO SUSPEND, LIMIT, MODIFY, OR TERMINATE THE
TELEPHONE EXCHANGE PRIVILEGE, A SHAREHOLDER EXPECTING TO MAKE A
TELEPHONE EXCHANGE MIGHT FIND THAT AN EXCHANGE COULD NOT BE
PROCESSED OR THAT THERE MIGHT BE A DELAY IN THE IMPLEMENTATION OF
THE EXCHANGE. (See How to Redeem Shares--By Exchange.) During
periods of volatile economic and market conditions, you may have
difficulty placing your exchange by telephone.

Automatic Exchanges. You may use the Automatic Exchange Privilege
to automatically redeem a fixed amount from your Fund account for
investment in another Stein Roe Fund account on a regular basis.

Telephone Redemption by Wire Privilege. You may use this
Privilege to redeem an amount of $1,000 or more from your account
by calling 800-338-2550. The proceeds will be transmitted by wire
to your account at a commercial bank previously designated by you
that is a member of the Federal Reserve System. The fee for
wiring proceeds (currently $3.50 per transaction; $7.00 after
January 31,1997) will be deducted from the amount wired.

Check-Writing Privilege. You may also redeem shares by writing
special checks in the amounts of $50 or more. Your checks are
drawn against a special checking account maintained with the
custodian, and you will be subject to the custodian's procedures
and rules relating to its checking accounts and to this Privilege.

Electronic Transfer Privilege. You may redeem shares by calling
800-338-2550 and requesting an electronic transfer ("Special
Redemption") of the proceeds to a bank account previously
designated by you at a bank that is a member of the Automated
Clearing House or at scheduled intervals ("Automatic Redemptions"-
- -see Shareholder Services). Electronic transfers are subject to a
$50 minimum and a $100,000 maximum. A Special Redemption request
received by telephone after 3:00 p.m., central time, is deemed
received on the next business day.

GENERAL REDEMPTION POLICIES. You may not cancel or revoke your
redemption order once instructions have been received and
accepted. The Trust cannot accept a redemption request that
specifies a particular date or price for redemption or any special
conditions. Please call 800-338-2550 if you have any questions
about requirements for a redemption before submitting your
request. If you wish to redeem shares held by a tax-sheltered
retirement plan sponsored by the Adviser, special procedures of
those plans apply. (See Shareholder Services--Tax-Sheltered
Retirement Plans.) The Trust reserves the right to require a
properly completed Application before making payment for shares
redeemed.

The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon that Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares, even though
each Fund attempts to maintain its net asset value at $1.00
(rounded to the nearest one cent), and may result in a realized
capital gain or loss.

The Trust normally intends to pay proceeds of a redemption within
two business days and generally no later than seven days after
proper instructions are received. If a request for Telephone
Redemption by Wire is received before 11:00 a.m., central time,
the proceeds will be paid on the day the order is received;
proceeds of an order received at or after 11:00 a.m., central
time, will be paid on the next business day. The Trust will not
be responsible for the consequences of delays, including delays in
the mail, banking, or Federal Reserve wire systems. If you
attempt to redeem shares within 15 days after they have been
purchased by check or electronic transfer, the Trust may delay
payment of the redemption proceeds to you until it can verify that
payment for the purchase of those shares has been (or will be)
collected. To reduce such delays, the Trust recommends that your
purchase be made by federal funds wire through your bank.
Generally, you may not use any Special Redemption Privilege to
redeem shares purchased by check (other than certified or
cashiers' checks) or electronic transfer until 15 days after their
date of purchase.

The Trust reserves the right at any time without prior notice to
suspend, limit, modify, or terminate any Privilege or its use in
any manner by any person or class.

Neither the Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided under
the Privileges, nor for any loss, liability, cost or expense for
acting upon instructions furnished thereunder if they reasonably
believe that such instructions are genuine. The Funds employ
procedures reasonably designed to confirm that instructions
communicated by telephone under any Special Redemption Privilege
or the Special Electronic Transfer Redemption Privilege are
genuine. Use of any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege authorizes the Funds and
their transfer agent to tape-record all instructions to redeem.
In addition, callers are asked to identify the account number and
registration, and may be required to provide other forms of
identification. Written confirmations of transactions are mailed
promptly to the registered address; a legend on the confirmation
requests that the shareholder review the transactions and inform
the Fund immediately if there is a problem. If a Fund does not
follow reasonable procedures for protecting shareholders against
loss on telephone transactions, it may be liable for any losses
due to unauthorized or fraudulent instructions.

The Trust reserves the right to redeem shares in any account and
send the proceeds to the owner if the shares in the account do not
have a value of at least $1,000. A shareholder would be notified
that his account is below the minimum and would be allowed 30 days
to increase the account before the redemption is processed.

Shares in any account you maintain with a Fund or any of the other
Stein Roe Funds may be redeemed to the extent necessary to
reimburse any Stein Roe Fund for any loss it sustains that is
caused by you (such as losses from uncollected checks and
electronic transfers or any Stein Roe Fund liability under the
Internal Revenue Code provisions on backup withholding).

SHAREHOLDER SERVICES

REPORTING TO SHAREHOLDERS. You will receive a confirmation
statement reflecting each of your purchases and redemptions of
shares of a Fund, as well as periodic statements detailing
distributions made by that Fund. Shares purchased by reinvestment
of dividends, by cross-reinvestment of dividends from another
Fund, or through an automatic investment plan will be confirmed to
you quarterly. In addition, the Trust will send you semiannual
and annual reports showing Fund portfolio holdings and will
provide you annually with tax information.

FUNDS-ON-CALL [REGISTERED] AUTOMATED TELEPHONE SERVICE. To
access Stein Roe Funds-on-Call [registered], just call 800-338-
2550 on any touch-tone telephone and follow the recorded
instructions. Funds-on-Call [registered] provides yields, prices,
latest dividends, account balances, last transaction, and other
information 24 hours a day, seven days a week. You also may use
Funds-on-Call [registered] to make Special Investments and
Redemptions, Telephone Exchanges, and Telephone Redemptions by
Check. These transactions are subject to the terms and conditions
of the individual privileges. (See How to Purchase Shares and How
to Redeem Shares.)

STEIN ROE COUNSELOR [SERVICE MARK] PROGRAM. The Adviser offers a
Stein Roe Counselor [SERVICE MARK] and a Stein Roe Personal
Counselor [SERVICE MARK] program. The programs are designed to
provide investment guidance in helping investors to select a
portfolio of Stein Roe Mutual Funds. The Stein Roe Personal
Counselor [SERVICE MARK] program, which automatically adjusts
client portfolios, has a fee of up to 1% of assets.

RECORDKEEPING AND ADMINISTRATION SERVICES. If you oversee or
administer investments for a group of investors, we offer a
variety of services.

TAX-SHELTERED RETIREMENT PLANS. Booklets describing the following
programs and special forms necessary for establishing them are
available on request. You may use all of the Stein Roe Funds,
except those investing primarily in tax-exempt securities, in
these plans. Please read the prospectus for each Fund in which
you plan to invest before making your investment.

Individual Retirement Accounts ("IRAs") for employed persons and
their non-employed spouses.

Prototype Money Purchase Pension and Profit-Sharing Plans for
self-employed individuals, partnerships, and corporations.

Simplified Employee Pension Plans permitting employers to provide
retirement benefits to their employees by utilizing IRAs while
minimizing administration and reporting requirements.

SPECIAL SERVICES. The following special services are available to
shareholders. Please call 800-338-2550 or write the Trust for
additional information and forms.

Dividend Purchase Option--to diversify your Fund investments by
having distributions from one Fund account automatically invested
in another Stein Roe Fund account. Before establishing this
option, you should obtain and read carefully the prospectus of the
Stein Roe Fund into which you wish to have your distributions
invested. The account from which distributions are made must be
of sufficient size to allow each distribution to usually be at
least $25. The account into which distributions are to be
invested may be opened with an initial investment of only $1,000.

Automatic Dividend Deposit (electronic transfer)--to have income
dividends and capital gain distributions deposited directly into
your bank account.

Telephone Redemption by Check Privilege ($1,000 minimum) and
Telephone Exchange Privilege ($50 minimum)--established
automatically when you open your account unless you decline them
on your Application. (See How to Redeem Shares--Special
Redemption Privileges.)

Telephone Redemption by Wire Privilege--to redeem shares from your
account by phone and have the proceeds transmitted by wire to your
account ($1,000 minimum).

Check-Writing Privilege--to redeem shares by writing special
checks against your Fund account ($50 minimum per check).

Special Redemption Option (electronic transfer)--to redeem shares
at any time and have the proceeds deposited directly to your bank
account ($50 minimum; $100,000 maximum).

Regular Investments (electronic transfer)--to purchase Fund shares
at regular intervals directly from your bank account ($50 minimum;
$100,000 maximum).

Special Investments (electronic transfer)--to purchase Fund shares
by telephone and pay for them by electronic transfer of funds from
your bank account ($50 minimum; $100,000 maximum).

Automatic Exchange Plan--to automatically redeem a fixed dollar
amount from your Fund account and invest it in another Stein Roe
Fund account on a regular basis ($50 minimum; $100,000 maximum).

Automatic Redemptions (electronic transfer)--to have a fixed
dollar amount redeemed and sent at regular intervals directly to
your bank account ($50 minimum; $100,000 maximum).

Systematic Withdrawals--to have a fixed dollar amount, declining
balance, or fixed percentage of your account redeemed and sent at
regular intervals by check to you or another payee.

NET ASSET VALUE

The purchase and redemption price of each Fund's shares is its net
asset value per share. The net asset value of a share of each
Fund is normally determined twice each day: at 11:00 a.m., central
time, and as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., central time). The net asset value
per share is computed by dividing the difference between the
values of the Fund's assets and liabilities by the number of
shares outstanding and rounding to the nearest cent. Net asset
value will not be determined on days when the Exchange is closed
unless, in the judgment of the Board of Trustees, the net asset
value of a Fund should be determined on any such day, in which
case the determination will be made at 3:00 p.m., central time.

Each Fund attempts to maintain its net asset value at $1.00 per
share. Portfolio securities are valued based on their amortized
cost, which does not take into account unrealized gains or losses.
Other assets and securities of a Fund for which this valuation
method does not produce a fair value are valued at a fair value
determined by the Board. The extent of any deviation between the
Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by
the Board of Trustees. If such deviation were to exceed 1/2 of
1%, the Board would consider what action, if any, should be taken,
including selling portfolio instruments, increasing, reducing or
suspending distributions, or redeeming shares in kind.

DISTRIBUTIONS AND INCOME TAXES

DISTRIBUTIONS. A dividend from net income of a Fund is declared
each business day to shareholders of record immediately before
3:00 p.m., central time. (See How to Purchase Shares.) Dividends
are paid monthly and confirmed at least quarterly. If a Fund's
net asset value per share were to decline, or were believed likely
to decline, below $1.00 (rounded to the nearest cent), the Board
might temporarily reduce or suspend dividends in an effort to
maintain net asset value at $1.00 per share.

All of your income dividends and capital gain distributions will
be reinvested in additional shares unless you elect to have
distributions either (1) paid by check; (2) deposited by
electronic transfer into your bank account; (3) applied to
purchase shares in your account with another Stein Roe Fund; or
(4) applied to purchase shares in a Stein Roe Fund account of
another person. (See Shareholder Services.) Reinvestment
normally occurs on the payable date. The Trust reserves the right
to reinvest the proceeds and future distributions in additional
Fund shares if checks mailed to you for distributions are returned
as undeliverable or are not presented for payment within six
months.

INCOME TAXES. Your distributions will be taxable to you, under
income tax law, whether received in cash or reinvested in
additional shares. For federal income tax purposes, any
distribution that is paid in January but was declared in the prior
calendar year is deemed paid in the prior calendar year.

You will be subject to federal income tax at ordinary rates on
income dividends and distributions of net short-term capital gain.
Distributions of net long-term capital gain will be taxable to you
as long-term capital gain regardless of the length of time you
have held your shares.

You will be advised annually as to the source of distributions.
If you are not subject to tax on your income, you will not be
required to pay tax on these amounts. Because each Fund's
investment income consists primarily of interest, it is expected
that none of the dividends paid by the Funds will qualify under
the Internal Revenue Code for the dividends received deduction
available to corporations.

For federal income tax purposes, each Fund is treated as a
separate taxable entity distinct from the other series of the
Trust.

This section is not intended to be a full discussion of income tax
laws and their effect on shareholders. You may wish to consult
your own tax advisor.

BACKUP WITHHOLDING. The Income Trust may be required to withhold
federal income tax ("backup withholding") from certain payments to
you, generally redemption proceeds. Backup withholding may be
required if:
- - You fail to furnish your properly certified social security or
other tax identification number;
- - You fail to certify that your tax identification number is
correct or that you are not subject to backup withholding due to
the underreporting of certain income;
- - The Internal Revenue Service informs the Trust that your tax
identification number is incorrect.

These certifications are contained in the Application that you
should complete and return when you open an account. The Funds
must promptly pay to the IRS all amounts withheld. Therefore, it
is usually not possible for a Fund to reimburse you for amounts
withheld. You may, however, claim the amount withheld as a credit
on your federal income tax return.

MANAGEMENT OF THE FUNDS

TRUSTEES AND INVESTMENT ADVISER. The Board of Trustees of the
Trust has overall management responsibility for the Trust and the
Funds. See the Statement of Additional Information for the names
of and other information about the trustees and officers.

The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolios and business affairs of the Funds and the
Trust, subject to the direction of the Board. The Adviser is
registered as an investment adviser under the Investment Advisers
Act of 1940. The Adviser was organized in 1986 to succeed to the
business of Stein Roe & Farnham, a partnership that had advised
and managed mutual funds since 1949. The Adviser is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which in turn is a majority owned indirect subsidiary
of Liberty Mutual Insurance Company.

In approving the use of a single combined prospectus, the Board
considered the possibility that one Fund might be liable for
misstatements in the prospectus regarding information concerning
another Fund.

FEES AND EXPENSES. Through June 30, 1996, the Adviser provided
investment advisory and administrative services to the Funds under
investment advisory agreements with the Trust relating to each
Fund. On July 1, 1996, each investment advisory agreement was
replaced with separate management and administrative agreements.
The aggregate rates of fees under the new agreements are equal to
those charged under the old advisory agreements. The Adviser is
entitled to receive from each Fund in return for its services,
monthly management and administrative fees, computed and accrued
daily based on the Fund's average net assets at the following
annual rates:

MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- -------------- ------------------------ -------------------------
.250% 250% up to $500 million, .500% up to $500 million,
.200% next $500 million, .450% next $500 million,
.150% thereafter .400% thereafter

The annualized fees for Cash Reserves and Government Reserves for
the year ended June 30, 1996, after the fee waiver for Government
Reserves described under Fee Table, amounted to 0.50% and 0.38% of
average net assets, respectively.

Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds,
including computation of each Fund's net asset value and
calculation of its net income and capital gains and losses on
disposition of Fund assets.

PORTFOLIO TRANSACTIONS. The Adviser places the orders for the
purchase and sale of each Fund's portfolio securities. In doing
so, the Adviser seeks to obtain the best combination of price and
execution, which involves a number of judgmental factors.

TRANSFER AGENT. SteinRoe Services Inc., One South Wacker Drive,
Chicago, Illinois 60606, a wholly owned subsidiary of Liberty
Financial, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records.

DISTRIBUTOR. The shares of each Fund are offered for sale through
Liberty Securities Corporation ("Distributor") without any sales
commissions or charges to the Funds or to their shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Financial. The business address of the Distributor is 600
Atlantic Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to SteinRoe Services Inc. at P.O. Box 8900, Boston,
Massachusetts 02205, except for participants in the Stein Roe
Counselor [SERVICE MARK] and Personal Counselor [SERVICE MARK]
Programs, who should send orders to SteinRoe Services Inc. at P.O.
Box 803938, Chicago, Illinois 60680. All distribution and
promotional expenses are paid by the Adviser, including payments
to the Distributor for sales of Fund shares.

CUSTODIAN. State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
the Funds. Foreign securities are maintained in the custody of
foreign banks and trust companies that are members of the Bank's
Global Custody Network or foreign depositories used by such
members. (See Custodian in the Statement of Additional
Information.)

ORGANIZATION AND DESCRIPTION OF SHARES

The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.

Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular Fund shall look only to the assets of the Trust or of
the respective Fund for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.

The risk of a particular Fund incurring financial loss on account
of unsatisfied liability of another Fund of the Trust is also
believed to be remote, because it would be limited to claims to
which the disclaimer did not apply and to circumstances in which
the other Fund was unable to meet its obligations.

<PAGE>
Stein Roe Mutual Funds
Certificate of Authorization
for use by corporations and associations only

Corporations or associations must complete this Certificate and
submit it with the Fund Application, each written redemption,
transfer or exchange request, and each request to terminate or
change any of the Privileges or special service elections.

If the entity submitting the Certificate is an association, the
word "association" shall be deemed to appear each place the word
"corporation" appears. If the officer signing this Certificate is
named as an authorized person, another officer must countersign
the Certificate. If there is no other officer, the person signing
the Certificate must have his signature guaranteed. If you are
not sure whether you are required to complete this Certificate,
call a Stein Roe account representative at 800-338-2550 .

The undersigned hereby certifies that he is the duly elected
Secretary of ____________________________ (the "Corporation")
(name of Corporation/Association)
and that the following individual(s):

AUTHORIZED PERSONS
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title

is (are) duly authorized by resolution or otherwise to act on
behalf of the Corporation in connection with the Corporation's
ownership of shares of any mutual fund managed by Stein Roe &
Farnham Incorporated (individually, the "Fund" and collectively,
the "Funds") including, without limitation, furnishing any such
Fund and its transfer agent with instructions to transfer or
redeem shares of that Fund payable to any person or in any manner,
or to redeem shares of that Fund and apply the proceeds of such
redemption to purchase shares of another Fund (an "exchange"), and
to execute any necessary forms in connection therewith.

Unless a lesser number is specified, all of the Authorized Persons
must sign written instructions. Number of signatures required:
________.

If the undersigned is the only person authorized to act on behalf
of the Corporation, the undersigned certifies that he is the sole
shareholder, director, and officer of the Corporation and that the
Corporation's Charter and By-laws provide that he is the only
person authorized to so act.

Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies that
the Corporation has authorized by resolution or otherwise the
establishment of the Telephone Exchange and Telephone Redemption
by Check Privileges for the Corporation's account with any Fund
offering any such Privilege. If elected on the Application (or
other form acceptable to the Funds), the undersigned also
certifies that the Corporation has similarly authorized
establishment of the Electronic Transfer, Telephone Redemption by
Wire, and Check-Writing Privileges for the Corporation's account
with any Fund offering said Privileges. The undersigned has
further authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished
pursuant to any such Privilege by any person believed by the Fund
or its transfer agent or their agents, officers, directors,
trustees, or employees to be authorized to act on behalf of the
Corporation and agrees that neither the Fund nor its transfer
agent, their agents, officers, directors, trustees, or employees
will be liable for any loss, liability, cost, or expense for
acting upon any such instructions.

These authorizations shall continue in effect until five business
days after the Fund and its transfer agent receive written notice
from the Corporation of any change.

IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____ day
of ________________, 19____.

________________________________
Secretary

_________________________________
Signature Guarantee*
*Only required if the person signing
the Certificate is the only person
named as "Authorized Person."
CORPORATE
SEAL
HERE

<PAGE>

[STEIN ROE MUTUAL FUNDS LOGO]

The Stein Roe Funds
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe Balanced Fund
Stein Roe Growth & Income Fund
Stein Roe Growth Stock Fund
Stein Roe Young Investor Fund
Stein Roe Special Fund
Stein Roe Special Venture Fund
Stein Roe Capital Opportunities Fund
Stein Roe International Fund

800-338-2550

In Chicago, visit our Fund Center at One South Wacker Drive, Suite
3200

Liberty Securities Corporation, Distributor

<PAGE>

GOVERNMENT INCOME FUND seeks high current income by investing
primarily in securities issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities.

INTERMEDIATE BOND FUND seeks high current income by investing
primarily in marketable debt securities. The dollar-weighted
average life of the Fund's portfolio is expected to be between
three and ten years.

INCOME FUND seeks high current income by investing principally in
medium-quality debt securities and, to a lesser extent, in lower-
quality securities which may involve greater risk.

HIGH YIELD FUND seeks total return by investing for a high level
of current income and capital growth. The Fund seeks to achieve
its objective by investing all of its net investable assets in
shares of SR&F High Yield Portfolio, a portfolio of SR&F Base
Trust that has the same investment objective and substantially the
same investment policies as the Fund. High Yield Portfolio
invests primarily in high-yield, high-risk medium- and lower-
quality debt securities.

LOWER-QUALITY SECURITIES, COMMONLY KNOWN AS "JUNK BONDS," ARE
SUBJECT TO A GREATER RISK WITH REGARD TO PAYMENT OF INTEREST AND
RETURN OF PRINCIPAL THAN HIGHER-RATED BONDS. INVESTORS SHOULD
CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH JUNK BONDS BEFORE
INVESTING. (SEE HOW THE FUNDS INVEST, RISKS AND INVESTMENT
CONSIDERATIONS, ORGANIZATION AND DESCRIPTION OF SHARES--SPECIAL
CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE, AND
APPENDIX--RATINGS.)

Each Fund is a "no-load" fund. There are no sales or redemption
charges, and the Funds have no 12b-1 plans. The Funds are series
of the STEIN ROE INCOME TRUST, an open-end management investment
company.

This prospectus contains information you should know before
investing in the Funds. Please read it carefully and retain it
for future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. This
prospectus is available electronically by using Stein Roe's
Internet address: "http://www. steinroe.com." You can get a free
paper copy of the prospectus, the Statement of Additional
Information, and the most recent financial statements by calling
800-338-2550 or by writing to Stein Roe Funds, Suite 3200, One
South Wacker Drive, Chicago, Illinois 60606.

The date of this prospectus is November 1, 1996.

<PAGE>
TABLE OF CONTENTS
Page
Summary........................... 3
Fee Table .........................6
Financial Highlights ..............8
The Funds ........................14
How the Funds Invest .............15
Government Income Fund.........15
Intermediate Bond Fund.........16
Income Fund....................18
High Yield Fund................19
Portfolio Investments and
Strategies....................20
Restrictions on the Funds'
Investments....................28
Risks and Investment Considera-
tions .........................29
How to Purchase Shares............30
By Check.......................31
By Wire........................31
By Electronic Transfer ........32
By Exchange ...................32
Conditions of Purchase ........32
Purchases Through Third
Parties....................33
Purchase Price and Effective
Date .......................33
How to Redeem Shares .............33
By Written Request ............33
By Exchange ...................34
Special Redemption Privileges .35
General Redemption Policies ...36
Shareholder Services .............38
Net Asset Value ..................40
Distributions and Income Taxes....41
Investment Return ................42
Management of the Funds...........43
Organization and Description of
Shares .........................46
Appendix--Ratings.................51
Certificate of Authorization......55

SUMMARY

Stein Roe Government Income Fund ("Government Income Fund"), Stein
Roe Intermediate Bond Fund ("Intermediate Bond Fund"), Stein Roe
Income Fund ("Income Fund"), and Stein Roe High Yield Fund ("High
Yield Fund") are series of the Stein Roe Income Trust, an open-end
diversified management investment company organized as a
Massachusetts business trust. Each Fund is a "no-load" fund.
There are no sales or redemption charges. (See The Funds and
Organization and Description of Shares.) This prospectus is not a
solicitation in any jurisdiction in which shares of the Funds are
not qualified for sale.

INVESTMENT OBJECTIVES AND POLICIES. Government Income Fund,
Intermediate Bond Fund, and Income Fund each seek a high level of
current income. High Yield Fund and High Yield Portfolio each
seek total return by investing for a high level of current income
and capital growth. Each Fund invests as described below. The
Funds seek to achieve their objectives by investing primarily in
debt obligations of various types.

GOVERNMENT INCOME FUND seeks high current income by investing
primarily in U.S. Government Securities. In addition, the Fund is
permitted to invest up to 20% of its assets in other types of debt
securities, including collateralized mortgage obligations and debt
securities of domestic issuers and of foreign issuers payable in
U.S. dollars.

INTERMEDIATE BOND FUND pursues a high level of current income,
consistent with capital preservation, by investing primarily in
marketable debt securities. At least 60% of the Fund's assets
will be invested in debt securities rated within the three highest
grades assigned by Moody's or by S&P, or in U.S. Government
Securities, commercial paper, and certain bank obligations. Under
normal market conditions, the Fund invests at least 65% of its
assets in securities with an average life of between three and ten
years, and expects that the dollar-weighted average life of its
portfolio will be between three and ten years.

INCOME FUND seeks high current income by investing principally in
medium-quality debt securities (such as securities rated A or Baa
by Moody's or A or BBB by S&P), with at least 60% of its assets
invested in medium- or higher-quality debt securities. Medium-
quality debt securities may have some speculative characteristics.
Income Fund may also invest to a lesser extent in securities of
lower quality, which may entail greater risk. Lower-quality
securities are commonly referred to as "junk bonds."

HIGH YIELD FUND invests all of its net investable assets in SR&F
High Yield Portfolio ("High Yield Portfolio"). High Yield
Portfolio invests in a diversified portfolio of securities in
accordance with an investment objective identical to and
investment policies substantially similar to those of High Yield
Fund. High Yield Portfolio seeks total return by investing for a
high level of current income and capital growth. High Yield
Portfolio invests primarily in high-yield, high-risk medium- and
lower-quality debt securities. Medium-quality debt securities,
although considered investment grade, may have some speculative
characteristics. Lower-quality debt securities are obligations of
issuers that are considered predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds."

For a more detailed discussion of each Fund's investment
objectives and policies, please see How the Funds Invest and
Portfolio Investments and Strategies. There is, of course, no
assurance that any Fund or High Yield Portfolio will achieve its
investment objective.

INVESTMENT RISKS. The risks inherent in each Fund and High Yield
Portfolio depend primarily upon the term and quality of the
obligations in its portfolio, as well as on market conditions.
Interest rate fluctuations will affect its net asset value, but
not the income received by a Fund or High Yield Portfolio from its
portfolio securities. However, because yields on debt securities
available for purchase by a Fund or High Yield Portfolio vary over
time, no specific yield on shares of a Fund or High Yield
Portfolio can be assured. Government Income Fund is designed for
investors who seek high income with minimum risk other than the
risk of changes in net asset value caused by fluctuations in
prevailing levels of interest rates. Intermediate Bond Fund is
appropriate for investors who seek high income with less net asset
value fluctuation from interest rate changes than that of a
longer-term fund and who can accept greater levels of credit and
other risks associated with securities that are rated below
investment grade. Income Fund and High Yield Fund are designed
for investors who seek a higher level of income and who can accept
greater levels of credit and other risks associated with
securities of medium or lower quality. Although both Income Fund
and High Yield Fund invest in medium- and lower-quality debt
securities, High Yield Fund is designed for investors who can
accept the heightened level of risk and principal fluctuation
inherent in a portfolio that invests at least 65% of its assets in
medium- and lower-quality debt securities, while Income Fund,
which invests up to 60% of its assets in high- and medium-quality
debt securities, can invest only up to 40% of its assets in such
securities. Intermediate Bond Fund, Income Fund, High Yield Fund,
and High Yield Portfolio may invest in foreign securities, which
may entail a greater degree of risk than investing in securities
of domestic issuers. Please see Restrictions on the Funds'
Investments and Risks and Investment Considerations for further
information.

PURCHASES. The minimum initial investment for each Fund is
$2,500. Additional investments must be at least $100 (only $50
for purchases by electronic transfer). Shares may be purchased by
check, by bank wire, by electronic transfer, or by exchange from
another Stein Roe Fund. (See How to Purchase Shares.)

REDEMPTIONS. For information on redeeming Fund shares, including
the special redemption privileges, please see How to Redeem
Shares.

MANAGEMENT AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") is investment adviser to Government Income Fund,
Intermediate Bond Fund, Income Fund, and High Yield Portfolio. In
addition, it provides administrative and bookkeeping and
accounting services to each Fund and High Yield Portfolio. For a
description of the Adviser and the fees paid by the Funds and High
Yield Portfolio, see Management of the Funds.

If you have any additional questions about the Funds or High Yield
Portfolio, please feel free to discuss them with an account
representative by calling 800-338-2550.

<PAGE>

FEE TABLE
Inter-
Government mediate High
Income Bond Income Yield
Fund Fund Fund Fund
---------- ------ ------ -----
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None None None None
Sales Load Imposed on Reinvested
Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees* None None None None
Exchange Fees None None None None

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets; after fee waiver, if
applicable)
Management and Administrative
Fees (after fee waiver, if
applicable) 0.43% 0.50% 0.62% 0.46%
12b-1 Fees None None None None
Other Expenses 0.57% 0.25% 0.26% 0.54%
----- ----- ----- -----
Total Fund Operating Expenses
(after fee waiver, if
applicable) 1.00% 0.75% 0.88% 1.00%
===== ===== ===== =====
___________________
*There is a $3.50 charge for wiring redemption proceeds to your
bank. This fee will be changed to $7.00 effective February 1, 1997.

EXAMPLES.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:

1 year 3 years 5 years 10 years
------ ------- ------- --------
Government Income Fund $10 $32 $55 $122
Intermediate Bond Fund 8 24 42 93
Income Fund 9 28 49 109
High Yield Fund 10 32 55 122

The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in a Fund. Because High Yield Fund has
no operating history, the information in the table is based upon
an estimate of expenses, assuming net assets of $50 million. For
Government Income Fund, the table is based upon actual expenses
incurred in the last fiscal year. For Intermediate Bond Fund
and Income Fund, the table is based upon actual expenses incurred
in the last fiscal year before any expense reimbursement by
the Adviser. The figures in the Examples assume that the
percentage amounts listed for the respective Funds under Annual
Fund Operating Expenses remain the same during each of the
periods, that all income dividends and capital gain distributions
are reinvested in additional Fund shares, and that, for purposes
of management fee breakpoints, if any, the Funds' respective net
assets remain at the same levels as in the most recently completed
fiscal year.

From time to time, the Adviser may voluntarily waive a portion of
its fees payable by a Fund. The Adviser has agreed to voluntarily
waive such fees to the extent ordinary operating expenses exceed a
certain percentage of each Fund's annual average net assets as follows:
Government Income Fund, 1%; and High Yield Fund, 1%. These commitments
expire on October 31, 1997, subject to earlier termination by the
Adviser on 30 days' notice to the Fund. An expense waiver for
Intermediate Bond Fund expired on October 31, 1996, and an expense
limitation for Income Fund was terminated effective October 31, 1996.
Absent such expense undertakings, Management and Administrative Fees
and Total Fund Operating Expenses would have been 0.60% and 1.17%
for Government Income Fund; and the estimated Management and
Administrative Fees and Total Fund Operating Expenses would be
0.65% and 1.19% for High Yield Fund. Any such reimbursement will
lower a Fund's overall expense ratio and increase its overall
return to investors. (Also see Management of the Funds--Fees
and Expenses.)

High Yield Fund pays the Adviser an administrative fee based on
the Fund's average daily net assets and High Yield Portfolio pays
the Adviser a management fee based on High Yield Portfolio's
average daily net assets. The management fee and expenses of both
High Yield Fund and High Yield Portfolio are summarized in the Fee
Table above and are described under Management of the Funds. The
Fund bears its proportionate share of Portfolio expenses. The
Trustees of Income Trust have considered whether the annual
operating expenses of the Fund, including its proportionate share
of the expenses of High Yield Portfolio, would be more or less
than if the Fund invested directly in the securities held by High
Yield Portfolio, and concluded that the Fund's expenses would not
be materially greater in such case.

The figures in the Examples are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less
than those shown. Although information such as that shown in the
Examples and Fee Table is useful in reviewing the Funds' expenses
and in providing a basis for comparison with other mutual funds,
it should not be used for comparison with other investments using
different assumptions or time periods.

FINANCIAL HIGHLIGHTS

The tables below reflect the results of operations of the Funds
(other than High Yield Fund, which has not yet commenced operations) on
a per-share basis and have been audited by Ernst & Young LLP,
independent auditors. These tables should be read in conjunction with
the respective Fund's financial statements and notes thereto. The
Funds' annual report, which may be obtained from Income Trust without
charge upon request, contains additional performance information.

<PAGE>
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD .... $10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48 $ 9.85
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... .72 .74 .78 .76 .75 .72 .64 .56 .62 .61
Net realized and
unrealized gains (losses)
on investments ........... (.31) (.15) .18 (.11) .15 .59 .31 (.77) .37 (.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................ .41 .59 .96 .65 .90 1.31 .95 (.21) .99 .46
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net investment income....... (.72) (.74) (.78) (.76) (.75) (.72) (.64) (.56) (.62) (.61)
Net realized capital gains.. -- (.05) -- -- -- -- (.25) (.01) -- --
In excess of realized gains.. -- -- -- -- -- -- -- (.20) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ....... (.72) (.79) (.78) (.76) (.75) (.72) (.89) (.77) (.62) (.61)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD.............. $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48 $ 9.85 $9.70
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets (a)... 1.00% 1.00% 1.00% 1.00% 1.00% 0.99% 0.95% 0.98% 1.00% 1.00%
Ratio of net investment
income to average net
assets (b)............... 7.13% 7.68% 8.19% 7.90% 7.65% 7.05% 6.25% 5.49% 6.56% 6.13%
Portfolio turnover rate.... 205% 237% 239% 181% 136% 139% 170% 167% 225% 73%
Total return.............. 4.01% 6.35% 10.61% 6.92% 9.61% 13.75% 9.60% (2.26%) 10.94% 4.63%
Net assets, end of
period (000 omitted)..... $22,656 $26,859 $32,011 $46,853 $49,952 $58,978 $61,591 $45,836 $37,280 $37,210
</TABLE>

INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>

Years Ended June 30.
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $9.92 $8.77 $8.51 $8.65 $8.38 $8.53 $8.99 $9.26 $8.44 $8.67
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........ .74 .68 .74 .73 .69 .69 .65 .56 .58 .58
Net realized and unrealized
gains (losses) on
investments............... (.41) (.12) .14 (.28) .16 .46 .27 (.59) .23 (.09)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................. .33 .56 .88 .45 .85 1.15 .92 (.03) .81 .49
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net investment income....... (.74) (.68) (.74) (.72) (.70) (.69) (.65) (.56) (.58) (.58)
Net realized capital gains.. (.74) (.14) -- -- -- -- -- (.08) -- --
In excess of realized gains. -- -- -- -- -- -- -- (.15) -- --
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions....... (1.48) (.82) (.74) (.72) (.70) (.69) (.65) (.79) (.58) (.58)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD................ $8.77 $8.51 $8.65 $8.38 $8.53 $8.99 $9.26 $8.44 $8.67 $8.58
===== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets (a)... 0.68% 0.73% 0.73% 0.74% 0.73% 0.70% 0.67% 0.70% 0.70% 0.70%
Ratio of net investment
income to average net
assets (b).............. 7.94% 7.97% 8.71% 8.60% 8.17% 7.87% 7.22% 6.20% 6.94% 6.79%
Portfolio turnover rate... 230% 273% 197% 296% 239% 202% 214% 206% 162% 202%
Total return.............. 3.40% 6.92% 10.97% 5.33% 10.62% 14.02% 10.59% (0.47%) 10.11% 5.76%
Net assets, end of
period (000 omitted)....$188,674 $162,225 $165,056 $161,439 $184,444 $242,948 $311,728 $302,507 $301,733 $298,112
</TABLE>

INCOME FUND
<TABLE>
<CAPTION>
Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36 $9.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........ .98 .95 .95 .92 .80 .76 .75 .69 .71 .71
Net realized and
unrealized gains (losses)
on investments............ (.23) (.11) .05 (.70) -- .56 .59 (.74) .43 (.16)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. .75 .84 1.00 .22 .80 1.32 1.34 (.05) 1.14 .55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS FROM NET
INVESTMENT INCOME......... (.98) (.95) (.95) (.92) (.80) (.76) (.75) (.69) (.71) (.71)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD................... $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36 $ 9.79 $9.63
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets (a).... 0.96% 0.91% 0.90% 0.93% 0.95% 0.90% 0.82% 0.82% 0.82% 0.82%
Ratio of net investment
income to average net
assets (b)............... 9.90% 10.08% 9.97% 10.02% 8.98% 8.20% 7.62% 6.94% 7.55% 7.26%
Portfolio turnover rate.... 153% 158% 94% 90% 77% 76% 39% 53% 64% 135%
Total return............... 7.70% 9.38% 11.06% 2.48% 9.30% 15.30% 14.64% (0.69%) 12.79% 5.70%
Net assets, end of
period (000 omitted).... $91,916 $96,611 $110,376 $89,023 $93,952 $112,706 $151,594 $158,886 $174,327 $309,564
</TABLE>

*Annualized.
**Not annualized.
(a) If the Funds had paid all of their expenses and there had been
no reimbursement of expenses by the Adviser, these ratios
would have been: for Government Income Fund, 1.44%, 1.37%,
1.21% and 1.07% for the years ended June 30, 1987 through
1990, respectively, and 1.09% and 1.17% for the years ended
June 30, 1995 and 1996; for Intermediate Bond Fund, 0.71% and
0.75% for the years ended June 30, 1995 and 1996,
respectively; and for Income Fund, 0.83%, 0.85% and 0.88% for
the years ended June 30, 1994, 1995 and 1996, respectively.
(b) Computed giving effect to the Adviser's fee waiver.

THE FUNDS

The mutual funds offered by this prospectus are STEIN ROE
GOVERNMENT INCOME FUND ("Government Income Fund"), STEIN ROE
INTERMEDIATE BOND FUND ("Intermediate Bond Fund"), STEIN ROE
INCOME FUND ("Income Fund"), and STEIN ROE HIGH YIELD FUND ("High
Yield Fund") (collectively, the "Funds"). Each of the Funds is a
no-load, diversified "mutual fund." No-load funds do not impose
commissions or charges when shares are purchased or redeemed.
Mutual funds sell their own shares to investors and invest the
proceeds in a portfolio of securities. A mutual fund allows you
to pool your money with that of other investors in order to obtain
professional investment management. Mutual funds generally make
it possible for you to obtain greater diversification of your
investments and simplify your recordkeeping.

The Funds are series of the Stein Roe Income Trust ("Income
Trust"), an open-end management investment company, which is
authorized to issue shares of beneficial interest in separate
series. Each series of Income Trust other than High Yield Fund
invests in a separate portfolio of securities and other assets,
with its own objectives and policies. High Yield Fund invests all
of its investable assets in shares of SR&F High Yield Portfolio
("High Yield Portfolio"), which is a series of shares of SR&F Base
Trust ("Base Trust").

Stein Roe & Farnham Incorporated (the "Adviser") provides
portfolio management, administrative, and accounting and
bookkeeping services to the Funds and High Yield Portfolio. The
Adviser also manages several other mutual funds with different
investment objectives, including equity funds, international
funds, tax-exempt bond funds, and money market funds. To obtain
prospectuses and other information on any of those mutual funds,
please call 800-338-2550.

Rather than invest in securities directly, each Fund may seek to
achieve its investment objective by converting to a "master
fund/feeder fund" structure. Under that structure, the Fund and
other investment companies and/or institutional investors with the
same investment objective would invest their assets in another
investment company having the same investment objective and
substantially the same investment policies and restrictions as the
Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and reduce costs. It is expected that
any such investment company would be managed by the Adviser in
substantially the same manner as the Fund. The only Fund
currently operating under the master fund/feeder fund structure is
High Yield Fund. If another Fund were to convert to the master
fund/feeder fund structure, it would require the approval of the
Board of Trustees of Income Trust, and shareholders of that Fund
would be given at least 30 days' prior notice. Such investment
would be made only if the Trustees determine it to be in the best
interests of a Fund and its shareholders. (See Organization and
Description of Shares--Special Considerations Regarding Master
Fund/Feeder Fund Structure.)

HOW THE FUNDS INVEST

Government Income Fund, Intermediate Bond Fund, and Income Fund
each seek a high level of current income. High Yield Fund and
High Yield Portfolio each seek total return by investing for a
high level of current income and capital growth. Each Fund
invests as described below. Further information on portfolio
investments and strategies may be found under Portfolio
Investments and Strategies in this prospectus and in the Statement
of Additional Information.

GOVERNMENT INCOME FUND. This Fund's investment objective is to
provide a high level of current income. It invests primarily in
securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities ("U.S.
Government Securities"). Depending on market conditions, the Fund
may invest a substantial portion of its assets in mortgage-backed
debt securities issued by GNMA, FNMA, and FHLMC.

Because the Fund's investment policy permits it to invest in U.S.
Government Securities that are not backed by the full faith and
credit of the U.S. Treasury, investment in the Fund may involve
risks that are different in some respects from an investment in a
fund that invests only in securities that are backed by the full
faith and credit of the U.S. Treasury. Such risks may include a
greater risk of loss of principal and interest on the securities
in the Fund's portfolio that are supported only by the issuing or
guaranteeing U.S. Government agency or instrumentality, since the
Fund must look principally or solely to that entity for ultimate
repayment.

Under normal market conditions, the Fund will invest at least 80%
of its assets in U.S. Government Securities. The Fund may also
invest up to 20% of its assets in other types of debt securities,
including debt securities of domestic issuers and of foreign
issuers payable in U.S. dollars, collateralized mortgage
obligations ("CMOs") and principal portions or coupon portions of
U.S. Government Securities that have been separated (stripped) by
banks, brokerage firms, or other entities. Stripped securities
are usually sold separately in the form of receipts or
certificates representing undivided interests in the stripped
portion. CMOs are securities collateralized by mortgages and
mortgage-backed securities. CMOs are not guaranteed by either the
U.S. Government or by its agencies or instrumentalities. Stripped
securities may be more volatile than non-stripped securities. The
staff of the Securities and Exchange Commission believes that
stripped securities are illiquid. The Fund has temporarily agreed
to treat stripped securities as subject to the Fund's restriction
on investment in illiquid securities. The Fund will invest in
debt securities rated at least investment grade or, if unrated,
deemed by the Adviser to be of comparable quality. Securities
rated in the fourth grade are neither highly protected nor poorly
secured. Such securities have some speculative characteristics,
and changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity of the issuers of such
securities to make principal and interest payments than is the
case for issuers of higher grade securities. If the rating of a
security held by the Fund is lost or reduced below investment
grade, the Fund is not required to dispose of the security, but
the Adviser will consider that fact in determining whether the
Fund should continue to hold the security.

INTERMEDIATE BOND FUND. This Fund's investment objective is to
provide a high level of current income, consistent with the
preservation of capital, by investing primarily in marketable debt
securities. Under normal market conditions, the Fund will invest
at least 65% of the value of its total assets (taken at market
value at the time of investment) in convertible and non-
convertible bonds and debentures, and at least 60% of its assets
will be invested in the following:

(1) Marketable straight-debt securities of domestic issuers, and
of foreign issuers payable in U.S. dollars, rated at time of
purchase within the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's") or by Standard & Poor's
Corporation ("S&P");
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at
time of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.

Under normal market conditions, the Fund invests at least 65% of
its assets in securities with an average life of between three and
ten years, and expects that the dollar-weighted average life of
its portfolio will be between three and ten years. Average life
is the weighted average period over which the Adviser expects the
principal to be paid, and differs from stated maturity in that it
estimates the effect of expected principal prepayments and call
provisions. With respect to GNMA securities and other mortgage-
backed securities, average life is likely to be substantially less
than the stated maturity of the mortgages in the underlying pools.
With respect to obligations with call provisions, average life is
typically the next call date on which the obligation reasonably
may be expected to be called. Securities without prepayment or
call provisions generally have an average life equal to their
stated maturity. During periods of rising interest rates, the
average life of mortgage-backed securities and callable
obligations may increase substantially because they are not likely
to be prepaid, which may result in greater net asset value
fluctuation.

The Fund also may invest in other debt securities (including those
convertible into or carrying warrants to purchase common stocks or
other equity interests, and privately placed debt securities),
preferred stocks, and marketable common stocks that the Adviser
considers likely to yield relatively high income in relation to
cost.

The Fund may invest up to 35% of its total assets in debt
securities that are rated below investment grade (with no minimum
permitted rating) and that, on balance, are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy. (See
Portfolio Investments and Strategies and Risks and Investment
Considerations for more information on the risks associated with
investing in debt securities rated below investment grade.)

For the fiscal year ended June 30, 1996, the Fund's portfolio was
invested, on average, as follows: high-quality short-term
instruments, 4.3%; U.S. Government Securities, 16.7%; AAA, 10.0%;
AA, 6.8%; A, 24.8%; BBB, 23.4%; BB, 14.0%; and unrated, 0.0%. The
ratings are based on a dollar-weighted average, computed monthly,
and reflect the higher of S&P or Moody's ratings. The ratings do
not necessarily reflect the current or future composition of the
Fund.

INCOME FUND. The investment objective of Income Fund is to
provide a high level of current income. Consistent with that
investment objective, capital preservation and capital
appreciation are regarded as secondary objectives.

Income Fund attempts to achieve its objective by investing
principally in medium-quality debt securities, which are
obligations of issuers that the Adviser believes possess adequate,
but not outstanding, capacities to service their debt securities,
such as securities rated A or Baa by Moody's or A or BBB by S&P.
The Adviser generally attributes to medium-quality securities the
same characteristics as do rating services.

Although Income Fund will invest at least 60% of its assets in
medium- or higher-quality debt securities, it may also invest to a
lesser extent in debt securities of lower quality (in the case of
rated securities, having a rating by Moody's or S&P of not less
than C). Although the Fund can invest up to 40% of its assets in
lower-quality securities, it does not intend to invest more than
35% in lower-quality securities. Lower-quality debt securities
are obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." Income Fund may invest in lower-
quality debt securities; for example, if the Adviser believes the
financial condition of the issuers or the protection offered to
the particular obligations is stronger than is indicated by low
ratings or otherwise. (See Portfolio Investments and Strategies
and Risks and Investment Considerations for more information on
the risks associated with investing in medium- and lower-quality
debt securities.) Income Fund may invest in higher-quality
securities; for example, under extraordinary economic or financial
market conditions, or when the spreads between the yields on
medium- and high-quality securities are relatively narrow.

Some issuers of debt securities choose not to have their
securities rated by a rating service, and Income Fund may invest
in unrated securities that the Adviser believes are suitable for
investment.

Under normal market conditions, Income Fund will invest at least
65% of the value of its total assets (taken at market value) in
convertible and non-convertible bonds and debentures. Such
securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by Income Fund for a sufficient time to permit orderly disposition
thereof or to establish long-term holding periods for federal
income tax purposes.

Income Fund may invest up to 35% of its total assets in other debt
securities, marketable preferred and common stocks, and foreign
and municipal securities that the Adviser considers likely to
yield relatively high income in relation to costs, and rights to
acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the
interest on which is generally exempt from federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.

For the fiscal year ended June 30, 1996, Income Fund's portfolio
was invested, on average, as follows: high-quality short-term
instruments, 3.2%; U.S. Government Securities, 4.5%; AAA, 0.3%;
AA, 8.1%; A, 20.5%; BBB, 30.2%; BB, 25.5%; B, 5.8%; and unrated,
1.9%. The ratings are based on a dollar-weighted average,
computed monthly, and reflect the higher of S&P or Moody's
ratings. The ratings do not necessarily reflect the current or
future composition of Income Fund.

HIGH YIELD FUND. High Yield Fund seeks to achieve its objective
by investing all of its investable assets in High Yield Portfolio.
The investment policies of High Yield Portfolio are substantially
identical to those of the Fund. High Yield Portfolio seeks total
return by investing for a high level of current income and capital
growth.

High Yield Portfolio invests principally in high-yield, high-risk
medium- and lower-quality debt securities. The medium- and lower-
quality debt securities in which High Yield Portfolio will invest
normally offer a current yield or yield to maturity that is
significantly higher than the yield from securities rated in the
three highest categories assigned by rating services such as S&P
or Moody's.

Under normal circumstances, at least 65% of High Yield Portfolio's
assets will be invested in high-yield, high-risk medium- and
lower-quality debt securities rated lower than Baa by Moody's or
lower than BBB by S&P, or equivalent ratings as determined by
other rating agencies or unrated securities that the Adviser
determines to be of comparable quality. Medium-quality debt
securities, although considered investment grade, have some
speculative characteristics. Lower-quality debt securities are
obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." Some issuers of debt securities
choose not to have their securities rated by a rating service, and
High Yield Portfolio may invest in unrated securities that the
Adviser believes are suitable for investment. High Yield
Portfolio may invest in debt obligations that are in default, but
such obligations are not expected to exceed 10% of High Yield
Portfolio's assets. (See Portfolio Investments and Strategies and
Risks and Investment Considerations for more information on the
risks associated with investing in medium- and lower-quality debt
securities.)

High Yield Portfolio may invest up to 35% of its total assets in
other securities including, but not limited to, pay-in-kind bonds,
securities issued in private placements, bank loans, zero coupon
bonds, foreign securities, convertible securities, futures, and
options. High Yield Portfolio may also invest in higher-quality
debt securities. Under normal market conditions, however, High
Yield Portfolio is unlikely to emphasize higher-quality debt
securities since generally they offer lower yields than medium-
and lower-quality debt securities with similar maturities. High
Yield Portfolio may also invest in common stocks and securities
that are convertible into common stocks, such as warrants.

PORTFOLIO INVESTMENTS AND STRATEGIES

For purposes of discussion under Portfolio Investments and
Strategies, the term "Fund" refers to Government Income Fund,
Intermediate Bond Fund, Income Fund, High Yield Fund, and High
Yield Portfolio.

U.S. GOVERNMENT SECURITIES. U.S. Government Securities include:
(i) bills, notes, bonds, and other debt securities, differing as
to maturity and rates of interest, that are issued by and are
direct obligations of the U.S. Treasury; and (ii) other securities
that are issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or instrumentalities and that
include, but are not limited to, Government National Mortgage
Association ("GNMA"), Federal Farm Credit Banks, Federal Home Loan
Banks, Farmers Home Administration, Federal Home Loan Mortgage
Corporation ("FHLMC"), and Federal National Mortgage Association
("FNMA"). U.S. Government Securities are generally viewed by the
Adviser as being among the safest of debt securities with respect
to the timely payment of principal and interest (but not with
respect to any premium paid on purchase), but generally bear a
lower rate of interest than corporate debt securities. However,
they are subject to market risk like other debt securities, and
therefore the Fund's shares can be expected to fluctuate in value.

MEDIUM- AND LOWER-QUALITY DEBT SECURITIES [INTERMEDIATE BOND FUND,
INCOME FUND, HIGH YIELD FUND, AND HIGH YIELD PORTFOLIO ONLY]
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. A Fund will diversify its holdings among a
number of issuers to help minimize this risk. An economic
downturn could severely disrupt this market and adversely affect
the value of outstanding bonds and the ability of the issuers to
repay principal and interest. In addition, lower-quality bonds
are less sensitive to interest rate changes than higher-quality
instruments (see Risks and Investment Considerations) and
generally are more sensitive to adverse economic changes or
individual corporate developments. During a period of adverse
economic changes, including a period of rising interest rates,
issuers of such bonds may experience difficulty in servicing their
principal and interest payment obligations.

Lower-quality debt securities are obligations of issuers that are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and, therefore, carry greater investment
risk, including the possibility of issuer default and bankruptcy,
and are commonly referred to as "junk bonds." The lowest rating
assigned by Moody's is for bonds that can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.

Achievement of the investment objective will be more dependent on
the Adviser's credit analysis than would be the case if a Fund or
High Yield Portfolio were investing in higher-quality debt
securities. Since the ratings of rating services (which evaluate
the safety of principal and interest payments, not market risks)
are used only as preliminary indicators of investment quality, the
Adviser employs its own credit research and analysis, from which
it has developed a proprietary credit rating system based upon
comparative credit analyses of issuers within the same industry.
These analyses may take into consideration such quantitative
factors as an issuer's present and potential liquidity,
profitability, internal capability to generate funds, debt/equity
ratio and debt servicing capabilities, and such qualitative
factors as an assessment of management, industry characteristics,
accounting methodology, and foreign business exposure.

Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and a Fund or High Yield Portfolio may have
greater difficulty selling its portfolio securities. (See Net
Asset Value.) The market value of these securities and their
liquidity may be affected by adverse publicity and investor
perceptions.

DERIVATIVES. Consistent with its objective, each Fund may invest
in a broad array of financial instruments and securities,
including conventional exchange-traded and non-exchange traded
options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, and other instruments, the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives"). No Fund expects to invest more than 5%
of its net assets in any type of Derivative except: for each Fund,
options, futures contracts, and futures options; and for
Government Income Fund and Intermediate Bond Fund, mortgage or
other asset-backed securities.

Derivatives are most often used to manage investment risk or to
create an investment position indirectly because they are more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.

The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.

MORTGAGE AND OTHER ASSET-BACKED DEBT SECURITIES. Government
Income Fund, Intermediate Bond Fund, and High Yield Portfolio each
may invest in securities secured by mortgages or other assets such
as automobile or home improvement loans and credit card
receivables. These instruments may be issued or guaranteed by the
U.S. Government or by its agencies or instrumentalities or by
private entities such as commercial, mortgage and investment banks
and financial companies or financial subsidiaries of industrial
companies.

Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.

The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal on
FHLMC securities. FNMA and FHLMC securities are not backed by the
full faith and credit of the U.S. Treasury.

Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by the Fund on purchase of such securities; in
addition, the proceeds of prepayment would likely be invested at
lower interest rates.

Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment of the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and
market factors. If mortgages are pre-paid during periods of
declining interest rates, there would be a resulting loss of the
full-term benefit of any premium paid by the Fund on purchase of
the CMO, and the proceeds of pre-payment would likely be invested
at lower interest rates. Each Fund tends to invest in CMOs of
classes known as planned amortization classes ("PACs") which have
pre-payment protection features tending to make them less
susceptible to price volatility.

Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.

Asset-backed securities tend to experience greater price
volatility than straight debt securities.

FLOATING RATE INSTRUMENTS. Each Fund may also invest in floating
rate instruments which provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in
amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may
be materially shorter than their stated maturities. To the extent
such instruments are subject to lifetime or periodic interest rate
caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted
duration is an inverse relationship between market price and
interest rates and refers to the approximate percentage change in
price for a 100 basis point change in yield. For example, if
interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of 2 would increase by
approximately 2%. Income Fund and High Yield Portfolio do not
intend to invest more than 5% of net assets in floating rate
instruments. Government Income Fund and Intermediate Bond Fund do
not intend to invest more than 10% of net assets in floating rate
instruments.

FUTURES AND OPTIONS. Each Fund may purchase and write both call
options and put options on securities, indexes and foreign
currencies, and enter into interest rate, index and foreign
currency futures contracts. Each Fund may also write options on
such futures contracts and purchase other types of forward or
investment contracts linked to individual securities, indexes or
other benchmarks, consistent with its investment objective, in
order to provide additional revenue, or to hedge against changes
in security prices, interest rates, or currency fluctuations.
Each Fund may write a call or put option only if the option is
covered. As the writer of a covered call option, the Fund
foregoes, during the option's life, the opportunity to profit from
increases in market value of the security covering the call option
above the sum of the premium and the exercise price of the call.
There can be no assurance that a liquid market will exist when a
Fund seeks to close out a position. Because of low margin
deposits required, the use of futures contracts involves a high
degree of leverage, and may result in losses in excess of the
amount of the margin deposit. Foreign currency futures and
options are permitted only if a Fund is permitted to invest in
foreign securities.

FOREIGN SECURITIES. Intermediate Bond Fund, Income Fund, and High
Yield Portfolio each may invest in foreign securities. No Fund
will invest in a foreign security if, as a result of such
investment, more than 25% of its total assets would be invested in
foreign securities. For purposes of this restriction, foreign
debt securities do not include securities represented by American
Depositary Receipts ("ADRs"), foreign debt securities denominated
in U.S. dollars, or securities guaranteed by a U.S. person such as
a corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Funds may invest in sponsored or unsponsored ADRs. In addition
to, or in lieu of, such direct investment, a Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Funds may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
At June 30, 1996, no portion of any Fund's assets was invested in
foreign securities as defined above, and no Fund intends to invest
more than 5% of its net assets in foreign securities. (See Risks
and Investment Considerations.)

LENDING OF PORTFOLIO SECURITIES. Subject to certain restrictions,
each Fund may lend its portfolio securities to broker-dealers and
banks. Any such loan must be continuously secured by collateral
in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned
by the Fund. The Fund would continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return that may be in
the form of a fixed fee or a percentage of the collateral. The
Fund would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five
business days. In the event of bankruptcy or other default of the
borrower, the Fund could experience both delays in liquidating the
loan collateral or recovering the loaned securities and losses
including (a) possible decline in the value of the collateral or
in the value of the securities loaned during the period while the
Fund seeks to enforce its rights thereto; (b) possible subnormal
levels of income and lack of access to income during this period;
and (c) expenses of enforcing its rights.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
Each Fund's assets may include securities purchased on a when-
issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. A Fund makes such commitments
only with the intention of actually acquiring the securities, but
may sell the securities before settlement date if the Adviser
deems it advisable for investment reasons. Securities purchased
in this manner involve a risk of loss if the value of the security
purchased declines before the settlement date.

When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that a Fund will sell
securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value the security repurchased
will be less than the security sold; and transaction costs
exceeding the return earned by the Fund on the sales proceeds of
the dollar roll.

PIK AND ZERO COUPON BONDS. Each Fund may invest in both zero
coupon bonds and bonds the interest on which is payable in kind
("PIK bonds"). A zero coupon bond is a bond that does not pay
interest for its entire life. A PIK bond pays interest in the
form of additional securities. The market prices of both zero
coupon and PIK bonds are affected to a greater extent by changes
in prevailing levels of interest rates and thereby tend to be more
volatile in price than securities that pay interest periodically
and in cash. In addition, because a Fund accrues income with
respect to these securities prior to the receipt of such interest
in cash, it may have to dispose of portfolio securities under
disadvantageous circumstances in order to obtain cash needed to
pay income dividends in amounts necessary to avoid unfavorable tax
consequences. High Yield Portfolio may invest up to 20% of its
total assets in PIK and zero coupon bonds.

SHORT SALES AGAINST THE BOX. Each Fund may sell short securities
the Fund owns or has the right to acquire without further
consideration, a technique called selling short "against the box."
Short sales against the box may protect the Fund against the risk
of losses in the value of its portfolio securities because any
unrealized losses with respect to such securities should be wholly
or partly offset by a corresponding gain in the short position.
However, any potential gains in such securities should be wholly
or partially offset by a corresponding loss in the short position.
Short sales against the box may be used to lock in a profit on a
security when, for tax reasons or otherwise, the Adviser does not
want to sell the security. For a more complete explanation,
please refer to the Statement of Additional Information.

PORTFOLIO TURNOVER. In attempting to attain its objective, each
Fund may sell portfolio securities without regard to the period of
time they have been held. Further, the Adviser may purchase and
sell securities for the portfolios of Government Income Fund,
Income Fund, and High Yield Portfolio with a view to maximizing
current return, even if portfolio changes would cause the
realization of capital gains. Although the average stated
maturity of the portfolios of Government Income Fund and Income
Fund generally will exceed ten years and the average stated
maturity of High Yield Portfolio will be from five to ten years,
the Adviser may adjust the average effective maturity of a Fund's
portfolio from time to time, depending on its assessment of the
relative yields available on securities of different maturities
and its expectations of future changes in interest rates. As a
result, the turnover rate of the Funds may vary from year to year.
The turnover rate for High Yield Portfolio may exceed 100%, but is
not expected to exceed 200% under normal market conditions. A
high rate of portfolio turnover may result in increased
transaction expenses and the realization of capital gains (which
may be taxable) or losses. (See Financial Highlights and
Distributions and Income Taxes.)

RESTRICTIONS ON THE FUNDS' INVESTMENTS

For purposes of discussion under Restrictions on the Fund's
Investments and Risks and Investment Considerations, the term
"Fund" refers to Government Income Fund, Intermediate Bond Fund,
Income Fund, High Yield Fund, and High Yield Portfolio.

No Fund may invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities; or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
each Fund, but not High Yield Portfolio, may invest all of its
assets in another registered investment company having the same
investment objective and substantially similar investment policies
as the Fund.

No Fund may make loans except that each Fund may (1) purchase
money market instruments and enter into repurchase agreements /1/;
(2) acquire publicly-distributed or privately-placed debt
securities; (3) lend its portfolio securities under certain
conditions; and (4) participate in an interfund lending program
with other Stein Roe Funds. A Fund may not borrow money, except
for non-leveraging, temporary, or emergency purposes or in
connection with participation in the interfund lending program.
Neither a Fund's aggregate borrowings (including reverse
repurchase agreements) nor its aggregate loans at any one time may
exceed 33 1/3% of the value of its total assets. Additional
securities may not be purchased when borrowings, less proceeds
receivable from sales of portfolio securities, exceed 5% of total
assets.

The policies set forth in the second and third paragraphs under
Restrictions on the Funds' Investments (but not the footnote) are
fundamental policies of each Fund./2/ The Statement of Additional
Information contains all of the investment restrictions.
- --------------
/1/A repurchase agreement involves a sale of securities to a Fund
with the concurrent agreement of the seller (bank or securities
dealer) to repurchase the securities at the same price plus an
amount equal to an agreed-upon interest rate within a specified
time. In the event of a bankruptcy or other default of a seller
of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying securities and losses. The Fund may
not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
/2/ A fundamental policy may be changed only with the approval of
a "majority of the outstanding vote securities" of a Fund as
defined in the Investment Company Act.
- -------------

RISKS AND INVESTMENT CONSIDERATIONS

All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although each Fund
seeks to reduce risk by investing in a diversified portfolio, this
does not eliminate all risk. The risks inherent in each Fund
depend primarily upon the term and quality of the obligations in
that Fund's portfolio, as well as on market conditions.

A decline in prevailing levels of interest rates generally
increases the value of securities in a Fund's portfolio, while an
increase in rates usually reduces the value of those securities.
As a result, interest rate fluctuations will affect a Fund's net
asset value, but not the income received by the Fund from its
portfolio securities. (Because yields on debt securities
available for purchase by a Fund vary over time, no specific yield
on shares of a Fund can be assured.) In addition, if the bonds in
a Fund's portfolio contain call, prepayment or redemption
provisions, during a period of declining interest rates, these
securities are likely to be redeemed, and the Fund will probably
be unable to replace them with securities having as great a yield.

Government Income Fund is designed for investors who seek high
income with minimum risk other than the risk of changes in net
asset value caused by fluctuations in prevailing levels of
interest rates. Intermediate Bond Fund is appropriate for
investors who seek high income with less net asset value
fluctuation from interest rate changes than that of a longer-term
fund, and who can accept greater levels of credit and other risks
associated with securities that are rated below investment grade.
Income Fund and High Yield Fund are designed for investors who
seek a higher level of income and who can accept greater levels of
credit and other risks associated with securities of medium or
lower quality. Although both Income Fund and High Yield Fund
invest in medium- and lower-quality debt securities, High Yield
Fund is designed for investors who can accept the heightened level
of risk and principal fluctuation which might result from a
portfolio that invests at least 65% of its assets in medium- and
lower-quality debt securities, while Income Fund, which invests up
to 60% of its assets in high- and medium-quality bonds, can invest
only up to 40% of its assets in such securities.

Investments in foreign securities, including ADRs, represent both
risks and opportunities not typically associated with investments
in domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, less market
liquidity, more market volatility, less well-developed and
regulated markets, and greater political instability. In
addition, various restrictions by foreign governments on
investments by non-residents may apply, including imposition of
exchange controls and withholding taxes on dividends, and seizure
or nationalization of investments owned by non-residents. Foreign
investments also tend to involve higher transaction and custody
costs.

Intermediate Bond Fund, Income Fund, and High Yield Portfolio each
may enter into foreign currency forward contracts and use options
and futures contracts, as described elsewhere in this prospectus,
to limit or reduce foreign currency risk.

There can be no assurance that a Fund or High Yield Portfolio will
achieve its objective, nor can a Fund assure that payments of
interest and principal on portfolio securities will be made when
due. If, after purchase by a Fund, the rating of a portfolio
security is lost or reduced, the Fund would not be required to
sell the security, but the Adviser would consider such a change in
deciding whether the Fund should retain the security in its
portfolio.

The investment objective of each Fund is not fundamental and may
be changed by the Board of Trustees without a vote of
shareholders. If there were a change in a Fund's investment
objective, such change may result in the Fund having an investment
objective different from the objective that the shareholder
considered appropriate at the time of investment in the Fund.

HOW TO PURCHASE SHARES

You may purchase shares of any of the Funds by check, by wire, by
electronic transfer, or by exchange from your account with another
Stein Roe Fund. The initial purchase minimum per Fund account is
$2,500; the minimum for Uniform Gifts/Transfers to Minors Act
("UGMA") accounts is $1,000; the minimum for accounts established
under an automatic investment plan (i.e., Regular Investments,
Dividend Purchase Option, or the Automatic Exchange Plan) is
$1,000 for regular accounts and $500 for UGMA accounts; and the
minimum per account for Stein Roe IRAs is $500. The initial
purchase minimum is waived for shareholders who participate in the
Stein Roe Counselor [SERVICE MARK] or Personal Counselor [SERVICE
MARK] Programs. Subsequent purchases must be at least $100, or at
least $50 if you purchase by electronic transfer. If you wish to
purchase shares to be held by a tax-sheltered retirement plan
sponsored by the Adviser, you must obtain special forms for those
plans. (See Shareholder Services.)

You may make subsequent investments by submitting a check along
with either the stub from your Fund account confirmation statement
or a note indicating the amount of the purchase, your account
number, and the name in which your account is registered. Each
individual check submitted for purchase must be at least $100, and
Income Trust generally will not accept cash, drafts, third party
checks, or checks drawn on banks outside of the United States.
Should an order to purchase shares of a Fund be cancelled because
your check does not clear, you will be responsible for any
resulting loss incurred by that Fund.

BY WIRE. You also may pay for shares by instructing your bank to
wire federal funds (monies of member banks within the Federal
Reserve System) to the First National Bank of Boston. Your bank
may charge you a fee for sending the wire. If you are opening a
new account by wire transfer, you must first call 800-338-2550 to
request an account number and furnish your social security or
other tax identification number. Neither the Funds nor Income
Trust will be responsible for the consequences of delays,
including delays in the banking or Federal Reserve wire systems.
Your bank must include the full name(s) in which your account is
registered and your Fund account number, and should address its
wire as follows:

Fund Numbers:
10--Government Income Fund
35--Intermediate Bond Fund
09--Income Fund
15--High Yield Fund

Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should address their
wires as follows:

BY ELECTRONIC TRANSFER. You may also make subsequent investments
by an electronic transfer of funds from your bank account.
Electronic transfer allows you to make purchases at your request
("Special Investments") by calling 800-338-2550 or at pre-
scheduled intervals ("Regular Investments") elected on your
Application. (See Shareholder Services.) Electronic transfer
purchases are subject to a $50 minimum and a $100,000 maximum.
You may not open a new account through electronic transfer.
Should an order to purchase shares of a Fund be cancelled because
your electronic transfer does not clear, you will be responsible
for any resulting loss incurred by that Fund.

BY EXCHANGE. You may purchase shares by exchange of shares from
another Stein Roe Fund account either by phone (if the Telephone
Exchange Privilege has been established on the account from which
the exchange is being made), by mail, in person, or automatically
at regular intervals (if you have elected the Automatic Exchange
Privilege). Restrictions apply; please review the information
under How to Redeem Shares--By Exchange.

CONDITIONS OF PURCHASE. Each purchase order for a Fund must be
accepted by an authorized officer of Income Trust or its
authorized agent and is not binding until accepted and entered on
the books of that Fund. Once your purchase order has been
accepted, you may not cancel or revoke it; you may, however,
redeem the shares. Income Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of Income Trust or of a Fund's shareholders. Income
Trust also reserves the right to waive or lower its investment
minimums for any reason. Income Trust does not issue certificates
for shares.

PURCHASES THROUGH THIRD PARTIES. You may purchase (or redeem)
shares through broker-dealers, banks, or other intermediaries
("Intermediary"). These Intermediaries may charge for their
services or place limitations on the extent to which you may use
the services offered by Income Trust. There are no charges or
limitations imposed by Income Trust (other than those described in
this prospectus) if shares are purchased (or redeemed) directly
from the Trust.

A purchase by check or wire transfer is made at the net asset
value next determined after the Fund receives the check or wire
transfer of funds in payment of the purchase.

A purchase by electronic transfer is made at the net asset value
next determined after the Fund receives the electronic transfer
from your bank. A Special Electronic Transfer Investment
instruction received by telephone on a business day before 3:00
p.m., central time, is effective on the next business day. Shares
begin earning dividends on the day following the day on which they
are purchased.

HOW TO REDEEM SHARES

(1) The request must be in writing and must indicate the number of
shares or dollar amount to be redeemed and identify the
shareholder's account number;

(2) The request must be signed by the shareholder(s) exactly as
the shares are registered;

(5) Corporations and associations must submit with each request a
completed Certificate of Authorization included in this
prospectus (or a form of resolution acceptable to Income
Trust); and

(6) The request must include other supporting legal documents as
required from organizations, executors, administrators,
trustees, or others acting on accounts not registered in their
names.

You may not use any of the Special Redemption Privileges if you
hold certificates for any of your Fund shares. The Telephone
Redemption by Check Privilege and Special Electronic Transfer
Redemptions are not available to redeem shares held by a tax-
sheltered retirement plan sponsored by the Adviser. (See also
General Redemption Policies.)

Telephone Exchange Privilege. You may use the Telephone Exchange
Privilege to exchange an amount of $50 or more from your account
by calling 800-338-2550 or by sending a telegram; new accounts
opened by exchange are subject to the $2,500 initial purchase
minimum. GENERALLY, YOU WILL BE LIMITED TO FOUR TELEPHONE
EXCHANGE ROUND-TRIPS PER YEAR AND THE FUNDS MAY REFUSE REQUESTS
FOR TELEPHONE EXCHANGES IN EXCESS OF FOUR ROUND-TRIPS (A ROUND-
TRIP BEING THE EXCHANGE OUT OF A FUND INTO ANOTHER STEIN ROE FUND,
AND THEN BACK TO THAT FUND). In addition, Income Trust's general
redemption policies apply to redemptions of shares by Telephone
Exchange. (See General Redemption Policies.)

Income Trust reserves the right to suspend or terminate at any
time and without prior notice the use of the Telephone Exchange
Privilege by any person or class of persons. Income Trust
believes that use of the Telephone Exchange Privilege by investors
utilizing market-timing strategies adversely affects the Funds.
THEREFORE, INCOME TRUST GENERALLY WILL NOT HONOR REQUESTS FOR
TELEPHONE EXCHANGES BY SHAREHOLDERS IDENTIFIED BY THE TRUST AS
"MARKET-TIMERS." Moreover, Income Trust reserves the right to
suspend, limit, modify, or terminate at any time and without prior
notice the Telephone Exchange Privilege in its entirety. Because
such a step would be taken only if the Board of Trustees believes
it would be in the best interests of the Funds, Income Trust
expects that it would provide shareholders with prior written
notice of any such action unless it appears that the resulting
delay in the suspension, limitation, modification, or termination
of the Telephone Exchange Privilege would adversely affect the
Funds. IF INCOME TRUST WERE TO SUSPEND, LIMIT, MODIFY, OR
TERMINATE THE TELEPHONE EXCHANGE PRIVILEGE, A SHAREHOLDER
EXPECTING TO MAKE A TELEPHONE EXCHANGE MIGHT FIND THAT AN EXCHANGE
COULD NOT BE PROCESSED OR THAT THERE MIGHT BE A DELAY IN THE
IMPLEMENTATION OF THE EXCHANGE. (See How to Redeem Shares--By
Exchange.) During periods of volatile economic and market
conditions, you may have difficulty placing your exchange by
telephone.

Automatic Exchanges. You may use the Automatic Exchange Privilege
to automatically redeem a fixed amount from your Fund account for
investment in another Stein Roe Fund account on a regular basis.

Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount of
$1,000 or more from your account by calling 800-338-2550. The
proceeds will be sent by check to your registered address. The
Telephone Redemption by Check Privilege is not available to redeem
shares held by a tax-sheltered retirement plan sponsored by the
Adviser.

Telephone Redemption by Wire Privilege. You may use this
Privilege to redeem shares from your account ($1,000 minimum;
$100,000 maximum) by calling 800-338-2550. The proceeds will be
transmitted by wire to your account at a commercial bank
previously designated by you that is a member of the Federal
Reserve System. The fee for wiring proceeds (currently $3.50 per
transaction; $7.00 after January 31, 1997) will be deducted from
the amount wired.

GENERAL REDEMPTION POLICIES. You may not cancel or revoke your
redemption order once instructions have been received and
accepted. Income Trust cannot accept a redemption request that
specifies a particular date or price for redemption or any special
conditions. Please call 800-338-2550 if you have any questions
about requirements for a redemption before submitting your
request. If you wish to redeem shares held by a tax-sheltered
retirement plan sponsored by the Adviser, special procedures of
those plans apply to such redemptions. (See Shareholder Services-
- -Tax-Sheltered Retirement Plans.) Income Trust reserves the right
to require a properly completed Application before making payment
for shares redeemed.

The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon that Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares and may result
in a realized capital gain or loss.

Income Trust will generally mail payment for shares redeemed
within seven days after proper instructions are received.
However, Income Trust normally intends to pay proceeds of a
Telephone Redemption by Wire on the next business day. If you
attempt to redeem shares within 15 days after they have been
purchased by check or electronic transfer, Income Trust may delay
payment of the redemption proceeds to you until it can verify that
payment for the purchase of those shares has been (or will be)
collected. To reduce such delays, Income Trust recommends that
your purchase be made by federal funds wire through your bank.
Generally, you may not use any Special Redemption Privilege to
redeem shares purchased by check (other than certified or
cashiers' checks) or electronic transfer until 15 days after their
date of purchase.

Income Trust reserves the right at any time without prior notice
to suspend, limit, modify, or terminate any Privilege or its use
in any manner by any person or class.

Neither Income Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided under
the Privileges, nor for any loss, liability, cost or expense for
acting upon instructions furnished thereunder if they reasonably
believe that such instructions are genuine. The Funds employ
procedures reasonably designed to confirm that instructions
communicated by telephone under any Special Redemption Privilege
or the Special Electronic Transfer Redemption Privilege are
genuine. Use of any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege authorizes the Funds and
their transfer agent to tape-record all instructions to redeem.
In addition, callers are asked to identify the account number and
registration, and may be required to provide other forms of
identification. Written confirmations of transactions are mailed
promptly to the registered address; a legend on the confirmation
requests that the shareholder review the transactions and inform
the Fund immediately if there is a problem. If a Fund does not
follow reasonable procedures for protecting shareholders against
loss on telephone transactions, it may be liable for any losses
due to unauthorized or fraudulent instructions.

Income Trust reserves the right to redeem shares in any account
and send the proceeds to the owner if the shares in the account do
not have a value of at least $1,000. A shareholder would be
notified that his account is below the minimum and would be
allowed 30 days to increase the account before the redemption is
processed.

SHAREHOLDER SERVICES

REPORTING TO SHAREHOLDERS. You will receive a confirmation
statement reflecting each of your purchases and redemptions of
shares of a Fund, as well as periodic statements detailing
distributions made by that Fund. Shares purchased by reinvestment
of dividends, by cross-reinvestment of dividends from another
Fund, or through an automatic investment plan will be confirmed to
you quarterly. In addition, Income Trust will send you semiannual
and annual reports showing Fund portfolio holdings and will
provide you annually with tax information.

RECORDKEEPING AND ADMINISTRATION SERVICES. If you oversee or
administer investments for a group of investors, we offer a
variety of services.

Individual Retirement Accounts ("IRAs") for employed persons and
their non-employed spouses.

Prototype Money Purchase Pension and Profit-Sharing Plans for
self-employed individuals, partnerships, and corporations.

Simplified Employee Pension Plans permitting employers to provide
retirement benefits to their employees by utilizing IRAs while
minimizing administration and reporting requirements.

SPECIAL SERVICES. The following special services are available
to shareholders. Please call 800-338-2550 or write Income Trust
for additional information and forms.

Automatic Dividend Deposit (electronic transfer)--to have income
dividends and capital gain distributions deposited directly into
your bank account.

Telephone Redemption by Wire Privilege--to redeem shares from your
account by phone and have the proceeds transmitted by wire to your
bank account ($1,000 minimum; $100,000 maximum).

Special Redemption Option (electronic transfer)--to redeem shares
at any time and have the proceeds deposited directly to your bank
account ($50 minimum; $100,000 maximum).

Regular Investments (electronic transfer)--to purchase Fund shares
at regular intervals directly from your bank account ($50 minimum;
$100,000 maximum).

Special Investments (electronic transfer)--to purchase Fund shares
by telephone and pay for them by electronic transfer of funds from
your bank account ($50 minimum; $100,000 maximum).

Automatic Exchange Plan--to automatically redeem a fixed dollar
amount from your Fund account and invest it in another Stein Roe
Fund account on a regular basis ($50 minimum; $100,000 maximum).

Automatic Redemptions (electronic transfer)--to have a fixed
dollar amount redeemed and sent at regular intervals directly to
your bank account ($50 minimum; $100,000 maximum).

Systematic Withdrawals--to have a fixed dollar amount, declining
balance, or fixed percentage of your account redeemed and sent at
regular intervals by check to you or another payee.

NET ASSET VALUE

The purchase and redemption price of each Fund's shares is its net
asset value per share. Each Fund and High Yield Portfolio
determines the net asset value of its shares as of the close of
trading on the New York Stock Exchange ("NYSE") (currently 3:00
p.m., central time) by dividing the difference between the values
of its assets and liabilities by the number of shares outstanding.
High Yield Portfolio allocates net asset value, income, and
expenses to High Yield Fund based on its respective percentage of
ownership.

Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Board of Trustees, the net
asset value of a Fund should be determined on any such day, in
which case the determination will be made at 3:00 p.m., central
time.

Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by a Fund for which
these valuation methods do not produce a fair value are valued by
a method that the Board believes will determine a fair value.

DISTRIBUTIONS AND INCOME TAXES

DISTRIBUTIONS. Income dividends are declared each business day,
paid monthly, and confirmed at least quarterly. Each Fund intends
to distribute by the end of each calendar year at least 98% of any
net capital gains realized from the sale of securities during the
twelve-month period ended October 31 in that year. The Funds
intend to distribute any undistributed net investment income and
net realized capital gains in the following year.

All of your income dividends and capital gain distributions will
be reinvested in additional shares unless you elect to have
distributions either (1) paid by check; (2) deposited by
electronic transfer into your bank account; (3) applied to
purchase shares in your account with another Stein Roe Fund; or
(4) applied to purchase shares in a Stein Roe Fund account of
another person. (See Shareholder Services.) Reinvestment
normally occurs on the payable date. Income Trust reserves the
right to reinvest the proceeds and future distributions in
additional Fund shares if checks mailed to you for distributions
are returned as undeliverable or are not presented for payment
within six months.

You will be advised annually as to the source of distributions.
If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.

If you realize a loss on the sale or exchange of Fund shares held
for six months or less, your short-term loss is recharacterized as
long-term to the extent of any long-term capital gain
distributions you have received with respect to those shares.

For federal income tax purposes, each Fund is treated as a
separate taxable entity distinct from the other series of Income
Trust.

This section is not intended to be a full discussion of income tax
laws and their effect on shareholders. You may wish to consult
your own tax advisor.

BACKUP WITHHOLDING. Income Trust may be required to withhold
federal income tax ("backup withholding") from certain payments to
you, generally redemption proceeds. Backup withholding may be
required if:
- - You fail to furnish your properly certified social security or
other tax identification number;
- - You fail to certify that your tax identification number is
correct or that you are not subject to backup withholding due to
the underreporting of certain income;
- - The Internal Revenue Service informs Income Trust that your tax
identification number is incorrect.

INVESTMENT RETURN

The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.

The yield of a Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income
is earned and reinvested at a constant rate and annualized at the
end of a six-month period.

Comparison of a Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. Yield figures are not based on
actual dividends paid. Past performance is not necessarily
indicative of future results. To obtain current yield or total
return information, you may call 800-338-2550.

MANAGEMENT OF THE FUNDS

TRUSTEES AND INVESTMENT ADVISER. The Board of Trustees of Income
Trust has overall management responsibility for the Trust and the
Funds. See Management in the Statement of Additional Information
for the names of and other information about the trustees and
officers. Since Income Trust and Base Trust have the same
trustees, the trustees have adopted conflict of interest
procedures to monitor and address potential conflicts between the
interests of High Yield Fund and High Yield Portfolio.

The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolios of the Funds and High Yield Portfolio and
the business affairs of the Funds, High Yield Portfolio, Income
Trust, and Base Trust, subject to the direction of the respective
Board. The Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940. The Adviser was organized in
1986 to succeed to the business of Stein Roe & Farnham, a
partnership that had advised and managed mutual funds since 1949.
The Adviser is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which in turn is a majority
owned indirect subsidiary of Liberty Mutual Insurance Company.

In approving the use of a single combined prospectus, the Board
considered the possibility that one Fund (or High Yield Portfolio)
might be liable for misstatements in the prospectus regarding
information concerning another Fund.

PORTFOLIO MANAGERS. Michael T. Kennedy has been portfolio manager
of Government Income Fund and Intermediate Bond Fund since 1988.
He is a vice-president of Income Trust, a senior vice president of
the Adviser, and has been associated with the Adviser since 1987.
From 1984 to 1987, he was employed by Homewood Federal Savings and
Loan. A chartered financial analyst and a chartered investment
counselor, he received his B.S. degree from Marquette University
in 1984 and his M.M. from Northwestern University in 1988. Mr.
Kennedy is secretary of the Adviser's Fixed Income Policy
Committee and managed $414 million in mutual fund net assets for
the Adviser as of June 30, 1996. Steven P. Luetger is associate
portfolio manager of Government Income Fund and Intermediate Bond
Fund. Mr. Luetger joined the Adviser in 1978 and is a senior vice
president. He received his B.A. from Knox College in 1975 and
M.B.A. from the University of Chicago in 1980.

Ann H. Benjamin, a vice-president of Income Trust, has been
portfolio manager of Income Fund since January 1990 and of High Yield
Portfolio since its inception in 1996. She is a senior vice
president of the Adviser and has been associated with the Adviser
since 1989. She received her B.B.A. from Chatham College in 1980
and her M.A. from Carnegie Mellon University in 1985. Ms.
Benjamin managed $309 million in mutual fund net assets for the
Adviser as of June 30, 1996, serves as High-Yield Credit Research
Manager for the Adviser, and is a member of the Adviser's Fixed
Income Credit Review Committee.

Stephen F. Lockman has been associate portfolio manager of Income
Fund since October 1995 and of High Yield Portfolio since its
inception in 1996. Mr. Lockman is a senior vice president of the
Adviser and has been employed by the Adviser since January 1994.
A chartered financial analyst, Mr. Lockman received a B.S. degree
from the University of Illinois in 1983 and an M.B.A. from DePaul
University in 1986.

FEES AND EXPENSES. Through June 30, 1996, the Adviser provided
investment advisory and administrative services to the Funds
(other than High Yield Fund) under investment advisory agreements
with Income Trust relating to each Fund. On July 1, 1996, each
investment advisory agreement was replaced with separate
management and administrative agreements. The aggregate rates of
fees under the new agreements are equal to those charged under the
old advisory agreements. The Adviser is entitled to receive: (i)
in return for its investment advisory and administrative services,
a monthly fee from each Fund (other than High Yield Fund) based on
its average net assets, computed and accrued daily, (ii) a monthly
portfolio management fee, computed and accrued daily, based on
High Yield Portfolio's average net assets, and (iii) a monthly
administrative service fee, computed and accrued daily from High
Yield Fund, at the following annual rates (dollar amounts are in
millions):

FUND MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- ---------- --------------- ------------------- ----------------
Government
Income .450% up to $100, .150% up to $100, .600% up to $100,
Fund ..425% thereafter .125% thereafter .550% thereafter
Interme-
diate Bond
Fund .350% .150% .500%
Income .500% up to $100, .150% up to $100, .650% up to $100,
Fund .475% thereafter .125% thereafter .600% thereafter
High Yield
Fund N/A .150% up to $500, .150% up to $500,
.125% thereafter .125% thereafter
High Yield
Portfolio.500% up to $500, N/A .500% up to $500,
.475% thereafter .475% thereafter

As noted under Fee Table, the Adviser may voluntarily waive a
portion of its fees. For the fiscal year ended June 30, 1996, the
fees for Government Income Fund, Intermediate Bond Fund, and
Income Fund, after the fee waivers described under Fee Table,
amounted to 0.43%, 0.45%, and 0.52% of average net assets,
respectively.

The Adviser provides office space and executive and other
personnel to Income Trust and Base Trust and bears any sales or
promotional expenses. All expenses of a Fund other than those
paid by the Adviser (including, but not limited to, printing and
postage charges, securities registration fees, custodian and
transfer agency fees, legal and auditing fees, compensation of
trustees not affiliated with the Adviser, and expenses incidental
to its organization) are paid out of the assets of the Fund.

Under a separate agreement with Income Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds including
computation of each Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.

PORTFOLIO TRANSACTIONS. The Adviser places the orders for the
purchase and sale of portfolio securities and options and futures
contracts for each Fund and High Yield Portfolio. In doing so,
the Adviser seeks to obtain the best combination of price and
execution, which involves a number of judgmental factors.

TRANSFER AGENT. SteinRoe Services Inc. ("SSI"), One South Wacker
Drive, Chicago, Illinois 60606, a wholly owned subsidiary of
Liberty Financial, is the agent of Income Trust for the transfer
of shares, disbursement of dividends, and maintenance of
shareholder accounting records.

ORGANIZATION AND DESCRIPTION OF SHARES

Income Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either Income
Trust's shareholders or its trustees. Income Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.

Under Massachusetts law, shareholders of a Massachusetts business
trust such as Income Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of Income Trust.
The Declaration of Trust provides that persons extending credit
to, contracting with, or having any claim against, Income Trust or
any particular series shall look only to the assets of Income
Trust or of the respective series for payment under such credit,
contract or claim, and that the shareholders, trustees and
officers of Income Trust shall have no personal liability
therefor. The Declaration of Trust requires that notice of such
disclaimer of liability be given in each contract, instrument or
undertaking executed or made on behalf of Income Trust. The
Declaration of Trust provides for indemnification of any
shareholder against any loss and expense arising from personal
liability solely by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is believed to be remote, because
it would be limited to circumstances in which the disclaimer was
inoperative and Income Trust was unable to meet its obligations.

The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of Income Trust
is also believed to be remote, because it would be limited to
claims to which the disclaimer did not apply and to circumstances
in which the other Fund was unable to meet its obligations.

SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE.
High Yield Fund, an open-end management investment company, seeks
to achieve its objective by investing all of its assets in shares
of another mutual fund having an identical investment objective to
High Yield Fund. This policy permitting High Yield Fund to act as
a feeder fund by investing in High Yield Portfolio, acting as a
master fund, was approved by High Yield Fund's initial
shareholder. Please refer to the How the Funds Invest--High Yield
Fund, Portfolio Investments and Strategies, and Restrictions on
the Funds' Investments for a description of the investment
objectives, policies, and restrictions of High Yield Fund and High
Yield Portfolio. The management and expenses of both High Yield
Fund and High Yield Portfolio are described under the Fee Table
and Management of the Funds. High Yield Fund bears its
proportionate share of High Yield Portfolio's expenses.

The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.

SR&F High Yield Portfolio is a separate series of SR&F Base Trust
("Base Trust"), a Massachusetts common trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
August 23, 1993. The Declaration of Trust of the Base Trust
provides that High Yield Fund and other investors in High Yield
Portfolio will be liable for all obligations of High Yield
Portfolio that are not satisfied by High Yield Portfolio.
However, the risk of High Yield Fund incurring financial loss on
account of such liability is limited to circumstances in which
liability was not adequately insured and High Yield Portfolio was
unable to meet its obligations. Accordingly, the Trustees of
Income Trust believe that neither High Yield Fund nor its
shareholders will be adversely affected by reason of High Yield
Fund's investing in High Yield Portfolio.

The Declaration of Trust of Base Trust provides that High Yield
Portfolio will terminate 120 days after the withdrawal of High
Yield Fund or any other investor in High Yield Portfolio, unless
the remaining investors vote to agree to continue the business of
High Yield Portfolio. The Trustees of Income Trust may vote High
Yield Fund's interests in High Yield Portfolio for such
continuation without approval of High Yield Fund's shareholders.

The common investment objective of High Yield Fund and High Yield
Portfolio is non-fundamental and may be changed without
shareholder approval, subject, however, to at least 30 days'
advance written notice to High Yield Fund's shareholders. The
fundamental policies of High Yield Fund and the corresponding
fundamental policies of High Yield Portfolio can be changed only
with shareholder approval.

If High Yield Fund, as an investor in High Yield Portfolio, is
requested to vote on a proposed change in a fundamental policy of
High Yield Portfolio or any other matter pertaining to High Yield
Portfolio (other than continuation of the business of High Yield
Portfolio after withdrawal of another investor), High Yield Fund
will solicit proxies from its shareholders and vote its interest
in High Yield Portfolio for and against such matters
proportionately to the instructions to vote for and against such
matters received from Fund shareholders. High Yield Fund will
vote shares for which it receives no voting instructions in the
same proportion as the shares for which it receives voting
instructions. If there are other investors in High Yield
Portfolio, there can be no assurance that any matter receiving a
majority of votes cast by Fund shareholders will receive a
majority of votes cast by all High Yield Portfolio investors. If
other investors hold a majority interest in High Yield Portfolio,
they could have voting control over High Yield Portfolio.

In the event that High Yield Portfolio's fundamental policies were
changed so as to be inconsistent with those of High Yield Fund,
the Board of Trustees of Income Trust would consider what action
might be taken, including changes to High Yield Fund's fundamental
policies, withdrawal of High Yield Fund's assets from High Yield
Portfolio and investment of such assets in another pooled
investment entity, or the retention of another investment adviser.
Any of these actions would require the approval of High Yield
Fund's shareholders. High Yield Fund's inability to find a
substitute master fund or comparable investment management could
have a significant impact upon its shareholders' investments. Any
withdrawal of High Yield Fund's assets could result in a
distribution in kind of portfolio securities (as opposed to a cash
distribution) to High Yield Fund. Should such a distribution
occur, High Yield Fund would incur brokerage fees or other
transaction costs in converting such securities to cash. In
addition, a distribution in kind could result in a less
diversified portfolio of investments for High Yield Fund and could
affect its liquidity.

Each investor in High Yield Portfolio, including High Yield Fund,
may add to or reduce its investment in High Yield Portfolio on
each day the NYSE is open for business. The investor's percentage
of the aggregate interests in High Yield Portfolio will be
computed as the percentage equal to the fraction (i) the numerator
of which is the beginning of the day value of such investor's
investment in High Yield Portfolio on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals
from the investor's investment in High Yield Portfolio effected on
such day; and (ii) the denominator of which is the aggregate
beginning of the day net asset value of High Yield Portfolio on
such day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in High
Yield Portfolio by all investors in High Yield Portfolio. The
percentage so determined will then be applied to determine the
value of the investor's interest in High Yield Portfolio as of the
close of business.

Base Trust may permit other investment companies and/or other
institutional investors to invest in High Yield Portfolio, but
members of the general public may not invest directly in High
Yield Portfolio. Other investors in High Yield Portfolio are not
required to sell their shares at the same public offering price as
High Yield Fund, could incur different administrative fees and
expenses than High Yield Fund, and their shares might be sold with
a sales commission. Therefore, Fund shareholders might have
different investment returns than shareholders in another
investment company that invests exclusively in High Yield
Portfolio. Investment by such other investors in High Yield
Portfolio would provide funds for the purchase of additional
portfolio securities and would tend to reduce High Yield
Portfolio's operating expenses as a percentage of its net assets.
Conversely, large-scale redemptions by any such other investors in
High Yield Portfolio could result in untimely liquidations of High
Yield Portfolio's security holdings, loss of investment
flexibility, and increases in the operating expenses of High Yield
Portfolio as a percentage of its net assets. As a result, High
Yield Portfolio's security holdings may become less diverse,
resulting in increased risk.

Currently one other investment company is expected to invest in
High Yield Portfolio, and that is Stein Roe Institutional High
Yield Fund, a series of Stein Roe Institutional Trust.
Information regarding any investment company that may invest in
High Yield Portfolio in the future may be obtained by writing to
Base Trust, Suite 3200, One South Wacker Drive, Chicago, Illinois
60606 or by calling 800-338-2550. The Adviser may provide
administrative or other services to one or more of such investors.

APPENDIX--RATINGS

RATINGS IN GENERAL. A rating of a rating service represents the
service's opinion as to the credit quality of the security being
rated. However, the ratings are general and are not absolute
standards of quality or guarantees as to the creditworthiness of
an issuer. Consequently, the Adviser believes that the quality of
debt securities should be continuously reviewed and that
individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security because it
does not take into account market value or suitability for a
particular investor. When a security has received a rating from
more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished
by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability
of such information, or for other reasons. The following is a
description of the characteristics of ratings used by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P").

CORPORATE BOND RATINGS
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or an exceptionally stable margin and principal is secure.
Although the various protective elements are likely to change,
such changes as can be visualized are more unlikely to impair the
fundamentally strong position of such bonds.

Aa. Bonds 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 bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa bonds.

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

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

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

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

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

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

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

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

RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.

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

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

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

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

C1. This rating is reserved for income bonds on which no interest
is being paid.

D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating is also used
upon the filing of a bankruptcy petition if debt service payments
are jeopardized.

NOTES: The ratings from AA to CCC may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing
within the major rating categories. Foreign debt is rated on the
same basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.

The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.

COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S. Moody's employs the following three
designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:

Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality

If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers, evaluates
the financial strength of the indicated affiliated corporations,
commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating
assessment.

Ratings By S&P. A brief description of the applicable rating
symbols and their meaning follows:

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

A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.

<PAGE>
Stein Roe Mutual Funds
Certificate of Authorization
for use by corporations and associations only

The undersigned hereby certifies that he is the duly elected
Secretary of ____________________________ (the "Corporation")
(name of Corporation/Association)
and that the following individual(s):

Unless a lesser number is specified, all of the Authorized Persons
must sign written instructions. Number of signatures required:
________.

These authorizations shall continue in effect until five business
days after the Fund and its transfer agent receive written notice
from the Corporation of any change.

IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____ day
of ___________________, 19___.

________________________________
Secretary

_________________________________
Signature Guarantee*
*Only required if the person signing
the Certificate is the only person
named as "Authorized Person."
CORPORATE
SEAL
HERE

<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]

800-338-2550

In Chicago, visit our Fund Center at One South Wacker Drive, Suite
3200

Liberty Securities Corporation, Distributor

<PAGE>

[STEIN ROE MUTUAL FUNDS LOGO]

PROSPECTUS
DEFINED CONTRIBUTION PLANS

STEIN ROE CASH RESERVES FUND
The Fund seeks to obtain maximum current income consistent with
capital preservation and maintenance of liquidity. The Fund
invests solely in money market instruments maturing in thirteen
months or less from time of investment.

This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").

The Fund is a series of the STEIN ROE INCOME TRUST, an open-end
management investment company. This prospectus contains
information you should know before investing in the Fund. Please
read it carefully and retain it for future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the Stein
Roe Funds at Suite 3200, One South Wacker Drive, Chicago, IL 60606
or by calling 800-322-1130. The Statement of Additional
Information contains information relating to other series of the
Stein Roe Income Trust that may not be available as investment
vehicles for your defined contribution plan.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996

TABLE OF CONTENTS
Page
Fee Table .....................2
Financial Highlights...........2
The Fund.......................3
How the Fund Invests...........4
Restrictions on the Fund's
Investments .................4
Risks and Investment
Considerations ...............5
How to Purchase Shares ........6
How to Redeem Shares ..........6
Net Asset Value ...............7
Distributions and Income Taxes.7
Management of the Fund.........8
Organization and Description
of Shares.....................9
For More Information...........9

<PAGE>
___________________________
FEE TABLE

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None

ANNUAL FUND OPERATING EXPENSES (as a
percentage of average
net assets)
Management and Administrative Fees 0.50%
12b-1 Fees None
Other Expenses 0.28%
-----
Total Fund Operating Expenses 0.78%
=====

EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$8 $25 $43 $97

For purposes of the Example above, the figures assume that the
percentage amounts for the Fund listed under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the
Example are not necessarily indicative of past or future expenses,
and actual expenses may be greater or less than those shown.
Although information such as that shown in the Fee Table and
Example is useful in reviewing the Fund's expenses and in
providing a basis for comparison with other mutual funds, it
should not be used for comparison with other investments using
different assumptions or time periods. The Example does not
reflect any charges or expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS

The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP,
independent auditors. The table should be read in conjunction
with the financial statements and notes thereto, which may be
obtained from the Trust without charge upon request.

<TABLE>
<CAPTION>
Six
Years Months
Ended Ended
December 31, June 30, Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income... 0.061 0.060 0.032 0.081 0.079 0.068 0.044 0.028 0.028 0.048 0.050
Distributions from net
investment income..... (0.061) (0.060) (0.032) (0.081) (0.079) (0.068) (0.044) (0.028) (0.028) (0.048) (0.050)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets..... 0.72% 0.72% *0.70% 0.75% 0.76% 0.78% 0.78% 0.79% 0.79% 0.76% 0.78%
Ratio of net investment
income to average
net assets............ 6.05% 6.02% *6.36% 8.13% 7.94% 6.81% 4.40% 2.81% 2.77% 4.83% 4.98%
Total return............ 6.25% 6.15% *6.43% 8.41% 8.20% 6.98% 4.49% 2.83% 2.81% 4.96% 5.07%
Net assets, end of
period (000 omitted).$814,544 $962,901 $930,074 $948,018 $949,803 $840,525 $711,087 $627,110 $554,713 $498,163 $476,840
<FN>
*Annualized.
</TABLE>

___________________________
THE FUND

STEIN ROE CASH RESERVES FUND (the "Fund") is a no-load,
diversified "mutual fund." Mutual funds sell their own shares to
investors and use the money they receive to invest in a portfolio
of securities. A mutual fund allows you to pool your money with
that of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. Because the Fund invests only in money market
instruments, it is called a "money market fund." No-load funds do
not impose commissions or charges when shares are purchased or
redeemed.

The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.

Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other mutual funds with different
investment objectives, including other money market funds, equity
funds, international funds, and taxable and tax-exempt bond funds.
To obtain prospectuses and other information on opening a regular
account in any of these mutual funds, please call 800-338-2550.

Although there can be no assurance that it will always be able to
do so, the Fund follows procedures designed to stabilize its price
per share at $1.00. The Statement of Additional Information
describes these procedures. Because the Fund strives to maintain
a $1.00 per share value, its return is usually quoted either as a
current seven-day yield, calculated by totaling the dividends on a
Fund share for the previous seven days and restating that yield as
an annual rate, or as an effective yield, calculated by adjusting
the current yield to assume daily compounding. The Fund's current
and effective yields for the seven-day period ended September 30,
1996, were 4.78% and 4.90%, respectively. To obtain current yield
information, you may call 800-338-2550.

From time to time, the Fund may also quote total return figures.
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.

Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Past performance is not necessarily indicative of future
results.
___________________________
HOW THE FUND INVESTS

The Fund seeks to obtain maximum current income consistent with
the preservation of capital and the maintenance of liquidity by
investing all of its assets in U.S. dollar-denominated money
market instruments maturing in thirteen months or less from time
of investment. Each security must be rated (or be issued by an
issuer that is rated with respect to its short-term debt) within
the highest rating category for short-term debt by at least two
nationally recognized statistical rating organizations ("NRSRO")
(or, if rated by only one NRSRO, by that rating agency), or, if
unrated, determined by or under the direction of the Board of
Trustees to be of comparable quality. These securities may
include:

The Fund maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset
value per share, and not in excess of 90 days. It is a
fundamental policy that the maturity of any instrument that grants
the holder an optional right to redeem at par plus interest and
without penalty will be deemed at any time to be the next date
provided for payment on exercise of such optional redemption
right.
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS

The Fund will not: (1) invest more than 10% of its net assets in
illiquid securities, including repurchase agreements maturing in
more than seven days (however, there is otherwise no limitation on
the percentage of the Fund's assets which may be invested in
repurchase agreements); or (2) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities
of any one issuer /3/--this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities. Notwithstanding the limitation on investments in a
single issuer, the Fund may invest all of its assets in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund.
- ----------------------
/1/ For a description of certain NRSRO commercial paper, note, and
bond ratings, see the Appendix to the Statement of Additional
Information.
/2/ A sale of securities to the Fund in which the seller (a bank
or securities dealer that the Adviser believes to be financially
sound) agrees to repurchase the securities at a higher price,
which includes an amount representing interest on the purchase
price, within a specified time.
/3/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), the Fund
will not, immediately after the acquisition of any security (other
than a Government Security or certain other securities as
permitted under the Rule), invest more than 5% of its total assets
in the securities of any one issuer; provided, however, that it
may invest up to 25% of its total assets in First Tier Securities
(as that term is defined in the Rule) of a single issuer for a
period of up to three business days after the purchase thereof.
- --------------------

The Fund may make not loans except that it may (1) purchase money
market instruments and enter into repurchase agreements; (2)
acquire publicly-distributed or privately-placed debt securities;
and (3) participate in an interfund lending program with other
Stein Roe Funds. The Fund may not borrow money, except for non-
leveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
Fund's aggregate borrowings (including reverse repurchase
agreements) nor its aggregate loans at any one time may exceed 33
1/3% of the value of its total assets. Additional securities may
not be purchased when borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of total assets.

The policies described in the preceding two paragraphs, which
summarize certain important investment restrictions of the Fund,
and the policy with respect to concentration of investment in the
financial services industry, can be changed only with the approval
of a "majority of the outstanding voting securities" of the Fund,
as defined in the Investment Company Act of 1940. All of the
investment restrictions are set forth in the Statement of
Additional Information.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS

All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that the Fund will achieve its objective or be able at
all times to maintain its net asset value per share at $1.00.

In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses, including: (a)
possible decline in the value of the collateral during the period
in which the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.

The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.

The Fund's policy of investing at least 25% of its assets in
securities of issuers in the financial services industry may cause
the Fund to be more adversely affected by changes in market or
economic conditions and other circumstances affecting the
financial services industry. Because the Fund's investment policy
permits it to invest in: securities of foreign branches of U.S.
banks (Eurodollars), U.S. branches of foreign banks (Yankee
dollars), and foreign banks and their foreign branches, such as
negotiable certificates of deposit; securities of foreign
governments; and securities of foreign issuers, such as commercial
paper and corporate notes, bonds and debentures, investment in the
Fund might involve risks that are different in some respects from
an investment in a fund that invests only in debt obligations of
U.S. domestic issuers. Such risks may include future political
and economic developments; the possible imposition of foreign
withholding taxes on interest income payable on securities held in
the portfolio; possible seizure or nationalization of foreign
deposits; the possible establishment of exchange controls; or the
adoption of other foreign governmental restrictions that might
adversely affect the payment of principal and interest on
securities in the portfolio. Additionally, there may be less
public information available about foreign banks and their
branches. Foreign banks and foreign branches of foreign banks are
not regulated by U.S. banking authorities, and generally are not
bound by accounting, auditing, and financial reporting standards
comparable to U.S. banks.

The Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these
securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed and the yields then available in the market may be
greater. The Fund will make such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for
investment reasons.

The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.

MASTER FUND/FEEDER FUND OPTION.
Rather than invest in money market securities directly, the Fund
may in the future seek to achieve its investment objective by
pooling all of its assets with assets of other investment
companies and/or institutional investors for investment in another
registered investment company having the same investment objective
and substantially the same investment policies and restrictions as
the Fund. It is expected that any such investment company would be
managed by the Adviser in substantially the same manner as the
Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and to reduce costs. Shareholders of the
Fund will be given at least 30 days' prior notice of any such
investment. Such investment would be made only if the trustees
determine it to be in the best interests of the Fund and its
shareholders.
___________________________
HOW TO PURCHASE SHARES

All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.

Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.

Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES

Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.

EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other Stein Roe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.

The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE

The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is normally determined twice each day: at 11:00 a.m., central
time, and as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., central time). The net asset value
per share is computed by dividing the difference between the
values of the Fund's assets and liabilities by the number of
shares outstanding and rounding to the nearest cent. Net asset
value will not be determined on days when the Exchange is closed
unless, in the judgment of the Board of Trustees, the net asset
value of the Fund should be determined on any such day, in which
case the determination will be made at 3:00 p.m., central time.

The Fund attempts to maintain its net asset value at $1.00 per
share. Portfolio securities are valued based on their amortized
cost, which does not take into account unrealized gains or losses.
Other assets and securities of the Fund for which this valuation
method does not produce a fair value are valued at a fair value
determined by the Board. The extent of any deviation between the
Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by
the Board of Trustees. If such deviation were to exceed 1/2 of
1%, the Board would consider what action, if any, should be taken,
including selling portfolio instruments, increasing, reducing or
suspending distributions, or redeeming shares in kind.
___________________________
DISTRIBUTIONS AND
INCOME TAXES

DISTRIBUTIONS.
A dividend from net income of the Fund is declared each business
day to shareholders of record immediately before 3:00 p.m.,
central time. Dividends credited to your account are distributed
monthly. If the Fund's net asset value per share were to decline,
or were believed likely to decline, below $1.00 (rounded to the
nearest cent), the Board might temporarily reduce or suspend
dividends in an effort to maintain net asset value at $1.00 per
share.

The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.

INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
___________________________
MANAGEMENT OF THE FUND

TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See the Statement of
Additional Information for the names of and other information
about the trustees and officers. The Fund's Adviser, Stein Roe &
Farnham Incorporated, One South Wacker Drive, Chicago, Illinois
60606, is responsible for managing the Fund's investment portfolio
and the business affairs of the Fund and the Trust, subject to the
direction of the Board. The Adviser is registered as an
investment adviser under the Investment Advisers Act. The Adviser
was organized in 1986 to succeed to the business of Stein Roe &
Farnham, a partnership that had advised and managed mutual funds
since 1949. The Adviser is a wholly owned subsidiary of Liberty
Financial Companies, Inc. ("Liberty Financial"), which in turn is
a majority owned indirect subsidiary of Liberty Mutual Insurance
Company.

FEES AND EXPENSES.
Through June 30, 1996, the Adviser provided investment advisory
and administrative services to the Fund under an investment
advisory agreement. On July 1, 1996, the investment advisory
agreement was replaced with separate management and administrative
agreements. The aggregate rates of fees under the new agreements
are equal to those charged under the old advisory agreement. The
Adviser receives, in return for its investment advisory and
administrative services, a monthly fee from the Fund based on its
average net assets, computed and accrued daily, at the following
annual rate:

The annualized fee amounted to 0.50% of average net assets for the
year ended June 30, 1996.

Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.

PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of the
Fund's portfolio securities. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which involves
a number of judgmental factors.

TRANSFER AGENT.
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned subsidiary of Liberty Financial, is
the agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.

DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Financial. The business address of the Distributor is 600
Atlantic Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to SteinRoe Services Inc. at P.O. Box 8900, Boston,
Massachusetts 02205. All distribution and promotional expenses
are paid by the Adviser, including payments to the Distributor for
sales of Fund shares.

CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Fund. Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of the Bank's Global
Custody Network or foreign depositories used by such members.
(See Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES

Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.

The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other series was unable to meet its obligations.
___________________________
FOR MORE INFORMATION

Contact a Stein Roe Retirement Plan Representative at 800-322-1130
for more information about this Fund.
__________________

<PAGE>

[STEIN ROE MUTUAL FUNDS LOGO]

PROSPECTUS
DEFINED CONTRIBUTION PLANS

STEIN ROE GOVERNMENT RESERVES FUND
The Fund seeks to obtain maximum current income consistent with
safety of capital and maintenance of liquidity. The Fund invests
in U.S. Government Securities maturing in thirteen months or less
from the date of purchase and repurchase agreements for U.S.
Government Securities regardless of the maturities of such
securities. U.S. Government Securities include securities issued
or guaranteed by the U.S. Government or by its agencies or
instrumentalities.

This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").

The Fund is a "no-load" money market fund and attempts to maintain
its net asset value at $1.00 per share. SHARES OF THE FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. There are no sales or
redemption charges, and the Fund has no 12b-1 plan. The Fund is a
series of the STEIN ROE INCOME TRUST, an open-end management
investment company. This prospectus contains information you
should know before investing in the Fund. Please read it
carefully and retain it for future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the Stein
Roe Funds at Suite 3200, One South Wacker Drive, Chicago, IL 60606
or by calling 800-322-1130. The Statement of Additional
Information contains information relating to other series of the
Stein Roe Income Trust that may not be available as investment
vehicles for your defined contribution plan.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996

TABLE OF CONTENTS
Page
Fee Table ....................2
Financial Highlights..........2
The Fund......................3
How the Fund Invests..........4
Restrictions on the Fund's
Investments .................4
Risks and Investment
Considerations ..............5
How to Purchase Shares .......6
How to Redeem Shares .........6
Net Asset Value ..............7
Distributions and Income
Taxes........................7
Management of the Fund........7
Organization and Description
of Shares....................8
For More Information..........9

<PAGE>
___________________________
FEE TABLE

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after
fee waiver; as a percentage of average
net assets)
Management and Administrative Fees (after
fee waiver) 0.38%
12b-1 Fees None
Other Expenses 0.32%
-----
Total Fund Operating Expenses (after
fee waiver) 0.70%
=====

The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year. (Also see
Management of the Fund--Fees and Expenses.) From time to time,
the Adviser may waive a portion of its fees payable by the Fund.
The Adviser has agreed to voluntarily waive such fees to the
extent that the Fund's ordinary operating expenses exceed 0.70 of
1% of average net assets through October 31, 1997, subject to
earlier termination by the Adviser on 30 days' notice to the Fund.
Any such reimbursement will lower the Fund's overall expense ratio
and increase its overall return to investors. Absent such expense
undertaking, Management Fees and Total Fund Operating Expenses
would have been 0.50% and 0.82%, respectively.

NET ASSET VALUE, BEGINNING
OF PERIOD................ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income..... 0.050 0.058 0.080 0.078 0.066 0.044 0.027 0.027 0.047 0.050
Distributions from net
investment income........ (0.050) (0.058) (0.080) (0.078) (0.066) (0.044) (0.027) (0.027) (0.047) (0.050)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of net expenses to
average net assets (a)... 1.03% 0.87% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment
income to average net
assets (b)................ 4.97% 5.75% 8.02% 7.79% 6.41% 4.27% 2.75% 2.71% 4.65% 4.94%
Total return............... 5.11% 5.90% 8.27% 8.05% 6.74% 4.45% 2.78% 2.74% 4.78% 5.01%
Net assets, end of
period (000 omitted).... $34,799 $41,787 $50,185 $53,400 $102,860 $132,982 $104,220 $105,488 $93,318 $66,928
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would
have been 1.04%, 0.93%, 0.98%, 0.83%, 0.79%, 0.76%, 0.75%,
0.75%, and 0.82% for the years ended June 30, 1988 through
1996, respectively.
(b) Computed giving effect to the Adviser's fee waiver.
</TABLE>

___________________________
THE FUND

STEIN ROE GOVERNMENT RESERVES FUND (the "Fund") is a no-load,
diversified "mutual fund." Mutual funds sell their own shares to
investors and use the money they receive to invest in a portfolio
of securities. A mutual fund allows you to pool your money with
that of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. Because the Fund invests only in money market
instruments, it is called a "money market fund." No-load funds do
not impose commissions or charges when shares are purchased or
redeemed.

Although there can be no assurance that it will always be able to
do so, the Fund follows procedures designed to stabilize its price
per share at $1.00. The Statement of Additional Information
describes these procedures. Because the Fund strives to maintain
a $1.00 per share value, its return is usually quoted either as a
current seven-day yield, calculated by totaling the dividends on a
Fund share for the previous seven days and restating that yield as
an annual rate, or as an effective yield, calculated by adjusting
the current yield to assume daily compounding. The Fund's current
and effective yields for the seven-day period ended September 30,
1996, were 4.53% and 4.69%, respectively. Absent the expense
limitation referred to above, current and effective yields for the
seven-day period ended September 30, 1996, would have been 4.38%
and 4.54%, respectively. To obtain current yield information, you
may call 800-338-2550.

The Fund seeks to obtain maximum current income consistent with
safety of capital and maintenance of liquidity by investment in
U.S. Government Securities maturing in thirteen months or less
from the date of purchase. These securities include:

(1) Securities issued by the U.S. Treasury;
(2) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are backed by the full faith and credit guarantee of the U.S.
Government;
(3) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are not backed by the full faith and credit guarantee of the
U.S. Government;
(4) Repurchase agreements /2/ for securities listed in (1), (2),
and (3) above, regardless of the maturities of such underlying
securities.

The Fund will not: (1) invest more than 10% of its net assets in
illiquid securities, including repurchase agreements maturing in
more than seven days (however, there is otherwise no limitation on
the percentage of the Fund's assets which may be invested in
repurchase agreements); or (2) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities
of any one issuer /2/--this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities. Notwithstanding the limitation on investments in a
single issuer, the Fund may invest all of its assets in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund.
- ----------------
/1/A sale of securities to the Fund in which the seller (a bank or
securities dealer that the Adviser believes to be financially
sound) agrees to repurchase the securities at a higher price,
which includes an amount representing interest on the purchase
price, within a specified time.
/2/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), the Fund
will not, immediately after the acquisition of any security (other
than a Government Security or certain other securities as
permitted under the Rule), invest more than 5% of its total assets
in the securities of any one issuer; provided, however, that it
may invest up to 25% of its total assets in First Tier Securities
(as that term is defined in the Rule) of a single issuer for a
period of up to three business days after the purchase thereof.
- --------------

The policies described in the preceding two paragraphs, which
summarize certain important investment restrictions of the Fund,
can be changed only with the approval of a "majority of the
outstanding voting securities" of the Fund, as defined in the
Investment Company Act of 1940. All of the investment
restrictions are set forth in the Statement of Additional
Information.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS

MASTER FUND/FEEDER FUND OPTION.
Rather than invest in money market securities directly, the Fund
may in the future seek to achieve its investment objective by
pooling all of its assets with assets of other investment
companies and/or institutional investors for investment in another
investment company having the same investment objective and
substantially the same investment policies and restrictions as the
Fund. It is expected that any such investment company would be
managed by the Adviser in substantially the same manner as the
Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and to reduce costs. Shareholders of the
Fund will be given at least 30 days' prior notice of any such
investment. Such investment would be made only if the trustees
determine it to be in the best interests of the Fund and its
shareholders.
___________________________
HOW TO PURCHASE SHARES

The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE

FEES AND EXPENSES.
Through June 30, 1996, the Adviser provided investment advisory
and administrative services to the Fund under an investment
advisory agreement. On July 1, 1996, the investment advisory
agreement was replaced with separate management and administrative
agreements. The aggregate rates of fees under the new agreements
are equal to those charged under the old advisory agreement. The
Adviser is entitled to receive, in return for its investment
advisory and administrative services, a monthly fee from the Fund
based on its average net assets, computed and accrued daily, at
the following annual rate:

The annualized fee, after the fee waiver described under Fee
Table, amounted to 0.38% of average net assets for the year ended
June 30, 1996.

TRANSFER AGENT.
SteinRoe Services Inc., One South Wacker Drive, Chicago, Illinois
60606, a wholly owned subsidiary of Liberty Financial, is the
agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.

CUSTODIAN.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101, is the custodian for the Fund. (See
Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES

Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.

Contact a Stein Roe Retirement Plan Representative at 800-322-1130
for more information about this Fund.
________________________

<PAGE>

[STEIN ROE MUTUAL FUNDS LOGO]

PROSPECTUS
DEFINED CONTRIBUTION PLANS

STEIN ROE GOVERNMENT INCOME FUND
The Fund seeks high current income by investing primarily in
securities issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.

This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").

The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company.

This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain it for
future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the Stein
Roe Funds at Suite 3200, One South Wacker Drive, Chicago, IL 60606
or by calling 800-322-1130. The Statement of Additional
Information contains information relating to other series of the
Stein Roe Income Trust that may not be available as investment
vehicles for your defined contribution plan.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996

TABLE OF CONTENTS

Page
Fee Table ......................2
Financial Highlights............2
The Fund........................3
How the Fund Invests............4
Portfolio Investments and
Strategies....................4
Restrictions on the Fund's
Investments ..................7
Risks and Investment
Considerations ...............8
How to Purchase Shares .........8
How to Redeem Shares ...........9
Net Asset Value ................9
Distributions and Income Taxes.10
Investment Return..............10
Management of the Fund.........11
Organization and Description
of Shares....................12
For More Information ..........12

<PAGE>
___________________________
FEE TABLE

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees* None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets; after fee waiver)
Management and Administrative
Fees (after fee waiver) 0.43%
12b-1 Fees None
Other Expenses 0.57%
-----
Total Fund Operating Expenses
(after fee waiver) 1.00%
=====

EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:

1 year 3 years 5 years 10 years
------ ------- ------- --------
$10 $32 $55 $122

The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year. From time to
time, the Adviser may waive a portion of its fees payable by the
Fund. The Adviser has agreed to voluntarily waive such fees to
the extent the Fund's ordinary operating expenses exceed 1% of
average net assets through October 31, 1997, subject to earlier
termination by the Adviser on 30 days' notice to the Fund. Any
such reimbursement will lower the Fund's overall expense ratio and
increase its overall return to investors. Absent such expense
undertaking, Management Fees and Total Fund Operating Expenses
would have been 0.60% and 1.17%, respectively. (Also see
Management of the Fund--Fees and Expenses.)

For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the
Example are not necessarily indicative of past or future expenses,
and actual expenses may be greater or less than those shown.
Although information such as that shown in the Fee Table and
Example is useful in reviewing the Fund's expenses and in
providing a basis for comparison with other mutual funds, it
should not be used for comparison with other investments using
different assumptions or time periods. The example does not
reflect any charges or expenses related to your employer's plan.
___________________________
FINANCIAL HIGHLIGHTS

The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP, independent
auditors. The table should be read in conjunction with the Fund's
financial statements and notes thereto. The Fund's annual report, which
may be obtained from the Trust without charge upon request, contains
additional performance information.

<TABLE>
<CAPTION>
Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD .... $10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48 $ 9.85
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... .72 .74 .78 .76 .75 .72 .64 .56 .62 .61
Net realized and
unrealized gains (losses)
on investments ........... (.31) (.15) .18 (.11) .15 .59 .31 (.77) .37 (.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................ .41 .59 .96 .65 .90 1.31 .95 (.21) .99 .46
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS
Net investment income....... (.72) (.74) (.78) (.76) (.75) (.72) (.64) (.56) (.62) (.61)
Net realized capital gains.. -- (.05) -- -- -- -- (.25) (.01) -- --
In excess of realized gains.. -- -- -- -- -- -- -- (.20) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ....... (.72) (.79) (.78) (.76) (.75) (.72) (.89) (.77) (.62) (.61)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD.............. $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48 $ 9.85 $9.70
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets (a)... 1.00% 1.00% 1.00% 1.00% 1.00% 0.99% 0.95% 0.98% 1.00% 1.00%
Ratio of net investment
income to average net
assets (b)............... 7.13% 7.68% 8.19% 7.90% 7.65% 7.05% 6.25% 5.49% 6.56% 6.13%
Portfolio turnover rate.... 205% 237% 239% 181% 136% 139% 170% 167% 225% 73%
Total return.............. 4.01% 6.35% 10.61% 6.92% 9.61% 13.75% 9.60% (2.26%) 10.94% 4.63%
Net assets, end of
period (000 omitted)..... $22,656 $26,859 $32,011 $46,853 $49,952 $58,978 $61,591 $45,836 $37,280 $37,210
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would
have been 1.44%, 1.37%, 1.21% and 1.07% for the years ended
June 30, 1987 through 1990, respectively; and 1.09% and 1.17%
for the years ended June 30, 1995 and 1996, respectively.
(b) Computed giving effect to the Adviser's fee waiver.
</TABLE>

___________________________
THE FUND

The mutual fund offered by this prospectus is STEIN ROE GOVERNMENT
INCOME FUND (the "Fund"). The Fund is a no-load, diversified
"mutual fund." No-load funds do not impose commissions or charges
when shares are purchased or redeemed. Mutual funds sell their
own shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping.

Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other mutual funds with different
investment objectives, including other bond funds, equity funds,
international funds, tax-exempt bond funds, and money market
funds. To obtain prospectuses and other information on opening a
regular account in any of these mutual funds, please call 800-338-
2550.
___________________________
HOW THE FUND INVESTS

The Fund's investment objective is to provide a high level of
current income. It invests primarily in securities issued or
guaranteed as to principal and interest by the U.S. Government or
by its agencies or instrumentalities ("U.S. Government
Securities"). Depending on market conditions, the Fund may invest
a substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC. Further information
on portfolio investments and strategies may be found under
Portfolio Investments and Strategies in this prospectus and in the
Statement of Additional Information.

Under normal market conditions, the Fund will invest at least 80%
of its assets in U.S. Government Securities. The Fund may also
invest up to 20% of its assets in other types of debt securities,
including debt securities of domestic issuers and of foreign
issuers payable in U.S. dollars, collateralized mortgage
obligations ("CMOs") and principal portions or coupon portions of
U.S. Government Securities that have been separated (stripped) by
banks, brokerage firms, or other entities. Stripped securities
are usually sold separately in the form of receipts or
certificates representing undivided interests in the stripped
portion. CMOs are securities collateralized by mortgages and
mortgage-backed securities. CMOs are not guaranteed by either the
U.S. Government or by its agencies or instrumentalities. Stripped
securities may be more volatile than non-stripped securities. The
staff of the Securities and Exchange Commission believes that
stripped securities are illiquid. The Fund has temporarily agreed
to treat stripped securities as subject to the Fund's restriction
on investment in illiquid securities. The Fund will invest in
debt securities rated at least investment grade or, if unrated,
deemed by the Adviser to be of comparable quality. Securities
rated in the fourth grade are neither highly protected nor poorly
secured. Such securities may have some speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of
the issuers of such securities to make principal and interest
payments than is the case for issuers of higher grade securities.
If the rating of a security held by the Fund is lost or reduced
below investment grade, the Fund is not required to dispose of the
security, but the Adviser will consider that fact in determining
whether the Fund should continue to hold the security.
___________________________
PORTFOLIO INVESTMENTS
AND STRATEGIES

U.S. GOVERNMENT SECURITIES.
U.S. Government Securities include: (i) bills, notes, bonds, and
other debt securities, differing as to maturity and rates of
interest, that are issued by and are direct obligations of the
U.S. Treasury; and (ii) other securities that are issued or
guaranteed as to principal and interest by the U.S. Government or
by its agencies or instrumentalities and that include, but are not
limited to, Government National Mortgage Association ("GNMA"),
Federal Farm Credit Banks, Federal Home Loan Banks, Farmers Home
Administration, Federal Home Loan Mortgage Corporation ("FHLMC"),
and Federal National Mortgage Association ("FNMA"). U.S.
Government Securities are generally viewed by the Adviser as being
among the safest of debt securities with respect to the timely
payment of principal and interest (but not with respect to any
premium paid on purchase), but generally bear a lower rate of
interest than corporate debt securities. However, they are
subject to market risk like other debt securities, and therefore
the Fund's shares can be expected to fluctuate in value.

DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments, the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives"). In each case,
the value of the instrument or security is "derived" from the
performance of an underlying asset or a "benchmark" such as a
security index, an interest rate, or a currency. The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, futures options,
and mortgage or other asset-backed securities.

MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES. The Fund may
invest in securities secured by mortgages or other assets such as
automobile or home improvement loans and credit card receivables.
These instruments may be issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities or by private
entities such as commercial, mortgage and investment banks and
financial companies or financial subsidiaries of industrial
companies.

Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment on the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and
market factors. If mortgages are pre-paid during periods of
declining interest rates, there would be a resulting loss of the
full-term benefit of any premium paid by the Fund on purchase of
the CMO, and the proceeds of pre-payment would likely be invested
at lower interest rates. The Fund tends to invest in CMOs of
classes known as planned amortization classes ("PACs") which have
pre-payment protection features tending to make them less
susceptible to price volatility.

Asset-backed securities tend to experience greater price
volatility than straight debt securities.

FLOATING RATE INSTRUMENTS. The Fund may also invest in floating
rate instruments which provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in
amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may
be materially shorter than their stated maturities. To the extent
such instruments are subject to lifetime or periodic interest rate
caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted
duration is an inverse relationship between market price and
interest rates and refers to the approximate percentage change in
price for a 100 basis point change in yield. For example, if
interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of 2 would increase by
approximately 2%. The Fund does not intend to invest more than
10% of net assets in floating rate instruments.

FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities and on indexes, and enter
into interest rate and index futures contracts and options on such
futures contracts, consistent with its investment objective, in
order to provide additional revenue, or to hedge against changes
in security prices or interest rates. The Fund may write a call
or put option only if the option is covered. As the writer of a
covered call option, the Fund foregoes, during the option's life,
the opportunity to profit from increases in market value of the
security covering the call option above the sum of the premium and
the exercise price of the call. There can be no assurance that a
liquid market will exist when the Fund seeks to close out a
position. Because of low margin deposits required, the use of
futures contracts involves a high degree of leverage, and may
result in losses in excess of the amount of the margin deposit.

SHORT SALES AGAINST THE BOX.
The Fund may sell short securities it owns or has the right to
acquire without further consideration, a technique called selling
short "against the box." Short sales against the box may protect
the Fund against the risk of losses in the value of its portfolio
securities because any unrealized losses with respect to such
securities should be wholly or partly offset by a corresponding
gain in the short position. However, any potential gains in such
securities should be wholly or partially offset by a corresponding
loss in the short position. Short sales against the box may be
used to lock in a profit on a security when, for tax reasons or
otherwise, the Adviser does not want to sell the security. For a
more complete explanation, please refer to the Statement of
Additional Information.

LENDING OF PORTFOLIO SECURITIES.
Subject to certain restrictions, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also
receive an additional return that may be in the form of a fixed
fee or a percentage of the collateral. The Fund would have the
right to call the loan and obtain the securities loaned at any
time on notice of not more than five business days. In the event
of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c)
expenses of enforcing its rights.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
The Fund's assets may include securities purchased on a when-
issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. The Fund makes such
commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if
the Adviser deems it advisable for investment reasons. Securities
purchased in this manner involve a risk of loss if the value of
the security purchased declines before the settlement date.

When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value of the security
repurchased will be less than the security sold; and transaction
costs exceeding the return earned by the Fund on the sales
proceeds of the dollar roll.

PORTFOLIO TURNOVER.
In seeking to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. Further, the Adviser may purchase and sell securities for
the Fund's portfolio with a view to maximizing current return,
even if portfolio changes would cause the realization of capital
gains. Although the average stated maturity of the Fund's
portfolio generally will exceed ten years, the Adviser may adjust
the average maturity of the Fund's portfolio from time to time,
depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future
changes in interest rates. As a result, the turnover rate of the
Fund may vary from year to year. A high rate of portfolio
turnover may result in increased transaction expenses and the
realization of capital gains (which may be taxable) or losses.
(See Financial Highlights and Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS

The Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities; or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
the Fund may invest all of its assets in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund.

The Fund may not make loans except that it may (1) purchase money
market instruments and enter into repurchase agreements /1/; (2)
acquire publicly-distributed or privately-placed debt securities;
(3) lend its portfolio securities under certain conditions; and
(4) participate in an interfund lending program with other Stein
Roe Funds. The Fund may not borrow money, except for non-
leveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
Fund's aggregate borrowings (including reverse repurchase
agreements) nor its aggregate loans at any one time may exceed 33
1/3% of the value of its total assets. Additional securities may
not be purchased when borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of total assets.
- -----------------
/1/ A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- -----------------

The policies set forth in the first two paragraphs under
Restrictions on the Fund's Investments (but not the footnote) are
fundamental policies of the Fund. The Statement of Additional
Information contains all of the investment restrictions.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS

All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although the Fund seeks
to reduce risk by investing in a diversified portfolio, this does
not eliminate all risk. The risks inherent in the Fund depend
primarily upon the term and quality of the obligations in the
Fund's portfolio, as well as on market conditions.

A decline in prevailing levels of interest rates generally
increases the value of securities in the Fund's portfolio, while
an increase in rates usually reduces the value of those
securities. As a result, interest rate fluctuations will affect
the Fund's net asset value, but not the income received by the
Fund from its portfolio securities. (Because yields on debt
securities available for purchase by the Fund vary over time, no
specific yield on shares of the Fund can be assured.) In
addition, if the bonds in the Fund's portfolio contain call,
prepayment or redemption provisions, during a period of declining
interest rates, these securities are likely to be redeemed, and
the Fund will probably be unable to replace them with securities
having as great a yield.

The Fund is designed for investors who seek high income with
minimum risk other than the risk of changes in net asset value
caused by fluctuations in prevailing levels of interest rates.

There can be no assurance that the Fund will achieve its
objective, nor can the Fund assure that payments of interest and
principal on portfolio securities will be made when due. If,
after purchase by the Fund, the rating of a portfolio security is
lost or reduced, the Fund would not be required to sell the
security, but the Adviser would consider such a change in deciding
whether the Fund should retain the security in its portfolio.

MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other investment companies and/or
institutional investors for investment in another investment
company having the same investment objective and substantially the
same investment policies and restrictions as the Fund. The purpose
of such an arrangement is to achieve greater operational
efficiencies and to reduce costs. It is expected that any such
investment company would be managed by the Adviser in
substantially the same manner as the Fund. Shareholders of the
Fund will be given at least 30 days' prior notice of any such
investment. Such investment would be made only if the trustees
determine it to be in the best interests of the Fund and its
shareholders.
___________________________
HOW TO PURCHASE SHARES

The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE

The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is determined as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., central time) by dividing the
difference between the values of the Fund's assets and liabilities
by the number of shares outstanding. Net asset value will not be
determined on days when the Exchange is closed unless, in the
judgment of the Board of Trustees, the net asset value of the Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., central time.

Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by the Fund for
which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES

DISTRIBUTIONS.
Income dividends are declared each business day and are paid
monthly. The Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended
October 31 in that year. The Fund intends to distribute any
undistributed net investment income and net realized capital gains
in the following year.

The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.

The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.

The yield of the Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income
is earned and reinvested at a constant rate and annualized at the
end of a six-month period.

Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND

TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See Management in the
Statement of Additional Information for the names of and other
information about the trustees and officers. The Adviser, Stein
Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
Illinois 60606, is responsible for managing the investment
portfolio and the business affairs of the Fund and the Trust,
subject to the direction of the Board. The Adviser is registered
as an investment adviser under the Investment Advisers Act of
1940. The Adviser was organized in 1986 to succeed to the
business of Stein Roe & Farnham, a partnership that had advised
and managed mutual funds since 1949. The Adviser is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which in turn is a majority owned indirect subsidiary
of Liberty Mutual Insurance Company.

PORTFOLIO MANAGER.
Michael T. Kennedy has been portfolio manager of the Fund since
1988. He is a vice-president of the Trust, a senior vice
president of the Adviser, and has been associated with the Adviser
since 1987. From 1984 to 1987, he was employed by Homewood
Federal Savings and Loan. A chartered financial analyst and a
chartered investment counselor, he received his B.S. degree from
Marquette University in 1984 and his M.M. from Northwestern
University in 1988. Mr. Kennedy is secretary of the Adviser's
Fixed Income Policy Committee and managed $414 million in mutual
fund net assets for the Adviser as of June 30, 1996. Steven P.
Luetger is associate portfolio manager for the Fund. Mr. Luetger
joined the Adviser in 1978 and is a senior vice president. He
received his B.A. from Knox College in 1975 and M.B.A. from the
University of Chicago in 1980.

FEES AND EXPENSES.
Through June 30, 1996, the Adviser provided investment advisory
and administrative services to the Fund under an investment
advisory agreement. On July 1, 1996, the investment advisory
agreement was replaced with separate management and administrative
agreements. The aggregate rates of fees under the new agreements
are equal to those charged under the old advisory agreement. The
Adviser is entitled to receive, in return for its investment
advisory and administrative services, a monthly fee from the Fund
based on its average net assets, computed and accrued daily, at
the following annual rate:

MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
--------------- ------------------- ----------------
.450% up to $100, .150% up to $100, .600% up to $100,
..425% thereafter .125% thereafter .550% thereafter

For the fiscal year ended June 30, 1996, the fee for the Fund
amounted to 0.43% of average net assets after the fee waiver
described under Fee Table.

PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Fund. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.

Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.

Contact a Stein Roe Retirement Plan Representative at 800-322-1130
for more information about this Fund.
_________________

<PAGE>

[STEIN ROE MUTUAL FUNDS LOGO]

PROSPECTUS
DEFINED CONTRIBUTION PLANS

STEIN ROE INTERMEDIATE BOND FUND
The Fund seeks high current income by investing primarily in
marketable debt securities. The dollar-weighted average life of
the Fund's portfolio is expected to be between three and ten
years.

This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").

The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company.

This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain it for
future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the Stein
Roe Funds at Suite 3200, One South Wacker Drive, Chicago, IL 60606
or by calling 800-322-1130. The Statement of Additional
Information contains information relating to other series of the
Stein Roe Income Trust that may not be available as investment
vehicles for your defined contribution plan.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996

TABLE OF CONTENTS
Page
Fee Table .............................2
Financial Highlights...................2
The Fund...............................3
How the Fund Invests...................4
Portfolio Investments and Strategies...5
Restrictions on the Fund's Investments.8
Risks and Investment Considerations ...8
How to Purchase Shares ................9
How to Redeem Shares .................10
Net Asset Value ......................10
Distributions and Income Taxes........10
Investment Return.....................11
Management of the Fund................11
Organization and Description of
Shares..............................12
For More Information..................13

<PAGE>
___________________________
FEE TABLE

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None

ANNUAL FUND OPERATING EXPENSES (as a
percentage of average net assets)
Management and Administrative Fees 0.50%
12b-1 Fees None
Other Expenses 0.25%
-----
Total Fund Operating Expenses 0.75%
=====
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:

1 year 3 years 5 years 10 years
------ ------- ------- --------
$ 8 $24 $42 $93

The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year before any
reimbursement by the Adviser. The Adviser's undertaking to
voluntarily waive its fees to the extent the Fund's ordinary
expenses exceeded 0.70 of 1% of average net assets expired on
October 31, 1996. (Also see Management--Fees and Expenses.)

For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods and that all
income dividends and capital gain distributions are reinvested in
additional Fund shares. The figures in the Example are not
necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown in the Fee Table and Example is
useful in reviewing the Fund's expenses and in providing a basis
for comparison with other mutual funds, it should not be used for
comparison with other investments using different assumptions or
time periods. The Example does not reflect any charges or
expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS

The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP, independent
auditors. The table should be read in conjunction with the Fund's
financial statements and notes thereto. The Fund's annual report, which
may be obtained from the Trust without charge upon request, contains
additional performance information.

The mutual fund offered by this prospectus is STEIN ROE
INTERMEDIATE BOND FUND (the "Fund"). The Fund is a no-load,
diversified "mutual fund." No-load funds do not impose
commissions or charges when shares are purchased or redeemed.
Mutual funds sell their own shares to investors and invest the
proceeds in a portfolio of securities. A mutual fund allows you
to pool your money with that of other investors in order to obtain
professional investment management. Mutual funds generally make
it possible for you to obtain greater diversification of your
investments and simplify your recordkeeping.

Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other mutual funds with different
investment objectives, including other bond funds, equity funds,
international funds, tax-exempt bond funds, and money market
funds. To obtain prospectuses and other information on opening a
regular account in any of these mutual funds, please call 800-338-
2550.
___________________________
HOW THE FUND INVESTS

The Fund's investment objective is to provide a high level of
current income, consistent with the preservation of capital, by
investing primarily in marketable debt securities. Under normal
market conditions, the Fund will invest at least 65% of the value
of its total assets (taken at market value at the time of
investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in the
following:

The Fund also may invest in mortgaged-backed and other debt
securities (including those convertible into or carrying warrants
to purchase common stocks or other equity interests, and privately
placed debt securities), preferred stocks, and marketable common
stocks that the Adviser considers likely to yield relatively high
income in relation to cost. Further information on portfolio
investments and strategies may be found under Portfolio
Investments and Strategies in this prospectus and in the Statement
of Additional Information.

The Fund may invest up to 35% of its total assets in debt
securities that are rated below investment grade (with no
permitted rating) and that, on balance, are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy. An
economic downturn could severely disrupt this market and adversely
affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. In addition, lower-
quality bonds are less sensitive to interest rate changes than
higher-quality instruments (see Risks and Investment
Considerations) and generally are more sensitive to adverse
economic changes or individual corporate developments. During a
period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.

Achievement of the Fund's investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if the Fund were investing exclusively in investment-grade debt
securities. Since the ratings of rating services (which evaluate
the safety of principal and interest payments, not market risks)
are used only as preliminary indicators of investment quality, the
Adviser employs its own credit research and analysis, from which
it has developed a credit rating system based upon comparative
credit analyses of issuers within the same industry. These
analyses may take into consideration such quantitative factors as
an issuer's present and potential liquidity, profitability,
internal capability to generate funds, debt/equity ratio and debt
servicing capabilities, and such qualitative factors as an
assessment of management, industry characteristics, accounting
methodology, and foreign business exposure.

Debt securities that are rated below investment grade tend to be
less marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and the Fund may have greater
difficulty selling its portfolio securities. (See Net Asset
Value.) The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.

DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments, the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives"). The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, futures options,
and mortgage or other asset-backed securities.

MORTGAGE AND OTHER ASSET-BACKED SECURITIES. The Fund may invest
in securities secured by mortgages or other assets such as
automobile or home improvement loans and credit card receivables.
These instruments may be issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities or by private
entities such as commercial, mortgage and investment banks and
financial companies or financial subsidiaries of industrial
companies.

Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment on the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and
market factors. If mortgages are pre-paid during periods of
declining interest rates, there would be a resulting loss of the
full-term benefit of any premium paid by the Fund on purchase of
the CMO, and the proceeds of pre-payment would likely be invested
at lower interest rates. The Fund tends to invest in CMOs of
classes known as planned amortization classes ("PACs") which have
pre-payment protection features tending to make them less
susceptible to price volatility.

Asset-backed securities tend to experience greater price
volatility than straight debt securities.

FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities, indexes and foreign
currencies, and enter into interest rate, index and foreign
currency futures contracts. The Fund may also write options on
such futures contracts and purchase other types of forward or
investment contracts linked to individual securities, indexes or
other benchmarks consistent with its investment objective, in
order to provide additional revenue, or to hedge against changes
in security prices, interest rates, or currency fluctuations. The
Fund may write a call or put option only if the option is covered.
As the writer of a covered call option, the Fund foregoes, during
the option's life, the opportunity to profit from increases in
market value of the security covering the call option above the
sum of the premium and the exercise price of the call. There can
be no assurance that a liquid market will exist when the Fund
seeks to close out a position. Because of low margin deposits
required, the use of futures contracts involves a high degree of
leverage, and may result in losses in excess of the amount of the
margin deposit.

FOREIGN SECURITIES.
Although the Fund may invest in foreign securities, it will not
invest in a foreign security if, as a result of such investment,
more than 10% of its total assets would be invested in foreign
securities. For purposes of this restriction, foreign securities
do not include securities represented by American Depositary
Receipts ("ADRs"), foreign debt securities denominated in U.S.
dollars, or securities guaranteed by a U.S. person such as a
corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Fund may invest in sponsored or unsponsored ADRs. In addition to,
or in lieu of, such direct investment, the Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Fund may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
Foreign securities may involve a greater degree of risk (including
risk related to exchange rate fluctuations, tax provisions, or
expropriation of assets) than do securities of domestic issuers.
At June 30, 1996, no assets of the Fund were invested in foreign
securities as defined above, and the Fund does not currently
intend to invest more than 5% of its net assets in such
securities. (See Risks and Investment Considerations.)

When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value the security repurchased
will be less than the security sold; and transaction costs
exceeding the return earned by the Fund on the sales proceeds of
the dollar roll.

PORTFOLIO TURNOVER.
In seeking to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. The turnover rate of the Fund may vary from year to year.
A high rate of portfolio turnover may result in increased
transaction expenses and the realization of capital gains (which
may be taxable) or losses. (See Financial Highlights and
Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS

The Fund may not make loans except that it may (1) purchase money
market instruments and enter into repurchase agreements /1/; (2)
acquire publicly-distributed or privately-placed debt securities;
(3) lend its portfolio securities under certain conditions; and
(4) participate in an interfund lending program with other Stein
Roe Funds. The Fund may not borrow money, except for non-
leveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
Fund's aggregate borrowings (including reverse repurchase
agreements) nor its aggregate loans at any one time may exceed 33
1/3% of the value of its total assets. Additional securities may
not be purchased when borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of total assets.
- ---------------
/1/ A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- ----------------

The Fund is appropriate for investors who seek high income with
less net asset value fluctuation from interest rate changes than
that of a longer-term fund, and who can accept greater levels of
credit and other risks associated with securities that are rated
below investment grade.

The Fund may enter into foreign currency forward contracts and use
options and futures contracts as described elsewhere in this
prospectus to limit or reduce foreign currency risk.

MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other investment companies and/or
institutional investors for investment in another investment
company having the same investment objective and substantially the
same investment policies and restrictions as the Fund. The
purpose of such arrangement is to achieve greater operational
efficiencies and to reduce costs. It is expected that any such
investment company would be managed by the Adviser in
substantially the same manner as the Fund. Shareholders of the
Fund will be given at least 30 days' prior notice of any such
investment. Such investment would be made only if the trustees
determine it to be in the best interests of the Fund and its
shareholders.
___________________________
HOW TO PURCHASE SHARES

GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions. The price at
which your redemption order will be executed is the net asset
value next determined after proper redemption instructions are
received. (See Net Asset Value.) Because the redemption price
you receive depends upon the Fund's net asset value per share at
the time of redemption, it may be more or less than the price you
originally paid for the shares.
___________________________
NET ASSET VALUE

Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by the Fund for
which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES

The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.

Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND

TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust and has overall management
responsibility for the Trust and the Fund. See Management in the
Statement of Additional Information for the names of and other
information about the trustees and officers. The Adviser, Stein
Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
Illinois 60606, is responsible for managing the investment
portfolio and the business affairs of the Fund and the Trust,
subject to the direction of the Board. The Adviser is registered
as an investment adviser under the Investment Advisers Act of
1940. The Adviser was organized in 1986 to succeed to the
business of Stein Roe & Farnham, a partnership that had advised
and managed mutual funds since 1949. The Adviser is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which in turn is a majority owned indirect subsidiary
of Liberty Mutual Insurance Company.

FEES AND EXPENSES.
Through June 30, 1996, the Adviser provided investment advisory
and administrative services to the Fund under an investment
advisory agreement. On July 1, 1996, the investment advisory
agreement was replaced with separate management and administrative
agreements. The aggregate rates of fees under the new agreements
are equal to those charged under the old advisory agreement. The
Adviser is entitled to receive from the Fund a management fee at
an annual rate of .350% of average net assets and an
administrative fee of .150%, for a total fee of .500%. Such fees
are computed and accrued daily and paid monthly. For the fiscal
year ended June 30, 1996, the fee amounted to 0.45% of average net
assets, after the fee waiver in effect during that period, as
described under Fee Table.

Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.

Contact a Stein Roe Retirement Plan Representative at 800-322-1130
for more information about this Fund.
____________________________

<PAGE>

[STEIN ROE MUTUAL FUNDS LOGO]

PROSPECTUS
DEFINED CONTRIBUTION PLANS

STEIN ROE INCOME FUND
The Fund seeks high current income by investing principally in
medium-quality debt securities and, to a lesser extent, in lower-
quality securities which may involve greater risk. (See How the
Fund Invests.)

This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").

The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company. This prospectus contains information you should know
before investing in the Fund. Please read it carefully and retain
it for future reference.

A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the Stein
Roe Funds at Suite 3200, One South Wacker Drive, Chicago, IL 60606
or by calling 800-322-1130. The Statement of Additional
Information contains information relating to other series of the
Stein Roe Income Trust that may not be available as investment
vehicles for your defined contribution plan.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996

TABLE OF CONTENTS

Page
Fee Table ..............................2
Financial Highlights....................2
The Fund................................3
How the Fund Invests....................3
Portfolio Investments and Strategies....5
Restrictions on the Fund's Investments .7
Risks and Investment Considerations ....8
How to Purchase Shares .................9
How to Redeem Shares ...................9
Net Asset Value ........................9
Distributions and Income Taxes.........10
Investment Return......................10
Management of the Fund.................11
Organization and Description of Shares.12
For More Information...................12

<PAGE>
___________________________
FEE TABLE

SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None

ANNUAL FUND OPERATING EXPENSES (as a percentage
of average net assets)
Management and Administrative Fees 0.62%
12b-1 Fees None
Other Expenses 0.26%
Total Fund Operating Expenses 0.88%
=====

EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:

1 year 3 years 5 years 10 years
------ ------- ------- --------
$9 $28 $49 $109

The purpose of the Fee Table is to assist you in understanding
the various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based on
actual expenses incurred in the last fiscal year before any
expense reimbursement by the Adviser. The Adviser's undertaking
to reimburse the Fund for expenses in excess of 0.82% of average
net assets was terminated on October 31, 1996. (Also see
Management 'of the Fund--Fees and Expenses.)

For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the
Example are not necessarily indicative of past or future expenses,
and actual expenses may be greater or less than those shown.
Although information such as that shown in the Fee Table and
Example is useful in reviewing the Fund's expenses and in
providing a basis for comparison with other mutual funds, it
should not be used for comparison with other investments using
different assumptions or time periods. The Example does not
reflect any charges or expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS

The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP,
independent auditors. The table should be read in conjunction
with the Fund's financial statements and notes thereto. The
Fund's annual report, which may be obtained from the Trust without
charge upon request, contains additional performance information.

<TABLE>
<CAPTION>
Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36 $9.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........ .98 .95 .95 .92 .80 .76 .75 .69 .71 .71
Net realized and
unrealized gains (losses)
on investments............ (.23) (.11) .05 (.70) -- .56 .59 (.74) .43 (.16)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. .75 .84 1.00 .22 .80 1.32 1.34 (.05) 1.14 .55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS FROM NET
INVESTMENT INCOME......... (.98) (.95) (.95) (.92) (.80) (.76) (.75) (.69) (.71) (.71)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD................... $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36 $ 9.79 $9.63
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets (a).... 0.96% 0.91% 0.90% 0.93% 0.95% 0.90% 0.82% 0.82% 0.82% 0.82%
Ratio of net investment
income to average net
assets (b)............... 9.90% 10.08% 9.97% 10.02% 8.98% 8.20% 7.62% 6.94% 7.55% 7.26%
Portfolio turnover rate.... 153% 158% 94% 90% 77% 76% 39% 53% 64% 135%
Total return............... 7.70% 9.38% 11.06% 2.48% 9.30% 15.30% 14.64% (0.69%) 12.79% 5.70%
Net assets, end of
period (000 omitted).... $91,916 $96,611 $110,376 $89,023 $93,952 $112,706 $151,594 $158,886 $174,327 $309,564
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would
have been 0.83%, 0.85%, and 0.88% for the years ended June 30,
1994 through 1996, respectively.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>

___________________________
THE FUND

The mutual fund offered by this prospectus is STEIN ROE INCOME
FUND (the "Fund"). The Fund is a no-load, diversified "mutual
fund." No-load funds do not impose commissions or charges when
shares are purchased or redeemed. Mutual funds sell their own
shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping.

Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other mutual funds with different
investment objectives, including other bond funds, equity funds,
international funds, tax-exempt bond funds, and money market
funds. To obtain prospectuses and other information on opening a
regular account in any of these mutual funds, please call 800-338-
2550.
___________________________
HOW THE FUND INVESTS

The investment objective of the Fund is to provide a high level of
current income. Consistent with this investment objective,
capital preservation and capital appreciation are regarded as
secondary objectives. The Fund attempts to achieve its objective
by investing principally in medium-quality debt securities, which
are obligations of issuers that the Adviser believes possess
adequate, but not outstanding, capacities to service their debt
securities, such as securities rated A or Baa by Moody's or A or
BBB by S&P. The Adviser generally attributes to medium-quality
securities the same characteristics as do rating services.
Further information on portfolio investments and strategies may be
found under Portfolio Investments and Strategies in this
prospectus and in the Statement of Additional Information.

Although the Fund will invest at least 60% of its assets in
medium- or higher-quality securities, it may also invest to a
lesser extent in securities of lower quality (in the case of rated
securities, having a rating by Moody's or S&P of not less than C).
Although the Fund can invest up to 40% of its assets in lower-
quality securities, it does not intend to invest more than 35% in
lower-quality securities. Lower-quality debt securities are
obligations of issuers that are predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal, and are commonly referred to as "junk bonds." The Fund
may invest in lower-quality debt securities; for example, if the
Adviser believes the financial condition of the issuers or the
protection offered to the particular obligations is stronger than
is indicated by low ratings or otherwise. The Fund may invest in
higher-quality securities; for example, under extraordinary
economic or financial market conditions, or when the spreads
between the yields on medium- and high-quality securities are
relatively narrow.

Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Fund may invest in
unrated securities that the Adviser believes are suitable for
investment.

Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely
disrupt this market and adversely affect the value of outstanding
bonds and the ability of the issuers to repay principal and
interest. In addition, lower-quality bonds are less sensitive to
interest rate changes than higher-quality instruments (see Risks
and Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.

Achievement of the Fund's investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if the Fund were investing in higher-quality debt securities.
Since the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only
as preliminary indicators of investment quality, the Adviser
employs its own credit research and analysis, from which it has
developed a credit rating system based upon comparative credit
analyses of issuers within the same industry. These analyses may
take into consideration such quantitative factors as an issuer's
present and potential liquidity, profitability, internal
capability to generate funds, debt/equity ratio and debt servicing
capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology, and
foreign business exposure.

Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and the Fund may have greater difficulty selling
its portfolio securities. (See Net Asset Value.) The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.

Under normal market conditions, the Fund will invest at least 65%
of the value of its total assets (taken at market value) in
convertible and non-convertible bonds and debentures. Such
securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by the Fund for a sufficient time to permit orderly disposition
thereof or to establish long-term holding periods for federal
income tax purposes.

The Fund may invest up to 35% of its total assets in other debt
securities, marketable preferred and common stocks, and foreign
and municipal securities that the Adviser considers likely to
yield relatively high income in relation to costs, and rights to
acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the
interest on which is generally exempt from federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.

DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments, the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives"). The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, or futures
options.

FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities, indexes and foreign
currencies, and enter into interest rate, index and foreign
currency futures contracts. The Fund may also write options on
such futures contracts and purchase other types of forward or
investment contracts linked to individual securities, indexes or
other benchmarks, consistent with its investment objective, in
order to provide additional revenue, or to hedge against changes
in security prices, interest rates, or currency fluctuations. The
Fund may write a call or put option only if the option is covered.
As the writer of a covered call option, the Fund foregoes, during
the option's life, the opportunity to profit from increases in
market value of the security covering the call option above the
sum of the premium and the exercise price of the call. There can
be no assurance that a liquid market will exist when the Fund
seeks to close out a position. Because of low margin deposits
required, the use of futures contracts involves a high degree of
leverage, and may result in losses in excess of the amount of the
margin deposit.

FOREIGN SECURITIES.
Although the Fund may invest in foreign securities, it will not
invest in a foreign security if, as a result of such investment,
more than 25% of its total assets would be invested in foreign
securities. For purposes of this restriction, foreign securities
do not include securities represented by American Depositary
Receipts ("ADRs"), foreign debt securities denominated in U.S.
dollars, or securities guaranteed by a U.S. person such as a
corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Fund may invest in sponsored or unsponsored ADRs. In addition to,
or in lieu of, such direct investment, the Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Fund may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
Foreign securities may involve a greater degree of risk (including
risk related to exchange rate fluctuations, tax provisions, or
expropriation of assets) than do securities of domestic issuers.
At June 30, 1996, no assets of the Fund were invested in foreign
securities as defined above, and the Fund does not currently
intend to invest more than 5% of its net assets in such
securities. (See Risks and Investment Considerations.)

When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value the security repurchased
will be less than the security sold; and transaction costs
exceeding the return earned by the Fund on the sales proceeds of
the dollar roll.

PORTFOLIO TURNOVER.
In seeking to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. Further, the Adviser may purchase and sell securities for
the portfolio of the Fund with a view to maximizing current
return, even if portfolio changes would cause the realization of
capital gains. Although the average stated maturity of the Fund's
portfolio generally will exceed ten years, the Adviser may adjust
the average maturity of the Fund's portfolio from time to time,
depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future
changes in interest rates. As a result, the turnover rate of the
Fund may vary from year to year. A high rate of portfolio
turnover may result in increased transaction expenses and the
realization of capital gains (which may be taxable) or losses.
(See Financial Highlights and Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS

The Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities; or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
the Fund may invest all or substantially all of its assets in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund.

The Fund may not make loans except that it may (1) purchase money
market instruments and enter into repurchase agreements /1/; (2)
acquire publicly-distributed or privately-placed debt securities;
(3) lend its portfolio securities under certain conditions; and
(4) participate in an interfund lending program with other Stein
Roe Funds. The Fund may not borrow money, except for non-
leveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
Fund's aggregate borrowings (including reverse repurchase
agreements) nor its aggregate loans at any one time may exceed 33
1/3% of the value of its total assets. Additional securities may
not be purchased when borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of total assets.
- -------------------
/1/ A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- ------------------------

The Fund is designed for investors who seek a higher level of
income and who can accept greater levels of credit and other risks
associated with securities of medium or lower quality.

The Fund may enter into foreign currency forward contracts and use
options and futures contracts as described elsewhere in this
prospectus to limit or reduce foreign currency risk.

The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE

Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by the Fund for
which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES

The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.

Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND

PORTFOLIO MANAGER.
Ann H. Benjamin, a vice-president of the Trust, became portfolio
manager of the Fund in January 1990. She is a senior vice
president of the Adviser and has been associated with it since
1989. She received her B.B.A. from Chatham College in 1980 and
her M.A. from Carnegie Mellon University in 1985. Ms. Benjamin
managed $309 million in mutual fund net assets for the Adviser as
of June 30, 1996, serves as High-Yield Credit Research Manager for
the Adviser, and is a member of the Adviser's Fixed Income Credit
Review Committee. Ms. Benjamin is assisted in managing the
portfolio by Stephen F. Lockman. Mr. Lockman is a senior vice
president of the Adviser and has been employed by the Adviser
since January 1994. A chartered financial analyst, Mr. Lockman
received a B.S. degree from the University of Illinois in 1983 and
an M.B.A. from DePaul University in 1986.

FEES AND EXPENSES.
Through June 30, 1996, the Adviser provided investment advisory
and administrative services to the Fund under an investment
advisory agreement. On July 1, 1996, the investment advisory
agreement was replaced with separate management and administrative
agreements. The aggregate rates of fees under the new agreements
are equal to those charged under the old advisory agreement. The
Adviser is entitled to receive, in return for its investment
advisory and administrative services, a monthly fee from the Fund
based on its average net assets, computed and accrued daily, at
the following annual rate:

MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- --------------- ------------------- ----------------
.500% up to $100, .150% up to $100, .650% up to $100,
.475% thereafter .125% thereafter .600% thereafter

For the fiscal year ended June 30, 1996, the fee amounted to 0.56%
of average net assets, after the expense limitation in effect during
that period, as described under Fee Table.

Contact a Stein Roe Retirement Plan Representative at 800-322-1130
for more information about this Fund.
_________________

<PAGE>

Statement of Additional Information Dated November 1, 1996

STEIN ROE INCOME TRUST

MONEY MARKET FUNDS
------------------
STEIN ROE CASH RESERVES FUND
STEIN ROE GOVERNMENT RESERVES FUND

BOND FUNDS
-----------
STEIN ROE GOVERNMENT INCOME FUND
STEIN ROE INTERMEDIATE BOND FUND
STEIN ROE INCOME FUND
STEIN ROE HIGH YIELD FUND

Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
800-338-2550

This Statement of Additional Information is not a prospectus
but provides additional information that should be read in
conjunction with the Money Market Funds' Prospectus and the Bond
Funds' Prospectus dated November 1, 1996 and any supplements
thereto. A Prospectus may be obtained at no charge by telephoning
800-338-2550.

TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Cash Reserves........................................4
Government Reserves..................................6
Government Income Fund...............................7
Intermediate Bond Fund...............................8
Income Fund..........................................9
High Yield Fund.....................................10
Portfolio Investments and Strategies....................11
Investment Restrictions.................................28
Additional Investment Considerations....................32
Purchases And Redemptions...............................33
Management..............................................34
Financial Statements....................................37
Principal Shareholders..................................38
Investment Advisory Services............................39
Distributor.............................................41
Transfer Agent..........................................42
Custodian...............................................42
Independent Auditors....................................43
Portfolio Transactions..................................43
Additional Income Tax Considerations....................45
Additional Information on the Determination of Net
Asset Value of the Money Market Funds.................46
Investment Performance..................................47
Appendix--Ratings.......................................54

<PAGE>
GENERAL INFORMATION AND HISTORY

Stein Roe Cash Reserves Fund, Stein Roe Government Reserves
Fund, Stein Roe Government Income Fund, Stein Roe Intermediate
Bond Fund, Stein Roe Income Fund, and Stein Roe High Yield Fund
are series of the Stein Roe Income Trust ("Income Trust"). Each
series of Income Trust other than Stein Roe High Yield Fund ("High
Yield Fund") invests in a separate portfolio of securities and
other assets, with its own objectives and policies. High Yield
Fund invests all of its investable assets in shares of SR&F High
Yield Portfolio ("High Yield Portfolio"), which is a series of
SR&F Base Trust ("Base Trust"). High Yield Fund and High Yield
Portfolio have identical investment objectives and substantially
identical investment policies.

As used herein, "Cash Reserves" refers to the series of
Income Trust designated Stein Roe Cash Reserves Fund, "Government
Reserves" refers to the series of the Trust designated Stein Roe
Government Reserves Fund, "Government Income Fund" refers to the
series of the Trust designated Stein Roe Government Income Fund,
"Intermediate Bond Fund" refers to the series of the Trust
designated Stein Roe Intermediate Bond Fund, and "Income Fund"
refers to the series of the Trust designated Stein Roe Income
Fund. The term "Money Market Funds" refers to Cash Reserves and
Government Reserves, and the term "Bond Funds" refers to Income
Fund, Government Income Fund, Intermediate Bond Fund, Income Fund,
High Yield Fund, and High Yield Portfolio. The series of Income
Trust are referred to collectively as "the Funds."

On November 1, 1995, the name of Income Trust was changed
from SteinRoe Income Trust to Stein Roe Income Trust. Prior to
November 1, 1995, Cash Reserves, Government Reserves, Government
Income Fund, Intermediate Bond Fund and Income Fund were named
SteinRoe Cash Reserves, SteinRoe Government Reserves, SteinRoe
Government Income Fund, SteinRoe Intermediate Bond Fund and
SteinRoe Income Fund, respectively. Prior to April 2, 1990,
SteinRoe Government Income Fund was named SteinRoe Governments
Plus and SteinRoe Intermediate Bond Fund was named SteinRoe
Managed Bonds. SteinRoe Income Fund was named SteinRoe High-Yield
Bonds prior to November 1, 1989.

Currently six series of Income Trust are authorized and
outstanding. Each share of a series is entitled to participate
pro rata in any dividends and other distributions declared by the
Board on shares of that series, and all shares of a series have
equal rights in the event of liquidation of that series. Each
whole share (or fractional share) outstanding on the record date
established in accordance with the By-Laws shall be entitled to a
number of votes on any matter on which it is entitled to vote
equal to the net asset value of the share (or fractional share) in
United States dollars determined at the close of business on the
record date (for example, a share having a net asset value of
$10.50 would be entitled to 10.5 votes). As a business trust,
Income Trust is not required to hold annual shareholder meetings.
However, special meetings may be called for purposes such as
electing or removing trustees, changing fundamental policies, or
approving an investment advisory contract. If requested to do so
by the holders of at least 10% of Income Trust's outstanding
shares, Income Trust will call a special meeting for the purpose
of voting upon the question of removal of a trustee or trustees
and will assist in the communications with other shareholders as
required by Section 16(c) of the Investment Company Act of 1940.
All shares of Income Trust are voted together in the election of
trustees. On any other matter submitted to a vote of
shareholders, shares are voted by individual series and not in the
aggregate, except that shares are voted in the aggregate when
required by the Investment Company Act of 1940 or other applicable
law. When the Board of Trustees determines that the matter
affects only the interests of one or more series, shareholders of
the unaffected series are not entitled to vote on such matters.

Stein Roe & Farnham Incorporated (the "Adviser") provides
administrative and accounting and recordkeeping services to the
Funds and High Yield Portfolio and provides investment advisory
services to Cash Reserves, Government Reserves, Income Fund,
Government Income Fund, Intermediate Bond Fund, Income Fund, and
High Yield Portfolio.

SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE

Rather than invest in securities directly, each Fund may seek
to achieve its objective by pooling its assets with assets of
other investment companies and/or institutional investors for
investment in another mutual fund having the same investment
objective and substantially the same investment policies and
restrictions as the Fund. The purpose of such an arrangement is
to achieve greater operational efficiencies and reduce costs. The
Adviser is expected to manage any such mutual fund in which a Fund
would invest. Such investment would be subject to determination
by the Trustees that it was in the best interests of the Fund and
its shareholders, and shareholders would receive advance notice of
any such change. The only Fund currently operating under the
Master Fund/Feeder Fund structure is High Yield Fund, which
commenced operations on November 1, 1996, as a feeder fund. For
more information, please refer to the Prospectus under the caption
Organization and Description of Shares--Special Considerations
Regarding the Master Fund/Feeder Fund Structure.

INVESTMENT POLICIES

The following information supplements the discussion of the
Funds' and High Yield Portfolio's respective investment objectives
and policies described in the Prospectus. In pursuing its
objective, each Fund will invest as described below and may employ
the investment techniques described in the Prospectus and
elsewhere in this Statement of Additional Information.
Investments and strategies that are common to two or more Funds
are described under Portfolio Investments and Strategies. The
investment objective of each Fund and High Yield Portfolio is a
non-fundamental policy and may be changed by the Board of Trustees
without the approval of a "majority of the outstanding voting
securities" /1/ of that Fund or Portfolio.
- --------------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy or (ii) more than
50% of the outstanding shares of the Fund.
- ------------
CASH RESERVES

This Fund seeks to obtain maximum current income consistent
with the preservation of capital and the maintenance of liquidity
by investing all of its assets in U.S. dollar-denominated money
market instruments maturing in thirteen months or less from time
of investment. Each security must be rated (or be issued by an
issuer that is rated with respect to its short-term debt) within
the highest rating category for short-term debt by at least two
nationally recognized statistical rating organizations ("NRSRO")
(or, if rated by only one NRSRO, by that rating agency) or, if
unrated, determined by or under the direction of the Board of
Trustees to be of comparable quality. These securities may
include:

(1) Securities issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or better
(or equivalent rating) by at least one NRSRO;
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries (U.S.
or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term debt obligations.
- -----------------
/2/ A repurchase agreement involves the sale of securities to the
Fund, with the concurrent agreement of the seller to repurchase
the securities at the same price plus an amount equal to an
agreed-upon interest rate, within a specified time. In the event
of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating
the underlying securities and losses.
- ------------------

The Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net
asset value per share and not in excess of 90 days. It is a
fundamental policy which may not be changed without the approval
of a majority of the outstanding voting securities, that the
maturity of any instrument that grants the holder the right to
redeem at par plus interest and without penalty will be deemed at
any time to be the next date provided for payment on exercise of
such optional redemption right.

It is the Fund's intention, as a general policy, to hold
securities to maturity. However, the Fund may attempt, from time
to time, to increase its yield by trading to take advantage of
variations in the markets for short-term money market instruments.
In addition, redemptions of the Fund's shares could necessitate
the sale of portfolio securities and these sales may occur when
such sales would not otherwise be desirable. While the Fund seeks
to invest in high-quality money market instruments, these
investments are not entirely without risk. An increase in
interest rates will generally reduce the market value of the
Fund's portfolio investments and a decline in interest rates will
generally increase the market value of the Fund's portfolio
investments. Investments in instruments other than U.S.
Government Securities are also subject to default by the issuer.

Because the Fund's investment policy permits it to invest in:
securities of foreign branches of U.S. banks (Eurodollars), U.S.
branches of foreign banks (Yankee dollars), and foreign banks and
their foreign branches, such as negotiable certificates of
deposit; securities of foreign governments; and securities of
foreign issuers, such as commercial paper and corporate notes,
bonds and debentures, investment in that Fund might involve risks
that are different in some respects from an investment in a fund
that invests only in debt obligations of U.S. domestic issuers.
Such risks may include future political and economic developments,
the possible imposition of foreign withholding taxes on interest
income payable on securities held in the portfolio, possible
seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other
foreign governmental restrictions that might adversely affect the
payment of principal and interest on securities in the Fund's
portfolio. Additionally, there may be less public information
available about foreign banks and their branches. Foreign banks
and foreign branches of foreign banks are not regulated by U.S.
banking authorities, and generally are not bound by accounting,
auditing, and financial reporting standards comparable to U.S.
banks.

The Fund may invest in notes and bonds that bear floating or
variable rates of interest, and that ordinarily have stated
maturities in excess of thirteen months, but permit the holder to
demand earlier payment of principal and accrued interest, upon not
more than 30 days' advance notice, at any time or after stated
intervals not exceeding thirteen months. Such instruments are
commonly referred to as "demand" obligations. Variable rate
demand notes include master demand notes, which are obligations
that permit the Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements
between the Fund, as lender, and the borrower. The interest rates
on these notes fluctuate from time to time. The issuer of such
obligations normally has a right, after a given period, to prepay
the outstanding principal amount of the obligations plus accrued
interest upon a specified number of days' notice to the holders of
such obligations. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time the rate
changes. The interest rate on a variable rate obligation is
adjusted automatically at the end of specified intervals.
Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because
these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments
will generally be traded, and there generally is no established
secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations
are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand.
Such obligations frequently are not rated by credit rating
agencies and the Fund may invest in obligations that are not so
rated only if the Board of Trustees determines that the
obligations are of comparable quality to the other obligations in
which the Fund may invest.

The Fund may purchase from financial institutions
participation interests in securities. A participation interest
gives the Fund an undivided interest in the security in the
proportion that the Fund's participation interest bears to the
total principal amount of the security. The Fund may also
purchase certificates of participation, such as participations in
a pool of mortgages or credit card receivables. Participation
interests and certificates of participation both may have fixed,
floating or variable rates of interest with remaining maturities
of one year or less. If these instruments are unrated, or have
been given a rating below that which is permissible for purchase
by the Fund, they will be backed by an irrevocable letter of
credit or guarantee of a bank, or the payment obligation otherwise
will be collateralized by U.S. Government Securities, or, in the
case of unrated participation interests, the Board of Trustees
must have determined that the instrument is of comparable quality
to those instruments in which the Fund may invest.

Under normal market conditions, the Fund will invest at least
25% of its assets in securities of issuers in the financial
services industry. This policy may cause the Fund to be more
adversely affected by changes in market or economic conditions and
other circumstances affecting the financial services industry.
The financial services industry includes issuers that, according
to the Directory of Companies Required to File Annual Reports with
the Securities and Exchange Commission, are in the following
categories: State banks; national banks; savings and loan holding
companies; personal credit institutions; business credit
institutions; mortgage-backed securities; financial services;
security and commodity brokers, dealers and services; life,
accident and health insurance carriers; fire, marine, casualty and
surety insurance carriers; insurance agents, brokers and services.

GOVERNMENT RESERVES

This Fund seeks to obtain maximum current income consistent
with safety of capital and maintenance of liquidity by investment
in U.S. Government Securities maturing in thirteen months or less
from the date of purchase. These securities include:

U.S. Government Securities include: (i) bills, notes, bonds,
and other debt securities, differing as to maturity and rates of
interest, that are issued by and are direct obligations of the
U.S. Treasury; and (ii) other securities that are issued or
guaranteed as to principal and interest by agencies or
instrumentalities of the U.S. Government and that include, but are
not limited to, Federal Farm Credit Banks, Federal Home Loan
Banks, Government National Mortgage Association, Farmers Home
Administration, Federal Home Loan Mortgage Corporation, and
Federal National Mortgage Association.

Because the Fund's investment policy permits it to invest in
U.S. Government Securities that are not backed by the full faith
and credit of the U.S. Treasury, investment in the Fund may
involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and interest
on the securities in the Fund's portfolio that are supported only
by the issuing or guaranteeing agency or instrumentality and,
accordingly, the Fund must look principally or solely to that
entity for ultimate repayment.

The Fund will not enter into a repurchase agreement maturing
in more than seven days if as a result thereof more than 10% of
its net assets (taken at market value at the time of the
investment) would be invested in illiquid securities, including
repurchase agreements maturing in more than seven days; however,
there is otherwise no limitation on the percentage of the Fund's
assets that may be invested in repurchase agreements. The Fund
will enter into repurchase agreements only where (i) the
underlying securities are U.S. Government Securities and (ii) the
seller agrees that the value of the underlying U.S. Government
Securities, including accrued interest (if purchased), will at all
times be equal to or exceed the value of the repurchase agreement.

The Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net
asset value per share, and, in any case, not in excess of 90 days.

It is the Fund's intention, in general, to hold securities to
maturity. However, the Fund may attempt, from time to time, to
increase its yield by trading to take advantage of variations in
the markets for U.S. Government Securities. In addition,
redemptions of the Fund's shares could necessitate the sale of
portfolio securities, and such sales may occur at times when sales
would not otherwise be desirable. An increase in prevailing
interest rates will generally reduce the value of the Fund's
portfolio investments, and a decline in prevailing interest rates
will generally increase the market value of the Fund's portfolio
investments.

GOVERNMENT INCOME FUND

This Fund's investment objective is to provide a high level
of current income. It invests primarily in U.S. Government
Securities.

Because the Fund's investment policy permits it to invest in
U.S. Government Securities that are not backed by the full faith
and credit of the U.S. Treasury, investment in the Fund may
involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and interest
on the securities in the Fund's portfolio that are supported only
by the issuing or guaranteeing U.S. Government agency or
instrumentality since the Fund must look principally or solely to
that entity for ultimate repayment.

Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC.

Under normal market conditions, the Fund will invest at least
80% of its assets in U.S. Government Securities. The Fund may
also invest up to 20% of its assets in other types of debt
securities, including debt securities of domestic issuers and of
foreign issuers payable in U.S. dollars, collateralized mortgage
obligations ("CMOs") and in principal portions or coupon portions
of U.S. Government Securities that have been separated (stripped)
by banks, brokerage firms, or other entities. CMOs are securities
collateralized by mortgages and mortgage-backed securities. CMOs
are not guaranteed by either the U.S. Government or by its
agencies or instrumentalities. Stripped securities are usually
sold separately in the form of receipts or certificates
representing undivided interests in the stripped portion.
Stripped securities may be more volatile than non-stripped
securities. The staff of the Securities and Exchange Commission
believes that stripped securities are illiquid. The Fund has
temporarily agreed to treat stripped securities as subject to the
Fund's restriction on investment in illiquid securities. The Fund
will invest in debt securities rated at least investment grade or,
if unrated, deemed by the Adviser to be of comparable quality.
Securities rated in the fourth grade are neither highly protected
nor poorly secured. Such securities have some speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of
the issuers of such securities to make principal and interest
payments than is the case for issuers of higher grade securities.
If the rating of a security held by the Fund is lost or reduced
below investment grade, the Fund is not required to dispose of the
security, but the Adviser will consider that fact in determining
whether the Fund should continue to hold the security.

INTERMEDIATE BOND FUND

This Fund's investment objective is to provide a high level
of current income, consistent with the preservation of capital, by
investing primarily in marketable debt securities. Under normal
market conditions, the Fund will invest at least 65% of the value
of its total assets (taken at market value at the time of
investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in the
following:

(2) U.S. Government Securities;

(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at
time of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and

(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.

Under normal market conditions, the Fund invests at least 65%
of its assets in securities with an average life of between three
and ten years, and expects that the dollar-weighted average life
of its portfolio will be between three and ten years. Average
life is the weighted average period over which the Adviser expects
the principal to be paid, and differs from stated maturity in that
it estimates the effect of expected principal prepayments and call
provisions. With respect to GNMA securities and other mortgage-
backed securities, average life is likely to be substantially less
than the stated maturity of the mortgages in the underlying pools.
With respect to obligations with call provisions, average life is
typically the next call date on which the obligation reasonably
may be expected to be called. Securities without prepayment or
call provisions generally have an average life equal to their
stated maturity. During periods of rising interest rates, the
average life of mortgage-backed securities and callable
obligations may increase substantially because they are not likely
to be prepaid, which may result in greater net asset value
fluctuation.

The Fund also may invest in other debt securities (including
those convertible into, or carrying warrants to purchase, common
stocks or other equity interests, and privately placed debt
securities); preferred stocks (including those convertible into,
or carrying warrants to purchase, common stocks or other equity
interests); and marketable common stocks that the Adviser
considers likely to yield relatively high income in relation to
cost.

The Fund may invest up to 35% of its total assets in debt
securities that are rated below investment grade (with no minimum
permitted rating) and that, on balance, are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy. (See
Portfolio Investments and Strategies for more information on the
risks associated with investing in debt securities rated below
investment grade.)

INCOME FUND

The Income Fund attempts to achieve its objective by
investing principally in medium-quality debt securities, which are
obligations of issuers that the Adviser believes possess adequate,
but not outstanding, capacities to service their debt securities,
such as securities rated A or Baa by Moody's or A or BBB by S&P.
The Adviser generally attributes to medium-quality securities the
same characteristics as do rating services.

Although the Income Fund will invest at least 60% of its
assets in medium- or higher-quality debt securities, the Income
Fund may also invest to a lesser extent in debt securities of
lower quality (in the case of rated securities, having a rating by
Moody's or S&P of not less than C). Although the Fund can invest
up to 40% of its assets in lower-quality securities, it does not
intend to invest more than 35% in lower-quality securities.
Lower-quality debt securities are obligations of issuers that are
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The Income Fund may invest in
lower-quality debt securities; for example, if the Adviser
believes the financial condition of the issuers or the protection
offered to the particular obligations is stronger than is
indicated by low ratings or otherwise. (See Portfolio Investments
and Strategies for more information on the risks associated with
investing in debt securities rated below investment grade.) The
Income Fund may invest in higher-quality securities; for example,
under extraordinary economic or financial market conditions, or
when the spreads between the yields on medium- and high-quality
securities are relatively narrow.

Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Income Fund may
invest in unrated securities that the Adviser believes are
suitable for investment.

Under normal market conditions, the Income Fund will invest
at least 65% of the value of its total assets (taken at market
value) in convertible and non-convertible bonds and debentures.
Such securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by the Income Fund for a sufficient time to permit orderly
disposition thereof or to establish long-term holding periods for
federal income tax purposes.

The Income Fund may invest up to 35% of its total assets in
other debt securities, marketable preferred and common stocks, and
foreign and municipal securities that the Adviser considers likely
to yield relatively high income in relation to costs, and rights
to acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the
interest on which is generally exempt from federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.

HIGH YIELD FUND

High Yield Fund seeks to achieve its objective by investing
all of its assets in High Yield Portfolio. The investment
policies of High Yield Portfolio are identical to those of the
Fund. High Yield Portfolio seeks total return by investing for a
high level of current income and capital growth.

High Yield Portfolio invests principally in high-yield, high-
risk medium- and lower-quality debt securities. The medium- and
lower-quality debt securities in which High Yield Portfolio will
invest normally offer a current yield or yield to maturity that is
significantly higher than the yield from securities rated in the
three highest categories assigned by rating services such as S&P
or Moody's.

Under normal circumstances, at least 65% of High Yield
Portfolio's assets will be invested in high-yield, high-risk
medium- and lower-quality debt securities rated lower than Baa by
Moody's or lower than BBB by S&P, or equivalent ratings as
determined by other rating agencies or unrated securities that the
Adviser determines to be of comparable quality. Medium-quality
debt securities, although considered investment grade, have some
speculative characteristics. Lower-quality debt securities are
obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." Some issuers of debt securities
choose not to have their securities rated by a rating service, and
High Yield Portfolio may invest in unrated securities that the
Adviser believes are suitable for investment. High Yield
Portfolio may invest in debt obligations that are in default, but
such obligations are not expected to exceed 10% of High Yield
Portfolio's assets. (See Portfolio Investments and Strategies
for more information on the risks associated with investing in
debt securities rated below investment grade.)

High Yield Portfolio may invest up to 35% of its total assets
in other securities including, but not limited to, pay-in-kind
bonds, securities issued in private placements, bank loans, zero
coupon bonds, foreign securities, convertible securities, futures,
and options. High Yield Portfolio may also invest in higher-
quality debt securities. Under normal market conditions, however,
High Yield Portfolio is unlikely to emphasize higher-quality debt
securities since generally they offer lower yields than medium-
and lower-quality debt securities with similar maturities. High
Yield Portfolio may also invest in common stocks and securities
that are convertible into common stocks, such as warrants.

PORTFOLIO INVESTMENTS AND STRATEGIES

For purposes of discussion under Portfolio Investments and
Strategies, the term "Fund" refers to Cash Reserves, Government
Reserves, Government Income Fund, Intermediate Bond Fund, Income
Fund, High Yield Fund, and High Yield Portfolio.

DERIVATIVES

Consistent with its objective, each Bond Fund may invest in a
broad array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives").

Derivatives are most often used to manage investment risk or
to create an investment position indirectly because it is more
efficient or less costly than direct investment that cannot be
readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.

The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and directions
of movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives.

High Yield Portfolio does not currently intend to invest more
than 5% of its net assets in any types of Derivatives except
options, futures contracts, and futures options. Income Fund does
not currently intend to invest, nor has the Fund during its past
fiscal year invested, more than 5% of its net assets in any type
of Derivative, except options, futures contracts, and futures
options. Each of Government Income Fund and Intermediate Bond
Fund does not currently intend to invest, nor has such Fund during
its past fiscal year invested, more than 5% of its net assets in
any type of Derivative except options, futures contracts, futures
options and obligations collateralized by either mortgages or
other assets. (See Mortgage and Other Asset-Backed Securities,
Variable and Floating Rate Instruments, and Options and Futures
below.)

MEDIUM- AND LOWER-QUALITY DEBT SECURITIES

Intermediate Bond Fund, Income Fund, High Yield Fund, and
High Yield Portfolio may invest in medium- and lower-quality debt
securities. Medium-quality debt securities, although considered
investment grade, have some speculative characteristics. Lower-
quality securities, commonly referred to as "junk bonds," are
those rated below the fourth highest rating category or bond of
comparable quality.

Investment in medium- or lower-quality debt securities
involves greater investment risk, including the possibility of
issuer default or bankruptcy. A Fund will diversify its holdings
among a number of issuers to help minimize this risk. An economic
downturn could severely disrupt this market and adversely affect
the value of outstanding bonds and the ability of the issuers to
repay principal and interest. In addition, lower-quality bonds
are less sensitive to interest rate changes than higher-quality
instruments and generally are more sensitive to adverse economic
changes or individual corporate developments. During a period of
adverse economic changes, including a period of rising interest
rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.

Lower-quality debt securities are obligations of issuers that
are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal according to
the terms of the obligation and, therefore, carry greater
investment risk, including the possibility of issuer default and
bankruptcy, and are commonly referred to as "junk bonds." The
lowest rating assigned by Moody's is for bonds that can be
regarded as having extremely poor prospects of ever attaining any
real investment standing.

Achievement of the investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if a Fund or High Yield Portfolio were investing in higher-quality
debt securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not market
risks) are used only as preliminary indicators of investment
quality, the Adviser employs its own credit research and analysis,
from which it has developed a proprietary credit rating system
based upon comparative credit analyses of issuers within the same
industry. These analyses may take into consideration such
quantitative factors as an issuer's present and potential
liquidity, profitability, internal capability to generate funds,
debt/equity ratio and debt servicing capabilities, and such
qualitative factors as an assessment of management, industry
characteristics, accounting methodology, and foreign business
exposure.

Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and a Fund or High Yield Portfolio may have
greater difficulty selling its portfolio securities. The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.

MORTGAGE AND OTHER ASSET-BACKED SECURITIES

Each Bond Fund may invest in securities secured by mortgages
or other assets such as automobile or home improvement loans and
credit card receivables. These instruments may be issued or
guaranteed by the U.S. Government or by its agencies or
instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or financial
subsidiaries of industrial companies.

Mortgage-backed securities provide either a pro rata interest
in underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs") which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities, and are usually issued in multiple classes each
of which has different payment rights, pre-payment risks and yield
characteristics. Mortgage-backed securities involve the risk of
pre-payment on the underlying mortgages at a faster or slower rate
than the established schedule. Pre-payments generally increase
with falling interest rates and decrease with rising rates but
they also are influenced by economic, social and market factors.
If mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit of
any premium paid by the Fund on purchase of the CMO, and the
proceeds of pre-payment would likely be invested at lower interest
rates. The Funds tend to invest in CMOs of classes known as
planned amortization classes ("PACs") which have pre-payment
protection features tending to make them less susceptible to price
volatility.

Non-mortgage asset-backed securities usually have less pre-
payment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.

VARIABLE AND FLOATING RATE INSTRUMENTS

Each Bond Fund may also invest in floating rate instruments
which provide for periodic adjustments in coupon interest rates
that are automatically reset based on changes in amount and
direction of specified market interest rates. In addition, the
adjusted duration of some of these instruments may be materially
shorter than their stated maturities. To the extent such
instruments are subject to lifetime or periodic interest rate caps
or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted
duration is an inverse relationship between market price and
interest rates and refers to the approximate percentage change in
price for a 100 basis point change in yield. For example, if
interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of 2 would increase by
approximately 2%. Neither Income Fund nor High Yield Portfolio
intends to invest more than 5% of its net assets in floating rate
instruments. Neither Government Income Fund nor Intermediate Bond
Fund intends to invest more than 10% of its net assets in floating
rate instruments.

In accordance with its investment objective and policies,
each Money Market Fund may invest in variable and floating rate
money market instruments which provide for periodic or automatic
adjustments in coupon interest rates that are reset based on
changes in amount and direction of specified short-term interest
rates. Neither Money Market Fund will invest in a variable or
floating rate instrument unless the Adviser determines that as of
any reset date the market value of the instrument can reasonably
be expected to approximate its par value.

LENDING OF PORTFOLIO SECURITIES

Subject to restriction (7) under Investment Restrictions,
each Bond Fund may lend its portfolio securities to broker-dealers
and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the
securities loaned by a Fund. The Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer on
the securities loaned, and would also receive an additional return
that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in
liquidating the loan collateral or recovering the loaned
securities and losses including (a) possible decline in the value
of the collateral or in the value of the securities loaned during
the period while the Fund seeks to enforce its rights thereto, (b)
possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights.

None of the Bond Funds has loaned portfolio securities during
its last fiscal year, nor does it intend to loan more than 5% of
its net assets.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE
AGREEMENTS; STANDBY COMMITMENTS

Each Money Market Fund may purchase instruments on a when-
issued or delayed-delivery basis. Although the payment terms are
established at the time the Fund enters into the commitment, the
instruments may be delivered and paid for some time after the date
of purchase, when their value may have changed and the yields
available in the market may be greater. The Funds will make such
commitments only with the intention of actually acquiring the
instruments, but may sell them before settlement date if it is
deemed advisable for investment reasons. Securities purchased in
this manner involve risk of loss if the value of the security
purchased declines before settlement date.

Each of the Bond Funds may purchase securities on a when-
issued or delayed-delivery basis, as described in the Prospectus.
A Bond Fund makes such commitments only with the intention of
actually acquiring the securities, but may sell the securities
before settlement date if the Adviser deems it advisable for
investment reasons. Securities purchased on a when-issued or
delayed-delivery basis are sometimes done on a "dollar roll"
basis. Dollar roll transactions consist of the sale by a Fund of
securities with a commitment to purchase similar but not identical
securities, generally at a lower price at a future date. A dollar
roll may be renewed after cash settlement and initially may
involve only a firm commitment agreement by a Fund to buy a
security. A dollar roll transaction involves the following risks:
if the broker-dealer to whom a Fund sells the security becomes
insolvent, the Fund's right to purchase or repurchase the security
may be restricted; the value of the security may change adversely
over the term of the dollar roll; the security which a Fund is
required to repurchase may be worth less than a security which the
Fund originally held; and the return earned by a Fund with the
proceeds of a dollar roll may not exceed transaction costs.

Each of the Bond Funds may enter into reverse repurchase
agreements with banks and securities dealers. A reverse
repurchase agreement is a repurchase agreement in which the Fund
is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of securities because it avoids certain
market risks and transaction costs.

At the time a Fund enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
reverse repurchase agreement, liquid assets (cash, U.S. Government
or other "high grade" debt obligations) of the Fund having a value
at least as great as the purchase price of the securities to be
purchased will be segregated on the books of the Fund and held by
the custodian throughout the period of the obligation. The use of
these investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value
fluctuation.

Standby commitment agreements create an additional risk for
each Fund because the other party to the standby agreement
generally will not be obligated to deliver the security, but the
Fund will be obligated to accept it if delivered. Depending on
market conditions, the Fund may receive a commitment fee for
assuming this obligation. If prevailing market interest rates
increase during the period between the date of the agreement and
the settlement date, the other party can be expected to deliver
the security and, in effect, pass any decline in value to the
Fund. If the value of the security increases after the agreement
is made, however, the other party is unlikely to deliver the
security. In other words, a decrease in the value of the
securities to be purchased under the terms of a standby commitment
agreement will likely result in the delivery of the security, and,
therefore, such decrease will be reflected in the Fund's net asset
value. However, any increase in the value of the securities to be
purchased will likely result in the non-delivery of the security
and, therefore, such increase will not affect the net asset value
unless and until the Fund actually obtains the security.

SHORT SALES AGAINST THE BOX

Each Fund may sell securities short against the box; that is,
enter into short sales of securities that it currently owns or has
the right to acquire through the conversion or exchange of other
securities that it owns at no additional cost. A Fund may make
short sales of securities only if at all times when a short
position is open the Fund owns at least an equal amount of such
securities or securities convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.

In a short sale against the box, a Fund does not deliver from
its portfolio the securities sold. Instead, the Fund borrows the
securities sold short from a broker-dealer through which the short
sale is executed, and the broker-dealer delivers such securities,
on behalf of the Fund, to the purchaser of such securities. The
Fund is required to pay to the broker-dealer the amount of any
dividends paid on shares sold short. Finally, to secure its
obligation to deliver to such broker-dealer the securities sold
short, the Fund must deposit and continuously maintain in a
separate account with the Fund's custodian an equivalent amount of
the securities sold short or securities convertible into or
exchangeable for such securities at no additional cost. A Fund is
said to have a short position in the securities sold until it
delivers to the broker-dealer the securities sold. A Fund may
close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities
sold short, rather than by delivering portfolio securities.

Short sales may protect a Fund against the risk of losses in
the value of its portfolio securities because any unrealized
losses with respect to such portfolio securities should be wholly
or partially offset by a corresponding gain in the short position.
However, any potential gains in such portfolio securities should
be wholly or partially offset by a corresponding loss in the short
position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to
the amount the Fund owns, either directly or indirectly, and, in
the case where the Fund owns convertible securities, changes in
the conversion premium.

Short sale transactions involve certain risks. If the price
of the security sold short increases between the time of the short
sale and the time a Fund replaces the borrowed security, the Fund
will incur a loss and if the price declines during this period,
the Fund will realize a short-term capital gain. Any realized
short-term capital gain will be decreased, and any incurred loss
increased, by the amount of transaction costs and any premium,
dividend or interest which the Fund may have to pay in connection
with such short sale. Certain provisions of the Internal Revenue
Code may limit the degree to which a Fund is able to enter into
short sales. There is no limitation on the amount of each Fund's
assets that, in the aggregate, may be deposited as collateral for
the obligation to replace securities borrowed to effect short
sales and allocated to segregated accounts in connection with
short sales. No Fund currently expects that more than 5% of its
total assets would be involved in short sales against the box.

LINE OF CREDIT

Subject to restriction (8) under Investment Restrictions,
each Fund may establish and maintain a line of credit with a major
bank in order to permit borrowing on a temporary basis to meet
share redemption requests in circumstances in which temporary
borrowing may be preferable to liquidation of portfolio
securities.

PIK AND ZERO COUPON BONDS

Each Bond Fund may invest in both zero coupon bonds and bonds
the interest on which is payable in kind ("PIK bonds"). A zero
coupon bond is a bond that does not pay interest for its entire
life. A PIK bond pays interest in the form of additional
securities. The market prices of both zero coupon and PIK bonds
are affected to a greater extent by changes in prevailing levels
of interest rates and thereby tend to be more volatile in price
than securities that pay interest periodically and in cash. In
addition, because a Fund accrues income with respect to these
securities prior to the receipt of such interest in cash, it may
have to dispose of portfolio securities under disadvantageous
circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax
consequences. High Yield Portfolio may invest up to 20% of its
total assets in PIK and zero coupon bonds.

RATED SECURITIES

For a description of the ratings applied by Moody's and S&P
(two of the approved NRSROs) to debt securities, please refer to
the Appendix. The rated debt securities described under
Investment Policies above for each Fund include securities given a
rating conditionally by Moody's or provisionally by S&P. If the
rating of a security held by a Fund is withdrawn or reduced, the
Fund is not required to sell the security, but the Adviser will
consider such fact in determining whether that Fund should
continue to hold the security. To the extent that the ratings
accorded by a NRSRO for debt securities may change as a result of
changes in such organizations, or changes in their rating systems,
each Fund will attempt to use comparable ratings as standards for
its investments in debt securities in accordance with its
investment policies.

FOREIGN SECURITIES

Intermediate Bond Fund, Income Fund, High Yield Fund, and
High Yield Portfolio each may invest up to 25% of total assets
(taken at market value at the time of investment) in securities of
foreign issuers that are not publicly traded in the United States
("foreign securities"). For purposes of these limits, foreign
securities do not include securities represented by American
Depositary Receipts ("ADRs"), securities denominated in U.S.
dollars, or securities guaranteed by U.S. persons. Investment in
foreign securities may involve a greater degree of risk (including
risks relating to exchange fluctuations, tax provisions, or
expropriation of assets) than does investment in securities of
domestic issuers.

Such Funds may invest in both "sponsored" and "unsponsored"
ADRs. In a sponsored ADR, the issuer typically pays some or all
of the expenses of the depositary and agrees to provide its
regular shareholder communications to ADR holders. An unsponsored
ADR is created independently of the issuer of the underlying
security. The ADR holders generally pay the expenses of the
depositary and do not have an undertaking from the issuer of the
underlying security to furnish shareholder communications. No
Fund expects to invest as much as 5% of its total assets in
unsponsored ADRs.

With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, the Funds'
investment performance is affected by the strength or weakness of
the U.S. dollar against these currencies. For example, if the
dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise
even though the price of the stock remains unchanged. Conversely,
if the dollar rises in value relative to the yen, the dollar value
of the yen-denominated stock will fall. (See discussion of
transaction hedging and portfolio hedging under Currency Exchange
Transactions.)

Investors should understand and consider carefully the risks
involved in foreign investing. Investing in foreign securities,
positions in which are generally denominated in foreign
currencies, and utilization of forward foreign currency exchange
contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements.

Although the Funds will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of
foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment in
these nations.

Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash) basis
at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market or through forward currency exchange
contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at
a specified future date (or within a specified time period) and
price set at the time of the contract. Forward contracts are
usually entered into with banks and broker-dealers, are not
exchange traded, and are usually for less than one year, but may
be renewed.

The Funds' foreign currency exchange transactions are limited
to transaction and portfolio hedging involving either specific
transactions or portfolio positions, except to the extent
described below under Synthetic Foreign Positions. Transaction
hedging is the purchase or sale of forward contracts with respect
to specific receivables or payables of a Fund arising in
connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to
portfolio security positions denominated or quoted in a particular
foreign currency. Portfolio hedging allows the Fund to limit or
reduce its exposure in a foreign currency by entering into a
forward contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future date
for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately
matched by a foreign-denominated liability. A Fund may not engage
in portfolio hedging with respect to the currency of a particular
country to an extent greater than the aggregate market value (at
the time of making such sale) of the securities held in its
portfolio denominated or quoted in that particular currency,
except that a Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy
currency where such currencies or currency act as an effective
proxy for other currencies. In such a case, a Fund may enter into
a forward contract where the amount of the foreign currency to be
sold exceeds the value of the securities denominated in such
currency. The use of this basket hedging technique may be more
efficient and economical than entering into separate forward
contracts for each currency held in a Fund. No Fund may engage in
"speculative" currency exchange transactions.

At the maturity of a forward contract to deliver a particular
currency, a Fund may either sell the portfolio security related to
such contract and make delivery of the currency, or it may retain
the security and either acquire the currency on the spot market or
terminate its contractual obligation to deliver the currency by
purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same
amount of the currency.

It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a Fund to
purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver
and if a decision is made to sell the security and make delivery
of the currency. Conversely, it may be necessary to sell on the
spot market some of the currency received upon the sale of the
portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver.

If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss to
the extent that there has been movement in forward contract
prices. If a Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between
a Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for
the purchase of the currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward
prices increase, a Fund will suffer a loss to the extent the price
of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. A default on the contract would
deprive a Fund of unrealized profits or force the Fund to cover
its commitments for purchase or sale of currency, if any, at the
current market price.

Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for a Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to a Fund of engaging in currency exchange
transactions varies with such factors as the currency involved,
the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.

Synthetic Foreign Positions. The Funds may invest in debt
instruments denominated in foreign currencies. In addition to, or
in lieu of, such direct investment, a Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars, and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. The
results of a direct investment in a foreign currency and a
concurrent construction of a synthetic position in such foreign
currency, in terms of both income yield and gain or loss from
changes in currency exchange rates, in general should be similar,
but would not be identical because the components of the
alternative investments would not be identical.

The Funds may also construct a synthetic foreign position by
entering into a swap arrangement. A swap is a contractual
agreement between two parties to exchange cash flows--at the time
of the swap agreement and again at maturity, and, with some swaps,
at various intervals through the period of the agreement. The use
of swaps to construct a synthetic foreign position would generally
entail the swap of interest rates and currencies. A currency swap
is a contractual arrangement between two parties to exchange
principal amounts in different currencies at a predetermined
foreign exchange rate. An interest rate swap is a contractual
agreement between two parties to exchange interest payments on
identical principal amounts. An interest rate swap may be between
a floating and a fixed rate instrument, a domestic and a foreign
instrument, or any other type of cash flow exchange. A currency
swap generally has the same risk characteristics as a forward
currency contract, and all types of swaps have counter-party risk.
Depending on the facts and circumstances, swaps may be considered
illiquid. Illiquid securities usually have greater investment
risk and are subject to greater price volatility. The net amount
of the excess, if any, of a Fund's obligations over which it is
entitled to receive with respect to an interest rate or currency
swap will be accrued daily and liquid assets (cash, U.S.
Government securities, or other "high grade" debt obligations) of
the Fund having a value at least equal to such accrued excess will
be segregated on the books of the Fund and held by the Custodian
for the duration of the swap.

The Funds may also construct a synthetic foreign position by
purchasing an instrument whose return is tied to the return of the
desired foreign position. An investment in these "principal
exchange rate linked securities" (often called PERLS) can produce
a similar return to a direct investment in a foreign security.

RULE 144A SECURITIES

Each Bond Fund may purchase securities that have been
privately placed but that are eligible for purchase and sale under
Rule 144A under the 1933 Act. That Rule permits certain qualified
institutional buyers, such as the Fund, to trade in privately
placed securities that have not been registered for sale under the
1933 Act. The Adviser, under the supervision of the Board of
Trustees, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the Fund's restriction of
investing no more than 10% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this
determination, the Adviser will consider the trading markets for
the specific security, taking into account the unregistered nature
of a Rule 144A security. In addition, the Adviser could consider
the (1) frequency of trades and quotes, (2) number of dealers and
potential purchasers, (3) dealer undertakings to make a market,
and (4) nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored and, if as a result of
changed conditions, it is determined that a Rule 144A security is
no longer liquid, the Fund's holdings of illiquid securities would
be reviewed to determine what, if any, steps are required to
assure that the Fund does not invest more than 10% of its assets
in illiquid securities. Investing in Rule 144A securities could
have the effect of increasing the amount of the Fund's assets
invested in illiquid securities if qualified institutional buyers
are unwilling to purchase such securities. The Fund does not
expect to invest as much as 5% of its total assets in Rule 144A
securities that have not been deemed to be liquid by the Adviser.

PORTFOLIO TURNOVER

For information on the portfolio turnover rate of the Funds,
see Financial Highlights in the Prospectus. General portfolio
turnover information is also contained in the Prospectus under
Risks and Investment Considerations.

The portfolio turnover rates of Government Income Fund,
Intermediate Bond Fund, and Income Fund have been greater than
100% in recent fiscal years because of increased volatility in the
financial markets and the Adviser's techniques for reacting to
changes in the markets to shift exposures to certain sectors and
to capture gains. The turnover rate for each of the Funds in the
future may vary greatly from year to year, and when portfolio
changes are deemed appropriate due to market or other conditions,
such turnover rate may be greater than might otherwise be
anticipated. A high rate of portfolio turnover may result in
increased transaction expenses and the realization of capital
gains or losses. Distributions of any net realized gains are
subject to federal income tax. (See Financial Highlights, Risks
and Investment Considerations, and Distributions and Income Taxes
in the Prospectus, and Additional Income Tax Considerations in
this Statement of Additional Information.)

OPTIONS ON SECURITIES AND INDEXES

Each Bond Fund may purchase and may sell both put options and
call options on debt or other securities or indexes in
standardized contracts traded on national securities exchanges,
boards of trade, or similar entities, or quoted on NASDAQ, and
agreements, sometimes called cash puts, that may accompany the
purchase of a new issue of bonds from a dealer.

An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value
of the index) at a specified exercise price at any time during the
term of the option. The writer of an option on an individual
security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price or to
pay the exercise price upon delivery of the underlying security.
Upon exercise, the writer of an option on an index is obligated to
pay the difference between the cash value of the index and the
exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets
of a particular financial or securities market, a specific group
of financial instruments or securities, or certain economic
indicators.)

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

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

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

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

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

Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant
differences between the securities markets and options markets
that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because
of market behavior or unexpected events.

There can be no assurance that a liquid market will exist
when a Fund seeks to close out an option position. If a Fund were
unable to close out an option that it had purchased on a security,
it would have to exercise the option in order to realize any
profit or the option would expire and become worthless. If a Fund
were unable to close out a covered call option that it had written
on a security, it would not be able to sell the underlying
security until the option expired. As the writer of a covered
call option, a Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the
security covering the call option above the sum of the premium and
the exercise price of the call.

If trading were suspended in an option purchased by a Fund,
the Fund would not be able to close out the option. If
restrictions on exercise were imposed, the Fund might be unable to
exercise an option it has purchased.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

Each Bond Fund may use interest rate futures contracts and
index futures contracts. An interest rate or index futures
contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or
the cash value of an index /3/ at a specified price and time. A
public market exists in futures contracts covering a number of
indexes as well as the following financial instruments: U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-
month U.S. Treasury bills; 90-day commercial paper; bank
certificates of deposit; Eurodollar certificates of deposit; and
foreign currencies. It is expected that other futures contracts
will be developed and traded.
- --------------
/3/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index contract was originally written. Although the
value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is
made.
- -------------

The Bond Funds may purchase and write call and put futures
options. Futures options possess many of the same characteristics
as options on securities and indexes (discussed above). A futures
option gives the holder the right, in return for the premium paid,
to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price at any time during
the period of the option. Upon exercise of a call option, the
holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a
put option, the opposite is true. A Fund might, for example, use
futures contracts to hedge against or gain exposure to
fluctuations in the general level of security prices, anticipated
changes in interest rates or currency fluctuations that might
adversely affect either the value of the Fund's securities or the
price of the securities that the Fund intends to purchase.
Although other techniques could be used to reduce that Fund's
exposure to security price, interest rate and currency
fluctuations, the Fund may be able to achieve its exposure more
effectively and perhaps at a lower cost by using futures contracts
and futures options.

Each Bond Fund will only enter into futures contracts and
futures options that are standardized and traded on an exchange,
board of trade, or similar entity, or quoted on an automated
quotation system.

The success of any futures transaction depends on the Adviser
correctly predicting changes in the level and direction of
security prices, interest rates, currency exchange rates and other
factors. Should those predictions be incorrect, a Fund's return
might have been better had the transaction not been attempted;
however, in the absence of the ability to use futures contracts,
the Adviser might have taken portfolio actions in anticipation of
the same market movements with similar investment results but,
presumably, at greater transaction costs.

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

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

Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or sales
of matching futures contracts (same exchange, underlying security
or index, and delivery month). If an offsetting purchase price is
less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original
purchase price, the Fund realizes a capital gain, or if it is
less, the Fund realizes a capital loss. The transaction costs
must also be included in these calculations.

RISKS ASSOCIATED WITH FUTURES

There are several risks associated with the use of futures
contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee that
there will be a correlation between price movements in the futures
contract and in the portfolio exposure sought. In addition, there
are significant differences between the securities and futures
markets that could result in an imperfect correlation between the
markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for
futures, futures options and debt securities, including technical
influences in futures trading and futures options and differences
between the financial instruments and the instruments underlying
the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers.
A decision as to whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.

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

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

LIMITATIONS ON OPTIONS AND FUTURES

If other options, futures contracts, or futures options of
types other than those described herein are traded in the future,
each Bond Fund may also use those investment vehicles, provided
the Board of Trustees determines that their use is consistent with
the Fund's investment objective.

A Bond Fund will not enter into a futures contract or
purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by that Fund plus
premiums paid by it for open futures option positions, less the
amount by which any such positions are "in-the-money," /4/ would
exceed 5% of the Fund's total assets.
- ---------------
/4/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- ---------------

When purchasing a futures contract or writing a put on a
futures contract, a Fund must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents (including
any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Fund similarly
will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the
Fund.

A Fund may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the
positions. For this purpose, to the extent the Fund has written
call options on specific securities in its portfolio, the value of
those securities will be deducted from the current market value of
the securities portfolio.

In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," each Fund will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the
assets of a Fund, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into [in
the case of an option that is in-the-money at the time of
purchase, the in-the-money amount (as defined in Section 190.01(x)
of the Commission Regulations) may be excluded in computing such
5%].

As long as a Fund continues to sell its shares in certain
states, the Fund's options transactions will also be subject to
certain non-fundamental investment restrictions set forth under
Investment Restrictions in this Statement of Additional
Information.

TAXATION OF OPTIONS AND FUTURES

If a Bond Fund exercises a call or put option that it holds,
the premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the
security sold (put). For cash settlement options and futures
options exercised by a Fund, the difference between the cash
received at exercise and the premium paid is a capital gain or
loss.

If a call or put option written by a Fund is exercised, the
premium is included in the proceeds of the sale of the underlying
security (call) or reduces the cost basis of the security
purchased (put). For cash settlement options and futures options
written by a Fund, the difference between the cash paid at
exercise and the premium received is a capital gain or loss.

Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by a Fund was in-the-
money at the time it was written and the security covering the
option was held for more than the long-term holding period prior
to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not
include the period of time the option is outstanding.

A futures contract held until delivery results in capital
gain or loss equal to the difference between the price at which
the futures contract was entered into and the settlement price on
the earlier of delivery notice date or expiration date. If a Fund
delivers securities under a futures contract, the Fund also
realizes a capital gain or loss on those securities.

For federal income tax purposes, a Fund generally is required
to recognize as income for each taxable year its net unrealized
gains and losses as of the end of the year on options, futures and
futures options positions ("year-end mark-to-market"). Generally,
any gain or loss recognized with respect to such positions (either
by year-end mark-to-market or by actual closing of the positions)
is considered to be 60% long-term and 40% short-term, without
regard to the holding periods of the contracts. However, in the
case of positions classified as part of a "mixed straddle," the
recognition of losses on certain positions (including options,
futures and futures options positions, the related securities and
certain successor positions thereto) may be deferred to a later
taxable year. Sale of futures contracts or writing of call
options (or futures call options) or buying put options (or
futures put options) that are intended to hedge against a change
in the value of securities held by a Fund: (1) will affect the
holding period of the hedged securities; and (2) may cause
unrealized gain or loss on such securities to be recognized upon
entry into the hedge.

In order for a Fund to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of
its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
foreign currencies or other income (including but not limited to
gains from options, futures, and forward contracts). In addition,
gains realized on the sale or other disposition of securities held
for less than three months must be limited to less than 30% of the
Fund's annual gross income. Any net gain realized from futures
(or futures options) contracts will be considered gain from the
sale of securities and therefore be qualifying income for purposes
of the 90% requirement. In order to avoid realizing excessive
gains on securities held less than three months, the Fund may be
required to defer the closing out of certain positions beyond the
time when it would otherwise be advantageous to do so.

Each Fund distributes to shareholders annually any net
capital gains that have been recognized for federal income tax
purposes (including year-end mark-to-market gains) on options and
futures transactions. Such distributions are combined with
distributions of capital gains realized on the Fund's other
investments and shareholders are advised of the nature of the
payments.

INVESTMENT RESTRICTIONS

Each Fund and High Yield Portfolio operate under the
following investment restrictions. A Fund or High Yield Portfolio
may not:

(1) invest in a security if, as a result of such investment,
more than 25% of its total assets (taken at market value at the
time of such investment) would be invested in the securities of
issuers in any particular industry, except that this restriction
does not apply to (i) U.S. Government Securities, (ii) [Cash
Reserves and Government Reserves only] repurchase agreements, or
(iii) [Cash Reserves only] securities of issuers in the financial
services industry, and [all Funds except High Yield Portfolio]
except that all or substantially all of the assets of the Fund may
be invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund;

(2) invest in a security if, with respect to 75% of its
assets, as a result of such investment, more than 5% of its total
assets (taken at market value at the time of such investment)
would be invested in the securities of any one issuer, except that
this restriction does not apply to U.S. Government Securities or
repurchase agreements for such securities and [all Funds except
High Yield Portfolio] except that all or substantially all of the
assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund; /5/
- ------------------
/5/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Cash
Reserves and Government Reserves will not, immediately after the
acquisition of any security (other than a Government Security or
certain other securities as permitted under the Rule), invest more
than 5% of its total assets in the securities of any one issuer;
provided, however, that each may invest up to 25% of its total
assets in First Tier Securities (as that term is defined in the
Rule) of a single issuer for a period of up to three business days
after the purchase thereof.
- --------------------

(3) invest in a security if, as a result of such investment,
it would hold more than 10% (taken at the time of such investment)
of the outstanding voting securities of any one issuer, [all Funds
except High Yield Portfolio] except that all or substantially all
of the assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund;

(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);

(5) purchase or sell commodities or commodities contracts or
oil, gas or mineral programs, [Government Income Fund only] except
that it may enter into futures and options on futures;
[Intermediate Bond Fund, Income Fund, High Yield Fund, and High
Yield Portfolio only] except that it may enter into (i) futures
and options on futures and (ii) forward contracts;

(6) purchase securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales of
portfolio securities, [Bond Funds only] but it may make margin
deposits in connection with transactions in options, futures, and
options on futures;

(7) make loans, although it may (a) [Bond Funds only] lend
portfolio securities and [all Funds] participate in an interfund
lending program with other Stein Roe Funds provided that no such
loan may be made if, as a result, the aggregate of such loans
would exceed 33 1/3% of the value of its total assets (taken at
market value at the time of such loans); (b) purchase money market
instruments and enter into repurchase agreements; and (c) acquire
publicly-distributed or privately-placed debt securities;

(8) borrow except that it may (a) borrow for non-leveraging,
temporary or emergency purposes, (b) engage in reverse repurchase
agreements and make other borrowings, provided that the
combination of (a) and (b) shall not exceed 33 1/3% of the value
of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and [Bond Funds only] (c) enter into futures and
options transactions; [all Funds] it may borrow from banks, other
Stein Roe Funds, and other persons to the extent permitted by
applicable law;

(9) act as an underwriter of securities, except insofar as
it may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale, [all Funds
except High Yield Portfolio] except that all or substantially all
of the assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund; or

(10) issue any senior security except to the extent
permitted under the Investment Company Act of 1940.

The above restrictions are fundamental policies and may not
be changed without the approval of a "majority of the outstanding
voting securities" of a Fund or High Yield Portfolio, as
previously defined herein. The policy on the scope of
transactions involving lending of portfolio securities to broker-
dealers and banks (as set forth herein under Portfolio Investments
and Strategies) is also a fundamental policy.

Each Fund and High Yield Portfolio are also subject to the
following restrictions and policies that may be changed by the
Board of Trustees. None of the following restrictions shall
prevent a Fund from investing all or substantially all of its
assets in another investment company having the same investment
objective and substantially similar investment policies as the
Fund. Unless otherwise indicated, a Fund or High Yield Portfolio
may not:

(A) invest for the purpose of exercising control or
management;

(B) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to
more than 5% of its total assets (valued at time of purchase) in
the case of any one other investment company and 10% of such
assets (valued at time of purchase) in the case of all other
investment companies in the aggregate; any such purchases are to
be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's
commission, except for securities acquired as part of a merger,
consolidation or acquisition of assets; /6/
- ------------------------
/6/ The Funds have been informed that the staff of the Securities
and Exchange Commission takes the position that the issuers of
certain CMOs and certain other collateralized assets are
investment companies and that subsidiaries of foreign banks may be
investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one
investment company to invest in another investment company.
Accordingly, the Funds intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
- ------------------------

(C) mortgage, pledge, hypothecate or in any manner transfer,
as security for indebtedness, any securities owned or held by it,
except as may be necessary in connection with (i) borrowings
permitted in (8) above and [Bond Funds only] (ii) options,
futures, and options on futures;

(D) purchase or retain securities of any issuer if 5% of the
securities of such issuer are owned by those officers and trustees
or directors of the Trust or of its investment adviser who each
own beneficially more than l/2 of 1% of its securities;

(E) purchase portfolio securities from, or sell portfolio
securities to, any of the officers and directors or trustees of
the Trust or of its investment adviser;

(F) purchase shares of other open-end investment companies,
except in connection with a merger, consolidation, acquisition, or
reorganization;

(G) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants which are not listed on the New York or American Stock
Exchange;

(H) [Bond Funds only] purchase a put or call option if the
aggregate premiums paid for all put and call options exceed 20% of
its net assets (less the amount by which any such positions are
in-the-money), excluding put and call options purchased as closing
transactions;

(I) [Bond Funds only] write an option on a security unless
the option is issued by the Options Clearing Corporation, an
exchange, or similar entity;

(J) [Bond Funds only] buy or sell an option on a security, a
futures contract, or an option on a futures contract unless the
option, the futures contract, or the option on the futures
contract is offered through the facilities of a national
securities association or listed on a national exchange or similar
entity;

(K) [Bond Funds only] invest in limited partnerships in real
estate unless they are readily marketable;

(L) sell securities short unless (i) it owns or has the
right to obtain securities equivalent in kind and amount to those
sold short at no added cost or (ii) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to
obtain and [Bond Funds only] provided that transactions in
options, futures, and options on futures are not treated as short
sales;

(M) invest more than 5% of its total assets (taken at market
value at the time of a particular investment) in securities of
issuers (other than issuers of federal agency obligations or
securities issued or guaranteed by any foreign country or asset-
backed securities) that, together with any predecessors or
unconditional guarantors, have been in continuous operation for
less than three years ("unseasoned issuers");

(N) [Government Income Fund, Intermediate Bond Fund, Income
Fund, High Yield Fund, and High Yield Portfolio only] invest more
than 15% of its total assets (taken at market value at the time of
a particular investment) in restricted securities, other than
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933;

(O) invest more than 15% of its total assets (taken at
market value at the time of a particular investment) in restricted
securities and securities of unseasoned issuers; or

(P) invest more than 10% of its net assets (taken at market
value at the time of a particular investment) in illiquid
securities /7/, including repurchase agreements maturing in more
than seven days.
- ---------------
/7/ In the judgment of the Adviser, Private Placement Notes, which
are issued pursuant to Section 4(2) of the Securities Act of 1933,
generally are readily marketable even though they are subject to
certain legal restrictions on resale. As such, they are not
treated as being subject to the limitation on illiquid securities.
- ---------------

ADDITIONAL INVESTMENT CONSIDERATIONS

The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
build wealth for generations, it has been guided by three primary
objectives which it believes are the foundation of a successful
investment program. These objectives are preservation of capital,
limited volatility through managed risk, and consistent above-
average returns, as appropriate for the particular client or
managed account.

Because every investor's needs are different, Stein Roe
mutual funds are designed to accommodate different investment
objectives, risk tolerance levels, and time horizons. In
selecting a mutual fund, investors should ask the following
questions:

What are my investment goals?
It is important to a choose a fund that has investment objectives
compatible with your investment goals.

What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share price,
such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If you
have a longer investment time frame, you may seek to maximize your
investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater
investment risk.

What is my tolerance for risk?
All investments, including those in mutual funds, have risks which
will vary depending on investment objective and security type.
However, mutual funds seek to reduce risk through professional
investment management and portfolio diversification.

In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values than
bond or money market mutual funds. Although there is no guarantee
that they will be able to maintain a stable net asset value of
$1.00 per share, money market funds emphasize safety of principal
and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than
money market funds but tend to have greater risk of principal and
yield volatility.

In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the performance
of high-yield, high-risk debt securities differ from those that
affect the performance of government securities or equity
securities.

PURCHASES AND REDEMPTIONS

Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
Net Asset Value, and Shareholder Services, and that information is
incorporated herein by reference. The Prospectus discloses that
you may purchase (or redeem) shares through investment dealers,
banks, or other institutions. It is the responsibility of any
such institution to establish procedures insuring the prompt
transmission to Income Trust of any such purchase order. The
state of Texas has asked that Income Trust disclose in its
Statement of Additional Information, as a reminder to any such
bank or institution, that it must be registered as a dealer in
Texas.

Each Fund's net asset value is determined on days on which
the New York Stock Exchange (the "NYSE") is open for trading. The
NYSE is regularly closed on Saturdays and Sundays and on New
Year's Day, the third Monday in February, Good Friday, the last
Monday in May, Independence Day, Labor Day, Thanksgiving, and
Christmas. If one of these holidays falls on a Saturday or
Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the judgment
of the Board of Trustees, net asset value of a Fund should be
determined on any such day, in which case the determination will
be made at 3:00 p.m., central time.

Income Trust reserves the right to suspend or postpone
redemptions of shares of any Fund during any period when: (a)
trading on the NYSE is restricted, as determined by the Securities
and Exchange Commission, or the NYSE is closed for other than
customary weekend and holiday closings; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c)
an emergency, as determined by the Securities and Exchange
Commission, exists, making disposal of portfolio securities or
valuation of net assets of such Fund not reasonably practicable.

Although neither Cash Reserves nor Government Reserves
currently charges a fee to its shareholders for the use of the
special Check-Writing Redemption Privilege offered by those Funds,
as described under How to Redeem Shares in the Money Market
Prospectus, each Fund pays for the cost of printing and mailing
checks to its shareholders and pays charges of the custodian for
payment of each check. The Trust reserves the right to establish
a direct charge to shareholders for use of the Privilege and both
the Trust and the custodian reserve the right to terminate this
service.

Income Trust intends to pay all redemptions in cash and is
obligated to redeem shares of a Fund solely in cash up to the
lesser of $250,000 or one percent of the net assets of that Fund
during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly
by a distribution in kind of securities. If redemptions were made
in kind, the redeeming shareholders might incur transaction costs
in selling the securities received in the redemptions.

Due to the relatively high cost of maintaining smaller
accounts, Income Trust reserves the right to redeem shares in any
account for their then-current value (which will be promptly paid
to the investor) if at any time the shares in the account do not
have a value of at least $1,000. An investor will be notified
that the value of his account is less than the minimum and allowed
at least 30 days to bring the value of the account up to at least
$1,000 before the redemption is processed. The Agreement and
Declaration of Trust also authorizes Income Trust to redeem shares
under certain other circumstances as may be specified by the Board
of Trustees.

MANAGEMENT

The following table sets forth certain information with
respect to trustees and officers of Income Trust:

<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AGE WITH THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
Gary A. Anetsberger 40 Senior Vice-President Chief Financial Officer of the Mutual Funds
(4) division of Stein Roe & Farnham Incorporated (the
"Adviser"); senior vice president of the Adviser
since April, 1996; vice president of the Adviser
prior thereto

Timothy K. Armour 48 President; Trustee President of the Mutual Funds division of the
(1)(2)(4) Adviser and director of the Adviser since June,
1992; senior vice president and director of
marketing of Citibank Illinois prior thereto

Jilaine Hummel Bauer 41 Executive Vice-President; General counsel and secretary of the Adviser since
(4) Secretary November 1995; senior vice president of the Adviser
since April, 1992; vice president of the Adviser
prior thereto

Ann H. Benjamin 38 Vice-President Senior vice president of the Adviser since July,
1994; vice president of the Adviser from January,
1992 to July, 1994; associate of the Adviser prior
thereto

Kenneth L. Block 76 Trustee Chairman Emeritus of A. T. Kearney, Inc.
(3)(4) (international management consultants)

William W. Boyd 69 Trustee Chairman and director of Sterling Plumbing Group,
(3)(4) Inc. (manufacturer of plumbing products) since 1992;
chairman, president, and chief executive officer of
Sterling Plumbing Group, Inc. prior thereto

Thomas W. Butch 39 Vice-President Senior vice president of the Adviser since
September, 1994; first vice president, corporate
communications, of Mellon Bank Corporation prior
thereto

Lindsay Cook (1)(4) 44 Trustee Senior vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser)

Philip J. Crosley 50 Vice-President Senior Vice President of the Adviser since February,
1996; Vice President, Institutional Sales-Advisor
Sales, Invesco Funds Group prior thereto

Douglas A. Hacker 41 Trustee Senior vice president and chief financial officer,
(3)(4) United Airlines, since July, 1994; senior vice
president, Finance, United Airlines, February, 1993
to July, 1994; vice president, American Airlines
prior thereto

Michael T. Kennedy 34 Vice-President Senior vice president of the Adviser since October,
1994; vice president of the Adviser from January,
1992 to October, 1994; associate of the Adviser
prior thereto

Steven P. Luetger 42 Vice-President Senior vice president of the Adviser

Lynn C. Maddox 55 Vice-President Senior vice president of the Adviser

Anne E. Marcel 38 Vice-President Vice president of the Adviser since April, 1996;
manager, Mutual Fund Sales & Services of the Adviser
since October, 1994; supervisor of the Counselor
Department of the Adviser from October, 1992 to
October, 1994; vice president of Selected Financial
Services prior thereto

Francis W. Morley 76 Trustee Chairman of Employer Plan Administrators and
(2)(3)(4) Consultants Co. (designer, administrator, and
communicator of employee benefit plans)

Jane M. Naeseth 46 Vice-President Senior vice president of the Adviser since January,
1991; vice president of the Adviser prior thereto

Charles R. Nelson 54 Trustee Van Voorhis Professor of Political Economy of the
(3)(4) University of Washington

Nicolette D. Parrish 46 Vice-President; Senior compliance administrator and assistant
(4) Assistant Secretary secretary of the Adviser since November 1995; senior
legal assistant for the Adviser prior thereto

Cynthia A. Prah (4) 34 Vice-President Manager of Shareholder Transaction Processing for
the Adviser

Sharon R. Robertson 34 Controller Accounting manager for the Adviser's Mutual Funds
(4) division

Janet B. Rysz (4) 41 Assistant Secretary Senior compliance administrator and assistant
secretary of the Adviser

Thomas P. Sorbo 35 Vice-President Senior vice president of the Adviser since January,
1994; vice president of the Adviser from September,
1992 to December, 1993; associate of Travelers
Insurance Company prior thereto

Thomas C. Theobald 59 Trustee Managing partner, William Blair Capital Partners
(3)(4) (private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994

Heidi J. Walter (4) 29 Vice-President Legal counsel for the Adviser since March, 1995;
associate with Beeler Schad & Diamond, P.C., prior
thereto

Gordon R. Worley (4) 77 Trustee Private investor

Hans P. Ziegler (4) 55 Executive Vice-President Chief executive officer of the Adviser since May,
1994; president of the Investment Counsel division
of the Adviser from July, 1993 to June, 1994;
president and chief executive officer, Pitcairn
Financial Management Group prior thereto

Margaret O. Zwick(4) 30 Treasurer Compliance manager for the Adviser's Mutual Funds
division since August 1995; compliance accountant,
January 1995 to July 1995; section manager, January
1994 to January 1995; supervisor prior thereto
<FN>
______________________
(1) Trustee who is an "interested person" of the Trust and of the
Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person holds the corresponding officer or trustee
position with the Base Trust.
</TABLE>

Certain of the trustees and officers of Income Trust and of
Base Trust are trustees or officers of other investment companies
managed by the Adviser. Mr. Armour, Ms. Bauer, and Mr. Cook are
also vice presidents of the Funds' distributor, Liberty Securities
Corporation. The address of Mr. Block is 11 Woodley Road,
Winnetka, Illinois 60093; that of Mr. Boyd is 2900 Golf Road,
Rolling Meadows, Illinois 60008; that of Mr. Cook is 600 Atlantic
Avenue, Boston, MA 02210; that of Mr. Hacker is P.O. Box 66100,
Chicago, IL 60666; that of Mr. Morley is 20 North Wacker Drive,
Suite 2275, Chicago, Illinois 60606; that of Mr. Nelson is
Department of Economics, University of Washington, Seattle,
Washington 98195; that of Mr. Theobald is Suite 3300, 222 West
Adams Street, Chicago, IL 60606; that of Mr. Worley is 1407
Clinton Place, River Forest, Illinois 60305; and that of the
officers is One South Wacker Drive, Chicago, Illinois 60606.

Associated with the Adviser since 1977, Ms. Naeseth has been
portfolio manager of Cash Reserves since 1980 and of Government
Reserves since its inception in 1982. From 1973 to 1977, she was
with the First Trust Company of Ohio. She received her B.A.
degree from the University of Illinois in 1972. As of June 30,
1996, she was responsible for managing $607 million in mutual fund
assets.

Officers and trustees affiliated with the Adviser serve
without any compensation from Income Trust. In compensation for
their services to Income Trust, trustees who are not "interested
persons" of Income Trust or the Adviser are paid an annual
retainer of $8,000 (divided equally among the Funds of Income
Trust) plus an attendance fee from each Fund for each meeting of
the Board or standing committee thereof attended at which business
for that Fund is conducted. The attendance fees (other than for a
Nominating Committee or Compensation Committee meeting) are based
on each Fund's net assets as of the preceding December 31. For a
Fund with net assets of less than $50 million, the fee is $50 per
meeting; with $51 to $250 million, the fee is $200 per meeting;
with $251 million to $500 million, $350; with $501 million to $750
million, $500; with $751 million to $1 billion, $650; and with
over $1 billion in net assets, $800. For a Fund participating in
the master fund/feeder fund structure, the trustees' attendance
fee is paid solely by the master portfolio. Each non-interested
trustee also receives $500 from Income Trust for attending each
meeting of the Nominating Committee or Compensation Committee.
Income Trust has no retirement or pension plan. The following
table sets forth compensation paid by Income Trust during the
fiscal year ended June 30, 1996 to each of the trustees:

Aggregate
Name of Compensation Total Compensation from
Trustee from Income Trust the Stein Roe Fund Complex*
- ---------------- ----------------- ---------------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Douglas A. Hacker -0- -0-
Thomas C. Theobald -0- -0-
Kenneth L. Block $23,567 $82,417
William W. Boyd 25,067 86,317
Francis W. Morley 23,767 82,017
Charles R. Nelson 25,067 86,317
Gordon R. Worley 23,567 82,817
_______________
* During this period, the Stein Roe Fund Complex consisted of the
six series of Income Trust, four series of Stein Roe Municipal
Trust, eight series of Stein Roe Investment Trust, and one series
of Base Trust. Messrs. Hacker and Theobald were elected trustees
on June 18, 1996, and, therefore, did not receive any compensation
for the year ended June 30, 1996.

FINANCIAL STATEMENTS

Please refer to the Money Market Funds' and the Bond Funds'
June 30, 1996 Financial Statements (balance sheets and schedules
of investments as of June 30, 1996 and the statements of
operations, changes in net assets, and notes thereto) and the
reports of independent auditors contained in the June 30, 1996
Annual Reports of the Money Market Funds and the Bond Funds. The
Financial Statements and the reports of independent auditors (but
no other material from the Annual Reports) are incorporated herein
by reference. The Annual Reports may be obtained at no charge by
telephoning 800-338-2550.

PRINCIPAL SHAREHOLDERS

As of the date of this Statement of Additional Information,
High Yield Fund had only one shareholder, Hans P. Ziegler, who held
200 shares. As of September 30, 1996, the only persons known by
Income Trust to own of record or "beneficially" 5% or more of
outstanding shares of any other Fund within the definition of that
term as contained in Rule 13d-3 under the Securities Exchange Act
of 1934 were as follows:

NAME AND ADDRESS FUND APPROXIMATE % OF
OUTSTANDING
SHARES HELD

First Bank National Cash Reserves 14.05%
Association* Government Reserves 20.81%
410 N. Michigan Avenue Government Income Fund 45.48%
Chicago, IL 60611 Intermediate Bond Fund 20.41%
Income Fund 17.14%

Charles Schwab & Co., Government Income Fund 9.14%
Inc.* Intermediate Bond Fund 34.18%
Attn: Mutual Fund Dept. Income Fund 14.99%
101 Montgomery Street
San Francisco, CA 94104

The Northern Trust Co.** Income Fund 23.79%
F/B/O Liberty Mutual
Daily Valuation Transitions
P.O. Box 92956
Chicago, IL 60675

Dunspaugh-Dalton Government Income Fund 5.61%
Foundation, Inc.
9040 Sunset Drive
Miami, FL 33173

Helmsman Management Government Reserves 8.07%
Services, Inc.
Attn: Director of Finance &
Budget
Riverside Office Park
13 Riverside Road
Weston, MA 02193
___________________
*Shares held of record, but not beneficially.
**Northern Trust Company holds shares of record on behalf of the
Liberty Mutual Employees' Thrift-Incentive Plan.

The following table shows shares of the Funds (other than
High Yield Fund) held by the categories of persons indicated as of
September 30, 1996, and in each case the approximate percentage of
outstanding shares represented:

Clients of the Adviser Trustees and
in their Client Accounts* Officers
------------------------ -------------------
Shares Held Percent Shares Held Percent
----------- ------- ----------- -------
Cash Reserves 71,091,490 14.81% 1,076,681 **
Government Reserves 7,278,491 11.40% 305,899 **
Government Income Fund 656,091 16.78% 38,326 **
Intermediate Bond Fund 7,624,041 21.86% 75,764 **
Income Fund 8,809,731 26.34% 70,352 **
______________
*The Adviser may have discretionary authority over such shares
and, accordingly, they could be deemed to be owned "beneficially"
by the Adviser under Rule 13d-3. However, the Adviser disclaims
actual beneficial ownership of such shares.
**Represents less than 1% of the outstanding shares.

INVESTMENT ADVISORY SERVICES

Stein Roe & Farnham Incorporated provides administrative
services to each Fund and High Yield Portfolio and portfolio
management services to Cash Reserves, Government Reserves,
Government Income Fund, Intermediate Bond Fund, Income Fund, and
High Yield Portfolio. The Adviser is a wholly owned subsidiary of
SteinRoe Services Inc. ("SSI"), the Funds' transfer agent, which
is a wholly owned subsidiary of Liberty Financial Companies, Inc.
("Liberty Financial"), which is a majority owned subsidiary of LFC
Holdings, Inc., which is a wholly owned subsidiary of Liberty
Mutual Equity Corporation, which is a wholly owned subsidiary of
Liberty Mutual Insurance Company. Liberty Mutual Insurance
Company is a mutual insurance company, principally in the
property/casualty insurance field, organized under the laws of
Massachusetts in 1912.

The directors of the Adviser are Kenneth R. Leibler, C. Allen
Merritt, Jr., Timothy K. Armour, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial; Mr.
Merritt is Senior Vice President and Treasurer of Liberty
Financial; Mr. Armour is President of the Adviser's Mutual Funds
division; and Mr. Ziegler is Chief Executive Officer of the
Adviser. The business address of Messrs. Leibler and Merritt is
Federal Reserve Plaza, Boston, Massachusetts 02210; and that of
Messrs. Armour and Ziegler is One South Wacker Drive, Chicago,
Illinois 60606.

The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of June 30, 1996, the Adviser managed
over $24.7 billion in assets: over $7.4 billion in equities and
over $17.3 billion in fixed-income securities (including $1.2
billion in municipal securities). The $24.7 billion in managed
assets included over $7 billion held by open-end mutual funds
managed by the Adviser (approximately 16% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 189,000 shareholders. The $7 billion in mutual
fund assets included over $660 million in over 38,000 IRA
accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and
regularly updates information for approximately 6,500 companies.
The Adviser also monitors over 1,400 issues via a proprietary
credit analysis system. At June 30, 1996, the Adviser employed
approximately 16 research analysts and 32 account managers. The
average investment-related experience of these individuals was 20
years.

Stein Roe Counselor [SERVICE MARK] and Stein Roe Personal
Counselor [SERVICE MARK] are professional investment advisory
services offered by the Adviser to Fund shareholders. Each is
designed to help shareholders construct Fund investment portfolios
to suit their individual needs. Based on information shareholders
provide about their financial goals and objectives in response to
a questionnaire, the Adviser's investment professionals create
customized portfolio recommendations. Shareholders participating
in Stein Roe Counselor [SERVICE MARK] are free to self direct
their investments while considering the Adviser's recommendations;
shareholders participating in Stein Roe Personal Counselor
[SERVICE MARK] enjoy the added benefit of having the Adviser
implement portfolio recommendations automatically for a fee of 1%
or less, depending on the size of their portfolios. In addition
to reviewing shareholders' goals and objectives periodically and
updating portfolio recommendations to reflect any changes, the
Adviser provides shareholders participating in these programs with
a dedicated Counselor [SERVICE MARK] representative. Other
distinctive services include specially designed account statements
with portfolio performance and transaction data, newsletters, and
regular investment, economic, and market updates. A $50,000
minimum investment is required to participate in either program.

Please refer to the description of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management of the
Funds and Fee Table in the Prospectus, which is incorporated
herein by reference. The advisory agreement relating to each Fund
(other than High Yield Fund) was replaced on July 1, 1996 with
separate management and administrative agreements. The table
below shows gross advisory fees paid by the Funds and any expense
reimbursements by the Adviser to them, which are described in the
Prospectus.

YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/96 6/30/95 6/30/94
- ------------- ------------ ---------- ---------- ----------
Cash Reserves Advisory fee $2,432,015 $2,648,885 $3,071,640
Government
Reserves Advisory fee 424,847 513,808 537,413
Reimbursement 104,830 50,557 48,548
Government
Income Fund Advisory fee 219,271 253,463 338,576
Reimbursement 61,700 38,282 --
Intermediate
Bond Fund Advisory fee 1,533,498 1,491,075 1,579,884
Reimbursement 157,406 25,687 --
Income Fund Advisory fee 1,482,696 1,011,101 1,004,273
Reimbursement 149,999 48,232 14,043

The Adviser provides office space and executive and other
personnel to the Funds and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
the Adviser, including but not limited to printing and postage
charges and securities registration and custodian fees and
expenses incidental to its organization.

Each Fund's administrative agreement provides that the
Adviser shall reimburse the Fund to the extent that total annual
expenses of the Fund (including fees paid to the Adviser, but
excluding taxes, interest, brokers' commissions and other normal
charges incident to the purchase and sale of portfolio securities,
and expenses of litigation to the extent permitted under
applicable state law) exceed the applicable limits prescribed by
any state in which shares of such Fund are being offered for sale
to the public; however, such reimbursement for any fiscal year
will not exceed the amount of the fees paid by such Fund under
that agreement for such year. Income Trust believes that
currently the most restrictive state limit on expenses is that of
California, which limit currently is 2 1/2% of the first $30
million of average net assets, 2% of the next $70 million, and 1
1/2% thereafter. In addition, in the interest of further limiting
the Funds' expenses, the Adviser may voluntarily waive its
management fee and/or absorb certain expenses for a Fund, as
described in the Prospectus under Fee Table. Any such
reimbursements will enhance the yields of such Fund.

Each management agreement also provides that neither the
Adviser nor any of its directors, officers, stockholders (or
partners of stockholders), agents, or employees shall have any
liability to Income Trust or Base Trust or any shareholder of the
Fund or High Yield Portfolio for any error of judgment, mistake of
law or any loss arising out of any investment, or for any other
act or omission in the performance by the Adviser of its duties
under the agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part
in the performance of its duties or from reckless disregard by the
Adviser of the Adviser's obligations and duties under that
agreement.

Any expenses that are attributable solely to the
organization, operation, or business of a Fund shall be paid
solely out of that Fund's assets. Any expenses incurred by Income
Trust that are not solely attributable to a particular Fund are
apportioned in such manner as the Adviser determines is fair and
appropriate, unless otherwise specified by the Board of Trustees.

BOOKKEEPING AND ACCOUNTING AGREEMENT

Pursuant to a separate agreement with Income Trust, the
Adviser receives a fee for performing certain bookkeeping and
accounting services for each Fund. For these services, the
Adviser receives an annual fee of $25,000 per Fund plus .0025 of
1% of average net assets over $50 million. During the fiscal
years ended June 30, 1995 and 1996, the Adviser received aggregate
fees of $114,541 and $173,384, respectively, from Income Trust for
services performed under this agreement.

DISTRIBUTOR

Shares of the Funds are distributed by Liberty Securities
Corporation ("LSC"), under a Distribution Agreement as described
under Management of the Funds in the Prospectus, which is
incorporated herein by reference. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of Income Trust, and
(ii) by a majority of the trustees who are not parties to the
Agreement or interested persons of any such party. Income Trust
has agreed to pay all expenses in connection with registration of
its shares with the Securities and Exchange Commission and
auditing and filing fees in connection with registration of its
shares under the various state blue sky laws and assumes the cost
of preparation of prospectuses and other expenses.

As agent, LSC offers shares of each Fund to investors in
states where the shares are qualified for sale, at net asset
value, without sales commissions or other sales load to the
investor. No sales commission or "12b-1" payment is paid by any
Fund. LSC offers the Funds' shares only on a best-efforts basis.

TRANSFER AGENT

SSI performs certain transfer agency services for Income
Trust, as described under Management of the Funds in the
Prospectus. For performing these services, SSI receives from each
Fund a fee based on an annual rate of 0.150 of 1% of average daily
net assets of each Money Market Fund and 0.140 of 1% of average
daily net assets of each Bond Fund (but not High Yield Portfolio).
The Board of Trustees believes the charges by SSI to the Funds are
comparable to those of other companies performing similar
services. (See Investment Advisory Services.)

CUSTODIAN

State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
Income Trust and Base Trust. It is responsible for holding all
securities and cash of the Funds, receiving and paying for
securities purchased, delivering against payment securities sold,
receiving and collecting income from investments, making all
payments covering expenses of the Funds, and performing other
administrative duties, all as directed by authorized persons. The
custodian does not exercise any supervisory function in such
matters as purchase and sale of portfolio securities, payment of
dividends, or payment of expenses of the Funds.

Portfolio securities purchased in the U.S. are maintained in
the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the U.S.
are maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network, and foreign
depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has
been approved by the Board of Trustees in accordance with
regulations under the Investment Company Act of 1940.

Each Board of Trustees reviews, at least annually, whether it
is in the best interest of each Fund, High Yield Portfolio, and
their shareholders to maintain assets in each custodial
institution. However, with respect to foreign sub-custodians,
there can be no assurance that a Fund, and the value of its
shares, will not be adversely affected by acts of foreign
governments, financial or operational difficulties of the foreign
sub-custodians, difficulties and costs of obtaining jurisdiction
over, or enforcing judgments against, the foreign sub-custodians,
or application of foreign law to a Fund's foreign sub-custodial
arrangements. Accordingly, an investor should recognize that the
non-investment risks involved in holding assets abroad are greater
than those associated with investing in the United States.

The Funds may invest in obligations of the custodian and may
purchase or sell securities from or to the custodian.

INDEPENDENT AUDITORS

The independent auditors for Income Trust and High Yield
Portfolio are Ernst & Young LLP, 233 South Wacker Drive, Chicago,
Illinois 60606. The independent auditors audit and report on the
Funds' annual financial statements, review certain regulatory
reports and the Funds' federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services
when engaged to do so by the Trust.

PORTFOLIO TRANSACTIONS

For purposes of discussion under Portfolio Transactions, the
term "Fund" refers to Cash Reserves, Government Reserves,
Government Income Fund, Intermediate Bond Fund, Income Fund, High
Yield Fund, and High Yield Portfolio.

The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Bond Funds. Purchases and sales of portfolio securities are
ordinarily transacted with the issuer or with a primary market
maker acting as principal or agent for the securities on a net
basis, with no brokerage commission being paid by a Fund.
Transactions placed through dealers reflect the spread between the
bid and asked prices. Occasionally, a Fund may make purchases of
underwritten issues at prices that include underwriting discounts
or selling concessions.

The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important factor
in this decision, but a number of other judgmental factors may
also enter into the decision. These include: the Adviser's
knowledge of current transaction costs; the nature of the security
being traded; the size of the transaction; the desired timing of
the trade; the activity existing and expected in the market for
the particular security; confidentiality; the execution, clearance
and settlement capabilities of the broker or dealer selected and
others that are considered; the Adviser's knowledge of the
financial stability of the broker or dealer selected and such
other brokers or dealers; and the Adviser's knowledge of actual or
apparent operational problems of any broker or dealer.
Recognizing the value of these factors, a Fund may incur a
transaction charge in excess of that which another broker or
dealer may have charged for effecting the same transaction.
Evaluations of the reasonableness of the costs of portfolio
transactions, based on the foregoing factors, are made on an
ongoing basis by the Adviser's staff and reports are made annually
to the Board of Trustees.

With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to be
capable of providing the best combination of price and execution
with respect to a particular portfolio transaction for a Fund, the
Adviser often selects a broker or dealer that has furnished it
with research products or services such as research reports,
subscriptions to financial publications and research compilations,
compilations of securities prices, earnings, dividends and similar
data, and computer databases, quotation equipment and services,
research-oriented computer software and services, and services of
economic and other consultants. Selection of brokers or dealers
is not made pursuant to an agreement or understanding with any of
the brokers or dealers; however, the Adviser uses an internal
allocation procedure to identify those brokers or dealers who
provide it with research products or services and the amount of
research products or services they provide, and endeavors to
direct sufficient commissions generated by its clients' accounts
in the aggregate, including the Funds, to such brokers or dealers
to ensure the continued receipt of research products or services
the Adviser feels are useful. In certain instances, the Adviser
receives from brokers and dealers products or services which are
used both as investment research and for administrative,
marketing, or other non-research purposes. In such instances, the
Adviser makes a good faith effort to determine the relative
proportions of such products or services which may be considered
as investment research. The portion of the costs of such products
or services attributable to research usage may be defrayed by the
Adviser (without prior agreement or understanding, as noted above)
through brokerage commissions generated by transactions of clients
(including the Funds), while the portions of the costs
attributable to non-research usage of such products or services is
paid by the Adviser in cash. No person acting on behalf of a Fund
is authorized, in recognition of the value of research products or
services, to pay a price in excess of that which another broker or
dealer might have charged for effecting the same transaction.
Research products or services furnished by brokers and dealers
through whom transactions are effected may be used in servicing
any or all of the clients of the Adviser and not all such research
products or services are used in connection with the management of
such Fund.

The Board has reviewed the legal developments pertaining to
and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD"). Therefore, except
with respect to purchases by the Income Fund of municipal
securities which are not subject to NASD Rules, the Funds will not
attempt to recapture underwriting discounts or selling
concessions. If the Income Fund were to purchase municipal
securities, it would attempt to recapture selling concessions
included in prices paid by the Income Fund in underwritten
offerings; however, the Adviser would not be able to negotiate
discounts from the fixed offering price for those issuers for
which there is a strong demand, and will not allow the failure to
obtain a discount to prejudice its ability to purchase an issue
for the Income Fund.

The following table shows any commissions paid by the Bond
Funds on futures transactions during the past three fiscal years.
The Funds did not pay commissions on any other transactions.

Intermediate Government
Bond Fund Income Fund Income Fund
----------- ----------- -----------
Total brokerage commissions
paid during year ended
6/30/96 -0- -0- -0-
Number of futures contracts -0- -0- -0-
Total brokerage commissions
paid during year ended
6/30/95 $25,000 -0- $7,625
Total brokerage commissions
paid during year ended
6/30/94 $32,900 -0- $5,002

The Trust has arranged for its custodian to act as a
soliciting dealer to accept any fees available to the custodian as
a soliciting dealer in connection with any tender offer for
portfolio securities. The custodian will credit any such fees
received against its custodial fees.

During the last fiscal year, certain Funds held securities
issued by one or more of the Funds' regular broker-dealers or the
parent of such broker-dealers that derive more than 15% of gross
revenue from securities-related activities. Such holdings were as
follows at June 30, 1996:

Amount of Securities
Fund Broker-Dealer Held (in thousands)
Cash Reserves Lehman Brothers Holdings Inc. $24,000
Morgan Stanley & Company, Inc. 20,000

Intermediate Kidder Peabody 3,699
Bond Fund Prudential Securities 6,770
Merrill Lynch, Pierce,
Fenner & Smith 9,416
Lehman Brothers,Inc. 12,720

Income Fund Goldman Sachs & Company 5,969
Lehman Brothers, Inc. 9,720

Government
Income Fund Merrill Lynch, Pierce,
Fenner & Smith 597

ADDITIONAL INCOME TAX CONSIDERATIONS

Each Fund and High Yield Portfolio intend to comply with the
special provisions of the Internal Revenue Code that relieve it of
federal income tax to the extent of its net investment income and
capital gains currently distributed to shareholders.

Because capital gain distributions reduce net asset value, if
a shareholder purchases shares shortly before a record date, he
will, in effect, receive a return of a portion of his investment
in such distribution. The distribution would nonetheless be
taxable to him, even if the net asset value of shares were reduced
below his cost. However, for federal income tax purposes the
shareholder's original cost would continue as his tax basis.

Each Fund expects that none of its dividends will qualify for
the deduction for dividends received by corporate shareholders.

ADDITIONAL INFORMATION ON THE DETERMINATION OF NET
ASSET VALUE OF THE MONEY MARKET FUNDS

Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. Each Money Market Fund values
its portfolio by the "amortized cost method" by which it attempts
to maintain its net asset value at $1.00 per share. This involves
valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the
market value of the instrument. Although this method provides
certainty in valuation, it may result in periods during which
value as determined by amortized cost is higher or lower than the
price a Fund would receive if it sold the instrument. Other
assets are valued at a fair value determined in good faith by the
Board of Trustees.

In connection with the Money Market Funds' use of amortized
cost and the maintenance of each Fund's per share net asset value
of $1.00, the Trust has agreed, with respect to each Fund: (i) to
seek to maintain a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining relative stability of
principal and not in excess of 90 days; (ii) not to purchase a
portfolio instrument with a remaining maturity of greater than
thirteen months; and (iii) to limit its purchase of portfolio
instruments to those instruments that are denominated in U.S.
dollars which the Board of Trustees determines present minimal
credit risks and that are of eligible quality as determined by any
major rating service as defined under SEC Rule 2a-7 or, in the
case of any instrument that is not rated, of comparable quality as
determined by the Board.

Each Money Market Fund has also agreed to establish
procedures reasonably designed to stabilize the Fund's price per
share as computed for the purpose of sales and redemptions at
$1.00. Such procedures include review of the Funds' portfolio
holdings by the Board of Trustees, at such intervals as it deems
appropriate, to determine whether the Funds' net asset values
calculated by using available market quotations or market
equivalents deviate from $1.00 per share based on amortized cost.
Calculations are made to compare the value of its investments
valued at amortized cost with market value. Market values are
obtained by using actual quotations provided by market makers,
estimates of market value, values from yield data obtained from
reputable sources for the instruments, values obtained from the
Adviser's matrix, or values obtained from an independent pricing
service. Any such service might value a Fund's investments based
on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market
conditions. The service may also employ electronic data
processing techniques, a matrix system or both to determine
valuations.

In connection with each Money Market Fund's use of the
amortized cost method of portfolio valuation to maintain its net
asset value at $1.00 per share, a Fund might incur or anticipate
an unusual expense, loss, depreciation, gain or appreciation that
would affect its net asset value per share or income for a
particular period. The extent of any deviation between a Fund's
net asset value based upon available market quotations or market
equivalents and $1.00 per share based on amortized cost will be
examined by the Board of Trustees as it deems appropriate. If
such deviation exceeds 1/2 of 1%, the Board of Trustees will
promptly consider what action, if any, should be initiated. In
the event the Board of Trustees determines that a deviation exists
that may result in material dilution or other unfair results to
investors or existing shareholders, it will take such action as it
considers appropriate to eliminate or reduce to the extent
reasonably practicable such dilution or unfair results. Actions
which the Board might take include: selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; increasing, reducing, or suspending
dividends or distributions from capital or capital gains; or
redeeming shares in kind. The Board might also establish a net
asset value per share by using market values, as a result of which
the net asset value might deviate from $1.00 per share.

INVESTMENT PERFORMANCE

Money Market Funds

A Money Market Fund may quote a "Current Yield" or "Effective
Yield" or both from time to time. The Current Yield is an
annualized yield based on the actual total return for a seven-day
period. The Effective Yield is an annualized yield based on a
daily compounding of the Current Yield. These yields are each
computed by first determining the "Net Change in Account Value"
for a hypothetical account having a share balance of one share at
the beginning of a seven-day period ("Beginning Account Value"),
excluding capital changes. The Net Change in Account Value will
always equal the total dividends declared with respect to the
account, assuming a constant net asset value of $1.00.

The yields are then computed as follows:

Net Change in Account Value 365
--------------------------- ----
Current Yield = Beginning Account Value x 7

[1 + Net Change in Account Value]365/7
--------------------------------------
Effective Yield = Beginning Account Value - 1

For example, the yields of the Money Market Funds for the
seven-day period ended June 30, 1996 were:

Cash Reserves
$.00089954 365
----------- ---
Current Yield = $1.00 x 7 = 4.70%

[1+$.00089954]35/7
-------------------
Effective Yield = $1.00 - 1 = 4.80%

Government Reserves
$.000863014 365
----------- ----
Current Yield = $1.00 x 7 = 4.50%

[1+$.000863014]365/7
--------------------
Effective Yield = $1.00 - 1 = 4.60%

The average dollar-weighted portfolio maturities of Cash
Reserves and of Government Reserves for the seven days ended June
30, 1996 were 48 and 56 days, respectively.

In addition to fluctuations reflecting changes in net income
of a Money Market Fund resulting from changes in income earned on
its portfolio securities and in its expenses, a Fund's yield also
would be affected if the Fund were to restrict or supplement its
dividends in order to maintain its net asset value at $1.00. (See
Net Asset Value in the Money Market Funds' Prospectus and
Additional Information on the Determination of Net Asset Value of
the Money Market Funds herein.) Portfolio changes resulting from
net purchases or net redemptions of Fund shares may affect yield.
Accordingly, a Fund's yield may vary from day to day and the yield
stated for a particular past period is not a representation as to
its future yield. A Fund's yield is not assured, and its
principal is not insured; however, each Money Market Fund will
attempt to maintain its net asset value per share at $1.00.

Comparison of a Money Market Fund's yield with those of
alternative investments (such as savings accounts, various types
of bank deposits, and other money market funds) should be made
with consideration of differences between the Fund and the
alternative investments, differences in the periods and methods
used in the calculation of the yields being compared, and the
impact of income taxes on alternative investments.

Bond Funds

A Bond Fund may quote yield figures from time to time. The
"Yield" of a Bond Fund is computed by dividing the net investment
income per share earned during a 30-day period (using the average
number of shares entitled to receive dividends) by the net asset
value per share on the last day of the period. The Yield formula
provides for semiannual compounding which assumes that net
investment income is earned and reinvested at a constant rate and
annualized at the end of a six-month period. For a given period,
an "Average Annual Total Return" may be computed by finding the
average annual compounded rate that would equate a hypothetical
initial amount invested of $1,000 to the ending redeemable value.

6
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) -1].

Where: a = dividends and interest earned during the period
. (For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which net
asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the ending net asset value of the Fund for the period.

For example, the Yields of the Bond Funds for the 30-day
period ended June 30, 1996 were:

Government Income Fund Yield = 6.65%
Intermediate Bond Fund Yield = 6.14%
Income Fund Yield = 7.36%

_____________________

Each Fund may quote total return figures from time to time.
A "Total Return" on a per share basis is the amount of dividends
received per share plus or minus the change in the net asset value
per share for a period. A "Total Return Percentage" may be
calculated by dividing the value of a share at the end of a period
(including reinvestment of distributions) by the value of the
share at the beginning of the period and subtracting one.

n
Average Annual Total Return is computed as follows: ERV = P(1+T)

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).

For example, for a $1,000 investment in a Fund, the "Total
Return," the "Total Return Percentage," and the "Average Annual
Total Return" at June 30, 1996 were:

TOTAL RETURN AVERAGE ANNUAL
TOTAL RETURN PERCENTAGE TOTAL RETURN
Cash Reserves
1 year $1,051 5.07% 5.07%
5 years 1,218 21.83 4.03
10 years 1,721 72.12 5.58

Government
Reserves
1 year 1,050 5.01 5.01
5 years 1,214 21.35 3.95
10 years 1,687 68.67 5.37

Government
Income Fund
1 year 1,046 4.63 4.63
5 years 1,414 41.44 7.18
10 years 2,028 102.80 7.33

Intermediate
Bond Fund
1 year 1,058 5.76 5.76
5 years 1,461 46.14 7.88
10 years 2,089 108.92 7.65

Income Fund
1 year 1,057 5.70 5.70
5 years 1,565 56.50 9.37
10 years 2,293 129.34 8.65

Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must pay
on a current basis. They are not necessarily indicative of future
results. The performance of a Fund is a result of conditions in
the securities markets, portfolio management, and operating
expenses. Although investment performance information is useful
in reviewing a Fund's performance and in providing some basis for
comparison with other investment alternatives, it should not be
used for comparison with other investments using different
reinvestment assumptions or time periods.

In advertising and sales literature, a Fund may compare its
yield and performance with that of other mutual funds, indexes or
averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit
products available from or through other financial institutions.
The composition of these indexes or averages differs from that of
the Funds. Comparison of a Fund to an alternative investment
should be made with consideration of differences in features and
expected performance.

All of the indexes and averages noted below will be obtained
from the indicated sources or reporting services, which the Funds
believe to be generally accurate. A Fund may also note its
mention in newspapers, magazines, or other media from time to
time. However, the Funds assume no responsibility for the
accuracy of such data. Newspapers and magazines that might
mention the Funds include, but are not limited to, the following:

Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money

All of the Funds may compare their performance to the
Consumer Price Index (All Urban), a widely-recognized measure of
inflation.

A Fund's performance may be compared to the following as
indicated below:

BENCHMARK FUND(S)
CS First Boston High Yield Index High Yield
Donoghue's Money Fund Averages [trademark]--Aggressive Cash Reserves
Donoghue's Money Fund Averages [trademark]--All Taxable Cash Reserves,
Government Reserves
Donoghue's Money Fund Averages [trademark]--Government Government Reserves
Donoghue's Money Fund Averages [trademark]--Prime Cash Reserves
Donoghue's Money Fund Averages [trademark]--Prime
and Eurodollar Cash Reserves
Donoghue's Money Fund Averages [trademark]--Prime,
Eurodollar, and Yankeedollar Cash Reserves
Donoghue's Money Fund Averages [trademark]--Taxable
(Includes the previous four categories) Cash Reserves
Donoghue's Money Fund Averages [trademark]--U.S.
Government & Agencies Government Reserves
Donoghue's Money Fund Averages [trademark]--U.S.
Treasury Government Reserves
Lehman Aggregate Index Intermediate Bond Fund
Lehman Government Bond Index Government Income Fund
Lehman Government/Corporate Index Intermediate Bond Fund
Lehman High Yield Bond Index High Yield Fund
Lehman High Yield Corporate Bond Index High Yield Fund
Lehman Intermediate Corporate Bond Index Income Fund
Lehman Intermediate Government/Corporate Index Intermediate Bond Fund
Lipper All Long-Term Fixed Income Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Lipper Corporate Bond Funds (A Rated) Average Intermediate Bond Fund
Lipper Corporate Bond Funds (BBB Rated) Average Income Fund
Lipper Intermediate-Term (5-10 Year) Investment
Grade Debt Funds Average Intermediate Bond Fund
Lipper Long-Term Taxable Bond Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Lipper Money Market Instrument Funds Average Cash Reserves
Lipper Short-Term Income Fund Average Cash Reserves,
Government Reserves
Lipper Short-Term U.S. Government Funds Average Government Reserves
Lipper U.S. Government Funds Average Government Income Fund
Merrill Lynch Corporate and Government Master Index Government Income
Fund, Intermediate
Bond Fund, Income Fund
Merrill Lynch High-Yield Master Index Income Fund, High
Yield Fund
Merrill Lynch Mortgage Master Index Government Income Fund
Morningstar All Long-Term Fixed Income Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Morningstar Corporate Bond (General) Average Income Fund, High
Yield Fund
Morningstar Corporate Bond (High Quality) Average Intermediate Bond Fund
Morningstar Government Bond (General) Average Government Income Fund
Morningstar Long-Term Taxable Bond Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Salomon Brothers Broad Investment Grade Bond Index Government Income
Fund, Intermediate
Bond Fund, Income Fund
Salomon Brothers Extended High Yield Market Index High Yield Fund
Salomon Brothers High Yield Market Index High Yield
Salomon Brothers Mortgage Index Government Income Fund

The Lipper and Morningstar averages are unweighted averages
of total return performance of mutual funds as classified,
calculated, and published by these independent services that
monitor the performance of mutual funds. The Funds may also use
comparative performance as computed in a ranking by these services
or category averages and rankings provided by another independent
service. Should these services reclassify a Fund to a different
category or develop (and place a Fund into) a new category, that
Fund may compare its performance or rank against other funds in
the newly-assigned category (or the average of such category) as
published by the service.

In advertising and sales literature, a Fund may also cite its
rating, recognition, or other mention by Morningstar or any other
entity. Morningstar's rating system is based on risk-adjusted
total return performance and is expressed in a star-rating format.
The risk-adjusted number is computed by subtracting a Fund's risk
score (which is a function of the Fund's monthly returns less the
3-month T-bill return) from the Fund's load-adjusted total return
score. This numerical score is then translated into rating
categories, with the top 10% labeled five star, the next 22.5%
labeled four star, the next 35% labeled three star, the next 22.5%
labeled two star, and the bottom 10% one star. A high rating
reflects either above-average returns or below-average risk, or
both.

The Merrill Lynch Mortgage Master Index measures total return
performance of federal agency mortgage-backed pass-through
securities. The Merrill Lynch High-Yield Master Index measures
the total return performance of corporate debt issues rated less
than investment grade but not in default. The Merrill Lynch
Corporate and Government Master Index measures total return
performance of a broad range of U.S. Treasury, federal agency, and
corporate debt securities, but excluding mortgage-backed
securities.

The Salomon Brothers Broad Investment Grade Bond Index
measures the market-weighted total return of a wide range of debt
securities, including U.S. Treasury/agency securities, investment-
grade corporate bonds, and mortgage pass-through securities. The
Salomon Brothers Mortgage Index measures total return of the
mortgage pass-through securities market.

Each Money Market Fund may compare its after-tax yield
(computed by multiplying the yield by one minus the highest
marginal federal individual tax rate) to the average yield for the
tax-free categories of the aforementioned services.

Investors may desire to compare the performance and features
of the Money Market Funds to those of various bank products. Each
Fund may compare its yield to the average rates of bank and thrift
institution money market deposit accounts, Super N.O.W. accounts,
and certificates of deposit. The rates published weekly by the
BANK RATE MONITOR [copyright], a North Palm Beach (Florida)
financial reporting service, in its BANK RATE MONITOR [copyright]
National Index are averages of the personal account rates offered
on the Wednesday prior to the date of publication by one hundred
leading banks and thrift institutions in the top ten Consolidated
Standard Metropolitan Statistical Areas. Account minimums range
upward from $2,500 in each institution and compounding methods
vary. Super N.O.W. accounts generally offer unlimited checking,
while money market deposit accounts generally restrict the number
of checks that may be written. If more than one rate is offered,
the lowest rate is used. Rates are subject to change at any time
specified by the institution. Bank account deposits may be
insured. Shareholder accounts in a Fund are not insured. Bank
passbook savings accounts compete with money market mutual fund
products with respect to certain liquidity features but may not
offer all of the features available from a money market mutual
fund, such as check writing. Bank passbook savings accounts
normally offer a fixed rate of interest while the yield of each
Fund fluctuates. Bank checking accounts normally do not pay
interest but compete with money market mutual funds with respect
to certain liquidity features (e.g., the ability to write checks
against the account). Bank certificates of deposit may offer
fixed or variable rates for a set term. (Normally, a variety of
terms are available.) Withdrawal of these deposits prior to
maturity will normally be subject to a penalty. In contrast,
shares of a Fund are redeemable at the next determined net asset
value (normally, $1.00 per share) after a request is received,
without charge.

Of course, past performance is not indicative of future
results.
____________________

To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based investment
firm. Ibbotson constructs (or obtains) very long-term (since
1926) total return data (including, for example, total return
indexes, total return percentages, average annual total returns
and standard deviations of such returns) for the following asset
types:

Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
____________________

A Fund may also use hypothetical returns to be used as an
example in a mix of asset allocation strategies. One such example
is reflected in the chart below, which shows the effect of tax
deferral on a hypothetical investment. This chart assumes that an
investor invested $2,000 a year on January 1, for any specified
period, in both a Tax-Deferred Investment and a Taxable
Investment, that both investments earn either 3%, 5%, 7%, or 9%
compounded annually, and that the investor withdrew the entire
amount at the end of the period. (A tax rate of 39.6% is applied
annually to the Taxable Investment and on the withdrawal of
earnings on the Tax-Deferred Investment.)

<TABLE>
<CAPTION>
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT

Interest
Rate 3% 5% 7% 9% 3% 5% 7% 9%
- --------------------------------------------------------------------------------
Com-
pound-
ing
Years Tax-Deferred Investment Taxable Investment
- ---- ------------------------------------ ------------------------------------

Average Life Calculations. From time to time, a Fund may
quote an average life figure for its portfolio. Average life is
the weighted average period over which the Adviser expects the
principal to be paid, and differs from stated maturity in that it
estimates the effect of expected principal prepayments and call
provisions. With respect to GNMA securities and other mortgage-
backed securities, average life is likely to be substantially less
than the stated maturity of the mortgages in the underlying pools.
With respect to obligations with call provisions, average life is
typically the next call date on which the obligation reasonably
may be expected to be called. Securities without prepayment or
call provisions generally have an average life equal to their
stated maturity.

Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average cost
per share.

Like any investment strategy, dollar cost averaging can't
guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.

From time to time, a Fund may offer in its advertising and
sales literature to send an investment strategy guide, a tax
guide, or other supplemental information to investors and
shareholders. It may also mention the Stein Roe Counselor
[SERVICE MARK] and Stein Roe Personal Counselor [SERVICE MARK]
Programs and asset allocation and other investment strategies.

APPENDIX--RATINGS

RATINGS IN GENERAL

A rating of a rating service represents the service's opinion
as to the credit quality of the security being rated. However,
the ratings are general and are not absolute standards of quality
or guarantees as to the creditworthiness of an issuer.
Consequently, the Adviser believes that the quality of debt
securities should be continuously reviewed and that individual
analysts give different weightings to the various factors involved
in credit analysis. A rating is not a recommendation to purchase,
sell or hold a security because it does not take into account
market value or suitability for a particular investor. When a
security has received a rating from more than one service, each
rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the
rating services from other sources that they consider reliable.
Ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of such information, or for other
reasons.

The following is a description of the characteristics of
ratings used by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P").

CORPORATE BOND RATINGS

RATINGS BY MOODY'S

Aaa. Bonds rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are
likely to change, such changes as can be visualized are more
unlikely to impair the fundamentally strong position of such
bonds.

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

Baa. Bonds 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.

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

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

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

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

RATINGS BY S&P

AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.

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

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

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

C1. This rating is reserved for income bonds on which no
interest is being paid.

D. Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears. The D rating is also
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.

NOTES:
The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the
major rating categories. Foreign debt is rated on the same basis
as domestic debt measuring the creditworthiness of the issuer;
ratings of foreign debt do not take into account currency exchange
and related uncertainties.

COMMERCIAL PAPER RATINGS

RATINGS BY MOODY'S

Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment
capacity of rated issuers:

Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality

RATINGS BY S&P

A brief description of the applicable rating symbols and
their meaning follows:

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