KEYSTONE AMERICA STRATEGIC INCOME FUND, 497, 1995-03-28

KEYSTONE AMERICA STRATEGIC INCOME FUND
497, 1995-03-28

Previous: CASH AMERICA INTERNATIONAL INC, DEF 14A, 1995-03-28

Next: KEYSTONE AMERICA GOVERNMENT SECURITIES FUND, 497, 1995-03-28

<PAGE>
KEYSTONE AMERICA STRATEGIC INCOME FUND
PROSPECTUS NOVEMBER 30, 1994

Keystone America Strategic Income Fund
(formerly Keystone America High Yield Bond 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. The Fund's net
asset value per share fluctuates in response to changes in the market value of
its portfolio securities.

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 information about securities
ratings, is contained in a statement of additional information dated November
30, 1994, 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.

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

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.

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 DEFAULT RISKS, 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 7; "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>
TABLE OF CONTENTS
Page
Fee Table ....................................................... 3
Financial Highlights ............................................ 4
The Fund ........................................................ 7
Investment Objectives and Policies .............................. 7
Risk Factors .................................................... 8
Investment Restrictions ......................................... 12
Pricing Shares .................................................. 13
Dividends and Taxes ............................................. 14
Fund Management and Expenses .................................... 14
How to Buy Shares ............................................... 17
Alternative Sales Options ....................................... 17
Calculation of Contingent Deferred Sales Charges and
Waiver of Sales Charges......................................... 20
Distribution Plans .............................................. 21
How to Redeem Shares ............................................ 22
Shareholder Services ............................................ 24
Performance Data ................................................ 26
Fund Shares ..................................................... 26
Additional Information .......................................... 27
Additional Investment Information ............................... (i)
Exhibit A ....................................................... A-1

<PAGE>
FEE TABLE
KEYSTONE AMERICA 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"; "Calculation of 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<F1> OPTION<F2>
SHAREHOLDER TRANSACTION EXPENSES
--------- --------- ---------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 3.00% 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 fourth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> .................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(as a percentage of average net assets)
Management Fees ................................... 0.64% 0.64% 0.64%
12b-1 Fees ........................................ 0.25% 1.00%<F7> 1.00%<F7>
Other Expenses .................................... 0.43% 0.43% 0.43%
---- ---- ----
Total Fund Operating Expenses ..................... 1.32% 2.07% 2.07%
==== ==== ====
<CAPTION>
EXAMPLES<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 $ 87.00 $116.00 $199.00
Class B ................................................................... $51.00 $ 85.00 $111.00 N/A
Class C ................................................................... $31.00 $ 65.00 $111.00 $240.00
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A ................................................................... $60.00 $ 87.00 $116.00 $199.00
Class B ................................................................... $21.00 $ 65.00 $111.00 N/A
Class C ................................................................... $21.00 $ 65.00 $111.00 $240.00
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 convert tax free to Class A shares after seven calendar
years.

<F2> Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Distributors, Inc., 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 are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge of 0.25%. See the "Calculation of Contingent Deferred Sales
Charges and Waiver of Sales Charges" section of this prospectus for an
explanation of the charge.

<F5> There is no exchange fee for exchange orders received by the Fund 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, 1994.

<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%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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
YEAR ENDED JULY 31, (COMMENCEMENT OF
------------------------------------------------------------------------------------------------- OPERATIONS) TO
1994<F5> 1993 1992 1991 1990 1989 1988 JULY 31, 1987
------------ ----------- ----------- ----------- ----------- ------------ ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value
beginning
of period.. $ 7.860 $ 7.020 $ 6.100 $ 7.170 $ 9.020 $ 9.360 $ 10.040 $10.000
-------- ------- ------- ------- ------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment
income --
net ....... 0.614 0.690 0.782 0.887 1.027 1.100 1.050 0.220
Net gains
(losses) on
securities.. (0.446) 0.894 0.885 (1.006) (1.789) (0.310) (0.650) - 0 -
-------- ------- ------- ------- ------- -------- -------- -------
Total
income
(loss)
from
investment
operations.. 0.168 1.584 1.667 (0.119) (0.762) 0.790 0.400 0.220
-------- ------- ------- ------- ------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends
from
investment
income net.. (0.614) (0.724) (0.747) (0.887) (1.038) (1.110) (1.080) (0.180)
Distributions
in excess of
investment
income
-- net<F4>.. (0.025) (0.020) - 0 - (0.064) (0.050) - 0 - - 0 - - 0 -
Tax basis
return of
capital .... (0.039) - 0 - - 0 - - 0 - - 0 - - 0 - - 0 - - 0 -
Distributions
from capital
gains -- net.. - 0 - - 0 - - 0 - - 0 - - 0 - (0.020) - 0 - - 0 -
-------- ------- ------- ------- ------- -------- -------- -------
Total
distributions.. (0.678) (0.744) (0.747) (0.951) (1.088) (1.130) (1.080) (0.180)
-------- ------- ------- ------- ------- -------- -------- -------
Net asset
value end
of period... $ 7.350 $ 7.860 $ 7.020 $ 6.100 $ 7.170 $ 9.020 $ 9.360 $10.040
======== ======= ======= ======= ======= ======== ======== =======
TOTAL
RETURN<F1>... 1.86% 24.13% 28.73% 0.54% (8.55%) 9.00% 4.49% 2.20%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating
and
management
expenses<F2>..1.32% 1.80% 2.09% 2.00% 2.00% 1.81% 1.28% 1.00%<F3>
Investment
income
-- net ... 7.79% 9.50% 11.73% 15.23% 12.91% 12.06% 10.98% 10.12%<F3>
Portfolio
turnover
rate........ 92% 151% 95% 82% 36% 73% 46% 13%
Net assets
end of
period
(thousands)..$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 operating and management
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 April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
<F4> Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net investment
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." For fiscal years
ended July 31, 1993, 1992, 1991 and 1990, respectively, distributions in
excess of book basis net income were charged to paid-in capital.
<F5> Calculation based on average shares outstanding.
</TABLE>

<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA STRATEGIC INCOME FUND -- CLASS B 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
JULY 31, 1994<F4> JULY 31, 1993
---------------- -------------------
<S> <C> <C>
Net asset value beginning of period ............ $ 7.890 $ 7.070
-------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income -- net ....................... 0.550 0.240
Net gains (losses) on securities ............... (0.442) 0.919
-------- -------
Total income from investment operations ........ 0.108 1.159
-------- -------
LESS DISTRIBUTIONS
Dividends from investment income -- net ....... (0.550) (0.240)
Distributions in excess of investment income --
net<F2> ...................................... (0.029) (0.099)
Tax basis return of capital .................... (0.039) - 0 -
-------- -------
Total distributions ............................ (0.618) (0.339)
-------- -------
Net asset value end of period .................. $ 7.380 $ 7.890
-------- -------
TOTAL RETURN<F1> ............................... 1.10% 16.75%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating and management expense ............. 2.07% 2.37%<F3>
Investment income -- net ..................... 7.11% 7.18%<F3>
Portfolio turnover rate ........................ 92% 151%
Net assets end of period (thousands) ........... $162,866 $35,415
======== =======
<FN>
- --------
<F1> Excluding applicable sales charges.
<F2> Effective August 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net investment
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." For the period
February 1, 1993 (Date of Initial Public Offering) to July 31, 1993,
distributions in excess of book basis net income were charged to paid-in
capital.
<F3> Annualized.
<F4> Calculation based on average shares outstanding.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA STRATEGIC INCOME FUND -- CLASS C 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
JULY 31, 1994<F4> JULY 31, 1993
----------------- -------------------
<S> <C> <C>
Net asset value beginning of period ............ $ 7.880 $ 7.070
-------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income -- net ....................... 0.550 0.244
Net gains (losses) on securities ............... (0.442) 0.905
-------- -------
Total income from investment operations ........ 0.108 1.149
-------- -------
LESS DISTRIBUTIONS
Dividends from investment income -- net ....... (0.550) (0.244)
Distributions in excess of investment income --
net<F2> ...................................... (0.029) (0.095)
Tax basis return of capital .................... (0.039) - 0 -
-------- -------
Total distributions ............................ (0.618) (0.339)
-------- -------
Net asset value end of period .................. $ 7.370 $ 7.880
-------- -------
TOTAL RETURN<F1> ............................... 1.09% 16.61%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating and management expense ............. 2.07% 2.25%<F3>
Investment income -- net ..................... 7.09% 7.35%<F3>
Portfolio turnover rate ........................ 92% 151%
Net assets end of period (thousands) ........... $59,228 $19,706
======= =======
<FN>
- -------
<F1> Excluding applicable sales charges.
<F2> Effective August 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net investment
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income -- net." For the period
February 1, 1993 (Date of Initial Public Offering) to July 31, 1993,
distributions in excess of book basis net income were charged to paid-in
capital.
<F3> Annualized.
<F4> Calculation based on average shares outstanding.
</TABLE>
<PAGE>
THE FUND
The 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-one funds managed or advised by 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
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 generous income sought by the Fund is ordinarily associated with high
yield, high risk bonds and similar securities in the lower rating categories of
the recognized rating agencies or with securities that are unrated. Such bonds
generally involve greater volatility of price and risk of principal and income
than bonds in the higher rating categories and are, on balance, considered
predominantly speculative.

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.

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 the
section of this prospectus entitled "Additional Investment Information" and the
statement of additional information.

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.

RISK FACTORS
Investing in the Fund involves the risk inherent to investing in any security,
i.e., net asset value will fluctuate in response to changes in economic
conditions, interest rates and the market's perception of the Fund's underlying
securities.

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.

The Fund seeks to maximize investment return over time from a combination of
many factors, including high current income and capital appreciation from high
yielding, high risk bonds and other similar securities commonly known as "junk
bonds." Realizing this objective involves risks that are greater than the risks
of investing in higher quality debt securities and may result in greater upward
and downward movement of the net asset value per share of the Fund. As a result,
such risks should be carefully considered by investors. These risks, discussed
in greater detail below, include risks from interest rate fluctuations; changes
in credit status, including weaker overall credit condition of issuers and risks
of default; industry, market and economic risk; volatility of price resulting
from broad and rapid changes in the value of underlying securities; and greater
price variability and credit risks of certain high yield, high risk securities
such as zero coupon bonds and PIKs.

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 Keystone'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.
*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ------ ------------- -------------
AAA 2.18% 0.00%
AA 1.51% 0.00%
A 1.27% 0.00%
BBB 0.00% 1.44%
BB 15.96% 3.25%
B 34.36% 17.34%
CCC 4.18% 1.95%
CC 0.00% 0.00%
CA 0.00% 0.00%
Unrated* 23.98% 0.00%
U.S. Governments,
equities and
others 16.56%
------
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,
consficatory 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.

FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objective of the Fund is fundamental and may not be changed
without the vote of a majority of the Fund's outstanding 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).

Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.

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

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;

(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;

(6) 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; and

(7) 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.

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.

As a matter of practice, the Fund treats reverse repurchase agreements as
borrowings for purposes of compliance with the limitations of 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 second investment
restriction enumerated above.

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 may not (1) write, purchase or sell puts, calls or
combinations thereof, except that, in connection with the purchase of debt
securities, it may acquire warrants or other rights to subscribe for securities
of issuers or securities of parents or subsidiaries of such issuers (warrants)
and that it may write covered put and call options and purchase put and call
options, "stand-by commitments" and master demand notes; provided that no more
than 5% of its total assets may be invested in warrants (for the purpose of this
restriction, warrants acquired by the Fund in units or attached to securities
may be deemed to be without value); and (2) invest in interests in oil, gas or
other mineral exploration or other development programs, except publicly traded
securities of companies engaging in such activities.

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 put and call options 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 put and call options 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 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.

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; in any case reflecting fair value as determined by the
Fund's Board of Trustees. 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 such distributions would
be (1) declared in October, November, or December to shareholders of record in
such month, (2) paid by the following January 31, and (3) includable in the
taxable income of the shareholders for 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. 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.

The Fund makes distributions in shares or, at the shareholder's option, in
cash. Such distributions may be reinvested at net asset value without any sales
charge. 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 Group of Mutual 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; (3)
providing services to the Fund's shareholders in connection with federal and
state taxation and distributions of income and capital gains; and (4) storing
documents relating to the Fund's activities.

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 Group, Inc. ("Keystone Group"), located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.

Keystone Group is a corporation privately owned by current and former members
of management of Keystone and its affiliates. The shares of Keystone Group
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,
Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Group of Mutual 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.

Keystone Management and Keystone have each adopted a Code of Ethics
incorporating policies on personal securities trading as recommended by the
Investment Company Institute ("ICI"), and it is anticipated that the Board of
Trustees of the Fund will adopt a Code of Ethics containing the ICI recommended
policies at its next Board Meeting to be held in December, 1994.

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, 1994, the Fund paid or accrued to Keystone
Management investment management and administrative service 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.

For the fiscal year ended July 31, 1994, the Fund's Class A Shares paid 1.32%
of average net assets in expenses. For the fiscal year ended July 31, 1994, the
Fund's Class B and Class C Shares each paid 2.07% of average net assets in
expenses.

During the year ended July 31, 1994, the Fund paid or accrued to Keystone
Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend
disbursing agent, $738,610 for shareholder services and a total of $15,491 to
KIRC and Keystone Group 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 Vice President and
Portfolio Manager and has more than 14 years of experience in fixed-income
investing.

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 Senior Portfolio Manager 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
Vice President and Senior Portfolio Manager and has more than 11 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, 1993 and 1994, the Fund's portfolio
turnover rates were 151% and 92%, 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 Distributors, Inc. ("KDI"), the Fund's principal
underwriter ("Principal Underwriter"). KDI, 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 KDI (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 KDI 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.

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.

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 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
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 sales charge when they are redeemed (except that
shares sold in a single purchase in excess of $1,000,000 without a front end
sales charge will be subject to a contingent deferred sales charge for one
year).

CLASS B SHARES -- BACK END LOAD OPTION
Class B 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 three
calendar years after the calendar year of purchase. Class B shares will
automatically convert to Class A shares at the end of seven calendar years after
purchase.

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 KDI.

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:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED<F1> OFFERING PRICE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
$1,000,000 and over<F2> ................ 0% 0% 0.25%
<FN>
- ---------
<F1> Rounded to the nearest one-hundredth percent.

<F2> Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge of 0.25%. See the "Calculation of Contingent Deferred Sales
Charge and Waiver of Sales Charges" section of this prospectus.
</TABLE>

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

The sales charge is paid to KDI, 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 shares of Class A maintained by such recipient outstanding on the
books of the Fund for specified periods.

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

Initial sales charges may be eliminated for persons purchasing Class A shares
to be included in a broker dealer managed fee based program (a "wrap account")
through broker/ dealers who have entered into special agreements with KDI.
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.

Upon prior notification to KDI, 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, where 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.

With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 or more on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge is retained by KDI. See "Calculation of
Contingent Deferred Sales Charges and Waiver of Sales Charges" below.

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 KDI (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 outstanding 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 certain exceptions, the Fund may impose 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. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by KDI. Amounts received by KDI under the
Class B Distribution Plan are reduced by deferred sales charges retained by KDI.
See "Calculation of Contingent Deferred Sales Charges and Waiver of Sales
Charges" below.

Class B shares that have been outstanding during seven calendar years 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. (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
less 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 PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
(the "Class B Distribution Plan") that provides 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 Plan are currently made to KDI (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 KDI under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above. KDI
generally reallows to brokers or others a commission equal to 3% of the price
paid for each Class B share sold as well as a shareholder service fee at the
rate of 0.25% per annum of the net asset value of Class B shares maintained by
such recipients outstanding 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 KDI. 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 KDI. See "Calculation of 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 KDI (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 KDI under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above. KDI
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 outstanding on
the books of the Fund for specified periods. See "Distribution Plans" below.

CALCULATION OF 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 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) Class C shares and certain Class A shares held for more than
one year from the date of purchase; or (4) Class B shares held during more than
four consecutive calendar years. Upon request for redemption, shares not subject
to the contingent deferred sales charge will be redeemed first. Thereafter,
shares held the longest will be the first to be redeemed.

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 KDI; and to a bank or trust company acting as a trustee for a
single account.

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; or (5) automatic withdrawals under an automatic
withdrawal plan of up to 1 1/2% per month of the shareholder's initial account
balance.

ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, KDI 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. KDI 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.

KDI 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
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 Investment Company Act of 1940 ("1940 Act").
Payments under the Class A Distribution Plan are currently limited to up to
0.25% annually of the average daily net asset value of Class A shares. The Class
B Distribution Plan and the Class C Distribution Plan provide for the payment at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares and Class C shares, respectively.

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 KDI).

KDI intends, but is not obligated, to continue to pay or accrue distribution
charges incurred in connection with the Class B Distribution Plan that exceed
current annual payments permitted to be received by KDI from the Fund. KDI
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.

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. After the termination of the Class B Distribution Plan,
however, KDI would be entitled to receive payment, at the annual rate of 1.00%
of the average daily net asset value of Class B shares, as compensation for its
services which had been earned at any time during which the Class B Distribution
Plan was in effect. Such unreimbursed Class B distribution expenses at July 31,
1994 were $10,692,537 (6.57% of Class B net assets on July 31, 1994).
Unreimbursed Class C distribution expenses at July 31, 1994 were $4,177,757
(7.05% of Class C net assets on July 31, 1994).

For the year ended July 31, 1994, the Fund paid KDI $260,276, $1,186,729 and
$491,530, 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.

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 bank wire of funds or EFT. Although the mailing of a redemption
check, 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 mailing of a redemption check has
been delayed, the check will be mailed 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
deferred sales charge, will be made within seven days thereafter except as
discussed herein.

Shareholders may also redeem their shares through their broker-dealers. KDI,
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 KDI receives the order. KDI 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. KDI 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.

REDEMPTION OF CERTAIN CLASS A SHARES
Class A shares purchased prior to January 1, 1991 and redeemed within four
calendar years of purchase may be subject to a 2.0% contingent deferred sales
charge. In instances where an existing Class A shareholder has purchased
additional Class A shares of the Fund after January 1, 1991 and subsequently
requests a redemption of a portion of his Class A shares, the shares first
redeemed will be those purchased after January 1, 1991 which were not purchased
subject to a contingent deferred sales charge. In addition, certain purchases of
Class A shares in the amount of $1,000,000 or more, on which no initial sales
charge has been paid, are subject to a contingent deferred sales charge of
0.25%. See the section entitled "Class A Shares".

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 KDI 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 KDI 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 may be exchanged for Class B shares of other Keystone America
Funds and 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.

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 where the original purchase was for $1,000,000 or more and
no sales charge was paid,

(2) Class B shares that have been held for less than four years, 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 shares of the Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing 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. 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. 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 KDI 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.

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

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 of your
Keystone America Funds automatically invested to purchase Class A 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.

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 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. or other industry publications.

FUND SHARES
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 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.

<PAGE>
- ------------------------------------------------------------------------------
ADDITIONAL INVESTMENT 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.

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 KDI 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 KDI
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 KDI or KIRC that a Letter of Intent is
in effect each time a purchase is made.

<PAGE>

KEYSTONE AMERICA
FAMILY OF FUNDS

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, Inc.
Omega Fund, Inc.
Fund of the Americas
Strategic Development Fund

[LOGO] KEYSTONE
Distributors, Inc.

200 Berkeley Street
Boston, Massachusetts 02116-5034

KASIF-P 11/94
52.4M

KEYSTONE
AMERICA

STRATEGIC
INCOME FUND

[LOGO]
PROSPECTUS AND
APPLICATION

<PAGE>

KEYSTONE AMERICA STRATEGIC INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

NOVEMBER 30, 1994

This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
America Strategic Income Fund (the "Fund") dated November 30, 1994. A copy of
the prospectus may be obtained from Keystone Distributors, Inc. ("KDI"), the
Fund's principal underwriter, (the "Principal Underwriter") 200 Berkeley Street,
Boston, Massachusetts 02116-5034.

- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
The Fund 2
Investment Policies 2
Investment Restrictions 2
Dividends and Taxes 6
Valuation of Securities 7
Sales Charges 8
Distribution Plans 11
Investment Manager 14
Investment Adviser 16
Trustees and Officers 18
Principal Underwriter 23
Brokerage 25
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

<PAGE>
- -------------------------------------------------------------------------------
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. The Fund is managed by Keystone Management, Inc.
("Keystone Management") and advised by 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.

- -------------------------------------------------------------------------------
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).

- -------------------------------------------------------------------------------
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:

(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) 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 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;

<PAGE>
(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. Dividends will be distributed in shares 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 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 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 reducing the
shareholder's federal tax basis for such shares, 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;

(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
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
of Fund shares ("Front End Load Option"). Class B shares are sold 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 that
have been outstanding during seven calendar years will automatically convert to
Class A shares, without imposition of a front end sales charge. (Conversion of
Class B shares represented by stock certificates will require the return of the
stock certificates to 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 KDI, the Fund's 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 may be imposed at the time of redemption of certain Fund shares as
follows:

CLASS A SHARES
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge will be retained by KDI. See "Calculation of
Contingent Deferred Sales Charge" below.

CLASS B SHARES
With certain exceptions, the Fund may 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 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. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI. See "Calculation of Contingent
Deferred Sales Charge" below.

CLASS C SHARES
With certain exceptions, the Fund may 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. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI. 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) Class C shares and certain Class A shares held during more
than one year; or (4) Class B shares held during more than four consecutive
calendar years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed. 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 Group,
Inc., Harbor Capital Management Company, Inc., their subsidiaries and KDI, 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 Mutual
Fund is at least $500,000 and any commission paid by the Fund and such other
funds at the time of such purchase is not more than 1% of the amount invested.

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; and (5) automatic withdrawals under a systematic withdrawal
plan of up to 1 1/2% per month of the shareholder's initial account balance.

- -------------------------------------------------------------------------------
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, 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
KDI).

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 KDI (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 outstanding on the books of the Fund for
specified periods.

CLASS B DISTRIBUTION PLAN
The Class B 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 B shares to finance any activity that is primarily
intended to result in the sale of Class B shares. Payments under the Class B
Distribution Plan are currently made to KDI (which may reallow all or part to
others, such as dealers) (1) as commissions in respect of Class B shares sold
and (2) as shareholder service fees. Amounts paid or accrued to KDI under (1)
and (2) in the aggregate may not exceed the annual limitation referred to above.
KDI generally reallows to brokers a commission equal to 3.00% of the price paid
for each Class B share sold as well as a service fee at the rate of 0.25% of the
average net asset value of shares maintained by such recipients outstanding on
the books of the Fund for specified periods.

KDI intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plan
that exceed current annual payments permitted to be received by KDI from the
Fund. KDI 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.

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. Payments under the Class C
Distribution Plan are currently made to KDI (which may reallow all or part to
others, such as dealers) (1) as commissions for Class C shares sold and (2) as
shareholder service fees. Amounts paid or accrued to KDI under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above. KDI
generally reallows to brokers or others (1) a commission in the amount of 0.75%
of the price paid for each Clas 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 (2) beginning approximately fifteen months after purchase, a commission at
an annual rate of 0.75% (subject to NASD rules) 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 outstanding on the books of the Fund for
specified periods.

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. After the termination of the Class B
Distribution Plan, however, KDI would be entitled to receive payment, at the
annual rate of 1.00% of the average daily net asset value of Class B shares, as
compensation for its services which had been earned at any time during which the
Class B Distribution Plan was in effect. The Fund's Class B unreimbursed
distribution expenses at July 31, 1994 were $10,692,537 (6.57% of Class B net
assets on July 31, 1994).

Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan 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 period ended July 31, 1994, the Fund paid KDI $260,276,
$1,186,729, and $491,530, 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 Keystone Custodian Funds and to certain
other funds in the Keystone Group of Mutual 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; (3) providing
services to the Fund's shareholders in connection with federal and state
taxation and distributions of income and capital gains; and (4) storing
documents relating to the Fund's activities.

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 Group, Inc. ("Keystone
Group"), 200 Berkeley Street, Boston, Massachusetts 02116-5034.

Keystone Group is a corporation privately owned by current and former
members of management of Keystone and its affiliates. The shares of Keystone
Group 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, Roger T. Wickers, Edward F. Godfrey, and Ralph J. Spuehler, Jr. Keystone
Group provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Group of Mutual 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 shareholder's 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, 1992, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$523,684, which represented 0.77% of the Fund's average net assets. Of such
amount paid to Keystone Management, $445,131 was paid to Keystone for its
services to 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 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.

- -------------------------------------------------------------------------------
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:

*GEORGE S. BISSELL: Chairman of the Board, Trustee and Chief Executive Officer
of the Fund; Chairman of the Board, Director and Chief Executive
Officer of Keystone Group, Keystone, Keystone Management, and Keystone
Software Inc. ("Keystone Software"), Keystone Fixed Income Advisers,
Inc. ("KFIA") and KIRC; Chairman of the Board, Chief Executive Officer
and Trustee or Director of Keystone America Capital Preservation and
Income Fund, Keystone America Capital Preservation and Income Fund-II,
Keystone America Fund for Total Return, Keystone America Global
Opportunities Fund, Keystone America Government Securities Fund,
Keystone America Intermediate Term Bond Fund, Keystone America Omega
Fund, Inc., Keystone America State Tax Free Fund; Keystone America
State Tax Free Fund, Series II; Keystone America Tax Free Income Fund,
Keystone America World Bond Fund, Keystone Australia Funds, Inc.,
Keystone America Hartwell Emerging Growth Fund, Inc., Keystone America
Hartwell Growth Fund, Inc., Keystone Fund of the Americas, and Keystone
Strategic Development Fund (collectively, "Keystone America Funds");
Keystone Custodian Funds, Series B-1, B-2, B-4, K-1, K-2, S-1, S-3 and
S-4 (collectively, "Keystone Custodian Funds"); Keystone Institutional
Adjustable Rate Fund, Keystone International Fund Inc., Keystone Liquid
Trust, Keystone Precious Metals Holdings, Inc., Keystone Tax Exempt
Trust, Keystone Tax Free Fund, and Master Reserves Trust (all such
funds, collectively, "Keystone Group Funds"); Chairman of the Board
Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"); Director of
Keystone Investment Management Corporation ("KIMCO"); Chairman of the
Board and Trustee of Anatolia College; and Trustee of University
Hospital (and Chairman of its Investment Committee).

FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Group 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 Group Funds; Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).

*ALBERT H. ELFNER, III: President and Trustee of the Fund; President and
Trustee or Director of all other Keystone Group Funds; Director and
Vice Chairman of Keystone; Chief Operating Officer, President and
Director of Keystone Group; Chairman of the Board and Director of KIMCO
and KFIA; President and Director of Keystone Management, Hartwell
Keystone and Keystone Software; Director of KDI, KIRC, Fiduciary
Investment Company, Inc. ("FICO") and Robert Van Partners, Inc.;
Director of Boston Children's Services Association and Trustee of
Anatolia College, Middlesex School, Middlebury College and Citizens
Bank; Member, Board of Governors, New England Medical Center; former
Director and President of Harbor Keystone Advisers, Inc.; and former
President of Keystone.

EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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 Group Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank.

LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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.

K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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 Group and
Keystone.

F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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 Group 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 Group Funds; Managing Director, Russell Miller, Inc.
(investment bankers) and Consultant, Drake Beam Morin, Inc. (executive
outplacement); Director of Connecticut Natural Gas Corporation, Trust
Company of Connecticut, Hartford Hospital and Old State House
Association; 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.

ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
Keystone Group 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.

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

ROSEMARY D. VAN ANTWERP: Vice President and Secretary of the Fund; Vice
President and Secretary of all other Keystone Group Funds; Vice
President and Associate General Counsel of Keystone Group; Senior Vice
President and General Counsel of Keystone, Keystone Management,
Hartwell Keystone, KIRC, KFIA, Keystone Software, and KIMCO; Senior
Vice President, General Counsel, Director and Assistant Clerk of FICO;
and Assistant Secretary of KDI.

EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Director, Senior Vice President, Chief
Financial Officer, and Treasurer of Keystone Group; Senior Vice
President, Chief Financial Officer, and Treasurer of KDI; Director,
Senior Vice President, Chief Financial Officer and Treasurer of
Keystone; Treasurer of KIMCO, Keystone Management, Keystone Software,
Inc. and FICO; and Treasurer and Director of Hartwell Keystone.

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

ROGER T. WICKERS: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Director, Senior Vice President,
General Counsel and Secretary of Keystone Group and KDI; Director and
Secretary, Keystone; Vice President, Assistant Secretary and Director,
Keystone Management; Director, KIRC; Director and Vice President, FICO;
and Director and Vice President, Hartwell Keystone.

* May be considered an "interested person" within the meaning of the 1940 Act.

Mr. Bissell and Mr. Elfner are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Group and several of its
affiliates, including Keystone, Keystone Management, KDI and KIRC. Mr. Bissell
and Mr. Elfner both own shares of Keystone Group. Mr. Bissell is Chairman of the
Board, Chief Executive Officer and Director of Keystone Group. Mr. Elfner is
President and Chief Operating Officer of Keystone Group.

The Board of Trustees of the Fund has established an Advisory Board
composed principally of former Trustees. The members of the Advisory Board are
James R. Dempsey, Knight Edwards, Donald T. Ellis, John M. Haffenreffer, Philip
B. Harley, Everett P. Pope, John W. Sharp, Spencer R. Stuart, Russel R. Taylor,
and Charles M. Williams. The Advisory Board will advise the Board of Trustees
and Keystone with respect to the management and operation of the Fund. The
recommendations of the Advisory Board will be considered by the Board of
Trustees and Keystone, but will not be binding on them.

The principal occupations and affiliations over the past five years of
the members of the Advisory Board are set forth below:

JAMES R. DEMPSEY: a private investor; Director or Trustee, Convest Energy
Corporation, Superior Electric Co.; former Chairman of the Board,
Transatlantic Investment Capital Corporation, Transatlantic Capital
Corporation; and former Trustee or Director of 7 Keystone Group Funds.

KNIGHT EDWARDS: Of Counsel, Edwards & Angell; Member of the Board of Managers
of 7 variable annuity separate accounts of the Travelers Insurance
Company; Trustee, 5 mutual funds sponsored by Travelers; Member of the
Advisory Board for 30 other Keystone Funds; and former Trustee or
Director of 7 Keystone Group Funds.

DONALD T. ELLIS: President, D.T. Ellis Associates; Associate, Michael Saunders &
Co., real estate broker; former Senior Vice President, Goldman
Financial Services, Inc.; former President, Chief Executive Officer and
Treasurer, Scott Seaboard Corporation; and former Trustee or Director
of 7 Keystone Group Funds.

JOHN M. HAFFENREFFER: Vice President and Treasurer of Haffenreffer & Co.;
Member of the Corporation and Treasurer of Haffenreffer Benevolent
Corp.; Director and Member of the Executive Committee of Liberty Bank
and Trust Company; Director of the Massachusetts Council of Churches;
Vice President, Director and Treasurer, Forest Hills Company; former
Director of Keystone; and former Trustee or Director of all Keystone
Custodian Funds and Keystone America Funds.

PHILIP B. HARLEY: Director of General Host Corporation, Stamford, Connecticut; a
Private Investor; former Director, President and Chief Executive
Officer, Baker Perkins, Inc; former Director, Baker Perkins Holdings
Ltd. (U.K.); and former Trustee or Director of all Keystone Custodian
Funds and Keystone America Funds.

EVERETT P. POPE: former Chairman and Trustee, Bowdoin College; former Chairman
of the Board and President of Workingmens Cooperative Bank; former
Chairman Massachusetts Higher Education Assistance Corporation
(guarantor of student loans); and former Trustee or Director of all
Keystone Custodian Funds and Keystone America Funds.

JOHN W. SHARP: Governor and Past President of Montreal General Hospital, Canada;
Honorary Vice Chairman and former National President of Boy Scouts of
Canada; Honorary Colonel, The Black Watch Royal Highland Regiment of
Canada; former Director of Keystone and Unimed, Inc.; former Chairman
and President, Vilas Industries, Ltd. (Canada); former Chairman, Moyer
School Supplies, Ltd. (Canada); former Senior Economic Adviser,
Province of Quebec, in New York City; former registered representative
with F.H. Deacon Hodgson Ltd; and former Trustee or Director of all
Keystone Custodian Funds and Keystone America Funds.

SPENCER R. STUART: Director of U.S. Tobacco Company, Asset Guaranty Inc.,
International Finance Group and Enhanced Financial Services Inc.;
Director and Chairman, Human Resources Committee, Allegheny
International, Inc.; former Director of Western Airlines, Inc.,
International Finance Group and Keystone; former Chairman, Council of
Managing Advisers, Dean Witter Reynolds Bank; Founder/former Chairman
of Spencer Stuart & Associates; and former Trustee or Director of all
Keystone Custodian Funds and Keystone America Funds.

RUSSEL R. TAYLOR: Trustee of the Gintel Funds, Greenwich, Connecticut; Associate
Professor and Director, H.W. Taylor Institute for Entrepreneurial
Studies, College of New Rochelle; former Director of Annis Furs, Inc.
and Minnetonka, Inc.; and former Trustee or Director of all Keystone
Custodian Funds and Keystone America Funds.

CHARLES M. WILLIAMS: Director, Horace Mann Educators Corp.; President, Charles
M. Williams Associates; Advisory Director, Orix U.S.A., Inc.; Director,
Fort Dearborn Income Securities, Inc.; former Director of four Merrill
Lynch Mutual funds, National Life Insurance Company of Vermont and
Institute for Financial Management, Inc.; President of Charles M.
Williams Associates, Inc.; Professor Emeritus, Harvard University
Graduate School of Business Administration; former Director of
Keystone, Hammermill Paper Co., Sonat, Inc., United States Leasing
International, Inc.; and former Trustee or Director of all Keystone
Custodian Funds and Keystone America Funds.

During the fiscal year ended July 31, 1994, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. During
the same period, the nonaffiliated Trustees received $27,456 in retainers and
fees. On August 31, 1994, the Fund's Trustees, officers and members of the
Advisory Board beneficially owned less than 1% of the Fund's then outstanding
shares.

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

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

Pursuant to a Principal Underwriting Agreement dated August 19, 1993
(the "Underwriting Agreement"), KDI acts as the Fund's Principal Underwriter.
KDI, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is a
Delaware corporation wholly-owned by Keystone. KDI as agent, has agreed to use
its best efforts to find purchasers for the shares. KDI 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 Agreement provides that KDI will bear the expense of preparing,
printing and distributing advertising and sales literature and prospectuses used
by it. In its capacity as principal underwriter, KDI may receive payments from
the Fund pursuant to the Fund's Distribution Plans.

All subscriptions and sales of shares by KDI 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
Agreement, the Fund is not liable to anyone for failure to accept any order.

The Fund has agreed under the Underwriting Agreement 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. KDI assumes the cost of sales literature and
preparation of prospectuses used by it and certain other expenses.

From time to time, if in KDI's judgment it could benefit the sales of
Fund shares, KDI 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.

KDI 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
KDI or any other person for whose acts KDI 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 Agreement provides that it 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 Agreement 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 Agreement will terminate automatically upon its
"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, KDI or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.

For the fiscal years July 31, 1992, 1993 and 1994, the Fund paid no
brokerage commissions.

- -------------------------------------------------------------------------------
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. 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, 1994 was 65.93. The cumulative total return of Class A for the one and five
years ended July 31, 1994 were (2.98)% and 42.59%, respectively. The compounded
average annual rate of return for Class A for the period February 13, 1987
through July 31, 1994 was 7.19%. The compounded average annual rate of return
for Class A for the five years ended July 31, 1994 was 7.35%. The cumulative
total return of Class B and Class C annualized for the period beginning February
1, 1993 (commencement of operations) through July 31, 1994 was 15.03% and
17.88%, respectively. The cumulative total return of Class B and Class C
annualized for the one year period ended July 31, 1994 was (1.71)% and 1.09%,
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, 1994 was 9.78% and 11.59%, 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, 1994 were 8.63%,
8.30%, and 8.31%, 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, One Boston Place, Boston, Massachusetts 02108,
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 October 31, 1994, Merrill Lynch Pierce, Fenner & Smith, Attn:
Book Entry 2nd Floor, 500 Atrium Drive, Somerset, NJ 08873-4199, owned of record
20.05% of the Fund's outstanding Class A shares. As of October 31, 1994, Merrill
Lynch Pierce, Fenner & Smith, Attn: Book Entry, 4800 Deer Lake Dr., E 3rd FL,
Jacksonville, FL 32246-7684, owned of record 17.82% of the Fund's outstanding
Class B shares. As of October 31, 1994, Merrill Lynch Pierce, Fenner & Smith,
Attn: Book Entry, 4800 Deer Lake Dr., E 3rd FL, Jacksonville, FL 32246-6484,
owned of record 30.62% of the Fund's Class C outstanding 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 KDI, 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 17 different investment companies in the Keystone
America family, which offers a range of choices to serve shareholder needs. 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 AMERICA HARTWELL GROWTH FUND, INC. - Seeks capital appreciation by
investment in securities selected for their long-term growth prospects.

KEYSTONE AMERICA 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 AMERICA CAPITAL PRESERVATION AND INCOME FUND-II - Seeks high level of
current income, consistent with low volatility of principal, by investing under
ordinary circumstances at least 65% adjustable rate securities issued by the
U.S. government, its agencies or instrumentalities.

KEYSTONE AMERICA FUND FOR TOTAL RETURN - Seeks above-average income, dividend
growth and capital appreciation potential from quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).

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

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

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

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

KEYSTONE AMERICA STATE TAX FREE FUND - A mutual fund currently offering three
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 AMERICA 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 AMERICA TAX FREE INCOME FUND - Seeks income exempt from federal income
taxes and capital preservation from the four highest grades of municipal bonds.

KEYSTONE AMERICA WORLD BOND FUND - Seeks current income by investing primarily
in a non-diversified portfolio consisting of investments in debt securities
denominated in U.S. and foreign currencies. The Portfolio seeks capital
appreciation as a secondary objective.

KEYSTONE AUSTRALIA FUNDS, INC. - Seeks a high level of current income by
investing at least 65% of its total assets in Australian dollar denominated debt
obligations.

KEYSTONE FUND OF THE AMERICAS - Seeks growth and income from a diversified
portfolio of established North American stocks, Latin American stocks and Latin
American bonds.

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.

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 securites are securites that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term mortage backed securites includes adjustable
rate mortgage securites and derivative mortage 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 securites, 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.

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 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 bequalifying 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 cotrast 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 internationa 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.

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 execise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
brokerdealer 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 isa
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>

Keystone America Strategic Income Fund

SCHEDULE OF INVESTMENTS--July 31, 1994

<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C> <C>
FIXED INCOME (92.5%)
CONVERTIBLE BOND (1.0%)
TECHNOLOGY (1.0%)
EMC Corp. (Cost $2,126,087) Conv. Deb. (Subord.) 6.250% 2002 $ 700,000 $ 3,398,500
INDUSTRIAL BONDS & NOTES (47.7%)
ADVERTISING AND PUBLISHING (1.4%)
Dimac Direct, Inc.
(10/29/93-$2,250,000)(b) Sr. Notes 12.000 2003 2,250,000 2,261,250
Lamar Advertising Co. Sr. Secd. Notes 11.000 2003 1,000,000 980,000
Lifestyle Brands Gtd. Deb. (Subord.) 10.000 1997 1,400,000 1,400,000
4,650,000 4,641,250
AEROSPACE (1.5%)
Sabreliner Corporation Sr. Notes 12.500 2003 4,000,000 3,860,000
Transdigm Incorporated (9/29/93-
$1,167,433)(b) Sr. Notes (Subord.) 13.000 2000 1,250,000 1,143,750
5,250,000 5,003,750
AIR TRANSPORTATION (1.2%)
CHC Helicopters Sr. Notes
(Subord.)/Wts. 11.500 2002 3,000,000 2,955,000
Continental Airlines, Inc. (a)(c) Sr. Equip. Trust
Cert. 12.125 1996 2,125,000 276,250
U.S. Africa Airways
(6/2/94-$750,000)(b) Sr. Secd. Notes 12.000 1999 750,000 750,000
5,875,000 3,981,250
AMUSEMENTS (3.8%)
Affinity Group Incorporated Sr. Notes (Subord.) 11.500 2003 750,000 750,000
El Comandante Capital Corp.
(6/14/94- $1,750,000)(b) 1st Mtge. Notes 11.750 2003 1,750,000 1,671,250
Grand Palais Casinos, Inc.
(8/15/93- $1,374,907)(b) Secd. PIK Notes 13.500 1994 1,294,335 1,294,335
Grand Palais Casinos, Inc.
(8/15/93- $363,027)(b) Secd. PIK Notes 13.500 1994 341,776 341,776
Grand Palais Casinos, Inc.
(8/15/93- $426,038)(b) Secd. PIK Notes 13.500 1994 401,092 401,092
Hemmeter Enterprises Inc. Sr. Secd. PIK
(12/14/93- $3,086,792)(b) Notes/Wts. 12.000 2000 2,875,000 2,228,125
Sam Houston Race Park Limited Sr. Secd. Note 11.750 1999 2,500,000 1,625,000
Spectravision Incorporated
(effective yield 11.498%)(d) Sr. Disc. Notes 0.000 2001 3,000,000 1,800,000
Starcraft Corp. (a)(c) Notes (Subord.) 16.500 1998 750,000 15,000
Treasure Bay Gaming & Resorts 1st Mtge. Notes/Wts. 12.250 2000 2,450,000 2,180,500
16,112,203 12,307,078
</TABLE>

See Notes to Schedule of Investments.

<PAGE>

SCHEDULE OF INVESTMENTS--July 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C> <C>
BUILDING MATERIALS (2.4%)
Associated Materials Inc. Sr. Note (Subord.) 11.500% 2003 $ 1,500,000 $ 1,500,000
Dal-Tile International Inc.
(effective yield 11.00%)(d) Sr. Secd. Note 0.000 1998 4,500,000 2,767,500
Koppers Industries Incorporated Sr. Note 8.500 2004 3,050,000 2,714,500
NVR Inc. Gtd. Sr. Notes 11.000 2003 1,000,000 960,000
10,050,000 7,942,000
CAPITAL GOODS (0.1%)
Lanesborough Corp. Sr. Notes (Subord.) 12.375 1997 775,000 449,500
CHEMICALS (1.7%)
Rexene Corp. Sr. Notes 9.000 1999 2,000,000 1,940,000
Scotts Company Sr. Notes (Subord.) 9.875 2004 1,500,000 1,522,500
Uniroyal Technology Corp. Sr. Secd. Notes/Wts. 11.750 2003 2,000,000 1,940,000
5,500,000 5,402,500
CONSUMER GOODS (3.1%)
Apparel Ventures Incorporated
(5/16/94- $2,940,000)(b) Sr. Notes/Wts. 12.250 2000 3,000,000 2,902,500
Cherokee Inc.
(5/1/93-$1,469,684)(a)(b)(c) Sr. Notes (Subord.) 11.000 1999 1,289,918 386,975
Drypers Corporation Sr. Notes 12.500 2002 3,000,000 3,135,000
Key Plastics Inc. Sr. Notes 14.000 1999 750,000 845,625
Sola Group Ltd. Sr. Note (Subord.) 6.000 2003 4,000,000 3,020,000
12,039,918 10,290,100
DIVERSIFIED COMPANIES (1.0%)
Jordan Industries Inc. Sr. Notes 10.375 2003 3,300,000 3,209,250
DRUGS (0.7%)
Alco Health Distribution Corp. Sr. PIK Deb. 11.250 2005 2,105,000 2,147,100
ENERGY SERVICES (0.4%)
Wainoco Oil Corp. Sr. Notes 12.000 2002 1,250,000 1,306,250
FOODS (3.3%)
Iowa Select Farms (1/21/94-
$5,389,049)(effective yield
13.716%)(b)(d) Sr. Disc. Notes/Wts. 0.000 2004 12,828,000 5,387,760
PM Holdings Corporation (effective
yield 11.62%)(d) Sr. Disc. Notes/Wts. 0.000 2023 2,000,000 1,140,000
Premium Standard Farms (9/29/93-
$3,034,898)(effective yield
12.00%)(b)(d) Sr. Secd. Disc. Notes 0.000 2003 3,885,000 2,939,003
Specialty Foods Acquisition Corp.
(effective yield 11.95%)(d) Sr. Secd. Disc. Debs. 0.000 2005 3,250,000 1,202,500
21,963,000 10,669,263
</TABLE>

(continued on next page)

<PAGE>

Keystone America Strategic Income Fund
SCHEDULE OF INVESTMENTS--July 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C> <C>
HEALTH CARE SERVICES (1.3%)
Chartwell Corporation Sr. Note 10.250% 2004 $ 1,500,000 $ 1,417,500
Community Health Systems Inc. Sr. Deb. (Subord.) 10.250 2003 2,000,000 1,980,000
Vendell Healthcare Inc. Sr. Notes 12.000 2000 1,000,000 720,000
4,500,000 4,117,500
INSURANCE (1.1%)
Reliance Group Holdings Sr. Deb. (Subord.) 9.750 2003 4,000,000 3,620,000
METALS AND MINING (9.1%)
AK Steel Holding Corp. Sr. Note 10.750 2004 3,000,000 3,015,000
Bethleham Steel Corp. Sr. Note 10.375 2003 3,000,000 3,000,000
Federal Industries Ltd., Canada Sr. Note 10.250 2000 5,795,000 5,592,175
Geneva Steel Co. Sr. Note 9.500 2004 4,400,000 4,020,060
Inland Steel Co. Unsec. Notes 12.750 2002 5,910,000 6,619,200
Republic Engineered Steels Inc. 1st Mtge. Notes 9.875 2001 3,000,000 2,850,000
Sheffield Steel Corporation Notes/Wts. 12.000 2001 2,000,000 2,060,000
Wheeling-Pittsburgh Corp. Sr. Note 9.375 2003 3,000,000 2,760,000
30,105,000 29,916,435
OIL (1.2%)
Chatwins Group Inc. Sr. Notes 13.000 2003 1,250,000 1,062,500
Plains Resources Inc. Sr. Notes (Subord.) 12.000 1999 2,900,000 2,929,000
4,150,000 3,991,500
OIL SERVICES (1.0%)
Dual Drilling Sr. Deb. (Subord.) 9.875 2004 3,500,000 3,185,000
PAPER AND PACKAGING (0.9%)
Container Corporation of America Gtd. Sr. Note 10.750 2002 3,000,000 3,030,000
RESTAURANTS (0.6%)
Great American Cookie Company Sr. Secd. Note 10.875 2000 2,000,000 1,855,000
RETAIL (4.4%)
Acme Boot Incorporated (12/17/93-
$3,000,000)(b) Sr. Notes/Common 11.500 2000 3,000,000 2,250,000
Almacs Inc.
(3/16/93-$1,174,224)(a)(b)(c) Sr. Secd. Notes 13.000 2000 1,250,000 62,500
Big 5 Sporting Goods Sr. Notes (Subord.) 13.625 2002 4,000,000 4,060,000
Cole National Group Incorporated Sr. Notes 11.250 2001 2,750,000 2,750,000
F F Holdings Corporation Sr. PIK Notes 14.250 2002 1,148,431 1,033,588
Finlay Enterprises Inc. (effective
yield 12.363%)(d) Sr. Disc. Deb. 0.000 2005 2,000,000 1,190,000
Finlay Fine Jewelry Corp. Sr. Note 10.625 2003 1,000,000 970,000
</TABLE>
See Notes to Schedule of Investments.
<PAGE>

SCHEDULE OF INVESTMENTS--July 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C> <C>
RETAIL--Continued
Mayfair Super Mkts Inc. Sr. Notes (Subord.) 11.750% 2003 $ 750,000 $ 660,000
Pamida, Inc. Sr. Notes (Subord.) 11.750 2003 1,400,000 1,400,000
17,298,431 14,376,088
TECHNOLOGY (1.0%)
Ampex Corporation (effective yield Disc. Conv. Bonds,
9.528%)(d) Series C 0.000 1997 958,000 613,120
Neodata Services Inc. (effective
yield 11.96%)(d) Sr. Def. Notes 0.000 2003 3,425,000 2,654,375
4,383,000 3,267,495
TELECOMMUNICATIONS (4.8%)
Cablevision Industries Sr. Notes 10.750 2002 2,500,000 2,475,000
Comcast Cellular Corp. (effective
yield 12.00%)(d) Part. Disc. Notes 0.000 2000 4,870,000 2,909,825
Continental Cablevision Inc. Sr. Deb. 9.000 2008 3,525,000 3,137,250
Dial Call Communications
Incorporated (effective yield Sr. Disc.
10.25%)(d) Notes/Wts./Shs 0.000 2005 1,000,000 520,000
Dial Call Communications
Incorporated (effective yield
13.468%)(d) Sr. Disc. Notes/Wts. 0.000 2004 4,820,000 2,795,600
One Comm Communications Corporation
(effective yield 10.125%)(d) Sr. Disc. Notes/Wts. 0.000 2004 3,600,000 2,043,000
Pagemart (10/12/93-$1,701,670) Unit (Sr. Disc.
(effective yield 12.25%)(b)(d) Notes/Wts.) 0.000 2003 290,000 1,783,500
20,605,000 15,664,175
TRANSPORTATION (1.1%)
Eletson Holdings Inc. 1st Mtge. Notes 9.250 2003 3,500,000 3,272,500
St. Johnsbury Trucking Inc.
(1/20/93- $637,711) (a)(b)(c) Sr. Secd. Notes 11.000 1998 750,000 450,000
4,250,000 3,722,500
UTILITIES (0.6%)
Consolidated Hydro Inc. (effective
yield 14.76%)(d) Sr. Disc. Notes 0.000 2003 3,500,000 2,012,500
TOTAL INDUSTRIAL BONDS & NOTES (COST $169,530,287) 190,161,552 156,107,484
FOREIGN BONDS (U.S. DOLLARS)
(31.3%)
Argentina Republic Secd. Deb. ("Brady"
par Bonds) 4.250 2023 16,000,000 8,200,000
Argentina Republic Unsecd. Deb. 8.375 2003 13,250,000 11,047,188
Banco Nacional de Mexico Unsecd. Deb. 7.000 1999 1,000,000 1,100,000
Cemex Sa + Tolmex Unsecd. Deb. 10.000 1999 2,000,000 2,037,500
CVRD-Cenebras Unsecd. Deb. 9.375 2003 2,000,000 1,782,500
Fomento Economico Mexicano Unsecd. Deb. 9.500 1997 2,000,000 2,040,000
</TABLE>

(continued on next page)

<PAGE>
Keystone America Strategic Income Fund
SCHEDULE OF INVESTMENTS--July 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C> <C>
FOREIGN BONDS (U.S. DOLLARS)--Continued
Grupo Televisa Sa DE SV Unsecd. Deb. 10.000% 1997 $ 3,000,000 $ 3,082,500
Indah Kiat International Finance
Company B V Gtd. Secd. Note 11.875 2002 3,000,000 3,015,000
Klabin Fabricadora Unsecd. Deb. 10.000 2001 5,000,000 4,518,750
Klabin Fabricadora Unsecd. Deb. 11.000 1998 2,000,000 1,927,500
Metalurgica Gerdau Unsecd. Deb. 10.250 2001 660,000 603,900
Mexico (United Mexican States) Secd. Deb. ("Brady"
par Bonds) 6.250 2019 22,250,000 14,657,187
Telecom Argentina Unsecd. Deb. 8.375 2000 9,000,000 8,178,750
Telecom Argentina
(10/4/93-$1,432,330)(b) Unsecd. Deb. 8.375 2000 1,440,000 1,308,600
Telecom Brasil Unsecd. Deb. 10.000 1997 15,642,000 15,281,415
Telecom Brasil Unsecd. Deb. 10.375 1997 800,000 798,000
Telefonica de Argentina Unsecd. Deb. 8.375 2000 4,400,000 4,031,500
Telefonica de Argentina S A
(9/10/93- $3,013,500)(b) Unsecd. Deb. 8.375 2000 3,000,000 2,748,750
Vencemos Sr. Unsecd. Deb. 9.250 1996 1,900,000 1,786,000
Venezuela (Republic of) Secd. Deb. ("Brady"
par Bonds) 6.750 2020 21,200,000 9,540,000
YPF Sociedad Anonima Secd. Deb. 8.000 2004 5,400,000 4,617,000
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost $112,997,635) 134,942,000 102,302,040
FOREIGN BONDS (NON U.S. DOLLARS) (2.5%)
Brascan Limited Unsecd. Deb. 7.000 2002 6,442,000 4,610,410
Canadian Dollar
Italy (Republic of) Gov't Bd. 12.000 2002 5,720,000,000 3,686,883
Italian Lira
TOTAL FOREIGN BONDS (NON U.S. DOLLARS) (Cost $7,942,277) 8,297,293
ADJUSTABLE RATE MORTGAGE SECURITIES (3.0%)
FNMA #124289, Cap. 13.435%, Margin
2.00% + CMT 5.547 2021 5,679,177 5,854,891
FNMA #238847, Cap. 13.325%, Margin
2.32% + CMT 5.860 2031 3,836,619 3,990,084
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost $9,866,926) 9,515,796 9,844,975
US GOVERNMENT ISSUES (7.0%)
U. S. Treasury Bonds 7.875 2021 10,500,000 10,972,500
U. S. Treasury Notes 8.000 1996 11,500,000 11,947,465
TOTAL US GOVERNMENT ISSUES
(Cost $23,575,628) 22,000,000 22,919,965
</TABLE>
See Notes to Schedule of Investments.
<PAGE>

SCHEDULE OF INVESTMENTS--July 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Par Market
Rate Date Value Value
<S> <C> <C> <C> <C>
TOTAL FIXED INCOME (Cost $326,038,840) $302,870,257

REPURCHASE AGREEMENT (2.9%)
Prudential Securities Inc.,
purchased 7/29/94 (Collateralized
by $10,325,000 GNMA, 7.00%,
2/15/24, Pool No. 354758) (Cost
$9,419,000) 4.220% 8/1/94 $9,422,312 9,419,000

Number of
Shares
PREFERRED STOCK (1.4%)
Acme Boot Incorporated (12/17/93-
$875,000)(b) Exch. Pfd. Sr. Voting 875 778,750
Ampex Corporation 2,687 1,262,890
U. S. Africa Airways
(6/2/94-$2,500,000)(b)(f) 2,500 2,500,000
TOTAL PREFERRED STOCK (Cost $5,937,116) 4,541,640
COMMON STOCKS, WARRANTS & RIGHTS (2.2%)
Alco Health Services Corp. (a) 3,810 102,870
Ampex Corporation (a) 589 994
Ampex Corporation, wts. (a)(e) 90,665 181,330
Chatwins Group Inc., wts. (a)(e) 1,250 5,625
Cherokee Inc. (6/16/93-$550,487)(a)(b) 94,905 41,521
Cookies USA, Inc. wts. (a)(e) 360 14,400
Dimac Corporation (a) 5,850 44,986
Drypers Corporation (a) 2,900 28,275
Finlay Enterprises, Inc. (a) 1,000 14,000
Gold River Hotel & Casino Corp., Class B (a)(e) 10,000 60,000
Grand Palais Casinos, Inc., wts. (a)(e) 87,342 1,528,487
Grand Union Capital Corp., Series A, wts. (a)(e) 75 15,000
HDA Management Corporation, wts. (a)(e) 1,750 7,875
Hemmeter Enterprises Inc., wts. (12/15/93--$0--)(a)(b)(e) 87,342 251,545
Hemmeter Enterprises Inc., wts.
(12/22/93- $225,00)(a)(b)(e) 25,000 75,000
Hollywood Casino Corp., Class A (a) 110,833 810,466
Mexico Oil Value Recovery, rts (a)(e) 8,250,000 83
Mexico Oil Value Recovery, rts (a)(e) 4,500,000 4,500
SHRP Incorporated, wts. (a)(e) 10,000 10,000
Specialty Equipment Co. (a)(f) 437,500 3,335,937
Specialty Foods Acquisition Corp. (a) 48,750 36,563
</TABLE>
(continued on next page)
<PAGE>
Keystone America Strategic Income Fund
SCHEDULE OF INVESTMENTS--July 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Number of Market
Rate Date Shares Value
<S> <C> <C> <C> <C>
COMMON STOCKS--Continued
St. Johnsbury Trucking Inc., Class
A (1/20/93- $139,207)(a)(b)(c) 244,222 $ 244
Sun Carriers Inc. (3/11/91-$20,251)
(a)(b) 195,600 196
Transdigm Incorporated, wts.
(9/29/93- $93,750)(a)(b)(e) 9,973 99,730
Venezuela Oil Value Recovery, rts.
(a)(e) 106,000 106
Waxman Industries Inc., wts. (a)(e) 10,000 2,500
WTD Industries, Inc. (a) 230,000 575,000
TOTAL COMMON STOCKS (Cost $3,335,612) 7,247,233
TOTAL INVESTMENTS (Cost--$344,730,568)(g) 324,078,130
OTHER ASSETS AND LIABILITIES--NET (1.0%) 3,196,668
NET ASSETS (100.0%) $327,274,798
</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) which 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. Dates of acquisition and costs are
set forth in parentheses after the titles of restricted securities. 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, 1994, the fair value of these restricted securities was
$34,058,152 (10.41% 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 accrual basis until maturity date.
(e) Security has been pledged as collateral for an open futures contract at
July 31, 1994.
(f) Affiliated issuers are those in which the Fund's holdings of an issuer
represents 5% or more of the outstanding voting securities of the issuer.
The Fund has never owned enough of the outstanding voting securities of
any issuer to have control (as defined in the Investment Company Act of
1940) of that issuer.
(g) The cost of investments for federal income tax purposes is $345,247,657.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at July 31, 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $ 7,409,874
Gross unrealized depreciation (28,579,401)
Net unrealized depreciation ($ 21,169,527)
</TABLE>
See Notes to Financial Statements
<PAGE>

FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 13, 1987
(Commencement of
Year Ended July 31, Operations) to
1994(e) 1993 1992 1991 1990 1989 1988 July 31, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
period $ 7.860 $ 7.020 $ 6.100 $ 7.170 $ 9.020 $ 9.360 $10.040 $10.000
Income from investment
operations
Investment income--net 0.614 0.690 0.782 0.887 1.027 1.100 1.050 0.220
Net gains (losses) on
securities (0.446) 0.894 0.885 (1.006) (1.789) (0.310) (0.650) -0-
Total income (loss) from
investment operations 0.168 1.584 1.667 (0.119) (0.762) 0.790 0.400 0.220
Less distributions
Dividends from investment
income--net (0.614) (0.724) (0.747) (0.887) (1.038) (1.110) (1.080) (0.180)
Distributions in excess of
investment income--net(d) (0.025) (0.020) -0- (0.064) (0.050) -0- -0- -0-
Tax basis return of capital (0.039) -0- -0- -0- -0- -0- -0- -0-
Distributions from capital
gains--net -0- -0- -0- -0- -0- (0.020) -0- -0-
Total distributions (0.678) (0.744) (0.747) (0.951) (1.088) (1.130) (1.080) (0.180)
Net asset value end of
period $ 7.350 $ 7.860 $ 7.020 $ 6.100 $ 7.170 $ 9.020 $ 9.360 $10.040
Total return(a) 1.86% 24.13% 28.73% 0.54% (8.55%) 9.00% 4.49% 2.20%
Ratios/supplemental data
Ratios to average net
assets:
Operating and management
expenses(b) 1.32% 1.80% 2.09% 2.00% 2.00% 1.81% 1.28% 1.00%(c)
Investment income--net 7.79% 9.50% 11.73% 15.23% 12.91% 12.06% 10.98% 10.12%(c)
Portfolio turnover rate 92% 151% 95% 82% 36% 73% 46% 13%
Net assets end of period
(thousands) $105,181 $85,793 $70,459 $70,246 $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 operating and management
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.
(c) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to July 31, 1987.
(d) Effective August 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. As a result, distribution amounts exceeding book basis net
investment (or tax basis net income on a temporary basis) are presented
as "Distributions in excess of investment income--net." For fiscal years
ended July 31, 1993, 1992, 1991 and 1990, respectively, distributions in
excess of book basis net income were charged to paid-in capital.
(e) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>

Keystone America Strategic Income Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended Public Offering) to
July 31, 1994(d) July 31, 1993
<S> <C> <C>
Net asset value beginning of period $ 7.890 $ 7.070
Income from investment operations
Investment income--net 0.550 0.240
Net gains (losses) on securities (0.442) 0.919
Total income from investment operations 0.108 1.159
Less distributions
Dividends from investment income--net (0.550) (0.240)
Distributions in excess of investment
income--net(b) (0.029) (0.099)
Tax basis return of capital (0.039) -0-
Total distributions (0.618) (0.339)
Net asset value end of period $ 7.380 $ 7.890
Total return(a) 1.10% 16.75%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expense 2.07% 2.37%(c)
Investment income--net 7.11% 7.18%(c)
Portfolio turnover rate 92% 151%
Net assets end of period (thousands) $162,866 $35,415
</TABLE>
(a) Excluding applicable sales charges.
(b) Effective August 1, 1993 the Fund adopted Statement of Position 93-1:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." For the period February 1, 1993 (Date of
Initial Public Offering) to July 31, 1993, distributions in excess of book
basis net income were charged to paid-in capital.

See Notes to Financial Statements.
<PAGE>

FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended Public Offering) to
July 31, 1994(d) July 31, 1993
<S> <C> <C>
Net asset value beginning of period $ 7.880 $ 7.070
Income from investment operations
Investment income--net 0.550 0.244
Net gains (losses) on securities (0.442) 0.905
Total income from investment operations 0.108 1.149
Less distributions
Dividends from investment income--net (0.550) (0.244)
Distributions in excess of investment
income--net(b) (0.029) (0.095)
Tax basis return of capital (0.039) -0-
Total distributions (0.618) (0.339)
Net asset value end of period $ 7.370 $ 7.880
Total return(a) 1.09% 16.61%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expense 2.07% 2.25%(c)
Investment income--net 7.09% 7.35%(c)
Portfolio turnover rate 92% 151%
Net assets end of period (thousands) $59,228 $19,706
</TABLE>
(a) Excluding applicable sales charges.
(b) Effective August 1, 1993 the Fund adopted Statement of Position 93-1:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." For the period February 1, 1993 (Date of
Initial Public Offering) to July 31, 1993, distributions in excess of book
basis net income were charged to paid-in capital.
(c) Annualized.
(d) Calculation based on average shares outstanding.

See Notes to Financial Statements.
<PAGE>

Keystone America Strategic Income Fund
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1994
<TABLE>
<S> <C>
Assets:
Investments at market value (identified
cost--$344,730,568) (Note 1) $324,078,130
Cash 2,898
Receivable for:
Investments sold 480,265
Fund shares sold 3,658,174
Interest 6,311,569
Forward foreign currency exchange
contracts (Notes 1 and 6) 19,534,408
Prepaid expenses 24,691
Other assets 35,738
Total assets 354,125,873
Liabilities:
Payable for:
Investments purchased 5,334,593
Fund shares redeemed 756,928
Income distribution 1,002,457
Forward foreign currency exchange
contracts (Notes 1 and 6) 19,684,843
Accrued expenses 72,254
Total liabilities 26,851,075
Net assets $327,274,798
Net assets represented by:
Paid-in capital $378,694,044
Accumulated distributions in excess of
investment income--net (1,089,927)
Accumulated realized gains (losses) on
investment transactions--net (29,527,130)
Net unrealized depreciation on (Note 1):
Investments (20,652,438)
Foreign currency related transactions--net
(Notes 1 and 6) (149,751)
Total net assets $327,274,798
Net asset value and redemption price per
share (Note 2):
Class A Shares ($7.35 on 14,309,230 shares
outstanding) $105,181,280
Class B Shares ($7.38 on 22,068,513 shares
outstanding) 162,865,587
Class C Shares ($7.37 on 8,032,568 shares
outstanding) 59,227,931
$327,274,798
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 2) $ 7.72
Class B Shares $ 7.38
Class C Shares $ 7.37
</TABLE>
STATEMENT OF OPERATIONS
Year Ended July 31, 1994
<TABLE>
<S> <C> <C>
Investment income:
Interest (net of foreign withholding
taxes of $59,726) $ 24,834,634
Expenses (Notes 2, 3 and 6):
Management fee $ 1,721,793
Shareholder services 738,610
Accounting, auditing and legal 83,054
Custodian fee 151,168
Printing 62,231
Trustees' fees and expenses 27,456
Distribution Plan expenses 1,938,535
Mailing and postage 2,977
Registration fees 96,997
Miscellaneous expenses 8,315
Net expenses 4,831,136
Investment income--net (Note 1) 20,003,498
Realized and unrealized gain (loss) on
investment and foreign currency related
transactions--net:
Realized loss on investments sold:
Proceeds from sales 233,627,047
Cost of investments sold 236,352,317
Realized loss on investment
transactions--net (2,725,270)
Realized gain on foreign currency related
transactions--net 78,096
Realized loss on investments and foreign
currency related transactions--net (Notes
1, 3 and 6) (2,647,174)
Net unrealized appreciation (depreciation)
on investments:
Beginning of year 1,653,225
End of year (20,652,438)
Net change in unrealized depreciation on
investments (22,305,663)
Net unrealized appreciation (depreciation)
on foreign currency related transactions:
Beginning of year 263,635
End of year (149,751)
Net change in unrealized depreciation on
foreign currency
related transactions (413,386)
Increase (decrease) in unrealized
appreciation or depreciation--net (22,719,049)
Net loss on investments and foreign
currency related transactions (25,366,223)
Net decrease in net assets resulting from operations ($ 5,362,725)
</TABLE>
See Notes to Financial Statements.
<PAGE>

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
Year ended July 31,
1994 1993
<S> <C> <C>
Operations:
Investment income--net (Note 1) $ 20,003,498 $ 7,269,131
Realized gain (loss) on investments and foreign currency related
transactions--net (Notes 1 and 3) (2,647,174) 5,919,178
Increase (decrease) in unrealized appreciation or depreciation--net (22,719,049) 4,634,203
Net increase (decrease) in net assets resulting from operations (5,362,725) 17,822,512
Net equalization charges and credits (Note 1) -0- 3,920
Distributions to shareholders from (Notes 1 and 5):
Investment income--net--Class A Shares (8,180,776) (6,901,194)
In excess of investment income--net--Class A Shares (297,073) (214,029)
Tax basis return of capital--Class A Shares (557,304) -0-
Investment income--net--Class B Shares (8,336,957) (457,237)
In excess of investment income--net--Class B Shares (170,776) (158,938)
Tax basis return of capital--Class B Shares (862,946) -0-
Investment income--net--Class C Shares (3,485,765) (262,227)
In excess of investment income--net--Class C Shares (111,966) (88,370)
Tax basis return of capital--Class C Shares (313,820) -0-
Total distributions to shareholders (22,317,383) (8,081,995)
Capital share transactions (exclusive of net equalization charges and
credits) (Note 2):
Proceeds from shares sold--Class A Shares 56,687,657 27,021,331
Proceeds from shares sold--Class B Shares 157,431,744 34,872,989
Proceeds from shares sold--Class C Shares 59,770,321 19,276,305
Payment for shares redeemed--Class A Shares (33,988,212) (23,312,586)
Payment for shares redeemed--Class B Shares (20,279,764) (926,442)
Payment for shares redeemed--Class C Shares (17,427,275) (442,638)
Net asset value of shares issued in reinvestment of distributions from:
Income, in excess of income and return of capital--Class A Shares 4,552,241 3,757,624
Income, in excess of income and return of capital--Class B Shares 4,762,342 249,143
Income, in excess of income and return of capital--Class C Shares 2,531,228 215,119
Net increase in net assets resulting from capital share transactions 214,040,282 60,710,845
Total increase in net assets 186,360,174 70,455,282
Net assets:
Beginning of year 140,914,624 70,459,342
End of year (including accumulated distributions in excess of investment
income--net as follows: July 1994--($1,089,927) and July 1993--0--(Note 1) $327,274,798 $140,914,624
</TABLE>

See Notes to Financial Statements.

<PAGE>

Keystone America Strategic Income Fund
NOTES TO FINANCIAL STATEMENTS

(1.) Significant Accounting Policies

Keystone America Strategic Income Fund (the "Fund"), formerly Keystone
America High Yield Bond Fund, is a Massachusetts business trust for which
Keystone Management, Inc. ("KMI") is the Investment Manager and 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 issues Class A, Class B and Class C 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 payable upon redemption within three calendar years after the year of
purchase. Class C shares are sold subject to a contingent deferred sales
charge payable upon redemption within one year after purchase. Class C shares
are available only through dealers who have entered into special distribution
agreements with Keystone Distributors, Inc. ("KDI"), the Fund's principal
underwriter.

Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting
of members of current and former management of Keystone. 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.

A futures contract is an agreement between two parties to buy and sell a
specific 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

<PAGE>

("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.

Exchange rate linked securities are debt securities which are indexed to
certain specific foreign exchange rates. The exchange rate linked securities
which the Fund will purchase are dollar denominated and pay interest and
principal in U.S. dollars. The principal amount of these securities will be
adjusted upwards or downwards at maturity to reflect changes in the exchange
rate between the dollar and one or more indexed currencies while the
obligation is outstanding.

B. Securities transactions are accounted for on 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 original issue 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 is 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 excise tax liability by making the required distributions under the
Internal Revenue Code.

D. For the year ended July 31, 1993, the Fund used the accounting practice
known as equalization by which a portion of the proceeds from sales and the
costs of redemptions of capital shares (equivalent on a per share basis to
the amount of undistributed net income on the date of the transaction was
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share was not affected by sales or
redemptions of shares. Effective August 1, 1993 the Fund discontinued
equalization accounting.

E. 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.

<PAGE>

Keystone America Strategic Income Fund

F. In connection with portfolio purchases and sales of securities denominated
in a foreign currency, the Fund may enter into foreign currency exchange
contracts ("contracts"). Additionally, from time to time, the Fund may enter
into contracts 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 risks that the other party will not complete the obligations of the
contracts.

G. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income are based on tax
basis net income. From time to time, the Fund may distribute dividends which
exceed book basis net income. Excess distributions were previously charged to
the Fund's undistributed net investment income. Distributions after January
31, 1990 were charged to the Fund's undistributed net investment income to
the extent of book basis net income available. The remainder of the
distributions were charged to paid-in capital. Effective August 1, 1993, the
Fund adopted Statement of Position 93-2: Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions by Investment Companies. As a result of this statement,
the Fund changed the classification of distributions to shareholders to
better disclose the differences between financial statement amounts and
distributions determined in accordance with income tax regulations.
Accordingly, amounts as of July 31, 1994 have been reclassified to reflect an
increase in paid-in capital of $776,232 and decreases in accumulated realized
gains (losses) on investment transactions--net and undistributed investment
income--net (accumulated distributions in excess of investment income--net)
of $266,120 and $510,112, respectively, to reflect adoption of the statement.

(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:
<TABLE>
<CAPTION>
Class A Shares
Year Ended July 31,
1994 1993
<S> <C> <C>
Shares sold 7,102,946 3,656,466
Shares redeemed (4,281,723) (3,305,756)
Shares issued in reinvestment
of distributions from income
and return of capital 576,905 525,898
Net increase 3,398,128 876,608
</TABLE>

<TABLE>
<CAPTION>
Class B Shares
February 1, 1993
Year (Date of Initial
Ended Public Offering)
July 31, to July 31,
1994 1993
<S> <C> <C>
Shares sold 19,549,754 4,576,616
Shares redeemed (2,576,838) (119,773)
Shares issued in reinvestment
of distributions from income
and return of capital 606,379 32,375
Net increase 17,579,295 4,489,218
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Class C Shares
February 1, 1993
Year (Date of Initial
Ended Public Offering)
July 31, to July 31,
1994 1993
<S> <C> <C>
Shares sold 7,433,632 2,531,341
Shares redeemed (2,223,361) (58,418)
Shares issued in reinvestment
of distributions from income
and return of capital 321,340 28,034
Net increase 5,531,611 2,500,957
</TABLE>

The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares.

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 KDI 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 shares sold by such others and remaining
outstanding on the books of the Fund 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 3.00% of the value of each share
sold; and/or (ii) service fees currently at an annual rate of 0.25% of the
average net asset value of shares sold by such others and remaining
outstanding on the books of the Fund 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 the Class B Distribution
Plan, payments to KDI will continue at the annual rate of 1.00% of the
average daily net asset value of Class B shares, as compensation for its
services which had been earned while the Class B Distribution Plan was in
effect. Unreimbursed distribution expenses at July 31, 1994 were $10,692,537.

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)(i) a commission at the time of purchase to 1.00% of the value of
each share sold, such payment to consist of a commission in the amount of
0.75% and the first year's service fee in advance in the amount of 0.25%, and
(ii) beginning approximately fifteen months after purchase, a commission at
an annual rate of 0.75% (subject to applicable limitations imposed by the
rules of National Association of Securities Dealers, Inc.) plus service fees
at an annual rate of 0.25% of the average daily net asset value of shares
sold by such others remaining outstanding on the books of the Fund for
specified periods. Unreimbursed distribution expenses at July 31, 1994
were $4,177,757.

For the year ended July 31, 1994, the Fund paid KDI $260,276, $1,186,729 and
$491,530 for Class A, Class B and Class C distribution expenses, respectively.

Presently, the Fund's class-specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan.

<PAGE>

Keystone America Strategic Income Fund
(3.) Securities Transactions

As of July 31, 1994, the Fund had a capital loss carryover for federal income
tax purposes of approximately $25,557,000 which expires as follows: 1998--
$1,843,000, 1999--$11,547,000 and 2000-- $12,167,000. For the year ended July
31, 1994, purchases and sales of investment securities (including proceeds
received at maturity) were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
<S> <C> <C>
Portfolio securities $ 436,674,864 $ 233,627,047
Short-term investments 2,690,532,680 2,686,787,680
$3,127,207,544 $2,920,414,727
</TABLE>

(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 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, 1994, the Fund paid or accrued to KMI 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 KMI,
$1,463,524 was paid to Keystone for its services to the Fund.

During the year ended July 31, 1994 the Fund paid or accrued to KIRC $738,610
for shareholder services and a total of $15,491 to KIRC and KGI 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.

(5.) Distributions to Shareholders

Distributions of $0.054 per share for Class A, $0.049 for Class B, and $0.049
for Class C from net investment income were declared payable by September 7,
1994 to shareholders of record August 25, 1994. 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.

<PAGE>

(6.) Forward Foreign Currency Exchange Contracts

At July 31, 1994, the Fund had entered into the following currency exchange
contracts that obligates the Fund to deliver currencies at specified future
dates. The unrealized depreciation of $150,435 on these contracts is included
in the accompanying financial statements. The terms of these contracts are as
follows:
<TABLE>
<CAPTION>
Exchange Currency to U.S. $ value Currency to U.S. $ value
date be delivered as of 7/31/94 be received as of 7/31/94
<S> <C> <C> <C> <C>
8/2/94 4,142,284 $ 4,142,284 5,747,626 $ 4,155,035
U.S. $ Canadian $
8/2/94 5,747,626 4,155,034 4,128,300 4,128,300
Canadian $ U.S. $
9/14/94 3,533,952 3,533,952 5,552,545,100 3,479,373
U.S. $ Italian Lira
9/14/94 5,552,545,100 3,479,373 3,449,000 3,449,000
Italian Lira U.S. $
9/19/94 6,059,129 4,374,200 4,322,700 4,322,700
Canadian $ U.S. $
$19,684,843 $19,534,408
</TABLE>
<PAGE>

Keystone America Strategic Income Fund
INDEPENDENT AUDITORS' REPORT

The Trustees and Shareholders
Keystone America Strategic Income Fund

We have audited the accompanying statement of assets and liabilities of
Keystone America Strategic Income Fund, including the schedule of
investments, as of July 31, 1994, 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 seven-year period ended July 31, 1994 and the period
from February 13, 1987 (commencement of operations) to July 31, 1987 for
Class A shares and for the year ended July 31, 1994, and for the period from
February 1, 1993 (date of initial offering) 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 audit 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, 1994 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 America Strategic Income Fund as of July 31, 1994, 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 9, 1994