KEYSTONE STRATEGIC INCOME FUND, 497, 1995-12-08

KEYSTONE STRATEGIC INCOME FUND
497, 1995-12-08

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KEYSTONE STRATEGIC INCOME FUND
PROSPECTUS NOVEMBER 28, 1995

Keystone Strategic Income Fund (formerly named Keystone America Strategic
Income Fund) (the "Fund") is a mutual fund that seeks high current income from
interest on debt securities. Secondarily, the Fund considers potential for
growth of capital in selecting securities. The Fund intends to allocate its
assets principally between eligible domestic high yield, high risk bonds and
debt securities of foreign governments and foreign corporations. In addition,
from time to time, the Fund will allocate a portion of its assets to United
States ("U.S.") government securities.

Generally, the Fund offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in the Fund's
fee table, "Alternative Sales Options," "Contingent Deferred Sales Charges and
Waiver of Sales Charges," "Distribution Plans," and "Fund Shares."

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

Additional information about the Fund, including more detailed information
about securities ratings, is contained in a statement of additional
information dated November 28, 1995, which has been filed with the Securities
and Exchange Commission and is incorporated by reference into this prospectus.
For a free copy, or for other information about the Fund, write to the address
or call the telephone number listed below.

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

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

TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 6
Investment Objectives and Policies 6
Risk Factors 8
Investment Restrictions 11
Pricing Shares 11
Dividends and Taxes 12
Fund Management and Expenses 12
How to Buy Shares 15
Alternative Sales Options 15
Contingent Deferred Sales Charges and Waiver
of Sales Charges 19
Distribution Plans 20
How to Redeem Shares 21
Shareholder Services 23
Performance Data 25
Fund Shares 26
Additional Information 26
Additional Investment Information (i)
Exhibit A A-1

THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN EITHER OR BOTH OF (I) LOWER
RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS"; AND (II) DEBT SECURITIES ISSUED BY
FOREIGN ISSUERS RATED BELOW INVESTMENT GRADE; BOTH OF WHICH ENTAIL GREATER
RISKS, INCLUDING RISKS OF DEFAULT, UNTIMELY INTEREST AND PRINCIPAL PAYMENTS AND
PRICE VOLATILITY, THAN THOSE FOUND IN HIGHER RATED SECURITIES, AND MAY PRESENT
PROBLEMS OF LIQUIDITY AND VALUATION. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING. SEE "INVESTMENT OBJECTIVES AND POLICIES," PAGE 6; "RISK
FACTORS," PAGE 8.

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

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

CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION[1] OPTION[2]
SHAREHOLDER TRANSACTION EXPENSES -------------- -------------- -------------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%[3]<F3> None None
(as a percentage of offering price)

Contingent Deferred Sales Charge .................. 0.00%[4]<F4> 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)[5]<F5> ................ $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES[6]<F6>
(as a percentage of average net assets)
Management Fees ................................... 0.66% 0.66% 0.66%
12b-1 Fees ........................................ 0.25% 0.98%[7]<F7> 1.00%[7]<F7>

Other Expenses .................................... 0.42% 0.42% 0.42%
---- ---- ----
Total Fund Operating Expenses ..................... 1.33% 2.06% 2.08%
==== ==== ====
<CAPTION>

EXAMPLES[8]<F8> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each period:

Class A ............................................................... $60.00 $88.00 $117.00 $200.00
Class B ............................................................... $71.00 $95.00 $131.00 N/A
Class C ............................................................... $31.00 $65.00 $112.00 $241.00
You would pay the following expenses on a $1,000
investment, assuming no redemption at the end of each period:
Class A ............................................................... $60.00 $88.00 $117.00 $200.00
Class B ............................................................... $21.00 $65.00 $111.00 N/A
Class C ............................................................... $21.00 $65.00 $112.00 $241.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

----------
<FN>
<F1> Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See "Class
B Shares" for more information.
<F2> Class C shares are available only through dealers who have entered into special distribution agreements with
KeystoneInvestment Distributors Company, the Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Alternative
Sales Options."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying
retirement or other plans are not subject to a sales charge, but may be subject to a contingent deferred sales
charge. See the "Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of
this prospectus for an explanation of the charge.
<F5> There is no fee for exchange orders received by the Fund directly from an individual investor over the Keystone
Automated Response Line ("KARL"). (For a description of KARL, see "Shareholder Services".)
<F6> Expense ratios are for the Fund's fiscal year ended July 31, 1995.
<F7> Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted
by rules adopted by the National Association of Securities Dealers, Inc.
<F8> The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example.
Actual return for the Fund may be greater or less than 5%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE STRATEGIC INCOME FUND -- CLASS A SHARES

(For a share outstanding throughout the period)

The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table has been taken from the Fund's Annual Report and should be
read in conjunction with the Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the
Fund's Annual Report. The Fund's financial statements, related notes, and
independent auditors' report are included in the statement of additional
information. Additional information about the Fund's performance is contained
in its Annual Report, which will be made available upon request and without
charge.
<TABLE>
<CAPTION>
FEBRUARY 13,
1987
(COMMENCEMENT
YEAR ENDED JULY 31, OF
----------------------------------------------------------------------------------------- OPERATIONS) TO
1995 1994(D)<F4> 1993 1992 1991 1990 1989 1988 JULY 31, 1987
--------- --------- -------- -------- -------- -------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period .. $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17 $ 9.02 $ 9.36 $ 10.04 $10.00
--------- --------- -------- -------- -------- -------- --------- --------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .. 0.64 0.61 0.69 0.78 0.89 1.03 1.10 1.05 0.22
Net gain (loss) on
investments, closed
futures contracts and
foreign currency
related transactions . (0.45) (0.44) 0.89 0.89 (1.01) (1.79) (0.31) (0.65) 0.00
--------- --------- -------- -------- -------- -------- --------- --------- -----
Total from investment
operations ........... 0.19 0.17 1.58 1.67 (0.12) (0.76) 0.79 0.40 0.22
--------- --------- -------- -------- -------- -------- --------- --------- -----
LESS DISTRIBUTIONS FROM:
Net investment income .. (0.60) (0.61) (0.72) (0.75) (0.89) (1.04) (1.11) (1.08) (0.18)
In excess of net
investment income .... (0.03) (0.03) (0.02) 0 (0.06) (0.05) 0 0 0
Tax basis return of
capital ............... (0.02) (0.04) 0 0 0 0 0 0 0
Net realized gains ..... 0 0 0 0 0 0 (0.02) 0 0
--------- --------- -------- -------- -------- -------- --------- --------- -----
Total distributions .... (0.65) (0.68) (0.74) (0.75) (0.95) (1.09) (1.13) (1.08) (0.18)
--------- --------- -------- -------- -------- -------- --------- --------- -----
Net asset value end of
period ............... $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17 $ 9.02 $ 9.36 $10.04
========= ======== ======= ======= ======= ======= ======== ======== ======
TOTAL RETURN<F1> .... 3.00% 1.86% 24.13% 28.73% 0.54% (8.55%) 9.00% 4.49% 2.20%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses<F2> 1.33% 1.32% 1.80% 2.09% 2.00% 2.00% 1.81% 1.28% 1.00%<F3>
Net investment income 9.31% 7.79% 9.50% 11.73% 15.23% 12.91% 12.06% 10.98% 10.12%<F3>
Portfolio turnover rate 95% 92% 151% 95% 82% 36% 73% 46% 13%
Net assets end of period
(thousands) ........... $85,970 $105,181 $85,793 $70,459 $70,246 $83,106 $138,499 $114,310 $8,191
========= ======== ======= ======= ======= ======= ======== ======== ======
<FN>
- -------------
<F1> Excluding applicable sales charges.
<F2> Figures are net of expense reimbursement by Keystone in connection with voluntary expense limitations. The "Ratio
of total expenses to average net assets" would have been 2.12%, 2.25%, 2.01%, 1.90%, 2.08% and 6.08% for the years
ended July 31, 1992, 1991, 1990, 1989, 1988 and the period from April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987, respectively.
<F3> Annualized for the period from April 14, 1987 (Commencement of Investment Operations) to July 31, 1987.
<F4> Calculation based on average shares outstanding.
</TABLE>
<PAGE>

FINANCIAL HIGHLIGHTS KEYSTONE STRATEGIC INCOME FUND -- CLASS B SHARES

(For a share outstanding throughout the period)

FEBRUARY 1, 1993
YEAR ENDED JULY 31, (DATE OF INITIAL
---------------------- PUBLIC OFFERING) TO
1995 1994(C) JULY 31, 1993
---------- ---------- -------------------
Net asset value beginning of
period ........................ $ 7.38 $ 7.89 $ 7.07
--------- --------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment income ........... 0.60 0.55 0.24
Net gain (loss) on investments,
closed futures contracts and
foreign currency related
transactions .................. (0.47) (0.44) 0.92
--------- --------- -------
Total from investment operations 0.13 0.11 1.16
--------- --------- -------
LESS DISTRIBUTIONS FROM:
Net investment income ........... (0.55) (0.55) (0.24)
In excess of net investment
income ........................ (0.03) (0.03) (0.10)
Tax basis return of capital ..... (0.01) (0.04) 0
--------- --------- -------
Total distributions ............. (0.59) (0.62) (0.34)
--------- --------- -------
Net asset value end of period ... $ 6.92 $ 7.38 $ 7.89
========= ========= =======
TOTAL RETURN(A) ................. 2.12% 1.10% 16.75%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ................ 2.06% 2.07% 2.37%(b)
Net investment income ......... 8.58% 7.11% 7.18%(b)
Portfolio turnover rate ......... 95% 92% 151%
Net assets end of period
(thousands) .................... $149,091 $162,866 $35,415
========= ======== =======
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE STRATEGIC INCOME FUND -- CLASS C SHARES

(For a share outstanding throughout the period)

FEBRUARY 1, 1993
YEAR ENDED JULY 31, (DATE OF INITIAL
---------------------- PUBLIC OFFERING) TO
1995 1994(C) JULY 31, 1993
---------- ---------- -------------------
Net asset value beginning of
period ......................... $ 7.37 $ 7.88 $ 7.07
------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment income ........... 0.59 0.55 0.24
Net gain (loss) on investments,
closed futures contracts and
foreign currency related
transactions .................. (0.45) (0.44) 0.91
------ ------ -------
Total from investment operations 0.14 0.11 1.15
------ ------ -------
LESS DISTRIBUTIONS FROM:
Net investment income ........... (0.55) (0.55) (0.24)
In excess of net investment
income ........................ (0.03) (0.03) (0.10)
Tax basis return of capital ..... (0.01) (0.04) 0
------ ------ -------
Total distributions ............. (0.59) (0.62) (0.34)
------ ------ -------
Net asset value end of period ... $ 6.92 $ 7.37 $ 7.88
======= ======= =======
TOTAL RETURN(A) ................. 2.27% 1.09% 16.61%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ................ 2.08% 2.07% 2.25%(b)
Net investment income ......... 8.56% 7.09% 7.35%(b)
Portfolio turnover rate ......... 95% 92% 151%
Net assets end of period
(thousands) .................... $46,221 $59,228 $19,706
======= ======= =======

(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
<PAGE>
THE FUND
The Fund (formerly named Keystone America Strategic Income Fund) is an open-
end, diversified management investment company commonly known as a mutual
fund. The Fund was formed as a Massachusetts business trust on October 24,
1986. The Fund is one of the twenty funds managed by Keystone Management, Inc.
("Keystone Management"), the Fund's investment manager, and is one of thirty
funds managed or advised by Keystone Investment Management Company (formerly
named Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment
adviser. Keystone and Keystone Management are, from time to time, collectively
referred to as "Keystone."

INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund seeks high current income from interest on debt securities.
Secondarily, the Fund considers potential for growth of capital in selecting
securities.

The Fund intends to allocate its assets principally between eligible
domestic high yield, high risk bonds and debt securities of foreign
governments and foreign corporations. In addition, the Fund will, from time to
time, allocate a portion of its assets to U.S. government securities. This
allocation will be made on the basis of Keystone's assessment of global
opportunities for high income. From time to time, the Fund may invest 100% of
its assets in U.S. or foreign securities.

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

There is no assurance that the Fund will achieve its investment objectives
since there is uncertainty in every investment.

PRINCIPAL INVESTMENTS. Under ordinary circumstances, the Fund's assets will be
invested principally in domestic high yield bonds and foreign
government and corporate debt securities. In addition, a portion of the Fund's
assets will, from time to time, be invested in U.S. government securities.
When, in Keystone's opinion, market conditions warrant, up to 100% of the
Fund's assets may be invested for temporary defensive purposes in the U.S.
government securities described below.

DOMESTIC HIGH YIELD BONDS. The Fund may invest principally in domestic debt
obligations, including zero coupon bonds and payment-in-kind securities
("PIKs"), debentures, convertible debentures, fixed, increasing and adjustable
rate bonds, stripped bonds, mortgage bonds, mortgage backed securities,
corporate notes (including convertible notes) with maturities at the date of
issue of at least five years (which may be senior or junior to other bonds),
equipment trust certificates, and units consisting of bonds with stock or
warrants to buy stock attached.

FOREIGN SECURITIES. The Fund may invest in debt obligations (which may be
denominated in U.S. dollars or in non-U.S. currencies) issued or guaranteed by
foreign corporations, certain supranational entities (such as the World Bank)
and foreign governments, their agencies and instrumentalities, and debt
obligations issued by U.S. corporations denominated in non-U.S. currencies.
These debt obligations may include bonds, debentures, notes and short-term
obligations.

U.S. GOVERNMENT SECURITIES. The Fund may invest in debt instruments issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
Government Securities"). Certain of these obligations, including U.S. Treasury
notes and bonds, and Government National Mortgage Association debentures
("Ginnie Mae's"), are issued by, or guaranteed with respect to both principal
and interest by, the full faith and credit of the U.S. government. Certain
other U.S. Government Securities, issued or guaranteed by federal agencies or
government-sponsored enterprises, are not supported by the full faith and
credit of the U.S. government. These latter securities may include obligations
supported by the right of the issuer to borrow from the U.S. Treasury, such as
obligations of Federal Home Loan Mortgage Corporation ("Freddie Mac's"), and
obligations supported by the credit of the instrumentality such as Federal
National Mortgage Association bonds ("Fannie Mae's"). U.S. Government
Securities in which the Fund may invest include zero coupon U.S. Treasury
securities, mortgage backed securities and money market instruments.

While the Fund may invest in securities of any maturity, it is currently
expected that the Fund will not invest in securities with maturities of more
than 30 years.

OTHER ELIGIBLE SECURITIES
Under ordinary circumstances, the Fund may also invest a limited portion of
its assets in the securities described below. When, in Keystone's opinion,
market conditions warrant, up to 100% of the Fund's assets may be invested for
temporary defensive purposes in the money market securities described below.

EQUITY SECURITIES. The Fund may invest in preferred stocks, including
adjustable rate preferred stocks and convertible preferred stocks, common
stocks and other equity securities, including convertible securities and
warrants, which may be used to create other permissible investments. Such
investments must be consistent with the Fund's primary objective of seeking a
high level of current income or be acquired as part of a unit combining income
and equity securities. In addition, the Fund may invest in limited
partnerships, including master limited partnerships.

MONEY MARKET SECURITIES. The Fund may invest in the following types of money
market securities: (1) obligations issued or guaranteed by the U.S. government
or by any agency or instrumentality of the U.S. government; (2) commercial
paper, including master demand notes, that at the date of investment is rated
A-1 (the highest grade by Standard & Poors Corporation ("S&P")), PRIME-1 (the
highest grade by Moody's Investor Services, Inc. ("Moodys")), or, if not rated
by such services, is issued by a company that at the date of investment has an
outstanding issue rated A or better by S&P or Moody's; (3) obligations,
including certificates of deposit and bankers' acceptances, of banks or
savings and loan associations having at least $1 billion in assets as of the
date of their most recently published financial statements that are members of
the Federal Deposit Insurance Corporation, including U.S. branches of foreign
banks and foreign branches of U.S. banks; and (4) obligations of U.S.
corporations that at the date of investment are rated A or better by S&P or
Moody's.

When the Fund is investing for temporary defensive purposes, it is not
pursuing its investment objective.

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

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

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

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

The Fund seeks high current income and capital appreciation predominantly
from high yielding, high risk bonds, commonly known as "junk bonds." This
investment approach involves risks greater than a more conservative approach.

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

By itself the Fund does not constitute a balanced investment program. You
should take into account your own investment objectives as well as your other
investments when considering an investment in the Fund

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

NONINVESTMENT GRADE BONDS. While the Fund has been in operation since February
13, 1987, Keystone, its adviser, has had continuous experience since 1935
investing in bonds selling at a substantial discount from par, convertible
bonds, noninvestment grade bonds and other securities that, as a class, may be
considered high yield, high risk securities.

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

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

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

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

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

(3) The value of certain securities held by the Fund may be more susceptible
to real or perceived adverse economic, company or industry conditions and
publicity than is the case for higher quality securities.

(4) The values of certain securities, like those of other fixed income
securities, fluctuate in response to changes in interest rates. When interest
rates decline, the value of a portfolio invested in bonds can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested
in bonds can be expected to decline. For example, in the case of an investment
in a fixed-income security, if interest rates increase after the security is
purchased, the security, if sold prior to maturity, may return less than its
cost. The prices of noninvestment grade bonds, however, are generally less
sensitive to interest rate changes than the prices of higher-rated bonds, but
are more sensitive to adverse or positive economic changes or individual
corporate developments. (With respect to derivative or structured securities,
the market value of such securities may vary depending on the manner in which
such securities have been structured. As a result, the value of such
investments may change at a more rapid rate than that of traditional fixed
income securities.)

(5) The secondary market for certain securities held by the Fund may be less
liquid at certain times than the secondary market for higher quality debt
securities, which may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing its
assets.

(6) Zero coupon bonds and PIKs involve additional special considerations.
For example, zero coupon bonds pay no interest to holders prior to maturity of
interest. PIK bonds are debt obligations that provide that the issuer may, at
its option, pay interest on such bonds in cash or in the form of additional
debt obligations. Such investments may experience greater fluctuation in value
due to changes in interest rates than debt obligations that pay interest
currently. Even though these investments do not pay current interest in cash,
the Fund is, nonetheless, required by tax laws to accrue interest income on
such investments and to distribute such amounts at least annually to
shareholders. Thus, the Fund could be required at times to liquidate
investments in order to fulfill its intention to distribute substantially all
of its net income as dividends. The Fund will not be able to purchase
additional income producing securities with cash used to make such
distributions, and its current income ultimately may be reduced as a result.

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

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

The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month during the last fiscal year in
securities assigned to the various rating categories by S&P and in unrated
securities determined by Keystone to be of comparable quality. Since the
percentages in this table are based on month-end averages throughout the
Fund's fiscal year, they do not reflect the Fund's holdings at any one point
in time. The percentages in each category may be higher or lower on any day
than those shown in the table below.
*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ------ ------------- -------------
AAA 5.03% 0.00%
AA 2.08% 0.00%
A 0.01% 0.00%
BBB 0.29% 0.77%
BB 20.04% 2.03%
B 26.69% 23.20%
CCC 0.96% 1.49%
CC 0.00% 0.00%
CA 0.00% 0.00%
Unrated* 27.49% 0.00%
U.S. Governments,
equities and others
17.41%
------
TOTAL 100.00%
======

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

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

FOREIGN SECURITIES
Investing in securities of foreign issuers generally involves more risk than
investing in a portfolio consisting solely of securities of domestic issuers
for the following reasons:

(1) there may be less public information available about foreign companies
than is available about U.S. companies;

(2) foreign companies are not generally subject to the uniform accounting,
auditing and financial reporting standards and practices applicable to U.S.
companies;

(3) foreign stock markets have less volume than the U.S. market, and the
securities of some foreign companies are less liquid and more volatile than
the securities of comparable U.S. companies;

(4) there may be less government regulation of stock exchanges, brokers,
listed companies and banks in foreign countries than in the U.S.;

(5) the Fund may incur fees on currency exchanges when it changes
investments from one country to another;

(6) the Fund's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization, establishment of exchange controls,
political or social instability or diplomatic developments;

(7) fluctuations in foreign exchange rates will affect the value of the
Fund's investments, the value of dividends and interest earned, gains and
losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments; and

(8) possible imposition of dividend or interest withholding at the source.

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

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

INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which
may not be changed without the vote of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in detail in the statement of
additional information. Unless otherwise stated, all references to the Fund's
assets are in terms of current market value.

Generally, the Fund may not do the following:

(1) purchase any security (other than U.S. government securities) of any
issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;

(2) borrow money or enter into reverse repurchase agreements, except that
the Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in aggregate amounts up to one-third
of the value of the Fund's net assets; provided that while borrowings from
banks exceed 5% of the Fund's net assets, any such borrowings will be repaid
before additional investments are made;

(3) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis or collateral
arrangement with respect to the writing of options on securities are not
deemed to be a pledge of assets;

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

(5) purchase any security (other than U.S. government securities) of any
issuer if as a result more than 25% of its total assets would be invested in a
single industry; except that there is no restriction with respect to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;

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

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

The Fund values certain publicly traded bonds on the basis of valuations
provided by a pricing service, approved by the Fund's Board of Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities, various relationships
between securities and yield to maturity in determining value. Short-term
investments purchased with maturities of sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market; short-term investments maturing in more than sixty days
for which market quotations are readily available are valued at current market
value; and short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market. All other investments are valued at market value or,
where market quotations are not readily available, at fair value as determined
in good faith according to procedures established by the Fund's Board of
Trustees.

DIVIDENDS AND TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code. The Fund qualifies if,
among other things, it distributes to its shareholders at least 90% of its net
investment income for its fiscal year. The Fund also intends to make timely
distributions, if necessary, sufficient in amount to avoid the nondeductible
4% excise tax imposed on a regulated investment company when it fails to
distribute, with respect to each calendar year, at least 98% of its ordinary
income for such calendar year and 98% of its net capital gains for the one-
year period ending on October 31 of such calendar year. Any taxable
distributions declared in October, November, or December to shareholders of
record in such a month, and paid by the following January 31, will be
includable in the taxable income of shareholders on December 31 of the year in
which such distributions were declared. If the Fund qualifies and if it
distributes substantially all of its net investment income and net capital
gains, if any, to shareholders, it will be relieved of any federal income tax
liability.

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

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

The Fund's income distributions are largely derived from interest on bonds
and thus are not, to any significant degree, eligible, in whole or in part,
for the corporate 70% dividends received deduction.

Income dividends and net short-term gains distributions are taxable as
ordinary income. Net long-term gains are taxable as capital gains regardless
of how long you have held the Fund's shares. If Fund shares are held for less
than six months, however, and are sold at a loss, such loss will be treated
for tax purposes as a long-term capital loss to the extent of any long-term
capital gains dividends received. The Fund advises you annually as to the
federal tax status of all distributions made during the year.

FUND MANAGEMENT AND EXPENSES

BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the
Fund. Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund and is responsible for
the overall management of the Fund's business and affairs.

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

Pursuant to its Investment Management Agreement with the Fund (the
"Management Agreement"), Keystone Management has delegated its investment
management functions, except for certain administrative and management
services, to Keystone and has entered into an Investment Advisory Agreement
with Keystone (the "Advisory Agreement") under which Keystone provides
investment advisory and management services to the Fund. Services performed by
Keystone Management include (1) performing research and planning with respect
to (a) the Fund's qualification as a regulated investment company under
Subchapter M of the Internal Revenue Code, (b) tax treatment of the Fund's
portfolio investments, (c) tax treatment of special corporate actions (such as
reorganizations), (d) state tax matters affecting the Fund, and (e) the Fund's
distributions of income and capital gains; (2) preparing the Fund's federal
and state tax returns; and (3) providing services to the Fund's shareholders
in connection with federal and state taxation and distributions of income and
capital gains.

The Fund currently pays Keystone Management a fee for its services at the
annual rate set forth below:
Aggregate
Net Asset Value
Management of the Shares
Fee Income of the Fund
- ------------------------------------------------------------------------------
2.0% of Gross Dividend
and Interest Income
plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000

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

The Management Agreement continues in effect from year to year only so long
as such continuance is specifically approved at least annually by the Fund's
Board of Trustees or by vote of a majority of the outstanding shares of the
Fund. In either case, the terms of the Management Agreement and continuance
thereof must be approved by the vote of a majority of the Fund's independent
Trustees ("Independent Trustees") cast in person at a meeting called for the
purpose of voting on such approval.

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

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

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

The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Fund's
Board of Trustees or by vote of a majority of the outstanding shares of the
Fund. In either case, the terms of the Advisory Agreement and continuance
thereof must be approved by the vote of a majority of Independent Trustees in
person at a meeting called for the purpose of voting on such approval.

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

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

During the year ended July 31, 1995, the Fund paid or accrued to Keystone
Management investment management and administrative service fees of
$1,954,412, which represented 0.66% of the Fund's average net assets. Of such
amount paid to Keystone Management, $1,661,250 was paid to Keystone for its
services to the Fund.

For the fiscal year ended July 31, 1995, the Fund's Class A, B, and C shares
each paid 1.33%, 2.06%, and 2.08%, respectively, of average net assets in
expenses.

During the year ended July 31, 1995, the Fund paid or accrued to Keystone
Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend
disbursing agent, $783,249 for transfer agent services and a total of $17,770
to KIRC and Keystone Investments as reimbursement for certain accounting
services. KIRC is a wholly-owned subsidiary of Keystone.

PORTFOLIO MANAGERS
Richard M. Cryan has managed the domestic high yield, high risk bond portion
of the Fund's portfolio since 1994. Mr. Cryan is a Keystone Senior Vice
President and has more than 14 years of experience in fixed-income investing.
He is responsible for the Fund's overall management.

Gilman C. Gunn has managed the portion of the Fund's portfolio invested in
foreign securities since 1993. Mr. Gunn is a Keystone Senior Vice President
and has served as the head of Keystone's international group for over three
years. Prior to that, he headed a global investment department of Citibank in
London. Mr. Gunn has over 21 years of experience in foreign securities
investing.

Christopher P. Conkey has managed the portion of the Fund's portfolio
invested in U.S. Government Securities since 1993. Mr. Conkey is a Keystone
Senior Vice President and has more than 12 years of experience in fixed-income
investing.

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

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

PORTFOLIO TURNOVER
For the fiscal years ended July 31, 1994 and 1995, the Fund's portfolio
turnover rates were 92% and 95%, respectively. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund. The Fund pays brokerage
commissions in connection with the writing of options and effecting the
closing purchase or sale transactions, as well as for some purchases and sales
of portfolio securities.

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

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

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

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

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

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

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

ALTERNATIVE SALES OPTIONS
GENERALLY, THE FUND OFFERS THREE CLASSES OF SHARES:

Class A Shares -- Front End Load Option
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a deferred sales charge when they are redeemed
except as follows: Class A shares purchased on or after April 10, 1995 (1) in
an amount equal to or exceeding $1,000,000 or (2) by a corporate qualified
retirement plan or a non-qualified deferred compensation plan sponsored by a
corporation having 100 or more eligible employees (a "Qualifying Plan"), in
either case without a front end sales charge, will be subject to a contingent
deferred sales charge for the 24 month period following the date of purchase.
Certain Class A shares purchased prior to April 10, 1995 may be subject to a
deferred sales charge upon redemption during the one year period following the
date of purchase.

CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
they are redeemed. Class B shares purchased on or after June 1, 1995 are
subject to a contingent deferred sales charge if redeemed during the 72 month
period commencing with and including the month of purchase. Class B shares
purchased prior to June 1, 1995 are subject to a deferred sales charge upon
redemption during the four calendar years following purchase. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
from and including the month of purchase will automatically convert to Class A
shares without the imposition of a front-end sales charge or exchange fee.
Class B shares purchased prior to June 1, 1995 will retain their existing
conversion rights.

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

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

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

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

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

AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------------------------------------
Less than $100,000 .......... 4.75% 4.99% 4.25%
$100,000 but less than
$250,000 .................... 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 .................... 2.50% 2.56% 2.25%
$500,000 but less than
$1,000,000 .................. 1.50% 1.52% 1.50%
- ----------
*Rounded to the nearest one-hundredth percent.
----------------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a tax
sheltered annuity plan sponsored by a public educational entity having 5,000
or more eligible employees (a "TSA Plan") will be at net asset value without
the imposition of a front-end sales charge (each such purchase, an "NAV
Purchase").

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

With the exception of Class A shares acquired by a TSA Plan, Class A shares
acquired on or after April 10, 1995 in an NAV Purchase are subject to a
contingent deferred sales charge of 1.00% upon redemption during the 24 month
period commencing on the date the shares were originally purchased. Class A
shares acquired by a TSA Plan in an NAV Purchase are not subject to a
contingent deferred sales charge. Certain Class A shares purchased without a
front-end sales charge prior to April 10, 1995 are subject to a contingent
deferred sales charge of 0.25% upon redemption during the one year period
commencing on the date such shares were originally purchased.

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

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

Initial sales charges may be eliminated for persons purchasing Class A
shares that are included in a broker dealer or investment adviser managed fee
based program (a wrap account) through broker/dealers or investment advisers
who have entered into special agreements with the Principal Underwriter.
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Keystone America Funds. See Exhibit A to this
prospectus.

Until December 31, 1995 and upon prior notification to the Principal
Underwriter, Class A shares may be purchased at net asset value by clients of
registered representatives within six months after the redemption of shares of
any registered open-end investment company not distributed or managed by
Keystone or its affiliates when the amount invested represents redemption
proceeds from such unrelated registered open-end investment company and the
shareholder either (1) paid a front end sales charge, or (2) was at some time
subject to, but did not actually pay, a contingent deferred sales charge with
respect to the redemption proceeds.

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

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

CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.

With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with
the following schedule:

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

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

No deferred sales charge is imposed on amounts redeemed thereafter.

With respect to Class B shares purchased prior to June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and the first calendar year
after the year of purchase; 2.00% on shares redeemed during the second
calendar year after the year of purchase; and 1.00% on shares redeemed during
the third calendar year after the year of purchase. No deferred sales charge
is imposed on amounts redeemed thereafter.

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

Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of a front-end sales charge or exchange fee. Class
B shares purchased prior to June 1, 1995 will similarly convert to Class A
shares at the end of seven calendar years after the year of purchase.
(Conversion of Class B shares represented by stock certificates will require
the return of the stock certificates to KIRC.) The Class B shares so converted
will no longer be subject to the higher expenses borne by Class B shares.
Because the net asset value per share of the Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is
the Fund's opinion that such a conversion will not constitute a taxable event
under federal income tax law. In the event that this ceases to be the case,
the Board of Trustees will consider what action, if any, is appropriate and in
the best interests of the Class B shareholders.

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

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

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

CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares to
pay expenses of the distribution of Class C shares. Payments under the Class C
Distribution Plan are currently made to the Principal Underwriter (which may
reallow all or part to others, such as dealers) (1) as commissions for Fund
shares sold and (2) as shareholder service fees. Amounts paid or accrued to
the Principal Underwriter under (1) and (2) in the aggregate may not exceed
the annual limitation referred to above. The Principal Underwriter generally
reallows to brokers or others a commission in the amount of 0.75% of the price
paid for each Class C share sold, plus the first year's service fee in advance
in the amount of 0.25% of the price paid for each Class C share sold, and,
beginning approximately fifteen months after purchase, a commission at an
annual rate of 0.75% (subject to NASD rules -- see "Distribution Plans") plus
service fees at an annual rate of 0.25%, respectively, of the average daily
net asset value of each Class C share maintained by such recipients on the
books of the Fund for specified periods. See "Distribution Plans" below.

CONTINGENT DEFERRED SALES CHARGES
AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at the time of
purchase of such shares. No contingent deferred sales charge is imposed when
you redeem amounts derived from (1) increases in the value of your account
above the net cost of such shares due to increases in the net asset value per
share of the Fund; (2) certain shares with respect to which the Fund did not
pay a commission on issuance, including shares acquired through reinvestment
of dividend income and capital gains distributions; (3) certain Class A shares
held for more than one year or two years, as the case may be; (4) Class B
shares held during more than four consecutive calendar years or more than 72
months, as the case may be; or (5) Class C shares held for more than one year.
Upon request for redemption, shares not subject to the contingent deferred
sales charge will be redeemed first. Thereafter, shares held the longest will
be the first to be redeemed.

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

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

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

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

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

The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to
banks and other financial services firms that facilitate transactions in
shares of the Fund for their clients. The Glass-Steagall Act currently limits
the ability of a depository institution (such as a commercial bank or a
savings and loan association) to become an underwriter or distributor of
securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from accepting payments under the arrangement
described above, or should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider what action, if any, is
appropriate.

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

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

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

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

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

In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B
shares sold during the two-year period commencing approximately June 1, 1995.
The Fund has agreed not to reduce the rate of payment of 12b-1 fees in respect
of such Class B shares unless it terminates such shares' Distribution Plan
completely. If it terminates such Distribution Plan, the Fund may be subject
to possible adverse distribution consequences.

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

For Class B shares sold prior to June 1, 1995, unreimbursed distribution
expenses at July 31, 1995 were $10,747,455 (7.21% of such Class B net assets
at July 31, 1995). For Class B shares sold on or after June 1, 1995,
unreimbursed distribution expenses at July 31, 1995 were $351,360 (0.23% of
such Class B net assets at July 31, 1995). Unreimbursed Class C distribution
expenses at July 31, 1995 were $4,539,048 (9.82% of Class C net assets at July
31, 1995).

For the year ended July 31, 1995, the Fund paid or accrued to the Principal
Underwriter $228,520, $1,490,077 ($1,485,292 with respect to Class B shares
sold prior to June 1, 1995 and $4,785 with respect to Class B shares sold on
or after June 1, 1995) and $506,712, respectively, pursuant to its Class A,
Class B, and Class C Distribution Plans.

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

HOW TO REDEEM SHARES
Fund shares may be redeemed for cash at their net asset value upon written
order by the shareholder(s) to the Fund, c/o KIRC, and presentation to the
Fund of a properly endorsed share certificate if certificates have been
issued. The signature(s) of the shareholder(s) on the written order and
certificates must be guaranteed. In order to redeem by telephone, you must
have completed the authorization in your account application.

The redemption value is the net asset value adjusted for fractions of a cent
and may be more or less than the shareholder's cost depending upon changes in
the value of the Fund's portfolio securities between purchase and redemption.

If imposed, the deferred sales charge is deducted from the redemption
process otherwise payable to you.

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

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

Shareholders may also redeem their shares through their broker-dealers. The
Principal Underwriter, acting as agent for the Fund, stands ready to
repurchase Fund shares upon orders from dealers at the redemption value
described above computed on the day on which the Principal Underwriter
receives the order. The Principal Underwriter will pay the redemption
proceeds, less any applicable deferred sales charge, to the dealer placing the
order within seven days thereafter, assuming it has received proper
documentation. The Principal Underwriter charges no fees for this service, but
the shareholder's broker-dealer may do so.

For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, OR BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC may
waive this requirement, but may also require additional documents in certain
cases. Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.

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

If you request redemption by telephone and a bank account previously has
been designated, you should state whether the proceeds should be wired or sent
EFT. In the absence of a request that the proceeds be wired or sent EFT, they
will be sent by check. The redemption order also should include the account
name as registered with the Fund and the account number.

TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. In order to insure that
instructions received by KIRC are genuine when you initiate a telephone
transaction, you will be asked to verify certain criteria specific to your
account. At the conclusion of the transaction, you will be given a transaction
number confirming your request, and written confirmation of your transaction
will be mailed the next business day. Your telephone instructions will be
recorded. Redemptions by telephone are allowed only if the address and bank
account of record have been the same for a minimum period of 30 days. If you
cannot reach the Fund by telephone you should follow the procedures for
redeeming by mail or through a broker as set forth above.

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

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

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

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

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

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

EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of
the Fund for shares of certain other Keystone America Funds and Keystone
Liquid Trust ("KLT") as follows:

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

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

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

Class B shares purchased on or after June 1, 1995 cannot be exchanged for
Class B shares of Keystone Capital Preservation and Income Fund during the 24
month period commencing with and including the month of original purchase.

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

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

(2) Class B shares that have been held for less than 72 months or four
years, as the case may be, or

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

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

You may exchange your shares for another Keystone fund for a $10 fee by
calling or writing to Keystone. The exchange fee is waived for individual
investors who make an exchange using KARL. Fund shares purchased by check may
be exchanged for shares after 15 days provided good payment for the purchase
of Fund shares has been collected. If the shares being tendered for exchange
are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction. The Fund reserves the
right to change or terminate this exchange offer or to change its terms,
including the right to change the service charge for any exchange.

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

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

An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements
of the fund being acquired. An exchange constitutes a sale for federal income
tax purposes.

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

KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount or to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the
transfer to take place. For money recently invested, you must allow normal
check clearing time before redemption proceeds are sent to your bank.

You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank
account will be debited to purchase shares in the Fund. You will receive
confirmation from the Principal Underwriter for every transaction.

To change the amount or terminate a Keystone America Money Line service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121,
Boston, Massachusetts 02106-2121, and include your account numbers.

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

AUTOMATIC INVESTMENT PLAN
Shareholders may take advantage of investing on an automatic basis by
establishing an automatic investment plan. Funds are drawn on a shareholder's
checking account monthly and used to purchase Fund shares.

AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, shareholders may arrange for regular
monthly or quarterly fixed withdrawal payments. Each payment must be at least
$100 and may be as much as 1.5% per month or 4.5% per quarter of the total net
asset value of the Fund shares in your account when the Automatic Withdrawal
Plan is opened. Fixed withdrawal payments are not subject to a deferred sales
charge. Excess withdrawals may decrease or deplete the value of your account.
Because of the effect of the applicable sales charge, a Class A investor
should not make continuous purchases of the Fund's shares while participating
in an automatic withdrawal plan.

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

Prior to participating in dollar cost averaging, you must have established
an account in a Keystone America Fund or a money market fund managed or
advised by Keystone. You should designate on the application the dollar amount
of each monthly or quarterly investment (minimum $100) you wish to make and
the fund in which the investment is to be made. Thereafter, on the first day
of the designated month an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and
invested in shares of the designated fund. If you are a Class A investor and
paid a sales charge on your initial purchase, the shares purchased will be
eligible for Rights of Accumulation and the sales charge applicable to the
purchase will be determined accordingly. In addition, the value of shares
purchased will be included in the total amount required to fulfill a Letter of
Intent. If a sales charge was not paid on the initial purchase, a sales charge
will be imposed at the time of subsequent purchases and the value of shares
purchased will become eligible for Rights of Accumulation and Letters of
Intent.

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

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

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

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

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

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

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

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

ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves as
the Fund's transfer agent and dividend disbursing agent.

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

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

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ADDITIONAL INVESTMENT INFORMATION
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The Fund may engage in the investment practices described below to the
extent described in the prospectus and statement of additional information.

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

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

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

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

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

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

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

As a group, PIK bonds trade flat (i.e., accrued interest). Their price is
expected to reflect an amount representing accreted interest since the last
payment. PIKs generally trade at higher yields than comparable cash-paying
securities of the same issuer. Their premium yield is the result of the lesser
desirability of non-cash interest, the more limited audience for non-cash
paying securities, and the fact that many PIKs have been issued to equity
investors who do not normally own or hold such securities.

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

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

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

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

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

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

REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having
to sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement,
it will establish a segregated account with the Fund's custodian containing
liquid assets having a value not less than the repurchase price (including
accrued interest) and will subsequently monitor the account to ensure such
value is maintained. Reverse repurchase agreements involve the risk that the
market value of the securities the Fund is obligated to repurchase may decline
below the repurchase price. Borrowing and reverse repurchase agreements
magnify the potential for gain or loss on the portfolio securities of the Fund
and, therefore, increase the possibility of fluctuation in the Fund's net
asset value. Such practices may constitute leveraging. In the event the buyer
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligation to
repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such determination.
The staff of the Securities and Exchange Commission has taken the position
that reverse repurchase agreements are subject to the percentage limit on
borrowings imposed on the Fund under the 1940 Act.

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

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

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

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

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

There are four principal types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction
can be created. Further information regarding options, futures, forwards and
swaps, is provided later in this section and is provided in the Fund's
statement of additional information.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

REDUCED SALES CHARGES

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

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

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

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

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

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

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

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

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

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

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

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

[Logo] KEYSTONE
INVESTMENTS

Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034

SIF-P 11/95 [Recycle Logo]

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

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

PHOTO:

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STRATEGIC INCOME
FUND
-----------------------------

[Logo]

PROSPECTUS AND
APPLICATION
<PAGE>

KEYSTONE STRATEGIC INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

NOVEMBER 28, 1995

This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone Strategic
Income Fund (formerly named Keystone America Strategic Income Fund) (the "Fund")
dated November 28, 1995. A copy of the prospectus may be obtained from
Keystone Investment Distributors Company (formerly named Keystone Distributors,
Inc.) (the "Principal Underwriter"), the Fund's principal underwriter, 200
Berkeley Street, Boston, Massachusetts 02116-5034.

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TABLE OF CONTENTS
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Page

The Fund 2
Investment Policies 2
Investment Restrictions 3
Dividends and Taxes 6
Valuation of Securities 7
Sales Charges 8
Distribution Plans 12
Investment Manager 15
Investment Adviser 18
Trustees and Officers 19
Principal Underwriter 23
Brokerage 24
Declaration of Trust 26
Standardized Total Return
and Yield Quotations 28
Additional Information 29
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-19

#1016060b

<PAGE>
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THE FUND
- --------------------------------------------------------------------------------

The Fund is an open-end, diversified management investment company
(commonly known as a mutual fund) that seeks high current income from interest
on debt securities. Secondarily, the Fund considers potential for growth of
capital in selecting securities. The Fund was formed as a Massachusetts business
trust on October 24, 1986 and was originally named Keystone America High Yield
Bond Fund. Subsequently, the Fund changed its name to Keystone America Strategic
Income Fund. The Fund changed its name from Keystone America Strategic Income
Fund to its current name on May 1, 1995. The Fund is managed by Keystone
Management, Inc. ("Keystone Management") and advised by Keystone Investment
Management Company (formerly named Keystone Custodian Funds, Inc.) ("Keystone").

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

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INVESTMENT POLICIES
- --------------------------------------------------------------------------------

The Fund intends to allocate its assets principally between eligible
domestic high yielding, high risk debt securities and foreign debt securities.
From time to time, the Fund will allocate a portion of its assets to United
States ("U.S.") government securities. The total return on such securities is
expected to include some capital gain. The Fund does not intend to hold
securities for capital gain unless the current yield on such securities remains
attractive. Certain investments, investment techniques and ratings criteria
applicable to the Fund are more fully explained in the Appendix to this
statement of additional information.

FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE

The investment objective of the Fund is fundamental and may not be changed
without approval of the holders of a majority of the Fund's outstanding voting
shares (which means the lesser of (1) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (2) more
than 50% of the outstanding shares).

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

The following investment restrictions are fundamental and may not be
changed without the vote of a majority of the Fund's outstanding voting shares.
Unless otherwise stated, all references to the assets of the Fund are in terms
of current market value. The Fund shall not do any of the following:

(2) purchase securities on margin except that it may obtain such short term
credit as may be necessary for the clearance of purchases and sales of
securities;

(3) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short, and unless not more than 10% of
its net assets are held as collateral for such sales at any one time;

(4) borrow money or enter into reverse repurchase agreements, except that
the Fund may (a) enter into reverse repurchase agreements or (b) borrow money
from banks for temporary or emergency purposes in aggregate amounts up to
one-third of the value of the Fund's net assets; provided that while borrowings
from banks exceed 5% of the Fund's net assets, any such borrowings will be
repaid before additional investments are made;

(5) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis or collateral
arrangement with respect to the writing of options on securities are not deemed
to be a pledge of assets;

(6) issue senior securities; the purchase or sale of securities on a "when
issued" basis or collateral arrangement with respect to the writing of options
on securities are not deemed to be the issuance of a senior security;

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

(8) purchase any security (other than U.S. government securities) of any
issuer if as a result more than 25% of its total assets would be invested in a
single industry; except that (a) there is no restriction with respect to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (b) wholly owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of the parents; (c) the industry classification of
utilities will be determined according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry); and (d) the industry classification of medically related industries
will be determined according to their services (for example, management,
hospital supply, medical equipment and pharmaceuticals will each be considered a
separate industry);

(9) invest more than 5% of its total assets in securities of any company
having a record, together with its predecessors, of less than three years of
continuous operation;

(10) purchase securities of other investment companies, except as part of a
merger, consolidation, purchase of assets or similar transaction;

(11) purchase or sell commodities or commodity contracts or real estate,
except that the Fund may purchase and sell securities secured by real estate and
securities of companies which invest in real estate and may engage in currency
or other financial futures contracts and related options transactions; and

(12) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.

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

As a matter of practice, the Fund treats reverse repurchase agreements
as borrowings for purposes of compliance with the limitations under the
Investment Company Act of 1940 (the "1940 Act"). Reverse repurchase agreements
will be taken into account along with borrowings from banks for purposes of the
5% limit set forth in the fourth fundamental investment restriction above.

Additional restrictions adopted by the Fund, which may be changed by the
Board of Trustees, provide that the Fund may not purchase or retain securities
of an issuer if, to the knowledge of the Fund, any officer, Trustee or Director
of the Fund, Keystone Management, or Keystone, each owning beneficially more
than 1/2 of 1% of the securities of such issuer, own in the aggregate more than
5% of the securities of such issuer, or such persons or management personnel of
the Fund or Keystone have a substantial beneficial interest in the securities of
such issuer. Portfolio securities of the Fund may not be purchased from or sold
or loaned to Keystone or any affiliate thereof or any of their Directors,
officers or employees.

Although not fundamental restrictions or policies requiring a shareholders'
vote to change, the Fund has undertaken to a state securities authority that, so
long as the state authority requires and shares of the Fund are registered for
sale in that state, the Fund (1) will not invest in interests in oil, gas or
other mineral exploration or development programs, except publicly traded
securities of companies engaging in such activities; (2) will not write or sell
puts, calls or combinations thereof; except that it may write covered put and
call options; (3) in connection with the purchase of debt securities, may
acquire warrants or other rights to subscribe for securities of issuers or
securities of parents or subsidiaries of such issuers ("warrants"), provided
that no more than 5% of its total assets may be invested in warrants (for the
purpose of this restriction, warrants attached to securities acquired by the
Fund may be deemed to be without value), in each case, unless authorized by a
vote of a majority of the Fund's outstanding voting shares; (4) will not invest
more than 15% of its net assets (calculated at the time of purchase) in
securities which are not registered in nor exempt from registration in that
state; and (5) will not invest more than 10% of its net assets (calculated at
the time of purchase) in not readily marketable securities.

Although not a fundamental restriction or policy requiring a shareholders'
vote to change, the Fund has undertaken to a state securities authority that, so
long as the state authority requires and shares of the Fund are registered for
sale in that state, the Fund will not invest in securities (other than U.S.
government securities) of any issuer if as a result more than 5% of its assets
would be invested in securities of a single issuer.

Although not fundamental restrictions or policies requiring a shareholders'
vote to change, the Fund has undertaken to a state securities authority that, so
long as the state authority requires and shares of the Fund are registered for
sale in that state, the Fund will not (1) write puts and calls on securities
unless (a) the option is issued by the Options Clearing Corporation, (b) the
security underlying the put or call is within the investment policies of the
Fund, and (c) the aggregate value of the securities underlying the calls or
obligations underlying the puts determined, as of the date of sale, does not
exceed 25% of its net assets; and (2) buy and sell puts and calls written by
others unless (a) the options are listed on a national securities or commodities
exchange or offered through certain approved national securities associations,
and (b) the aggregate premiums paid on such options held at any time do not
exceed 20% of the Fund's net assets.

Although not a fundamental restriction or policy requiring a shareholder's
vote to change the Fund has agreed that so long as the state authority requires
and shares of the Fund are registered for sale in that state, the Fund will
maintain 300% asset coverage on any leverage or bank borrowings.

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

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

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

The Fund intends to distribute dividends to its shareholders from net
investment income monthly and all net realized long term capital gains at least
annually. Distributions will be made in additional shares of that class of
shares upon which the distribution is based or, at the option of the
shareholder, in cash. All shareholders may receive distributions in shares
without being subject to a deferred sales charge when such shares are redeemed.
Shareholders who have not opted to receive cash prior to the record date for any
distributions will have the number of such shares determined on the basis of the
Fund's net asset value per share computed at the end of the day on the record
date after adjustment for the distribution. Net asset value is used in computing
the number of shares in both gains and income distribution reinvestments.
Account statements and/or checks as appropriate will be mailed to shareholders
within seven days after the Fund pays the distribution. Unless the Fund receives
instructions to the contrary from a shareholder before the record date, it will
assume that the shareholder wishes to receive that distribution and future gains
and income distributions in shares. Instructions continue in effect until
changed in writing.

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

When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. Therefore, net
investment income distributions will not be made on the basis of distributable
income as computed on the books of the Fund, but will be made on a federal
income tax basis. Shareholders of the Fund will be advised annually of the
federal income tax status of distributions.

- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------

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

(1) securities for which market quotations are readily available are valued
at the mean of the bid and asked prices at the time of valuation;

(2) short-term investments that are purchased with maturities of sixty days
or less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market;

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

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

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

The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing fixed income securities. As a result,
depending on the particular securities owned by the Fund, it is likely that most
of the valuations for such securities will be based upon their fair value
determined under procedures which have been approved by the Board of Trustees.
The Board of Trustees has authorized the use of a pricing service to determine
the fair value of its fixed income securities and certain other securities.
Securities for which market quotations are readily available are valued on a
consistent basis at that price quoted which, in the opinion of the Trustees or
the person designated by the Board of Trustees to make the determination, most
nearly represents the market value of the particular security. Any securities
for which market quotations are not readily available or other assets are valued
on a consistent basis at fair value as determined in good faith using methods
prescribed by the Board of Trustees.

- --------------------------------------------------------------------------------
SALES CHARGES
- --------------------------------------------------------------------------------

GENERAL

Generally, the Fund offers three classes of shares. Class A shares are
offered with a maximum front end sales charge of 4.75% payable at the time of
purchase ("Front End Load Option"). Class B shares purchased on or after June 1,
1995 are subject to a contingent deferred sales charge payable if redeemed
during the 72 month period from and including the month of purchase. Class B
shares purchased prior to June 1, 1995 are subject to a contingent deferred
sales charge payable upon redemption within three calendar years after the year
of purchase ("Back End Load Option"). Class B shares purchased on or after June
1, 1995 that have been outstanding eight years from and including the month of
purchase will automatically convert to Class A shares without the imposition of
a front-end sales charge or exchange fee. Class B shares purchased prior to June
1, 1995 that have been outstanding during seven calendar years will similarly
convert to Class A shares. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to Keystone
Investor Resource Center, Inc., the Fund's transfer and dividend disbursing
agent ("KIRC").) Class C shares are sold subject to a contingent deferred sales
charge payable upon redemption within one year after purchase ("Level Load
Option"). Class C shares are available only through dealers who have entered
into special distribution agreements with the Principal Underwriter. The
prospectus contains a general description of how investors may buy shares of the
Fund, a table of applicable sales charges for Class A shares, a discussion of
reduced sales charges that may apply to subsequent purchases, and a description
of applicable contingent deferred sales charges.

CONTINGENT DEFERRED SALES CHARGES

In order to reimburse the Fund for certain expenses relating to the sale of
its shares (see "Distribution Plans"), a contingent deferred sales charge is
imposed at the time of redemption of certain Fund shares as follows:

CLASS A SHARES

With certain exceptions, purchases of Class A shares made on or after April
10, 1995 (1) in an amount equal to or exceeding $1,000,000 and/or (2) by a
corporate qualified retirement plan or a non-qualified deferred compensation
plan sponsored by a corporation having 100 or more eligible employees (a
"Qualifying Plan"), in either case without a front-end sales charge, will be
subject to a contingent deferred sales charge of 1.00% during the 24 month
period following the date of purchase. Certain Class A shares purchased without
a front-end sales charge prior to April 10, 1995 may be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one-year period
commencing on the date such shares were originally purchased. The contingent
deferred sales charge will be retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.

CLASS B SHARES

With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of net asset value or net cost of such Class B shares redeemed during
succeeding twelve-month periods as follows: 5.00% during the first twelve month
period; 4.00% during the second twelve month period; 3.00% during the third
twelve month period; 3.00% during the fourth twelve month period; 2.00% during
the fifth twelve month period; and 1.00% during the sixth twelve month period.
No deferred sales charge is imposed on amounts redeemed thereafter.

With respect to Class B shares purchased prior to June 1, 1995, the Fund,
with certain exceptions, will impose a deferred sales charge of 3.00% on shares
redeemed during the calendar year of purchase and during the first calendar year
after the year of purchase; 2.00% on shares are deemed during the second
calendar year after the year of purchase; and 1.00% on shares redeemed during
the third calendar year after the year of purchase. No deferred sales charge is
imposed on amounts redeemed thereafter.

When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charge retained by the
Principal Underwriter. see "Calculation of Contingent Deferred Sales Charge"
below.

CLASS C SHARES

With certain exceptions, the Fund will impose a deferred sales charge of 1%
on shares redeemed within one year after the date of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter.

When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.

CALCULATION OF CONTINGENT DEFERRED SALES CHARGE

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

No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held during more than
one year or two years, as the case may be; (4) Class B shares held during more
than four consecutive calendar years or more than 72 months, as the case may be;
or (5) Class C shares held for more than one year.

Upon request for redemption, shares not subject to the contingent deferred
sales charge will be redeemed first. Thereafter, shares held the longest will be
the first to be redeemed. There is no contingent deferred sales charge when the
shares of a class are exchanged for the shares of the same class of another
Keystone America Fund. Moreover, when shares of one such class of a fund have
been exchanged for shares of another such class of a fund, the calendar year of
the exchange is assumed to be the year shares tendered for exchange were
originally purchased.

WAIVER OF SALES CHARGES

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

In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund purchased by a bank or trust company in a single account
in the name of such bank or trust company as trustee if the initial investment
in shares of the Fund and shares of any other Keystone Investments Family of
Funds is at least $500,000 and any commission paid by the Fund and such other
funds at the time of such purchase is not more than 1% of the amount invested.

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

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

- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------

Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1. The Fund's respective
Class A, B and C Distribution Plans have been approved by the Fund's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Fund as defined in the 1940 Act ("Independent Trustees") and the Trustees
who have no direct or indirect financial interest in the Distribution Plans or
any agreement related thereto (the "Rule 12b-1 Trustees," who are the same as
the Independent Trustees). (Each Class A, B, and C Distribution Plan, referred
to as a "Distribution Plan" and, collectively, "Distribution Plans.")

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

CLASS A DISTRIBUTION PLAN

The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate that is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares to finance any
activity that is primarily intended to result in the sale of Class A shares.

Payments under the Class A Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
as shareholder service fees at an annual rate of up to 0.25% of the average net
asset value of Class A shares maintained by such recipients on the books of the
Fund for specified periods.

CLASS B DISTRIBUTION PLAN

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

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

In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such Distribution Plan completely. If it
terminates such Distribution Plan, the Fund may be subject to possible adverse
distribution consequences.

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

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

CLASS C DISTRIBUTION PLAN

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

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

DISTRIBUTION PLANS IN GENERAL

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

A Distribution Plan may be terminated at any time by vote of the Rule 12b-1
Trustees or by vote of a majority of the outstanding voting shares of the
respective class of the Fund shares.

Any change in a Distribution Plan that would materially increase the
distribution expenses provided for in the Distribution Plan requires shareholder
approval. Otherwise, the Distribution Plans may be amended by the Trustees,
including the Rule 12b-1 Trustees.

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

The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limit specified above, and the amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by the Distribution Plan as
stated above.

For the fiscal year ended July 31, 1995, the Fund paid or accrued to the
Principal Underwriter $228,520, $1,490,077 ($1,485,292 with respect to Class B
shares sold prior to June 1, 1995 and $4,785 with respect to Class B shares sold
on or after June 1, 1995), and $506,712, respectively, pursuant to the Fund's
Class A, Class B and Class C Distribution Plans. These amounts were used to pay
commissions and service fees.

- --------------------------------------------------------------------------------
INVESTMENT MANAGER
- --------------------------------------------------------------------------------

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

Except as otherwise noted below, pursuant to an Investment Management
Agreement with the Fund dated August 19, 1993 (the "Management Agreement") and
subject to the supervision of the Fund's Board of Trustees, Keystone Management
manages and administers the operation of the Fund and manages the investment and
reinvestment of the Fund's assets in conformity with the Fund's investment
objectives and restrictions. The Management Agreement stipulates that Keystone
Management shall provide office space, all necessary office facilities,
equipment and personnel in connection with its services under the Management
Agreement and pay or reimburse the Fund for the compensation of officers and
Trustees of the Fund who are affiliated with the investment manager as well as
pay all expenses of Keystone Management incurred in connection with the
provisions of its services. All charges and expenses other than those
specifically referred to as being borne by Keystone Management will be paid by
the Fund, including, but not limited to, custodian charges and expenses;
bookkeeping and auditors' charges and expenses; transfer agent charges and
expenses; fees of Independent Trustees; brokerage commissions, brokers' fees and
expenses; issue and transfer taxes; costs and expenses under the Distribution
Plans; taxes and trust fees payable to governmental agencies; the cost of share
certificates; fees and expenses of the registration and qualification of the
Fund and its shares with the Securities and Exchange Commission (sometimes
referred to herein as the "SEC" or the "Commission") or under state or other
securities laws; expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the Fund; expenses of shareholders' and Trustees' meetings;
charges and expenses of legal counsel for the Fund and for the Trustees of the
Fund on matters relating to the Fund; charges and expenses of filing annual and
other reports with the SEC and other authorities; and all extraordinary charges
and expenses of the Fund.

The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser under which Keystone or
another investment adviser, as investment adviser, will provide substantially
all the services to be provided by Keystone Management under the Management
Agreement. The Management Agreement also permits Keystone Management to delegate
to Keystone or another investment adviser substantially all of the investment
manager's rights, duties and obligations under the Management Agreement.
Services currently performed by Keystone Management include (1) performing
research and planning with respect to (a) the Fund's qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code,
(b) tax treatment of the Fund's portfolio investments, (c) tax treatment of
special corporate actions (such as reorganizations), (d) state tax matters
affecting the Fund, and (e) the Fund's distributions of income and capital
gains; (2) preparing the Fund's federal and state tax returns; and (3) providing
services to the Fund's shareholders in connection with federal and state
taxation and distributions of income and capital gains.

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

Aggregate Net
Management Asset Value of the
Fee Income Shares of the Fund
- --------------------------------------------------------------------------------
2.0% of Gross Dividend
and Interest Income Plus
0.50% of the first $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000;

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

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

2.5% of the first $30 million of Fund average net assets;
2.0% of the next $70 million of Fund average net assets; and
1.5% of Fund average net assets over $100 million.

Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan fees, are not included in the calculation of the state expense
limitation. This limitation may be modified or eliminated in the future.

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

The Management Agreement continues in effect only so long as such
continuance is approved at least annually by the Board of Trustees of the Fund
or by a vote of a majority of the outstanding shares, and such renewal has been
approved by the vote of a majority of the Independent Trustees cast in person at
a meeting called for the purpose of voting on such approval. The Management
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund's Board of Trustees or by a vote of a majority of outstanding shares. The
Management Agreement will terminate automatically upon its "assignment" as that
term is defined in the 1940 Act.

For a discussion of fees paid to Keystone Management, see "Investment
Adviser" below.

- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------

Pursuant to the Management Agreement, Keystone Management has delegated
its investment management functions, except for certain administrative and
management services, to Keystone and has entered into an Investment Advisory
Agreement with Keystone dated August 19, 1993 (the "Advisory Agreement") under
which Keystone provides investment advisory and management services to the Fund.

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

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

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

Pursuant to the Advisory Agreement and subject to the supervision of the
Fund's Board of Trustees, Keystone manages and administers the Fund's operation
and manages the investment and reinvestment of the Fund's assets in conformity
with the Fund's investment objectives and restrictions. The Advisory Agreement
stipulates that Keystone shall provide office space, all necessary office
facilities, equipment and personnel in connection with its services under the
Advisory Agreement and pay or reimburse the Fund for the compensation of
officers and Trustees of the Fund who are affiliated with the investment adviser
and as well as pay all expenses of Keystone incurred in connection with
provision of its services. All charges and expenses other than those
specifically referred to as being borne by Keystone will be paid by the Fund,
including, but not limited to, custodian charges and expenses; bookkeeping and
auditors' charges and expenses; transfer agent charges and expenses; fees of
Independent Trustees; brokerage commissions, brokers' fees and expenses; issue
and transfer taxes, costs and expenses under the Distribution Plan; taxes and
trust fees payable to governmental agencies; the cost of share certificates;
fees and expenses of the registration and qualification of the Fund and its
shares with the SEC or under state or other securities laws; expenses of
preparing, printing and mailing prospectuses, statements of additional
information, notices, reports and proxy materials to shareholders of the Fund;
expenses of shareholders' and Trustees' meetings; charges and expenses of legal
counsel for the Fund and for the Trustees of the Fund on matters relating to the
Fund; charges and expenses of filing annual and other reports with the SEC and
other authorities, and all extraordinary charges and expenses of the Fund.

During the year ended July 31, 1993, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of $566,603,
which represented 0.72% of the Fund's average net assets. Of such amount paid to
Keystone Management, $481,613 was paid to Keystone for its services to the Fund.

During the year ended July 31, 1994, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of $1,721,793,
which represented 0.64% of the Fund's average net assets. Of such amount paid to
Keystone Management, $1,463,524 was paid to Keystone for its services to the
Fund.

During the year ended July 31, 1995, the Fund paid or accrued to Keystone
Management investment and administrative services fees of $1,954,412, which
represented 0.66% of the Fund's average net assets. Of such amount paid to
Keystone Management, $1,661,250 was paid to Keystone for its services to the
Fund.

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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------

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

*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments; President, Chief Executive Officer and
Trustee or Director of all 30 funds in the Keystone Investments Family of
Funds; Director and Chairman of the Board, Chief Executive Officer and Vice
Chairman of Keystone; Chairman of the Board and Director of Keystone
Institutional Company, Inc. ("Keystone Institutional") (formerly named
Keystone Investment Management Corporation), and Keystone Fixed Income
Advisors ("KFIA"); Director, Chairman of the Board, Chief Executive Officer
and President of Keystone Management and Keystone Software Inc. ("Keystone
Software"); Director and President of Keystone Asset Corporation, Keystone
Capital Corporation, and Keystone Trust Company; Director of the Principal
Underwriter, KIRC, and Fiduciary Investment Company, Inc. ("FICO");
Director and Vice President of Robert Van Partners, Inc.; Director of
Boston Children's Services Association; Trustee of Anatolia College,
Middlesex School, and Middlebury College; Member, Board of Governors, New
England Medical Center; and former Trustee of Neworld Bank; former Director
of Hartwell Keystone Advisors, Inc. ("Harwell Keystone").

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

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

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

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

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

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

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

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

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

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

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

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

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

KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer of
KIRC.

GILMAN G. GUNN: Vice President of the Fund; Vice President of certain other
Keystone Investments Funds; and Senior Vice President of Keystone.

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

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

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

During the fiscal year ended July 31, 1995, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. During
the same period, the nonaffiliated Trustees received $30,894 in retainers and
fees. For the year ended December 31, 1994, fees paid to Independent
Trustees on a complex wide basis was $585,990. As of August 31,
1995, the Fund's Trustees and officers beneficially owned less than 1% of each
of the Fund's then outstanding classes of shares.

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

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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------

Pursuant to the Principal Underwriting Agreements by and between the Fund
and the Principal Underwriter (the "Underwriting Agreements"), the Principal
Underwriter acts as the Fund's principal underwriter. The Principal Underwriter,
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is a Delaware
corporation wholly-owned by Keystone. The Principal Underwriter, as agent, has
agreed to use its best efforts to find purchasers for the shares. The Principal
Underwriter may retain and employ representatives to promote distribution of the
shares and may obtain orders from brokers, dealers and others, acting as
principals, for sales of shares to them. The Underwriting Agreements provide
that the Principal Underwriter will bear the expense of preparing, printing and
distributing advertising and sales literature and prospectuses used by them. In
its capacity as principal underwriter, the Principal Underwriter may receive
payments from the Fund pursuant to the Fund's Distribution Plans.

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

The Fund has agreed under the Underwriting Agreements to pay all expenses
in connection with registration of its shares with the Commission and auditing
and filing fees in connection with registration of its shares under the various
state "blue-sky" laws. The Principal Underwriter assumes the cost of sales
literature and preparation of prospectuses used by it and certain other
expenses.

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

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

The Underwriting Agreements provide that they will remain in effect as long
as its terms and continuance are approved by a majority of the Trustees of the
Fund and a majority of the Fund's Independent Trustees who are the same as the
Rule 12b-1 Trustees at least annually in accordance with the 1940 Act and rules
and regulations thereunder.

The Underwriting Agreements may be terminated, without penalty, on 60 days'
written notice by a majority of the Fund's Independent Trustees who are the same
as the Rule 12b-1 Trustees or by a vote of a majority of outstanding shares. The
Underwriting Agreements will terminate automatically upon their "assignment" as
that term is defined in the 1940 Act.

- --------------------------------------------------------------------------------
BROKERAGE
- --------------------------------------------------------------------------------

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

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

The Fund expects that purchases and sales of income securities usually will
be principal transactions. Such securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. There
usually will be no brokerage commissions paid by the Fund for such purchases.
Purchases from underwriters will include the underwriting commission or
concession, and purchases from dealers serving as market makers will include a
dealer's mark up or reflect a dealer's mark down. Where transactions are made in
the over-the-counter market, the Fund will deal with primary market makers
unless more favorable prices are otherwise obtainable.

Neither Keystone Management, Keystone, nor the Fund intend to place
securities transactions with any particular broker-dealer or group thereof. The
Fund's Board of Trustees, however, has determined that the Fund may follow a
policy of considering sales of shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution, including best price, described above.

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

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

In no instance are portfolio securities purchased from or sold to Keystone
Management, Keystone, the Principal Underwriter or any of their affiliated
persons, as defined in the 1940 Act and rules and regulations issued thereunder.

For the fiscal years July 31, 1993 and 1994, the Fund paid no brokerage
commissions. For the fiscal year ended July 31, 1995, the Fund paid $11,235 in
brokerage commissions.

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DECLARATION OF TRUST
- --------------------------------------------------------------------------------

MASSACHUSETTS BUSINESS TRUST

The Fund is a Massachusetts business trust established under a Declaration
of Trust dated October 24, 1986, as amended (the "Declaration of Trust"). The
Fund is similar in most respects to a business corporation. The principal
distinction between the Fund and a corporation relates to the shareholder
liability described below. A copy of the Declaration of Trust is filed as an
exhibit to the Registration Statement of which this statement of additional
information is a part. This summary is qualified in its entirety by reference to
the Declaration of Trust.

DESCRIPTION OF SHARES

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

SHAREHOLDER LIABILITY

Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Fund's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Fund; (2) requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees; and (3) provides for indemnification out
of the Fund's property for any shareholder held personally liable for the
obligations of the Fund.

VOTING RIGHTS

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

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

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

LIMITATION OF TRUSTEES' LIABILITY

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

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

- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------

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

The cumulative total return of Class A annualized for the period beginning
February 13, 1987 (commencement of investment operations) through July 31, 1995
was 70.91%. The cumulative total return of Class A for the one and five years
ended July 31, 1995 were (1.89%) and 60.68%, respectively. The compounded
average annual rate of return for Class A for the period February 13, 1987
through July 31, 1995 was 6.67%. The compounded average annual rate of return
for Class A for the five years ended July 31, 1995 was 9.95%. The cumulative
total return of Class B and Class C annualized for the period beginning February
1, 1993 (commencement of operations) through July 31, 1995 was 17.60% and
20.56%, respectively. The cumulative total return of Class B and Class C
annualized for the one year period ended July 31, 1995 was (1.63%) and 2.27%,
respectively. The compounded average annual rate of return for the Fund's Class
B and Class C annualized for the period from February 1, 1993 (commencement of
operations) through July 31, 1995 was 6.70% and 7.77%, respectively.

Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The current yields of Class
A, Class B, and Class C for the 30-day period ended July 31, 1995 were 8.07%,
7.71%, and 7.71%, respectively.

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

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

KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the Fund's independent auditors.

KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone, acts as transfer agent and dividend
disbursing agent for the Fund.

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

As of August 31, 1995, Merrill Lynch Pierce Fenner & Smith, 4800 Deer Lake
Dr. E., Jacksonville, FL 32246-6484, owned 19.123% of the outstanding Class A
shares.

As of August 31, 1995, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 15.212% of the outstanding Class
B shares.

As of August 31, 1995, Merrill Lynch Pierce Fenner & Smith, 4800 Deer Lake
Dr. E., Jacksonville, FL 32246-6484, owned 22.735% of the outstanding Class C
shares.

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

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

The Fund is one of 15 different investment companies in the Keystone
America Family, which offers a range of choices to serve shareholder needs. In
addition to the Fund, the Keystone America Family includes the following funds
having the various investment objectives described below:

KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.

KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.

KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.

KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).

KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.

KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.

KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.

KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.

KEYSTONE STATE TAX FREE FUND - A mutual fund currently offering five separate
series of shares investing in different portfolio securities which seeks the
highest possible current income, exempt from federal income taxes and applicable
state taxes.

KEYSTONE STATE TAX FREE FUND-SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.

KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.

KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investments in debt
securities denominated in U.S. and foreign currencies.

KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and South and Central America).

KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long term capital growth by
investing primarily in equity securities.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------

MONEY MARKET INSTRUMENTS

Money market securities are instruments with remaining maturities of one
year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes) and obligations
issued or guaranteed by the United States ("U.S.") government, its agencies or
instrumentalities, some of which may be subject to repurchase agreements.

COMMERCIAL PAPER

Commercial paper will consist of issues rated at the time of purchase A-1
by Standard & Poor's Corporation (S&P) or PRIME-1 by Moody's Investors Service,
Inc. (Moody's); or, if not rated, will be issued by companies which have an
outstanding debt issue rated at the time of purchase Aaa, Aa or A by Moody's, or
AAA, AA or A by S&P, or will be determined by Keystone to be of comparable
quality.

A. S&P RATINGS

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The top category is as follows:

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

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

B. MOODY'S RATINGS

The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designation, judged to be investment grade, to
indicate the relative repayment capacity of rated issuers.

1. The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated PRIME-1 (or related supporting institutions) are deemed
to have a superior capacity for repayment of short term promissory obligations.
Repayment capacity of Prime-1 issuers is normally evidenced by the following
characteristics:

1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance on debt
and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges and high
internal cash generation; and
5) well established access to a range of financial markets and assured
sources of alternate liquidity.

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

CERTIFICATES OF DEPOSIT

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

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

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

BANKERS' ACCEPTANCES

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

U.S. GOVERNMENT SECURITIES

Securities issued or guaranteed by the U.S. government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance and securities issued by the Government National Mortgage
Association ("GNMA"). Treasury bills have maturities of one year or less.
Treasury notes have maturities of one to ten years and Treasury bonds generally
have maturities of greater than ten years at the date of issuance. GNMA
securities include GNMA mortgage pass-through certificates. Such securities are
supported by the full faith and credit of the U.S. Government.

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

Some obligations of U.S. government agencies and instrumentalities, such as
securities of Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Interamerican Development Bank.

MORTGAGE BACKED SECURITIES

Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term mortgage backed securities includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations.

There are currently three basic types of mortgage-backed securities: (i)
those issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as GNMA, FNMA, and FHLMC (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full-faith and credit" of
the U.S.); (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole mortgage loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.

The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
governmental or private lenders. Such securities, which are ownership interests
in the underlying mortgage loans, differ from conventional debt securities,
which provide for periodic payment of interest in fixed amounts (usually
semi-annually) with principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a "pass
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such mortgage loans, net of any fees paid
to the guarantor of such securities and the services of the underlying mortgage
loans.

Collateralized mortgage obligations in which the Fund may invest are
securities issued by a U.S. government instrumentality that are collateralized
by a portfolio of mortgages or mortgage-backed securities. The issuer's
obligation to make interest and principal payments is secured by the underlying
portfolio of mortgages or mortgage-backed securities.

ZERO COUPON "STRIPPED" BONDS

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

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

EQUIPMENT TRUST CERTIFICATES

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

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

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

CORPORATE BOND RATINGS

S&P CORPORATE BOND RATINGS

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

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

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

b. Nature of and provisions of the obligation; and

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

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

Bond ratings are as follows:

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

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

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

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

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

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

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

MOODY'S CORPORATE BOND RATINGS

Moody's ratings are as follows:

1. Aaa - Bonds which are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

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

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

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

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

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

7. 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.

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

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

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

MOODY'S PREFERRED STOCK RATINGS

Preferred stock ratings and their definitions are as follows:

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

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

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

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

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

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

OPTIONS TRANSACTIONS

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

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

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

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

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

PURCHASING PUT AND CALL OPTIONS. The Fund can close out a put option it has
purchased by effecting a closing sale transaction; for example, the Fund may
close out a put option it has purchased by selling a put option. If, however, a
secondary market does not exist at a time the Fund wishes to effect a closing
sale transaction, the Fund will have to exercise the option to realize any
profit. In addition, in a transaction in which the Fund does not own the
security underlying a put option it has purchased, the Fund would be required,
in the absence of a secondary market, to purchase the underlying security before
it could exercise the option. In each such instance, the Fund would incur
additional transaction costs.

The Fund may also purchase call options for the purpose of offsetting
previously written call options of the same series.

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

OPTION WRITING AND RELATED RISKS

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

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

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

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

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

OPTIONS TRADING MARKETS

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

The staff of the Commission currently is of the view that the premiums
which the Fund pays for the purchase of unlisted options, and the value of
securities used to cover unlisted options written by the Fund, are considered to
be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its fundamental investment restriction
prohibiting it from investing more than 10% of its total assets (taken at
current value) in any combination of illiquid assets and securities. The Fund
intends to request that the Commission staff reconsider its current view. It is
the intention of the Fund to comply with the staff's current position and the
outcome of such reconsideration.

SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS

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

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

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

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

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

RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be closed out
only in a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any particular time, and for some
options no secondary market may exist. In such event, it might not be possible
to effect closing transactions in particular options, with the result that the
Fund would have to exercise its options in order to realize any profit and might
incur transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.

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

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

FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS

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

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

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

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

FUTURES CONTRACTS

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

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

INTEREST RATE FUTURES CONTRACTS

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

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

INDEX BASED FUTURES CONTRACTS

STOCK INDEX FUTURES CONTRACTS

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

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

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

OTHER INDEX BASED FUTURES CONTRACTS

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

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

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

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

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

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

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

OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES

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

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

PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS

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

PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS

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

USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS

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

LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS

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

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

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

FEDERAL INCOME TAX TREATMENT

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

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

RISKS OF FUTURES CONTRACTS

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

At best, the correlation between changes in prices of futures contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indices underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. In addition
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.

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

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

RISKS OF OPTIONS ON FUTURES CONTRACTS

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

FOREIGN CURRENCY TRANSACTIONS

The Fund may invest in securities of foreign issuers. When the Fund invests
in foreign securities they usually will be denominated in foreign currencies and
the Fund may hold funds in foreign currencies. Thus, the value of a Fund share
will be affected by changes in exchange rates.

FORWARD CURRENCY CONTRACTS

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

CURRENCY FUTURES CONTRACTS

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

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

FOREIGN CURRENCY OPTIONS TRANSACTIONS

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

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

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

PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES

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

PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES

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

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

CURRENCY TRADING RISKS

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

EXCHANGE RATE RISK

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

MATURITY GAPS AND INTEREST RATE RISK

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

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

CREDIT RISK

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

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

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

COUNTRY RISK

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

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

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

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

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

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

GLOSSARY OF TERMS

CLASS OF OPTIONS. Options covering the same underlying security.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SERIES OF OPTIONS. Options covering the same underlying security and having
the same exercise price and expiration date.

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

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

UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>

SCHEDULE OF INVESTMENTS--July 31, 1995

<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED INCOME (94.5%)
INDUSTRIAL BONDS & NOTES (40.5%)
ADVERTISING (0.7%)
Lamar Advertising Co. Sr. Secd. Notes 11.000% 2003 $1,000,000 $ 1,010,000
Lifestyle Brands Gtd. Deb. (Subord.) 10.000 1997 1,050,000 1,050,000
- ---------------------------------------------------------------------------------------------------------------------------
2,060,000
- ---------------------------------------------------------------------------------------------------------------------------
AEROSPACE (1.2%)
SabreLiner Inc. Sr. Notes 12.500 2003 2,500,000 2,200,000
Transdigm Inc. Sr. Notes (Subord.) 13.000 2000 1,250,000 1,143,750
- ---------------------------------------------------------------------------------------------------------------------------
3,343,750
- ---------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION (0.1%)
US Africa Airways (6/2/94-$750,000)(a)(b)(c) Sr. Secd. Notes 12.000 1999 750,000 345,000
- ---------------------------------------------------------------------------------------------------------------------------
AMUSEMENTS (2.4%)
El Comandante Capital Corp. 1st Mtge. Notes 11.750 2003 1,750,000 1,645,000
Grand Palais Casinos, Inc. (8/15/94-
$2,542,000)(b) Sr. Secd. PIK Notes 18.250 1997 2,250,000 2,250,000
Hemmeter Enterprises, Inc. (12/14/93- Unit (Sr. Secd. PIK
$4,992,674)(b) Notes/Wts.) 12.000 2000 6,597,710 2,837,015
Starcraft Corp. (2/11/88-$178,833)(a)(b)(c) Notes (Subord.) 16.500 1998 750,000 15,000
- ---------------------------------------------------------------------------------------------------------------------------
6,747,015
- ---------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (4.3%)
Alpine Group, Inc. (e) Sr. Notes 12.250 2003 2,000,000 1,840,000
Associated Materials, Inc. Sr. Notes (Subord.) 11.500 2003 1,500,000 1,380,000
HMH Properties, Inc. Sr. Secd. Notes 9.500 2005 3,000,000 2,947,500
Koppers Industries, Inc. Sr. Notes 8.500 2004 2,050,000 1,988,500
Schuller International Group, Inc. Sr. Notes 10.875 2004 1,400,000 1,529,500
USG Corp. Deb. 8.750 2017 2,500,000 2,425,000
- ---------------------------------------------------------------------------------------------------------------------------
12,110,500
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS (0.2%)
Lanesborough Corp. Sr. Secd. Notes (Subord.) 10.000 2000 575,000 402,500
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS (0.8%)
Key Plastics, Inc. Sr. Notes 14.000 1999 250,000 252,500
Sherritt Gordon Ltd. Sr. Notes 9.750 2003 2,000,000 2,000,000
- ---------------------------------------------------------------------------------------------------------------------------
2,252,500
- ---------------------------------------------------------------------------------------------------------------------------
(continued on next page)
See Notes to Schedule of Investments.

9
<PAGE>

<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER GOODS (2.2%)
American Safety Razor Co. (e) Sr. Notes 9.875% 2005 $ 750,000 $ 754,688
Drypers Corp. Sr. Notes 12.500 2002 2,000,000 1,880,000
International Semi-Tech Electronics, Inc.
(Eff. Yield 11.98%)(d) Sr. Secd. Disc. Notes 0.000 2003 3,000,000 1,597,500
Revlon Consumer Products Corp. Sr. Notes (Subord.) 10.500 2003 2,000,000 2,010,000
- ---------------------------------------------------------------------------------------------------------------------------
6,242,188
- ---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.4%)
Jordan Industries, Inc. Sr. Notes 10.375 2003 1,300,000 1,225,250
- ---------------------------------------------------------------------------------------------------------------------------
FOODS (4.9%)
Cott Corporation Sr. Notes 9.375 2005 1,650,000 1,658,250
Iowa Select Farms (1/21/94-$6,182,225)
(Eff. Yield 13.716%)(b)(d) Sr. Disc. Notes/Wts. 0.000 2004 12,828,000 6,184,507
Iowa Select Farms (8/2/94-$3,833,241)
(Eff. Yield 16.62%)(b)(d) Sr. Disc. Notes/Wts. 0.000 2004 7,954,000 3,834,703
Specialty Foods Corp. Sr. Notes (Subord.) 11.250 2003 2,000,000 1,960,000
- ---------------------------------------------------------------------------------------------------------------------------
13,637,460
- ---------------------------------------------------------------------------------------------------------------------------
HEALTHCARE (0.4%)
Community Health Systems Inc. Sr. Deb. (Subord.) 10.250 2003 1,000,000 1,065,000
- ---------------------------------------------------------------------------------------------------------------------------
INSURANCE (1.4%)
CCP Insurance, Inc. Sr. Note 10.500 2004 2,000,000 2,100,000
Reliance Group Holdings, Inc. Sr. Deb. (Subord.) 9.750 2003 2,000,000 1,960,000
- ---------------------------------------------------------------------------------------------------------------------------
4,060,000
- ---------------------------------------------------------------------------------------------------------------------------
METALS & MINING (2.1%)
Algoma Steel Inc. 1st Mtge. 12.375 2005 2,000,000 1,880,000
Inland Steel Co. Unsecd. Notes 12.750 2002 1,910,000 2,134,425
Republic Engineered Steels, Inc. 1st Mtge. Notes 9.875 2001 2,000,000 1,890,000
- ---------------------------------------------------------------------------------------------------------------------------
5,904,425
- ---------------------------------------------------------------------------------------------------------------------------
NATURAL GAS (1.5%)
TransTexas Gas Corp. Sr. Secd. Note 11.500 2002 4,000,000 4,160,000
- ---------------------------------------------------------------------------------------------------------------------------
OIL (2.3%)
Chatwins Group, Inc. Sr. Notes 13.000 2003 1,250,000 1,037,500
Gulf Canada Resources Ltd. Sr. Notes (Subord.) 9.625 2005 1,475,000 1,489,750
Kelley Oil & Gas Corporation Sr. Notes 13.500 1999 2,000,000 1,960,000
Plains Resources, Inc. Sr. Notes (Subord.) 12.000 1999 1,900,000 1,976,000
- ---------------------------------------------------------------------------------------------------------------------------
6,463,250
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
10
<PAGE>

<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAPER & PACKAGING (2.3%)
Container Corp. of America Sr. Notes 10.750% 2002 $2,000,000 $ 2,130,000
Owens-Illinois, Inc. Deb. 11.000 2003 2,000,000 2,205,000
Rainy River Forest Products, Inc. Sr. Notes 10.750 2001 2,000,000 2,120,000
- ---------------------------------------------------------------------------------------------------------------------------
6,455,000
- ---------------------------------------------------------------------------------------------------------------------------
RESTAURANTS (1.3%)
Great American Cookie Co., Inc. Sr. Secd. Notes 10.875 2001 2,000,000 1,720,000
Pantry, Inc. Sr. Notes 12.000 2000 2,000,000 1,980,000
- ---------------------------------------------------------------------------------------------------------------------------
3,700,000
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL (4.7%)
Big 5 Holdings, Inc. Sr. Notes (Subord.) 13.625 2002 125,000 128,125
Cole National Group, Inc. Sr. Notes 11.250 2001 1,750,000 1,706,250
Finlay Fine Jewelry Corp. Sr. Notes 10.625 2003 1,000,000 970,000
Hills Stores Co. Sr. Notes 10.250 2003 2,000,000 1,912,500
Pamida, Inc. Sr. Notes (Subord.) 11.750 2003 775,000 689,750
Pathmark Stores, Inc. Sr. Notes (Subord.) 9.625 2003 2,000,000 1,980,000
Penn Traffic Co. Sr. Notes (Subord.) 9.625 2005 2,000,000 1,795,000
Service Merchandise Co. Sr. Deb. (Subord.) 9.000 2004 2,000,000 1,690,000
Southland Corp. 1st Priority Sr. Deb.
(Subord.) 5.000 2003 3,000,000 2,310,000
- ---------------------------------------------------------------------------------------------------------------------------
13,181,625
- ---------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (0.5%)
Ampex Corp. (Eff. Yield 10.125%)(d) Disc. Conv. Bonds,
Series C 0.000 1997 958,000 1,331,620
- ---------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (5.0%)
Adelphia Communications Corp. Sr. Notes 12.500 2002 1,400,000 1,442,000
Bell Cablemedia PLC (Eff. Yield 10.67%)(d) Sr. Disc. Notes 0.000 2004 2,000,000 1,330,000
Cablevision Systems Corp. Sr. Deb. (Subord.) 9.875 2013 2,000,000 2,180,000
Centennial Cellular Corp. Sr. Notes 10.125 2005 500,000 501,875
Continental Cablevision, Inc. Sr. Deb. 9.500 2013 2,525,000 2,651,250
Pagemart, Inc. (Eff. Yield 12.25%)(d) Sr. Disc. Notes 0.000 2003 2,900,000 1,885,000
Paging Network, Inc. Sr. Notes (Subord.) 10.125 2007 1,000,000 1,020,000
Rogers Cablesystems Ltd. Sr. Notes 10.000 2005 3,000,000 3,142,500
- ---------------------------------------------------------------------------------------------------------------------------
14,152,625
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION (1.2%)
Eletson Holdings, Inc. 1st Mtge. Notes 9.250 2003 2,000,000 1,920,000
Viking Star Shipping, Inc. Notes 9.625 2003 1,500,000 1,530,000
- ---------------------------------------------------------------------------------------------------------------------------
3,450,000
- ---------------------------------------------------------------------------------------------------------------------------
(continued on next page)
See Notes to Schedule of Investments.
11
<PAGE>

<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES (0.6%)
Consolidated Hydro, Inc.
(Eff. Yield 14.76%)(6/15/93-
$2,208,791)(b)(d) Sr. Disc. Notes 0.000% 2003 $ 3,100,000 $ 1,720,500
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$117,249,685) 114,010,208
- ---------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES (1.8%)
FNMA # 124289, Cap. 13.431%, Margin
2.00% + CMT (Cost $5,139,575) 7.632 2021 4,967,570 5,095,634
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) (27.3%)
Argentina Republic Unsecd. Deb. 8.375 2003 3,250,000 2,478,125
Brazil (Republic of) Secd. Bonds
("Brady" par Bonds) 4.000 2024 20,000,000 8,725,000
Celulose Nipo Brasileiras Unsecd. Deb. 9.375 2003 3,750,000 3,496,875
Fomento Economico Mexico, S.A. Unsecd. Deb. 9.500 1997 2,000,000 1,955,000
Grupo Televisa, S. A. de C.V. Unsecd. Med.
Term Notes 10.000 1997 3,000,000 2,925,000
Indah Kiat International Finance Co. Gtd. Sr. Secd. Notes 11.375 1999 2,000,000 2,020,000
Indah Kiat International Finance Co. Gtd. Sr. Secd. Notes 11.875 2002 3,000,000 3,030,000
Ispat Mexicana S. A. Sr. Unsecd. Deb. 10.375 2001 2,000,000 1,750,000
Klabin Fabricadora Papel Unsecd. Deb. 11.000 1998 2,000,000 1,980,000
Klabin Fabricadora Papel Unsecd. Deb. 10.000 2001 5,000,000 4,550,000
Metalurgica Gerdau, S.A. Unsecd. Deb. 10.250 2001 660,000 620,400
Telecom Argentina Unsecd. Deb. 8.375 2000 9,000,000 8,100,000
Telecom Argentina (e) Unsecd. Deb. 8.375 2000 1,440,000 1,310,400
Telecomunicacoes Brasileiras S. A. Unsecd. Deb. 10.000 1997 13,892,000 13,913,815
Telecomunicacoes Brasileiras S. A. Unsecd. Deb. 10.375 1997 800,000 809,000
Telefonica de Argentina Unsecd. Deb. 8.375 2000 7,400,000 6,660,000
Telefonica de Argentina Unsecd. Deb. 11.875 2004 6,000,000 5,970,000
Vencemos Financing Unsecd. Deb. 9.250 1996 1,900,000 1,738,500
Yacimientos Petroliferos Fiscales S. A.
(YPF) Unsecd. Notes 8.000 2004 5,400,000 4,698,324
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$79,911,392) 76,730,439
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (NON U.S. DOLLARS) (8.0%)
Denmark (Kingdom of) Deb. 8.000 2003 49,000,000 8,997,958
Danish Krone
France (Government of) Sr. Unsecd. Notes 7.500 2005 37,000,000 7,772,201
French Franc
Sweden (Kingdom of) Deb. 10.250 2003 41,000,000 5,797,342
Swedish Krona
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (Cost--$21,755,460) 22,567,501
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
12
<PAGE>

<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (16.9%)
U.S. Treasury Bonds 7.875% 2021 $9,600,000 $ 10,656,000
U.S. Treasury Bonds 7.625 2025 1,000,000 1,096,720
U.S. Treasury Notes 8.250 1998 6,600,000 6,986,694
U.S. Treasury Notes 7.875 2004 5,925,000 6,495,281
U.S. Treasury Notes 6.500 2005 1,000,000 1,004,530
U.S. Treasury Notes 5.875 2000 500,000 493,670
U.S. Treasury Notes 8.875 1997 6,925,000 7,350,264
U.S. Treasury Notes (g) 8.875 1998 8,000,000 8,654,960
U.S. Treasury Notes 8.750 2000 4,250,000 4,713,505
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$46,343,477) 47,451,624
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$270,399,589) 265,855,406
- ---------------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS/WARRANTS (2.6%)
Ampex Corp.(a) 589 2,558
Ampex Corp., Class A (a) 19,247 81,800
Ampex Corp., Class C (a) 318,648 1,354,254
Ampex Corp., wts. (a) 90,665 385,326
Chatwins Group, Inc., wts. (a) 1,250 625
CHC Helicopter Corp., wts. (a) 2,400 2,400
Cookies USA, Inc., wts. (a) 360 14,400
Dial Page, Inc., wts. (a) 4,820 9,640
Dimac Corp. (a) 17,833 283,099
Finlay Enterprises, Inc. (a) 667 10,339
Grand Palais Casinos, Inc., Ltd. Liab. Int. (8/15/94-$-0-) (a)(b) 160,136 1,602
Grand Palais Casinos, Inc., wts. (8/15/94-$57) (a)(b) 87,342 660,306
Grand Palais Casinos, Inc., Series A, wts. (8/15/94-$727) (a)(b) 72,794 550,324
Grand Palais Casinos, Inc., Series B, wts. (8/15/94-$397) (a)(b) 39,706 300,177
Grand Palais Casinos, Inc., Series C, wts. (8/15/94-$3,507) (a)(b) 350,735 3,508
HDA Management Corp., wts. (a) 1,750 9,275
Hemmeter Enterprises, Inc., wts. (12/15/93-$0-) (a)(b) 87,342 88
Hemmeter Enterprises, Inc., wts. (12/22/93-$225,000) (a)(b) 98,568 99
Lanesborough Corp. (a) 790 8
Pagemart, Inc., wts. (a) 13,340 80,040
Specialty Equipment Cos., Inc. (a) 265,800 3,372,338
Transdigm Inc., wts. (a) 9,973 99,730
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/WARRANTS (Cost--$2,155,681) 7,221,936
- ---------------------------------------------------------------------------------------------------------------------------
(continued on next page)
See Notes to Schedule of Investments.

13
<PAGE>

<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREFERRED STOCKS (0.4%)
Ampex Corp. (11/20/92-$2,106,054) (a)(b) $ 2,156 $ 970,200
US Africa Airways (6/2/94-$2,500,000) (a)(b) 2,500 3
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (Cost--$4,606,054) 970,203
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (1.0%)
U.S. GOVERNMENT (AND AGENCY) ISSUES (0.4%)
U.S. Treasury Bills 1995 1,255,000 1,240,040
- ---------------------------------------------------------------------------------------------------------------------------
Maturity
Value
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.6%)
Keystone Joint Repurchase Agreement (Investments in repurchase
agreements, in a joint trading account, dated 7/31/95)(f) 5.830 08/01/95 $1,740,282 1,740,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT TERM INVESTMENTS (Cost--$2,980,059) 2,980,040
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$280,141,383)(h) 277,027,585
OTHER ASSETS AND LIABILITIES--NET (1.5%) 4,254,555
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $281,282,140
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTES TO SCHEDULE OF INVESTMENTS

(a) Non-income producing security.

(b) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933) and are valued using market quotations where
available. In the absence of such quotations, these securities are valued at
fair value in the opinion of management--in the case of bonds, at estimated
value considering quality, coupon, term, call feature, yield to maturity of
the security and similar issues which are actively traded, sinking fund,
marketability, plus adjustment, if any, for equity features or other special
factors. The Fund may make investments in an amount up to 15% of the value of
the Fund's net assets in such securities. The date of acquisition and cost
are set forth in parentheses after the title of each restricted security. On
the date of acquisition there was no market quotation or similar securities
and the above securities were valued at acquisition costs. At July 31, 1995,
the fair value of these restricted securities was $14,586,017 (5.00% of net
assets). The Fund will not pay the costs of disposition of the above
restricted securities other than ordinary brokerage fees, if any.

(c) Securities which have defaulted on payment of interest and/or
principal. The Fund has ceased accruing income on these securities.

(d) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.

(e) Securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.

(f) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at July 31, 1995.

(g) $2,275,000 principal amount of this security is used as collateral for
a reverse repurchase agreement at July 31, 1995.

(h) The cost of investments for federal income tax purposes is
$280,708,880. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at July 31, 1995 are as follows:

Gross unrealized appreciation $ 9,785,923
Gross unrealized depreciation (13,467,218)
------------
Net unrealized depreciation ($ 3,681,295)
============

Legend of Portfolio Abbreviations:
FNMA--Federal National Mortgage Association

See Notes to Financial Statements.

14
<PAGE>

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

<TABLE>
<CAPTION>
Year Ended July 31,
1995 1994(d) 1993 1992 1991
=============================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value beginning
of period $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17
- ---------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.64 0.61 0.69 0.78 0.89
Net gain (loss) on
investments, closed
futures contracts and
foreign currency related
transactions (0.45) (0.44) 0.89 0.89 (1.01)
- ---------------------------------------------------------------------------------------------
Total from investment
operations 0.19 0.17 1.58 1.67 (0.12)
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.61) (0.72) (0.75) (0.89)
In excess of net investment
income (0.03) (0.03) (0.02) 0 (0.06)
Tax basis return of capital (0.02) (0.04) 0 0 0
Net realized gains 0 0 0 0 0
- ---------------------------------------------------------------------------------------------
Total distributions (0.65) (0.68) (0.74) (0.75) (0.95)
- ---------------------------------------------------------------------------------------------
Net asset value end of
period $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10
=============================================================================================
Total return(a) 3.00% 1.86% 24.13% 28.73% 0.54%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(b) 1.33% 1.32% 1.80% 2.09% 2.00%
Net investment income 9.31% 7.79% 9.50% 11.73% 15.23%
Portfolio turnover rate 95% 92% 151% 95% 82%
- ---------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $85,970 $105,181 $85,793 $70,459 $70,246
=============================================================================================

<CAPTION>
February 13, 1987
(Commencement of
Year Ended July 31, Operations) to
1990 1989 1988 July 31, 1987
=============================================================================================
<S> <C> <C> <C>
Net asset value beginning
of period $ 9.02 $ 9.36 $ 10.04 $10.00
- ---------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 1.03 1.10 1.05 0.22
Net gain (loss) on
investments, closed
futures contracts and
foreign currency related
transactions (1.79) (0.31) (0.65) 0.00
- ---------------------------------------------------------------------------------------------
Total from investment
operations (0.76) 0.79 0.40 0.22
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (1.04) (1.11) (1.08) (0.18)
In excess of net investment
income (0.05) 0 0 0
Tax basis return of capital 0 0 0 0
Net realized gains 0 (0.02) 0 0
- ---------------------------------------------------------------------------------------------
Total distributions (1.09) (1.13) (1.08) (0.18)
- ---------------------------------------------------------------------------------------------
Net asset value end of
period $ 7.17 $9.02 $ 9.36 $10.04
=============================================================================================
Total return(a) (8.55%) 9.00% 4.49% 2.20%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(b) 2.00% 1.81% 1.28% 1.00%(c)
Net investment income 12.91% 12.06% 10.98% 10.12%(c)
Portfolio turnover rate 36% 73% 46% 13%
- ---------------------------------------------------------------------------------------------
Net assets end of period
(thousands) $83,106 $138,499 $114,310 $ 8,191
=============================================================================================
</TABLE>

(a) Excluding applicable sales charges.

(b) Figures are net of expense reimbursement by Keystone in connection with
voluntary expense limitations. The "Ratio of total expenses to average net
assets" would have been 2.12%, 2.25%, 2.01%, 1.90%, 2.08% and 6.08% for the
years ended July 31, 1992, 1991, 1990, 1989, 1988 and the period from April
14, 1987 (Commencement of Investment Operations) to July 31, 1987,
respectively.

(d) Calculation based on average shares outstanding.

See Notes to Financial Statements.

15
<PAGE>

FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering) to
1995 1994(c) July 31, 1993
<S> <C> <C> <C>
=============================================================================================
Net asset value beginning of period $ 7.38 $ 7.89 $ 7.07
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net Investment income 0.60 0.55 0.24
Net gain (loss) on investments, closed
futures contracts and foreign currency
related transactions (0.47) (0.44) 0.92
- ---------------------------------------------------------------------------------------------
Total from investment operations 0.13 0.11 1.16
- ---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.55) (0.55) (0.24)
In excess of net investment income (0.03) (0.03) (0.10)
Tax basis return of capital (0.01) (0.04) 0
- ---------------------------------------------------------------------------------------------
Total distributions (0.59) (0.62) (0.34)
- ---------------------------------------------------------------------------------------------
Net asset value end of period $ 6.92 $ 7.38 $ 7.89
=============================================================================================
Total return(a) 2.12% 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.06% 2.07% 2.37%(b)
Net investment income 8.58% 7.11% 7.18%(b)
Portfolio turnover rate 95% 92% 151%
- ---------------------------------------------------------------------------------------------
Net assets end of period (thousands) $149,091 $162,866 $35,415
=============================================================================================

</TABLE>

(a) Excluding applicable sales charges.

(b) Annualized.

See Notes to Financial Statements.

16
<PAGE>

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

<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended July 31, Public Offering) to
1995 1994(c) July 31, 1993
<S> <C> <C> <C>
==========================================================================================
Net asset value beginning of period $ 7.37 $ 7.88 $ 7.07
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.59 0.55 0.24
Net gain (loss) on investments, closed
futures contracts and foreign currency
related transactions (0.45) (0.44) 0.91
- ------------------------------------------------------------------------------------------
Total from investment operations 0.14 0.11 1.15
- ------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.55) (0.55) (0.24)
In excess of net investment income (0.03) (0.03) (0.10)
Tax basis return of capital (0.01) (0.04) 0
- ------------------------------------------------------------------------------------------
Total distributions (0.59) (0.62) (0.34)
- ------------------------------------------------------------------------------------------
Net asset value end of period $ 6.92 $ 7.37 $ 7.88
==========================================================================================
Total return(a) 2.27% 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.08% 2.07% 2.25%(b)
Net investment income 8.56% 7.09% 7.35%(b)
Portfolio turnover rate 95% 92% 151%
- ------------------------------------------------------------------------------------------
Net assets end of period (thousands) $46,221 $59,228 $19,706
==========================================================================================
</TABLE>
(a) Excluding applicable sales charges.

(b) Annualized.

See Notes to Financial Statements.

17
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1995

============================================================
Assets (Notes 1 and 7):
Investments at market value (identified
cost--$280,141,383) $277,027,585
Cash 2,335
Receivable for:
Investments sold 2,418,781
Fund shares sold 1,106,584
Interest 5,620,433
Forward foreign currency exchange
contracts 36,856,232
Prepaid expenses 7,247
Other assets 215,068
- ------------------------------------------------------------
Total assets 323,254,265
- ------------------------------------------------------------
Liabilities (Notes 1, 4 and 7):
Payable for:
Investments purchased 750,000
Reverse repurchase agreement 2,501,630
Fund shares redeemed 391,381
Income distribution 850,214
Forward foreign currency exchange
contracts 37,349,697
Due to related parties 35,429
Other accrued expenses 93,774
- ------------------------------------------------------------
Total liabilities 41,972,125
- ------------------------------------------------------------
Net assets $281,282,140
============================================================
Net assets represented by (Notes 1 and 7):
Paid-in capital $352,816,575
Accumulated distributions in excess of net
investment income (1,023,303)
Accumulated net realized gain (loss) on
investments, closed futures contracts and
foreign currency related transactions (66,912,635)
Net unrealized appreciation (depreciation)
on:
Investments (3,113,798)
Foreign currency related transactions (484,699)
- ------------------------------------------------------------
Total net assets $281,282,140
============================================================
Net Asset Value (Note 2):
Class A Shares
Net assets of $85,969,868/12,482,994
shares outstanding $6.89
Offering price per share
($6.89/0.9525)(based on a sales charge of
4.75% of the offering price July 31, 1995) $7.23
Class B Shares
Net assets of $149,090,949/21,533,256
shares outstanding $6.92
Class C Shares
Net assets of $46,221,323/6,683,142 shares
outstanding $6.92
============================================================

STATEMENT OF OPERATIONS
Year Ended July 31, 1995

==========================================================================
Investment income (Note 1):
Interest (net of foreign withholding taxes of $20,741) $ 31,125,349
Other income 140,543
- --------------------------------------------------------------------------
31,265,892
- --------------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fees $ 1,954,412
Transfer agent fees 783,249
Accounting, auditing and legal fees 107,763
Custodian fees 136,937
Printing 35,162
Trustees' fees and expenses 30,894
Distribution Plan expenses 2,225,309
Registration fees 116,594
Miscellaneous 19,322
- --------------------------------------------------------------------------
Total expenses 5,409,642
- --------------------------------------------------------------------------
Net investment income (Note 1) 25,856,250
- --------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments, closed futures contracts and
foreign currency related transactions
(Notes 1, 3 and 7):
Net realized gain (loss) on:
Investments (37,601,948)
Closed futures contracts (212,014)
Foreign currency related transactions (208,034)
- --------------------------------------------------------------------------
Net realized gain (loss) on investments,
closed futures contracts and foreign
currency related transactions (38,021,996)
- --------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments 17,538,640
Foreign currency related transactions (334,948)
- --------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments and foreign
currency related transactions 17,203,692
- --------------------------------------------------------------------------
Net gain (loss) on investments, closed
futures contracts and foreign currency
related transactions (20,818,304)
- --------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 5,037,946
==========================================================================
See Notes to Financial Statements.

18
<PAGE>

STATEMENTS OF CHANGES IN NET ASSETS
Year Ended July 31,
1995 1994
============================================================================
Operations:
Net investment income $ 25,856,250 $ 20,003,498
Net realized gain (loss) on investments,
closed futures contracts and foreign
currency related transactions (38,021,996) (2,647,174)
Net change in unrealized appreciation
(depreciation) 17,203,692 (22,719,049)
- ----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,037,946 (5,362,725)
- ----------------------------------------------------------------------------
Distributions to shareholders from (Notes 1
and 6):
Net investment income:
Class A Shares (8,015,693) (8,180,776)
Class B Shares (12,000,626) (8,336,957)
Class C Shares (3,983,775) (3,485,765)
In excess of net investment income:
Class A Shares (385,252) (297,073)
Class B Shares (576,777) (170,776)
Class C Shares (191,469) (111,966)
Tax basis return of capital:
Class A Shares (199,090) (557,304)
Class B Shares (298,065) (862,946)
Class C Shares (98,947) (313,820)
- ----------------------------------------------------------------------------
Total distributions to shareholders (25,749,694) (22,317,383)
- ----------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 10,254,533 56,687,657
Class B Shares 34,092,723 157,431,744
Class C Shares 12,856,402 59,770,321
Payment for shares redeemed:
Class A Shares (27,229,543) (33,988,212)
Class B Shares (44,185,075) (20,279,764)
Class C Shares (24,956,159) (17,427,275)
Net asset value of shares issued in
reinvestment of dividends and
distributions:
Class A Shares 4,322,219 4,552,241
Class B Shares 6,821,317 4,762,342
Class C Shares 2,742,673 2,531,228
- ----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share
transactions (25,280,910) 214,040,282
- ----------------------------------------------------------------------------
Total increase (decrease) in net assets (45,992,658) 186,360,174
- ----------------------------------------------------------------------------
Net assets:
Beginning of year 327,274,798 140,914,624
End of year [including accumulated
distributions in excess of net investment
income as follows: July 1995--($1,023,303)
and July 1994--($1,089,927)](Note 1) $281,282,140 $327,274,798
============================================================================
See Notes to Financial Statements.

19
<PAGE>

NOTES TO FINANCIAL STATEMENTS

(1.) Significant Accounting Policies

Keystone Strategic Income Fund (formerly Keystone America Strategic Income
Fund) (the "Fund") is a Massachusetts business trust for which Keystone
Management, Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc. ("Keystone") is
the Investment Adviser. The Fund was organized on October 24, 1986 and had no
operations prior to February 13, 1987. It is registered under the Investment
Company Act of 1940 as a diversified open-end investment company.

The Fund currently offers three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge which
varies depending on when shares were purchased and how long they have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year after purchase, and available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company ("KIDC") (formerly Keystone
Distributors, Inc.), the Fund's principal underwriter.

Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") formerly Keystone Group, Inc., a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former management of Keystone and its affiliates. KMI is a wholly-owned
subsidiary of Keystone. Keystone Investor Resource Center, Inc. ("KIRC") a
wholly-owned subsidiary of Keystone, is the Fund's transfer agent.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.

A. Investments are usually valued at the closing sales price, or in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair: (a) securities (including restricted
securities) for which complete quotations are not readily available and (b)
listed securities if, in the opinion of management, the last sales price does
not reflect a current value, or if no sale occurred. Market quotations are
not considered to be readily available for long-term bonds and notes; such
investments are stated at fair value on the basis of valuations furnished by
a pricing service, approved by the Board of Trustees, which determines
valuations for normal, institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. Short-term investments which are purchased with
maturities of sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount) which when combined with accrued interest approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased which
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount) which when combined with accrued interest approximates
market.

The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures contract
is an agreement between two parties to buy and sell a spe-

20
<PAGE>

cific amount of a commodity, security, financial instrument, or, in the case
of stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income. In addition
to market risk, the Fund is subject to the credit risk that the other party
will not complete the obligations of the contract.

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

C. The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of l986, as amended
("Internal Revenue Code"). Thus, the Fund expects to be relieved of any
federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.

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

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

21
<PAGE>

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

F. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income are determined in
accordance with income tax regulations. Distributions from taxable net
investment income and net capital gains can exceed book basis net investment
income and net capital gains.

The significant differences between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
are due to the deferral of losses for income tax purposes that have been
recognized for financial statement purposes, and differences in the treatment
of certain foreign currency gains and losses.

G. The Fund enters into reverse repurchase agreements with qualified
third-party broker-dealers as determined by and under the direction of the
Fund's Board of Trustees. Interest on the value of reverse repurchase
agreements issued and outstanding is based upon competitive market rates at
the time of issuance. At the time the Fund enters into a reverse repurchased
agreement, it will establish and maintain a segregated account with the
lender containing securities having a value not less than the repurchase
price (including accrued interest). If the counterparty to the transaction is
rendered insolvent, the ultimate realization of the securities to be
repurchased by the Fund may be delayed of limited.

The average daily balance of reverse repurchase agreements outstanding during
the year ended July 31, 1995 was approximately $2,137,500, or $0.05 per share
based on average shares outstanding during the year at a weighted average
interest rate of 6.14%. The maximum amount of borrowings outstanding at any
week-end during the year was $5,003,056 (including accrued interest), at a
weighted average interest rate of 5.57%, and was 1.63% of total assets. The
rate on the July 31, 1995 borrowing was 5.95% and matures on August 1, 1995.

(2) Capital Share Transactions

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

Class A Shares
- -----------------------------------------------------------------------
Year Ended July 31,
1995 1994
- -----------------------------------------------------------------------
Shares sold 1,476,748 7,102,946
Shares redeemed (3,933,229) (4,281,723)
Shares issued in reinvestment of dividends
and distributions 630,245 576,905
- -----------------------------------------------------------------------
Net increase (decrease) (1,826,236) 3,398,128
=======================================================================

22
<PAGE>

Class B Shares
- -----------------------------------------------------------------------
Year Ended July 31,
1995 1994
- -----------------------------------------------------------------------
Shares sold 4,868,980 19,549,754
Shares redeemed (6,393,919) (2,576,838)
Shares issued in reinvestment of dividends
and distributions 989,682 606,379
- -----------------------------------------------------------------------
Net increase (decrease) (535,257) 17,579,295
=======================================================================

Class C Shares
- -----------------------------------------------------------------------
Year Ended July 31,
1995 1994
- -----------------------------------------------------------------------
Shares sold 1,847,558 7,433,632
Shares redeemed (3,594,976) (2,223,361)
Shares issued in reinvestment of dividends
and distributions 397,992 321,340
- -----------------------------------------------------------------------
Net increase (decrease) (1,349,426) 5,531,611
=======================================================================

The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940
Act").

The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of 0.25% of the
average net asset value of Class A shares maintained by the such others
outstanding on the Fund's books for specified periods.

The Class B Distribution Plan provides for payment at an annual rate of
1.00% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by the Fund under the
Class B Distribution Plan are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 4.00% of the price paid
for each Class B share sold plus the first year's service fee in advance in
the amount of 0.25% of the price paid for each Class B share sold. Beginning
approximately 12 months after the purchase of a Class B share, the dealer or
other party will receive service fees at an annual rate of 0.25% of the
average daily net asset value of such Class B shares maintained by such
others outstanding on the Fund's books for specified periods. A contingent
deferred sales charge will be imposed, if applicable, on Class B shares
purchased after June 1, 1995 at rates ranging from a maximum of 5.00% of
amounts redeemed during the first twelve months following the date of
purchase to 1.00% of amounts redeemed during the sixth twelve month period
following the date of purchase. Class B shares purchased on or after June 1,
1995 that have been outstanding for eight years following the month of
purchase will automatically convert to Class A shares without a front end
sales charge or exchange fee. Class B shares purchased prior to June 1, 1995
will retain their existing conversion rights.

The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to .75% of the
price paid for each share sold plus the first year's service fee in advance
in the amount of 0.25% of the price paid

23
<PAGE>

for each Class C share. Beginning approximately 15 months after purchase, the
dealer or other party will receive a commission at an annual rate of 0.75%
(subject to applicable limitations imposed by the rules of National
Association of Securities Dealers, Inc. ("NASD rule") plus service fees at an
annual rate of 0.25%, respectively, of the average daily net asset value of
each Class C shares maintained by such others outstanding on the Fund's books
for specified periods.

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

During the year ended July 31, 1995, the Fund paid or accrued to KIDC
$228,520, $1,490,077 and $506,712 for Class A, Class B and Class C
Distribution Plans, respectively. These amounts represent 0.25%, 0.98% and
1.00%, respectively, of the net asset value of Class A, Class B and Class C
at July 31, 1995. Under the NASD Rule, the maximum uncollected amounts for
which KIDC may seek payment from the Fund under its Distribution Plans are
$11,098,815 and $4,539,048 or 7.44% and 9.82% of net assets for Classes B and
C, respectively, as of July 31, 1995.

(3.) Securities Transactions

As of July 31, 1995, the Fund had a capital loss carryover for federal
income tax purposes of approximately $30,845,000 which expires as follows:
1998--$1,843,000, 1999--$11,547,000, 2000--$12,167,000 and 2002--$5,288,000.
For the year ended July 31, 1995, purchases and sales of investment
securities (including proceeds received at maturity) were as follows:

Cost of Proceeds
Purchases from Sales
===========================================================
Portfolio securities $ 270,706,365 $ 289,938,510
Short-term investments 1,462,350,162 1,470,029,162
- -----------------------------------------------------------
$1,733,056,527 $1,759,967,672
===========================================================

(4.) Investment Management and Transactions with Affiliates

Under the terms of the Investment Management Agreement between KMI and the
Fund, dated December 29, 1989, KMI provides investment management and
administrative services to the Fund. In return, KMI is paid a management fee
computed and payable daily at a rate of 2.0% of the Fund's gross investment
income plus an amount determined by applying percentage rates, which start at
0.50% and decline, as net assets increase, to 0.25% to the net asset value of
the Fund. KMI has entered into an Investment Advisory Agreement with Keystone,
dated December 30, 1989, under which Keystone provides investment advisory and
management services to the Fund and receives for its services an annual fee
representing 85% of the management fee received by KMI. During the year ended
July 31, 1995, the Fund paid or accrued to KMI investment management and
administrative services fees of $1,954,412 which represented 0.66% of the Fund's
average net assets. Of such amount paid to KMI, $1,661,250 was paid to Keystone
for its services to the Fund.

During the year ended July 31, 1995 the Fund paid or accrued to KIRC
$783,249 for transfer agent services and $17,770 to KII as reimbursement for
certain accounting services.

Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees received
no compensation directly from the Fund.

24
<PAGE>

(5.) Class Level Expenses

Presently, the Fund's class-specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.
For the year ended July 31, 1995, the total amount of expenses incurred by
each class' Distribution Plan is set forth in Note (2.) "Capital Share
Transactions."

(6.) Distributions to Shareholders

Distributions of $0.049 per share for Class A, $0.045 for Class B, and
$0.045 for Class C from net investment income were declared payable on
September 26, 1995 to shareholders of record September 25, 1995. These
distributions are not reflected in the accompanying financial statements.

The Fund intends to distribute to its shareholders dividends from net
investment income monthly and all net realized long-term capital gains, if
any, annually. Any taxable distribution which is declared in December and
paid before the next February 1 will be taxable to shareholders in the year
declared.

(7.) Forward Foreign Currency Exchange Contracts

At July 31, 1995, the Fund had entered into the following foreign currency
exchange contracts which obligate the Fund to receive or deliver currencies
at specified future dates. The unrealized depreciation of $493,465 on these
contracts is included in the accompanying financial statements. The terms of
these contracts are as follows:

Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered as of 7/31/95 be received as of 7/31/95
- ----------------------------------------------------------------------------
8/03/95 9,961,200 $ 2,078,850 2,000,000 $2,000,000
Fr Franc U.S. $
8/23/95 2,705,052 2,705,052 3,812,080 2,813,017
U.S. $ Aust. $
8/23/95 3,812,080 2,813,017 2,715,344 2,715,344
Aust. $ U.S. $
8/23/95 2,889,060 2,889,060 15,634,150 2,900,613
U.S. $ Danish Krone
8/23/95 15,634,150 2,900,613 2,765,491 2,765,491
Danish Krone U.S. $
8/23/95 2,522,704 2,522,704 12,500,000 2,607,999
U.S. $ Fr. Franc
8/23/95 346,569 346,569 1,664,500 347,281
U.S $ Fr. Franc
8/23/95 14,164,500 2,955,281 2,761,003 2,761,003
Fr. Franc U.S $
8/23/95 2,868,326 2,868,326 20,408,143 2,882,091
U.S. $ Swedish Krona

25
<PAGE>

Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered as of 7/31/95 be received as of 7/31/95
- ----------------------------------------------------------------------------
8/23/95 20,408,143 2,882,091 2,743,768 2,743,768
Swedish
Krona U.S. $
10/12/95 4,542,905 4,542,905 24,563,485 4,553,819
U.S $ Danish Krone
10/12/95 15,708,048 2,912,111 2,868,264 2,868,264
Danish Krone U.S. $
10/12/95 8,855,438 1,641,707 1,625,000 1,625,000
Danish Krone U.S. $
10/12/95 1,643,869 1,643,869 7,899,450 1,647,542
U.S.$ Fr. Franc
10/12/95 7,899,450 1,647,542 1,625,000 1,625,000
Fr. Franc U.S. $
- ----------------------------------------------------------------------------
$37,349,697 $36,856,232
============================================================================

FEDERAL TAX STATUS--FISCAL 1995 DISTRIBUTIONS (Unaudited)

The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:

Class A Shares Class B Shares Class C Shares
Income Return of Income Return of Income Return of
Dividends Capital Dividends Capital Dividends Capital
$0.63 $0.02 $0.58 $0.01 $0.58 $0.01

In January 1996 complete information on calendar year 1995 distributions will
be forwarded to you to assist in completing your 1995 federal income tax
return.

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Keystone Strategic Income Fund

INDEPENDENT AUDITORS' REPORT

The Trustees and Shareholders
Keystone Strategic Income Fund

We have audited the accompanying statement of assets and liabilities of
Keystone Strategic Income Fund (formerly Keystone America Strategic Income
Fund), including the schedule of investments, as of July 31, 1995, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the eight-year
period ended July 31, 1995 and the period from February 13, 1987
(commencement of operations) to July 31, 1987 for Class A shares and for each
of the years in the two year period ended July 31, 1995 and the period from
February 1, 1993 to July 31, 1993 for Class B and Class C shares. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1995 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Keystone Strategic Income Fund as of July 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Boston, Massachusetts
September 1, 1995