KEYSTONE STRATEGIC INCOME FUND, 497, 1997-01-02

KEYSTONE STRATEGIC INCOME FUND
497, 1997-01-02

Previous: HANCOCK JOHN WORLD FUND, 497J, 1997-01-02

Next: KEYSTONE GOVERNMENT SECURITIES FUND, 497, 1997-01-02

<PAGE>
KEYSTONE STRATEGIC INCOME FUND
PROSPECTUS NOVEMBER 29, 1996
AS SUPPLEMENTED JANUARY 1, 1997

CLASS A
CLASS B
CLASS C

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

This prospectus provides information regarding the Class A, B and C shares
offered by the Fund. Information on share classes and their fee and sales charge
structures may be found in the "Expense Information," "How to Buy Shares,"
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans and Agreements" and "Fund Shares" sections
of this prospectus.

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 is contained in a statement of
additional information dated December 10, 1996, as supplemented, 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 provided on this
page.

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

TABLE OF CONTENTS
Page
Expense Information 2
Financial Highlights 3
The Fund 6
Investment Objectives and Policies 6
Investment Restrictions 7
Risk Factors 8
Pricing Shares 11
Dividends and Taxes 11
Fund Management and Expenses 12
Distribution Plans and Agreements 15
How to Buy Shares 18
Alternative Sales Options 19
Contingent Deferred Sales Charge and Waiver of Sales Charges 22
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

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT INSURED OR OTHERWISE PROTECTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.

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>
EXPENSE INFORMATION
KEYSTONE STRATEGIC INCOME FUND

The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in Class A, B and C shares* of the Fund will
bear directly or indirectly. For more complete descriptions of the various costs
and expenses, see the following sections of this prospectus: "Fund Management
and Expenses"; "How to Buy Shares"; "Alternative Sales Options"; "Contingent
Deferred Sales Charge and Waiver of Sales Charges"; "Distribution Plans and
Agreements"; and "Shareholder Services."

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ........... 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load ............................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original declining to 1.00% in year and 0.00%
purchase price or redemption proceeds, as the sixth year and thereafter
applicable) 0.00% thereafter
Exchange Fee ...................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(as a percentage of average net assets)
Management Fees ................................... 0.65% 0.65% 0.65%
12b-1 Fees ........................................ 0.23% 1.00%(6) 1.00%(6)
Other Expenses .................................... 0.42% 0.42% 0.42%
---- ---- ----
Total Fund Operating Expenses ..................... 1.30% 2.07% 2.07%
==== ==== ====
<CAPTION>
EXAMPLES(7) 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 $ 87 $115 $197
Class B ............................................................... $71 $ 95 $131 $211
Class C ............................................................... $31 $ 65 $111 $240
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ............................................................... $60 $ 87 $115 $197
Class B ............................................................... $21 $ 65 $111 $211
Class C ............................................................... $21 $ 65 $111 $240
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>
- ----------
(1) Class B shares purchased on or after January 1, 1997, convert tax free to Class A shares after seven years. See "Class B
Shares" for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with Evergreen
Keystone Distributor, Inc., the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of $1,000,000 or more are not subject to a sales charge
at the time of purchase, but may be subject to a contingent deferred sales charge. See the "Class A Shares" and "Contingent
Deferred Sales Charge and Waiver of Sales Charges" sections of this prospectus for an explanation of the charge.
(5) Expense ratios are for the Fund's fiscal year ended July 31, 1996. Total Fund Operating Expenses includes indirectly paid
expenses.
(6) 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. ("NASD").
(7) 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%.
* The Fund also offers Class Y shares which bear no distribution or shareholder servicing expenses. Class Y shares are only
available to certain investors. See "Fund Shares."
</FN>
</TABLE>
<PAGE>

FINANCIAL HIGHLIGHTS
KEYSTONE STRATEGIC INCOME FUND -- CLASS A SHARES

(For a share outstanding throughout each year)

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 appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
its Annual Report, which will be made available upon request and without charge.

<TABLE>
<CAPTION>
FEBRUARY 13,
1987
(COMMENCEMENT
YEAR ENDED JULY 31, OF OPERATIONS)
-------------------------------------------------------------------------------------------- TO
1996 1995 1994(c) 1993 1992 1991 1990 1989 1988 JULY 31, 1987
------- ------- -------- ------- ------- ------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR ... $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17 $ 9.02 $ 9.36 $ 10.04 $10.00
------- ------- -------- ------- ------- ------- ------- -------- -------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income . 0.54 0.64 0.61 0.69 0.78 0.89 1.03 1.10 1.05 0.22
Net realized and
unrealized gain
(loss) on
investments, closed
futures contracts and
forward foreign
currency related
transactions ........ (0.09) (0.45) (0.44) 0.89 0.89 (1.01) (1.79) (0.31) (0.65) 0
------- ------- -------- ------- ------- ------- ------- -------- -------- ------
Total from investment
operations .......... 0.45 0.19 0.17 1.58 1.67 (0.12) (0.76) 0.79 0.40 0.22
------- ------- -------- ------- ------- ------- ------- -------- -------- ------
LESS DISTRIBUTIONS FROM:
Net investment income . (0.52) (0.60) (0.61) (0.72) (0.75) (0.89) (1.04) (1.11) (1.08) (0.18)
In excess of net
investment income ... 0 (0.03) (0.03) (0.02) 0 (0.06) (0.05) 0 0 0
Tax basis return of
capital ............. (0.05) (0.02) (0.04) 0 0 0 0 0 0 0
Net realized gains .... 0 0 0 0 0 0 0 (0.02) 0 0
------- ------- -------- ------- ------- ------- ------- -------- -------- ------
Total distributions ... (0.57) (0.65) (0.68) (0.74) (0.75) (0.95) (1.09) (1.13) (1.08) (0.18)
------- ------- -------- ------- ------- ------- ------- -------- -------- ------
NET ASSET VALUE END
OF YEAR .............. $ 6.77 $ 6.89 $ 7.35 $ 7.86 $ 7.02 $ 6.10 $ 7.17 $ 9.02 $ 9.36 $10.04
======= ======= ======== ======= ======= ======= ======= ======== ======== ======
TOTAL RETURN(a) ....... 6.84% 3.00% 1.86% 24.13% 28.73% 0.54% (8.55%) 9.00% 4.49% 2.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ..... 1.30%(d) 1.33% 1.32% 1.80% 2.09% 2.00% 2.00% 1.81% 1.28% 1.00%(b)
Total expenses
excluding
reimbursement ..... 1.30%(d) 1.33% 1.32% 1.80% 2.12% 2.25% 2.01% 1.90% 2.08% 6.08%(b)
Net investment income 8.05% 9.31% 7.79% 9.50% 11.73% 15.23% 12.91% 12.06% 10.98% 10.12%(b)
Portfolio turnover rate 101% 95% 92% 151% 95% 82% 36% 73% 46% 13%
NET ASSETS END OF YEAR
(THOUSANDS) ......... $68,118 $85,970 $105,181 $85,793 $70,459 $70,246 $83,106 $138,499 $114,310 $8,191
======= ======= ======== ======= ======= ======= ======= ======== ======== ======

<FN>
(a) Excluding applicable sales charges.
(b) Annualized for the period from April 14, 1987 (Commencement of Investment Operations) to July 31, 1987.
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31, 1996 includes indirectly paid expenses. Excluding
indirectly paid expenses, the expense ratio would have been 1.28%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE STRATEGIC INCOME FUND -- CLASS B SHARES

(For a share outstanding throughout each year)

<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED JULY 31, (DATE OF INITIAL
------------------------------------ PUBLIC OFFERING) TO
1996 1995 1994(c) JULY 31, 1993
------- -------- -------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $ 6.92 $ 7.38 $ 7.89 $ 7.07
------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............ 0.50 0.60 0.55 0.24
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions ................... (0.09) (0.47) (0.44) 0.92
------- -------- -------- -------
Total from investment operations . 0.41 0.13 0.11 1.16
------- -------- -------- -------
LESS DISTRIBUTIONS FROM:
Net investment income ............ (0.47) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital ...... (0.05) (0.01) (0.04) 0
------- -------- -------- -------
Total distributions .............. (0.52) (0.59) (0.62) (0.34)
------- -------- -------- -------
NET ASSET VALUE END OF YEAR ...... $ 6.81 $ 6.92 $ 7.38 $ 7.89
======= ======== ======== =======
TOTAL RETURN(a) .................. 6.21% 2.12% 1.10% 16.75%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ................. 2.07%(d) 2.06% 2.07% 2.37%(b)
Net investment income .......... 7.28% 8.58% 7.11% 7.18%(b)
Portfolio turnover rate .......... 101% 95% 92% 151%
NET ASSETS END OF YEAR (THOUSANDS) $123,389 $149,091 $162,866 $35,415
======== ======== ======== =======

(For a share outstanding throughout each year)

<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED JULY 31, (DATE OF INITIAL
------------------------------------ PUBLIC OFFERING) TO
1996 1995 1994(c) JULY 31, 1993
------- -------- -------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $ 6.92 $ 7.37 $ 7.88 $ 7.07
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............ 0.49 0.59 0.55 0.24
Net realized and unrealized gain
(loss) on investments, closed
futures contracts and forward
foreign currency related
transactions ................... (0.09) (0.45) (0.44) 0.91
------- ------- ------- -------
Total from investment operations . 0.40 0.14 0.11 1.15
------- ------- ------- -------
LESS DISTRIBUTIONS FROM:
Net investment income ............ (0.47) (0.55) (0.55) (0.24)
In excess of net investment income 0 (0.03) (0.03) (0.10)
Tax basis return of capital ...... (0.05) (0.01) (0.04) 0
------- ------- ------- -------
Total distributions .............. (0.52) (0.59) (0.62) (0.34)
------- ------- ------- -------
NET ASSET VALUE END OF YEAR ...... $ 6.80 $ 6.92 $ 7.37 $ 7.88
======= ======= ======= =======
TOTAL RETURN(a) .................. 6.07% 2.27% 1.09% 16.61%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ................. 2.07%(d) 2.08% 2.07% 2.25%(b)
Net investment income .......... 7.29% 8.56% 7.09% 7.35%(b)
Portfolio turnover rate .......... 101% 95% 92% 151%
NET ASSETS END OF YEAR (THOUSANDS) $31,816 $46,221 $59,228 $19,706
======= ======== ======= =======

<FN>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
(d) Ratio of total expenses to average net assets for the year ended July 31, 1996 includes indirectly
paid expenses. Excluding indirectly paid expenses, the expense ratio would have been 2.05%.
</FN>
</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 more than thirty funds advised and managed
by Keystone Investment Management Company ("Keystone"), the Fund's
investment adviser.

INVESTMENT OBJECTIVES AND POLICIES

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

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

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

Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objectives.

PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund will invest principally in domestic high
yield bonds and foreign government and corporate debt securities. In addition,
the Fund will, from time to time, invest a portion of its assets in U.S.
government securities.

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),
foreign governments, their agencies and instrumentalities, and debt
obligations issued by U.S. corporations denominated in non-U.S. currencies.
These debt obligations may include bonds, debentures, notes and short-term
obligations.

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

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

OTHER ELIGIBLE SECURITIES
Under ordinary circumstances, the Fund may also invest a limited portion of
its assets in the securities described below. When, in Keystone's opinion,
market conditions warrant, the Fund may invest up to 100% of its assets for
temporary defensive purposes in the money market securities described below.
When the Fund is investing for temporary defensive purposes, it is not pursuing
its investment objective.

EQUITY SECURITIES. The Fund may invest in preferred stocks, including
adjustable rate 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 its agencies or instrumentalities 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 Service ("Moody's"), 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 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.

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. The Fund may also enter into currency and other financial
futures contracts and related options transactions for hedging purposes and not
for speculation. The Fund may employ new investment techniques with respect to
such options and 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 "Risk
Factors" and "Additional Investment Information" sections of this prospectus and
the statement of additional information.

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

Generally, the Fund may not do the following:

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

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

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.

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

By itself, the Fund does not constitute a balanced investment program. The
Fund seeks high current income and capital appreciation predominantly from high
yielding, high risk bonds, commonly known as "junk bonds." This investment
approach involves risks greater than a more conservative approach. You should
take into account your own investment objectives as well as your other
investments when considering an investment in the Fund.

Certain risks related to the Fund are discussed below. In addition to the
risks discussed in this section, specific risks attendant to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.

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

BELOW-INVESTMENT GRADE BONDS. Since 1935, Keystone has had experience
investing in bonds selling at a substantial discount from par, convertible
bonds, below-investment 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. Below-investment 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 below-investment 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 below-investment grade bonds.

While investment in the Fund provides opportunities to maximize return over
time, investors should be aware of the following risks associated with
below-investment 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 these securities 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) Their value 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) Their value, like those of other fixed income securities, fluctuates in
response to changes in interest rates; generally rising when interest rates
decline and falling when interest rates rise. For example, if interest rates
increase after a fixed income security is purchased, the security, if sold prior
to maturity, may return less than its cost. The prices of below-investment 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.

(5) The secondary market for such securities may be less liquid at certain
times than the secondary market for higher quality debt securities, which may
adversely effect (i) the market price of the security, (ii) the Fund's ability
to dispose of particular issues and (iii) the Fund's ability 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. PIKs 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. The Fund may also invest in
unrated securities that, in Keystone's judgment, offer comparable yields and
risks as securities that are rated. 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.

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

The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month during the last fiscal year in
securities assigned to the various rating categories by S&P and in unrated
securities determined by Keystone to be of comparable quality. Since the
percentages in this table are based on month-end averages throughout the Fund's
fiscal year, they do not reflect the Fund's holdings at any one point in time.
The percentages in each category may be higher or lower on any day than those
shown in the table below.
<PAGE>

*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ------ ------------- -------------
AAA 17.97% 0.00%
AA 10.71% 0.00%
A 1.14% 0.00%
BBB 0.75% 0.00%
BB 20.01% 0.83%
B 18.77% 17.77%
CCC 0.00% 1.69%
CC 0.00% 0.20%
CA 0.00% 0.00%
Unrated* 20.49% 0.00%
U.S. Governments,
equities and others 10.16% 0.00%
------
TOTAL 100.00%
======

Since the Fund takes an aggressive approach to investing, Keystone attempts 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 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, yield to
maturity and the percentage of zero coupon bonds, PIKs and non-accruing items in
the Fund's portfolio.

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: publicly available information on issuers and securities
may be scarce; many foreign countries do not follow the same accounting,
auditing and financial reporting standards as are used in the U.S.; market
trading volumes may be smaller, resulting in less liquidity and more price
volatility compared to U.S. securities of comparable quality; there may be less
regulation of securities trading and its participants; the possibility may exist
for expropriation, confiscatory taxation, nationalization, establishment of
exchange controls, political or social instability or negative diplomatic
developments; and dividend or interest withholding may be imposed at the source.

Fluctuations in foreign exchange rates impose an additional level of risk,
possibly affecting the value of the Fund's foreign investments and earnings,
gains and losses realized through trades, and the unrealized appreciation or
depreciation of investments. The Fund may also incur costs when it shifts assets
from one country to another.

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.

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.

PRICING SHARES
The Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock Exchange (the
"Exchange") is open. However, the Fund does not compute its net asset value 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 is currently 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.

Current values for the Fund's portfolio securities are determined as follows:

(1) Certain publicly traded bonds are valued 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.

(2) Short-term investments maturing in sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which approximates market.

(3) 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.

(4) 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 continue to qualify as a regulated
investment company (a "RIC") under the Internal Revenue Code of 1986, as amended
(the "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 RIC 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.

If the Fund qualifies as a RIC 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, if any, annually. Shareholders
receive Fund distributions in the form of additional shares of that class of
shares upon which the distribution is based or, at the shareholder's option, in
cash. Fund distributions in the form of additional shares are made at net asset
value without the imposition of a sales charge.

Because Class A shares bear most of the costs of distribution of such shares
through payment of a front-end sales charge while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B and Class C shares will generally be higher than those
of Class A shares 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.

Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains distributions are taxable
as ordinary income. Net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares are held for
less than six months, however, and are sold at a loss, such loss will be treated
as a long-term capital loss for tax purposes to the extent of any long-term
capital gains dividends received. Any taxable dividends declared in October,
November or December to shareholders of record in such a month, and paid by the
following January 31, will be includable in the taxable income of shareholders
on December 31 of the year in which the dividends were declared.

The Fund advises its shareholders 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
provides investment advice, management and administrative services to the Fund.

INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"). Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.

On December 11, 1996, Keystone Investments succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments is a wholly-owned subsidiary of First Union National Bank of North
Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the U.S. based on total
assets as of September 30, 1996.

First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG"),
together with Lieber & Company and Evergreen Asset Management Corp. ("Evergreen
Asset"), wholly-owned subsidiaries of FUNB, manage or otherwise oversee the
investment of over $50 billion in assets belonging to a wide range of clients,
including the Evergreen Family of Funds.

Pursuant to its Investment Advisory and Management Agreement with the Fund
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund and provides all
necessary office space, facilities and equipment.

The Fund currently pays Keystone 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.

Keystone's fee is computed as of the close of business each business day and
payable daily.

The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, 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 shareholders the Fund. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
the Fund's Independent Trustees (Trustees who are not "interested persons" of
the Fund, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the Fund's Distribution Plans or any agreement related
thereto), cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated, without penalty, on 60 days'
written notice by the Fund or Keystone or may be terminated by a vote of
shareholders of the Fund. The Advisory Agreement will terminate automatically
upon its assignment.

PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"),
which is not affiliated with First Union, is now the Fund's principal
underwriter (the "Principal Underwriter"). EKD replaces Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Fund's principal underwriter. EKIS may no longer act as
principal underwriter of the Fund due to regulatory restrictions imposed by the
Glass-Steagall Act upon national banks such as FUNB and their affiliates, that
prohibit such entities from acting as the underwriters or distributors of mutual
fund shares. While EKIS may no longer act as principal underwriter of the Fund
as discussed above, EKIS may continue to receive compensation from the Fund or
the Principal Underwriter in respect of underwriting and distribution services
performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to .75% of the average daily net assets of the Fund,
subject to certain restrictions. Both EKD and Furman Selz are located at 230
Park Avenue, New York, New York 10169.

SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to the Fund
pursuant to a sub-administration agreement. For its services under that
agreement, Furman Selz receives a fee from Keystone at the maximum annual rate
of .01% of the average daily net assets of the Fund.

It is expected that on or about January 2, 1997, Furman Selz will transfer
EKD, and its related mutual fund distribution and administration business, to
BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.

PORTFOLIO MANAGERS
Richard M. Cryan has managed the domestic high yield, high risk bond portion
of the Fund's portfolio since 1994. Mr. Cryan is a Keystone Senior Vice
President and has more than 16 years of experience in fixed-income investing.
He is responsible for the Fund's overall management.

Gilman C. Gunn has managed the portion of the Fund's portfolio invested in
foreign securities since 1993. Mr. Gunn is a Keystone Senior Vice President
and has served as the head of Keystone's international group for over four
years. Prior to that, he headed a global investment department of Citibank in
London. Mr. Gunn has over 22 years of experience in foreign securities
investing.

Christopher P. Conkey has managed the portion of the Fund's portfolio
invested in U.S. Government Securities since 1993. Mr. Conkey is a Keystone
Senior Vice President and has more than 13 years of experience in fixed-income
investing.

FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and distribution plan fees discussed in this prospectus, the principal expenses
that the Fund is expected to pay include, but are not limited to, expenses of
its Independent Trustees; transfer, dividend disbursing, and shareholder
servicing agent expenses; custodian expenses; fees of its independent auditors;
fees of legal counsel to the Fund and its Independent Trustees; fees payable to
government agencies, including registration and qualification fees attributable
to 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.

For the fiscal year ended July 31, 1996, the Fund paid or accrued to Keystone
Management, Inc., the Fund's former investment manager, investment management
and administrative services fees of $1,663,669 (0.65% of the Fund's average
daily net asset value on an annualized basis). Of such amount, $1,414,119 was
paid to Keystone for its services to the Fund.

For the fiscal year ended July 31, 1996, the Fund paid or accrued $655,455 to
Evergreen Keystone Service Company (formerly Keystone Investor Resource Center,
Inc.) ("EKSC") for services rendered as the Fund's transfer agent and dividend
disbursing agent and $24,365 to Keystone for certain accounting services. EKSC,
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is a
wholly-owned subsidiary of Keystone.

For the fiscal year ended July 31, 1996, the Fund's Class A, Class B and Class
C shares paid 1.30%, 2.07% and 2.07%, respectively, of their respective average
class net assets in expenses (including indirectly paid expenses).

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 consider the number of shares of the Fund sold by the
broker-dealer. In addition, broker-dealers executing portfolio transactions,
from time to time, may be affiliated with the Fund, Keystone, the 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, 1995 and 1996, the Fund's portfolio
turnover rates were 95% and 101%, respectively. High portfolio turnover may
involve correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund, as well as additional realized
gains and/or losses. 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.

For further information about brokerage and distributions, see the statement
of additional information.

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

DISTRIBUTION PLANS AND AGREEMENTS

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 by the Fund
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers),
as service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipient and outstanding on the books
of the Fund for specified periods.

CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B Distribution Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as broker-dealers) and to EKIS,
the predecessor to the Fund's Principal Underwriter, (1) as commissions for
Class B shares sold, (2) as shareholder service fees and (3) as interest.
Amounts paid or accrued to the Principal Underwriter or EKIS in the aggregate
may not exceed the annual limitation referred to above.

The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealers or other party will also receive service fees at an annual rate
of 0.25% of the value of Class B shares maintained by the recipient and
outstanding on the books of the Fund for specified periods. See "Distribution
Plans Generally" below.

CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares (the
"Class C Distribution Plan") that provides for expenditures by the Fund at an
annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the Distribution of Class C shares. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) and to EKIS, the predecessor
to the Fund's Principal Underwriter, (1) as commissions for Class C shares sold,
(2) as shareholder service fees, and (3) as interest. Amounts paid or accrued to
the Principal Underwriter or EKIS in the aggregate may not exceed the annual
limitation referred to above.

The Principal Underwriter generally reallows to broker-dealers 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 Generally") plus service fees which are paid at the
annual rate of 0.25%, respectively, of the value of Class C shares maintained by
the recipient and outstanding on the books of the Fund for specified periods.
See "Distribution Plans Generally" below.

DISTRIBUTION PLANS GENERALLY
As discussed above, 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 pursuant to Rule 12b-1 under the 1940 Act.

The NASD limits the amount that the Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of its
shares, of which 0.75% may be used to pay 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 amounts (less any contingent deferred sales charges
("CDSCs") paid by shareholders to the Principal Underwriter) remaining unpaid
from time to time.

In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. The Fund has agreed not to reduce the rate of payment of 12b-1 fees in
respect of such Class B shares, unless it terminates such shares' Distribution
Plan completely. If it terminates such Distribution Plan, the Fund may be
subject to adverse distribution consequences.

The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of the Fund will be
provided by FUNB or its affiliates.

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. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).

Unpaid distribution costs at July 31, 1996 were: $9,880,397 for Class B shares
purchased prior to June 1, 1995 (9.10% of net class assets for such Class B
shares); $911,527 for Class B shares purchased on or after June 1, 1995 (6.17%
of net class assets for such Class B shares); and $4,739,883 for Class C shares
(14.90% of net class assets).

Broker-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.

DISTRIBUTION AGREEMENTS
The Fund has entered into principal underwriting agreements (each a
"Distribution Agreement") with the Principal Underwriter. Pursuant to the
Distribution Agreements, the Fund will compensate the Principal Underwriter for
its services as distributor at an annual rate that may not exceed .25 of 1% of
the Fund's average daily net assets attributable to Class A shares, .75 of 1% of
the Fund's average daily net assets attributable to the Class B shares, subject
to certain restrictions, and .75 of 1% of the Fund's average daily net assets
attributable to the Class C shares.

The Fund may also make payments under its Distribution Plans, in amounts of up
to .25 of 1% of its average daily net assets on an annual basis, attributable to
Class A, B and C shares, respectively, to compensate organizations, which may
include, among others, the Principal Underwriter and Keystone or their
respective affiliates, for services rendered to shareholders and/or the
maintenance of shareholder accounts.

The Fund may not pay any distribution or servicing fees during any fiscal
period in excess of NASD limits. Since the Principal Underwriter's compensation
under the Distribution Agreements is not directly tied to the expenses incurred
by the Principal Underwriter, the amount of compensation received by it under
the Distribution Agreements during any year may, subject to certain conditions,
be more than its actual expenses and may result in a profit to the Principal
Underwriter. Distribution expenses incurred by the Principal Underwriter in one
fiscal year that exceed the level of compensation paid to the Principal
Underwriter for that year may be paid from distribution fees received from a
Fund in subsequent fiscal years.

The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund ("Advances"). The Principal Underwriter
intends to seek full reimbursement for such Advances from the Fund (together
with annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
payments, the effect would be to extend the period of time during which the Fund
incurs the maximum amount of costs allowed by a Distribution Plan.

In states where the Principal Underwriter is not registered as a
broker-dealer, shares of the Fund will only be sold through other broker-dealers
or other financial institutions that are registered.

ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to those broker-dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such
broker-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. Broker-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 1933 Act.

The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers including, from time to time, to
First Union Brokerage Services, Inc., an affiliate of Keystone, that satisfy
certain criteria established from time to time by the Principal Underwriter.
These conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on the
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 1.00% of the value of shares sold by such broker-dealer.

The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to banks
and other financial services firms that facilitate transactions in shares of the
Fund for their clients.

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 broker-dealers pursuant to state laws.

EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository institutions
(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.

The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB, are
subject to and in compliance with the aforementioned laws and regulations.

Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone Investments or its affiliates
from performing the services required under the investment advisory contract or
from acting as agent in connection with the purchase of shares of a fund by its
customers. In such event, it is expected that the Trustees would identify, and
call upon each Fund's shareholders to approve, a new investment adviser. If this
were to occur, it is not anticipated that the shareholders of any Fund would
suffer any adverse financial consequences.

HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of the Fund by mailing to the Fund, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Fund. You may also 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 any
amount may be made by check, by wiring Federal funds, by direct deposit or by an
electronic funds transfer ("EFT").

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

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

The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable.

The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.

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 EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.

ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by the Fund:

CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions, Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a CDSC during the month of purchase and the 12-month period
following the month of purchase.

CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are, with certain exceptions, subject to a
CDSC if redeemed during the month of purchase and the 72-month period following
the month of purchase. Class B shares purchased after January 1, 1997, that have
been outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without the imposition of a front-end sales charge or
exchange fee.

CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are subject to a CDSC if they are redeemed
during the month of purchase and the 12-month period following the month of
purchase. Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Principal Underwriter.

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

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

The Fund will not normally accept any purchase of Class B shares in the amount
of $250,000 or more and will not normally accept any purchase of Class C shares
in the amount of $500,000 or more.

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

CLASS A SHARES

Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:

AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------------------------------------
Less than $50,000 ................ 4.75% 4.99% 4.25%
$50,000 but less than $100,000 ... 4.50% 4.71% 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% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%

- ----------
*Rounded to the nearest one-hundredth percent.

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

Purchases of the Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.

With respect to purchases of the Fund's Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions at the following rate: 1.00% of the
investment amount up to $2,999,999; plus 0.50% of the investment amount between
$3,000,000 and $4,999,999; plus 0.25% of the investment amount over $4,999,999.

With respect to purchases of the Fund's Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.

Purchases of the Fund's Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.

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

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

Initial sales charges may be eliminated for persons purchasing Class A shares
that are offered in connection with certain fee based programs, such as wrap
accounts sponsored or managed by broker-dealers, investment advisers, or others
who have entered into special agreements with the Principal Underwriter. Initial
sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of the Fund alone or in combination with Class A
shares of other Keystone America Funds. See Exhibit A to this prospectus.

Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after a change in the registered representative's employment when the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front-end sales charge, or (2)
was at some time subject to, but did not actually pay, a CDSC with respect to
the redemption proceeds.

Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the amount
invested represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front-end sales
charge, or (2) was at some time subject to, but did not actually pay, a CDSC
with respect to the redemption proceeds. This special net asset value purchase
is currently being offered on a calendar month-by-month basis and may be
modified or terminated in the future.

CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, the Fund, with
certain exceptions, imposes a CDSC on Class B shares redeemed as follows:

CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
Month of purchase and the first twelve-month
period following the month of purchase ..... 5.00%
Second twelve-month period following the month
of purchase ................................ 4.00%
Third twelve-month period following the month
of purchase ................................ 3.00%
Fourth twelve-month period following the month
of purchase ................................ 3.00%
Fifth twelve-month period following the month
of purchase ................................ 2.00%
Sixth twelve-month period following the month
of purchase ................................ 1.00%

No CDSC is imposed on amounts redeemed thereafter.

When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plans are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.

Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after the month of purchase, will automatically convert to Class A
shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is the
Fund's opinion that such a conversion will not constitute a taxable event under
federal income tax law. In the event that this ceases to be the case, the Board
of Trustees will consider what action, if any, is appropriate and in the best
interest of such Class B shareholders.

CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Fund imposes a CDSC of 1.00% on shares redeemed during the month
of purchase and the 12-month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to you. The CDSC is retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.

CONTINGENT DEFERRED SALES CHARGE AND
WAIVER OF SALES CHARGES
Any CDSC imposed upon the redemption of Class A, Class B, or Class C shares is
a percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net asset value at the time of purchase of such shares.

With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost of such shares; (2) certain shares with respect to
which the Fund did not pay a commission on issuance, including shares acquired
through reinvestment of dividend income and capital gains distributions; (3)
certain Class A shares held for more than 12 months after the month of purchase;
(4) Class B shares held for more than 72 months after the month of purchase; or
(5) Class C shares held for more than one year after the month of purchase. Upon
request for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.

With respect to Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan (as
a whole) redeems substantially all of its assets.

In addition, no CDSC is imposed on a redemption of shares of the Fund in the
event of (1) death or disability of the shareholder; (2) a lump-sum distribution
from a 401(k) plan or other benefit plan qualified under the Employee Retirement
Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA
plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of accounts having an aggregate net asset value of less than $1,000;
(5) automatic withdrawals under the Systematic Income Plan of up to 1.0% per
month of the shareholder's initial account balance; (6) withdrawals consisting
of loan proceeds to a retirement plan participant; (7) financial hardship
withdrawals made by a retirement plan participant; or (8) withdrawals consisting
of returns of excess contributions or excess deferral amounts made to a
retirement plan participant.

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

HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Fund, c/o EKSC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Fund. Your signature(s) on the written
order and certificates must be guaranteed as described below. In order to redeem
by telephone or to engage in telephone transactions generally, you must complete
the authorization in your account application. Proceeds for shares redeemed on
telephone order will be deposited by wire or EFT only to the bank account
designated in your account application.

You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable CDSC, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for this
service. Your broker-dealer, however, may charge a service fee.

The redemption value equals the net asset value per share adjusted for
fractions of a cent and may be more or less than your cost depending upon
changes in the value of the Fund's portfolio securities between purchase and
redemption. A CDSC may be imposed by the Fund at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you.

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

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

For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND EKSC'S POLICIES. The Fund or EKSC may waive this
requirement or may 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 EKSC reserve the right to withdraw this waiver
at any time.

If the Fund receives a redemption order, but you have 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 you and
process the order on the day such information is received.

TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to engage
in telephone transactions generally, you must complete the appropriate sections
of the Fund's application.

In order to insure that instructions received by EKSC 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-dealer as set forth herein.

SMALL ACCOUNTS
Due to 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 CDSCs are
applied to such redemptions.

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

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

SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from EKSC 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 do 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 the same type of Class B shares of other
Keystone America Funds and the same type of Class B shares of KLT; and

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

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

(1) Class A shares acquired without a front-end sales charge,

(2) Class B shares that have been held for less than 72 months, or

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

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

You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for exchange
are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction. The Fund reserves the right to terminate
this exchange offer or to change its terms, including the right to charge for
exchanges.

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

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

An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. 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.

AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $25 per month or $75 per quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.

To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call EKSC. Please
include your account numbers. Termination may take up to 30 days.

RETIREMENT PLANS
The Fund has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.

SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $75 and may be as much as 1.0% per month
or 3.0% per quarter of the total net asset value of the Fund shares in your
account when the Systematic Income Plan was opened. Fixed withdrawal payments
are not subject to a CDSC. Excessive withdrawals may decrease or deplete the
value of your account. Moreover, 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 a Systematic Income Plan.

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

Prior to participating in dollar cost averaging, you must establish an account
in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment you wish to make and (2) 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. See Exhibit A -- "Reduced Sales Charges" at
the back of the prospectus.

TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your 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. See Exhibit A --
"Reduced Sales Charges" at the back of the prospectus.

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

PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield."
ALL DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
and current yield are computed separately for each class of shares of the Fund.

Total return refers to average annual compounded rates of return over
specified periods determined by comparing the initial amount invested in a
particular class to the ending redeemable value of that amount. The resulting
equation assumes reinvestment of all dividends and distributions and deduction
of the maximum sales charge or applicable CDSC and all recurring charges, if
any, applicable to all shareholder accounts. The exchange fee is not included in
the calculation.

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

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

FUND SHARES
The Fund issues Class A, B, C and Y 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 the respective class; (2) each class of shares has
exclusive voting rights with respect to its Distribution Plan, if any; (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. Class Y shares bear no distribution or shareholder
servicing expenses. Class Y shares are only available to (i) persons who at or
prior to December 31, 1994, owned shares in a mutual fund managed by Evergreen
Asset, (ii) certain institutional investors and (iii) investment advisory
clients of CMG, Evergreen Asset or their affiliates. Shares may be exchanged as
explained under "Shareholder Services," but will have no other preference,
conversion, exchange or preemptive rights. Shares are redeemable, transferable
and freely assignable as collateral. The Fund is authorized to issue additional
series or classes 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 holders of 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
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
- --------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets such as
U.S. government securities or other high grade debt securities, 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.

"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. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained 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 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 in furtherance of 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 establish
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 U.S. 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") 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 an 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.

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

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

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

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

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

REDUCED SALES CHARGES

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

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

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

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

For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. EKSC 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 EKSC, 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 EKSC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.

When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, EKSC 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 EKSC. 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
EKSC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.

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

()

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

- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------

Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169

SIF-P Sup. 1/97
39.5M
540093 [recycle logo]

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

[graphic omitted]

STRATEGIC
INCOME FUND

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

---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------

PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE STRATEGIC INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

DECEMBER 10, 1996
AS SUPPLEMENTED JANUARY 1, 1997

This statement of additional information pertains to all classes of shares
of Keystone Strategic Income Fund (the "Fund"). It is not a prospectus, but
relates to, and should be read in conjunction with, either the prospectus
offering Class A, B and C shares, dated November 29, 1996, as supplemented, or
the separate prospectus offering Class Y shares, dated December 10, 1996, as
supplemented. You may obtain a copy of either prospectus from the Fund's
principal underwriter, Evergreen Keystone Distributor, Inc., or your
broker-dealer. Evergreen Keystone Distributor, Inc. is located at 230 Park
Avenue, New York, New York 10169.

- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
The Fund ................................................................ 2
Investment Policies...................................................... 2
Investment Restrictions.................................................. 2
Distributions and Taxes.................................................. 4
Valuation of Securities.................................................. 5
Brokerage................................................................ 5
Sales Charges............................................................ 7
Distribution Plans....................................................... 10
Trustees and Officers.................................................... 12
Investment Adviser....................................................... 16
Principal Underwriter.................................................... 18
Sub-administrator........................................................ 19
Declaration of Trust..................................................... 20
Standardized Total Return and Yield Quotations........................... 21
Additional Information................................................... 22
Financial Statements..................................................... 24
Appendix ................................................................ A-1

<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.

Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.

Certain information about the Fund is contained in its prospectuses. 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 yield, 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.

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

The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares (as defined in the Investment Company Act of 1940, as
amended, (the "1940 Act")). Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.

The Fund may not do the following:

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.

- ------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------

The Fund will make distributions from net investment income monthly and
capital gains, if any, annually in shares, or, at the option of the shareholder,
in cash. Distributions are taxable whether received in cash or in additional
shares. Shareholders who have not opted, prior to the record date for any
distribution, to receive cash will receive a number of distributed shares
determined on the basis of the amount of the distribution and the Fund's net
asset value per share computed at the end of the ex-dividend date after
adjustment for the distribution. Net asset value is used in computing the number
of shares in both gains and income distribution reinvestments. Account
statements and/or checks as appropriate will be mailed to shareholders within
seven days after the Fund pays the distribution. Unless the Fund receives
instructions to the contrary from a shareholder before the record date, it will
assume that the shareholder wishes to receive that distribution and future gains
and income distributions in shares. Instructions continue in effect until
changed in writing.

It is not expected that the Fund's income dividends will be eligible for
the corporate 70% dividends received deduction. Distributed long-term capital
gains are taxable as such to the shareholder, regardless of how long the
shareholder has held the Fund's shares. If such shares are held less than six
months and redeemed at a loss, however, the shareholder will recognize a
long-term capital loss on such shares to the extent of the long-term capital
gain distribution received in connection with such shares. If the net asset
value of the Fund's shares is reduced below a shareholder's cost by a capital
gains distribution, such distribution, to the extent of the reduction, would be
a return of investment, though taxable as stated above. Since distributions of
capital gains depend upon profits actually realized from the sale of securities
by the Fund, they may or may not occur. The foregoing comments relating to the
taxation of dividends and distributions paid on the Fund's shares relate solely
to federal income taxation. Such dividends and distributions may also be subject
to state and local taxes.

When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been predetermined to the best
of the Fund's ability to be taxable as ordinary income. 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 as
follows:

(1) short-term investments maturing in 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;

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

(3) securities, including restricted securities, for which complete
quotations are not readily available, and other assets are valued at prices
deemed in good faith to be fair under procedures established by the Fund's Board
of Trustees.

The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing fixed income securities. As a result, it is
likely that most of the valuations for such securities will be based upon their
fair value determined under procedures that have been approved by the Fund's
Board of Trustees. The Fund's 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.

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

SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund, Keystone
seeks the best execution of orders at the most favorable prices. Keystone
determines whether a broker has provided the Fund with best execution and price
in the execution of a securities transaction by evaluating, among other things:

1. overall direct net economic result to the Fund;

2. the efficiency with which the transaction is effected;

3. the broker's ability to effect the transaction where a large block is
involved;

4. the broker's readiness to execute potentially difficult transactions in
the future;

5. the financial strength and stability of the broker; and

6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and trends
and other statistical and factual information.

The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.

Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between the Fund and its other clients 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 Keystone's other clients. Under the Advisory
Agreement, Keystone is 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 follows such a practice,
it will do so on a basis that is fair and equitable to the Fund.

Neither the Fund nor Keystone intends on placing securities transactions
with any particular broker. The Fund's Board of Trustees has determined,
however, that the Fund may consider sales of Fund shares as a factor in the
selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.

BROKERAGE COMMISSIONS
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.

GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase prices,
the Fund may participate, if and when practicable, in group bidding for the
direct purchase from an issuer of certain securities.

Keystone makes investment decisions for the Fund independently from those
of its other clients. It may frequently develop, however, that Keystone will
make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.

The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.

The Board of Trustees will, from time to time, review the Fund's brokerage
policy. Because of the possibility of further regulatory developments affecting
the securities exchanges and brokerage practices generally, the Board of
Trustees may change, modify or eliminate any of the foregoing practices.

For the fiscal year ended July 31, 1994, the Fund paid no brokerage
commissions. For the fiscal years end ed July 31, 1995 and 1996, the Fund paid
$30,894 and $35,599, respectively, in brokerage commissions.

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

The Fund offers four classes of shares that differ primarily with respect
to sales charges and distribution fees. As described below, depending upon the
class of shares that you purchase, the Fund will impose a sales charge when you
purchase Fund shares, a contingent deferred sales charge (a "CDSC") when you
redeem Fund shares or no sales charges at all. The Fund charges a CDSC as
reimbursement for certain expenses, such as commissions or shareholder servicing
fees, that it has incurred in connection with the sale of its shares (see
"Distribution Plans"). If imposed, the Fund deducts CDSCs from the redemption
proceeds you would otherwise receive. CDSCs attributable to your shares are, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor. See the
prospectus for additional information on a particular class.

CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January 1,
1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.

Class B Shares
The Fund offers Class B shares at net asset value (without an initial sales
charge). With respect to Class B shares purchased after January 1, 1997, the
Fund charges a CDSC on shares redeemed as follows:

Redemption Timing CDSC Rate
----------------- ---------
Month of purchase and the first twelve-month
period following the month of purchase......................5.00%
Second twelve-month
period following the month of purchase......................4.00%
Third twelve-month
period following the month of purchase......................3.00%
Fourth twelve-month
period following the month of purchase......................3.00%
Fifth twelve-month
period following the month of purchase......................2.00%
Sixth twelve-month
period following the month of purchase......................1.00%
Thereafter.......................................................0.00%

Class B shares purchased after January 1, 1997, that have been outstanding
for seven years after the month of purchase, will automatically convert to Class
A shares 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 certificate to Evergreen Keystone Service Company (formerly
Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's transfer and
dividend disbursing agent.)

Class C Shares
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Underwriter. The Fund offers Class
C shares at net asset value (without an initial sales charge). With certain
exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem shares
purchased after January 1, 1997, during the month of your purchase and the
12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.

Class Y Shares
Class Y shares are not offered to the general public and are available only
to (i) persons who at or prior to December 31, 1994 owned shares in a mutual
fund advised by Evergreen Asset Management Corp. ("Evergreen Asset"), (ii)
certain institutional investors and (iii) investment advisory clients of Capital
Management Group of First Union National Bank of North Carolina ("FUNB"),
Evergreen Asset or their affiliates. Class Y shares are offered at net asset
value without a front-end or back-end sales charge and do not bear any Rule
12b-1 distribution expenses.

CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC 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. Upon request for redemption, the Fund will
redeem shares not subject to the CDSC first. Thereafter, the Fund will redeem
shares held the longest first.

SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.

Waiver of Sales Charges
Purchases of the Fund's Class A shares made after January 1, 1997, (i) in
the amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan") or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.

Shares of the Fund may also be sold, to the extent permitted by applicable
law, regulations, interpretations, or exemptions, at net asset value without the
imposition of an initial sales charge to (1) certain Directors, Trustees,
officers, full-time employees or sales representatives of the Fund, Keystone,
the Principal Underwriter, and certain of their affiliates who have been such
for not less than ninety days, and to members of the immediate families of such
persons; (2) a pension and profit-sharing plan established by such companies,
their subsidiaries and affiliates, for the benefit of their Directors, Trustees,
officers, full-time employees, and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with the Principal Underwriter;
provided, however, that all such sales are made upon the written assurance that
the purchase is made for investment purposes and that the securities will not be
resold except through redemption by the Fund.

No initial sales charge or CDSC is imposed on purchases or redemptions of
shares of the Fund 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 or any fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.

With respect to Class C shares purchased by a Qualifying Plan, no CDSC will
be imposed on any redemptions made specifically by an individual participant in
the Qualifying Plan. This waiver is not available in the event a Qualifying
Plan, as a whole, redeems substantially all of its assets.

In addition, no CDSC 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 plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.

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

Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").

The Fund's 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, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees"). The Fund's Class Y shares have not
adopted a Distribution Plan and incur no Distribution Plan expenses.

The 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 1.00% 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 Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any CDSCs paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.

CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which 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,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.

Amounts paid by the Fund under the Class A Distribution Plan are currently
used to pay others, such as broker-dealers, service fees at an annual rate of up
to 0.25% of the average net asset value of Class A shares maintained by such
others and outstanding on the books of the Fund for specified periods.

CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.

The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party may also receive service fees at an annual rate of
0.25% of the average daily net asset value of such Class B share maintained by
the recipient and outstanding on the books of the Fund for specified periods.

The Principal Underwriter intends, but is not obligated, to continue to pay
or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plans.

In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. The Fund has agreed not to reduce the rate of payment of 12b-1 fees in
respect of such Class B shares unless it terminates such shares' Distribution
Plan completely. If it terminates such Distribution Plans, the Fund may be
subject to adverse distribution consequences.

The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of the Fund will be
provided by FUNB or its affiliates.

CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.

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

DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent 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 such Distribution Plan
as stated above.

Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.

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 votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.

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 Independent Trustees of the Fund have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.

For the fiscal period ended July 31, 1996, the Fund paid the Principal
Underwriter $181,536, $1,399,711 ($1,279,839 with respect to Class B shares sold
prior to June 1, 1995 and $119,872 with respect to Class B shares sold on or
after June 1, 1995), and $390,758, respectively, pursuant to the Fund's Class A,
Class B and Class C Distribution Plans.

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

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

FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (invest ment
advice); and former Member, Board of Advisers, Credito
Emilano (banking).

LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of all the Evergreen funds other than Evergreen
Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.

CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).

FOSTER BAM: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of all the Evergreen funds other than Evergreen
Investment Trust; Partner in the law firm of Cummings &
Lockwood; Director, Symmetrix, Inc. (sulphur company)
and Pet Practice, Inc. (veterinary services); and
former Director, Chartwell Group Ltd. (Manufacturer of
office furnishings and accessories), Waste Disposal
Equipment Acquisition Corporation and Rehabilitation
Corporation of America (rehabilitation hospitals).

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

EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.

CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
and former Director, Peoples Bank (Charlotte, NC).

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

JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Chairman and Trustee of the Evergreen funds; former
Chairman of the Distribution Foundation for the
Carolinas; and former Vice President of Lance Inc.
(food manufacturing).

LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.

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

GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).

THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of the Evergreen funds; former Vice President
and Director of Rexham Corporation; and former Director
of Carolina Cooperative Federal Credit Union.

*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of the Evergreen funds; and Partner in the law
firm of Holcomb and Pettit, P.A.

DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Vice Chair and former 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.

RUSSELL A.
SALTON, III MD: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of the Evergreen funds; Medical Director, U.S.
Health Care/Aetna Health Services; and former Managed
Health Care Consultant; former President, Primary
Physician Care.

MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Trustee of the Evergreen funds; and Attorney, Law
Offices of Michael S. Scofield.

RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
funds in the Key stone Investments Families of Funds;
Chairman, Environmental Warranty, Inc. (Insurance
agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance Company,
and Enhance Financial Services, Inc.; Chairman, Board
of Trustees, Hartford Graduate Center; Trustee, Greater
Hartford YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation; former
Trustee, Kingswood-Oxford School; and former Managing
Director and Consultant, Russell Miller, Inc.

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

JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and Treasurer
of the Evergreen funds; Senior Managing Director,
Furman Selz LLC since 1992; Managing Director from 1984
to 1992; 230 Park Avenue, Suite 910, New York, NY.

GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds in
the Keystone Investments Families of Funds; Senior Vice
President and Director of Administration and Regulatory
Services, BISYS Fund Services; 3435 Stelzer Road,
Columbus, Ohio.

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

Mr. Bissell is deemed an "interested person" of the Fund by virtue of his
ownership of stock of First Union Corporation ("First Union"), of which Keystone
is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr. Pettit and
Mr. Simons may each be deemed an "interested person" as a result of certain
legal services rendered to a subsidiary of First Union by their respective law
firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C. As of the date hereof, Mr. Pettit and Mr. Simons are each
applying for an exemption from the SEC which would allow them to retain their
status as an Independent Trustee.

After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS. See "Sub-administrator."

During the fiscal year ended July 31, 1996, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Fund. During
the same period, the unaffiliated Trustees received $30,556 in retainers and
fees. Annual retainers and meeting fees paid by all funds in the Keystone
Investments Families of Funds (which includes more than thirty mutual funds) for
the calendar year ended December 31, 1995 totaled approximately $450,716. As of
November 30, 1996, the Trustees and officers beneficially owned less than 1% of
the Fund's then outstanding Class A, Class B and Class C shares, respectively.

Except as set forth above, the address of all of the Fund's Trustees and
officers and the address of the Fund is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.

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

Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.

On December 11, 1996, the predecessor corporation to Keystone Investments
and indirectly each subsidiary of Keystone Investments, including Keystone, were
acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary of First Union
Corporation ("First Union"). The predecessor corporation to Keystone Investments
was acquired by FUNB by merger into a wholly-owned subsidiary of FUNB, which
entity then succeeded to the business of the predecessor corporation.
Contemporaneously with the Acquisition, the Fund entered into a new investment
advisory agreement with Keystone and into a principal underwriting agreement
with EKD, a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"). The new
investment advisory agreement (the "Advisory Agreement") was approved by the
shareholders of the Fund on December 9, 1996, and became effective on December
11, 1996. As a result of the above transactions, Keystone Management, Inc.
("Keystone Management"), which prior to the Acquisition acted as investment
manager to the Fund, no longer acts as such to the Fund. Keystone currently
provides the Fund with all the services that may previously have been provided
by Keystone Management. The fee rate paid by the Fund for the services provided
by Keystone and its affiliates has not changed as a result of the Acquisition.

Keystone Investments and each of its subsidiaries, including Keystone, are
now indirectly owned by First Union. First Union is headquartered in Charlotte,
North Carolina, and had $133.9 billion in consolidated assets as of September
30, 1996. First Union and its subsidiaries provide a broad range of financial
services to individuals and businesses throughout the United States. The Capital
Management Group of FUNB, together with Lieber & Company and Evergreen Asset
Management Corp., wholly- owned subsidiaries of FUNB, manage or otherwise
oversee the investment of over $50 billion in assets belonging to a wide range
of clients, including the Evergreen Family of Funds.

Pursuant to the Advisory Agreement and subject to the supervision of the
Fund's Board of Trustees, Keystone furnishes to the Fund investment advisory,
management and administrative services, office facilities, and equipment in
connection with its services for managing the investment and reinvestment of the
Fund's assets. Keystone pays for all of the expenses incurred in connection with
the provision of its services.

The Fund pays for all charges and expenses, other than those specifically
referred to as being borne by Keystone, including, but not limited to, (1)
custodian charges and expenses; (2) bookkeeping and auditors' charges and
expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) 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 Fund pays Keystone a fee for its services at the annual rate of:

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;

Keystone's fee is computed as of the close of business each business day and
payable daily.

Under the Advisory Agreement, any liability of Keystone in connection with
rendering services thereunder is limited to situations involving its willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties.

The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only if approved at least annually by
the Board of Trustees of the Fund or by a vote of a majority of the Fund's
outstanding shares (as defined in the 1940 Act). In either case, the terms of
the Advisory Agreement and continuance thereof must be 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 Advisory 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 Advisory Agreement will
terminate automatically upon its "assignment" as that term is defined in the
1940 Act.

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

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

During the year ended July 31, 1996, the Fund paid or accrued to Keystone
Management investment management and administrative services fees of $1,663,669
(0.65% of the Fund's average net assets). Of such amount paid to Keystone
Management, $1,414,119 was paid to Keystone for its services to the Fund.

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

The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.

The Principal Underwriter, as agent, has agreed to use its best efforts to
find purchasers for the shares. The Principal Underwriter may retain and employ
representatives to promote distribution of the shares and may obtain orders from
broker-dealers, and others, acting as principals, for sales of shares to them.
The Underwriting Agreements provide that the Principal Underwriter will bear the
expense of preparing, printing, and distributing advertising and sales
literature and prospectuses used by it. The Principal Underwriter or EKIS, its
predecessor, may receive payments from the Fund pursuant to the Fund's
Distribution Plans.

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

The Fund has agreed under the Underwriting Agreements to pay all expenses
in connection with the registration of its shares with the SEC and auditing and
filing fees in connection with the registration of its shares under the various
state "blue-sky" laws.

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

Each Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually (i) by a vote of a majority
of the Fund's Independent Trustees, and (ii) by vote of a majority of the Fund's
Trustees, in each case, cast in person at a meeting called for that purpose.

Each Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.

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

- ------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- ------------------------------------------------------------------------------

Furman Selz provides officers and certain administrative services to the
Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund. Furman Selz is
located at 230 Park Avenue, New York, New York 10169.

- ------------------------------------------------------------------------------
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 on file 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 shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund currently
offers Class A, B, C and Y 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. At meetings called for the initial election of Trustees or to consider
other matters, shares are entitled to one vote per share. Shares generally vote
together as one class on all matters. 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.

After an initial meeting as described above, no further 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 Fund's 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 involved in the conduct of his office.

- ------------------------------------------------------------------------------
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 annual rate of return for Class A for the year ended July 31, 1996 was
1.76%. The compounded average annual rates of return for Class A for the five
years ended July 31, 1996 and the period February 13, 1987 (commencement of
operations) through July 31, 1996 were 11.27% and 6.69%, respectively.

The annual rates of return on Class B and Class C shares for the one year
period ended July 31, 1996 were 2.28% and 6.07%, respectively. The compounded
average annual rates of return for the Fund's Class B and Class C shares
annualized for the period from February 1, 1993 (commencement of operations)
through July 31, 1996 were 6.62% and 7.28%, 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 shares for the 30-day period ended July 31, 1996 were
7,18%, 6.77%, and 6.77%, respectively.

Information on Class Y shares is not yet available.

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

REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorized payment to be made in portfolio
securities or other property. The Fund has obligated itself, however, under the
1940 Act, to redeem for cash all shares presented for redemption by any one
shareholder up to the lesser of $250,000 or 1% of the Fund's net assets in any
90-day period. Securities delivered in payment of redemptions would be valued at
the same value assigned to them in computing the net asset value per share and
would, to the extent permitted by law, be readily marketable. Shareholders
receiving such securities would incur brokerage costs upon the securities' sale.

GENERAL
State Street Bank and Trust Company, located at 225 Franklin Street,
Boston, Massachusetts 02110, is custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian, in addition to its custodial services, is
responsible for accounting and related record keeping on behalf of the Fund.

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

EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is
a wholly-owned subsidiary of Keystone and is the Fund's transfer agent and
dividend disbursing agent.

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

As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 18.46% of the outstanding Class
A shares.

As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 14.94% of the outstanding Class
B shares.

As of November 30, 1996, Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Dr. E., Jacksonville, FL 32246-6484, owned 25.77% of the outstanding Class
C shares.

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

The Fund's prospectuses and statement of additional information omit
certain information contained in the registration statement filed with the
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 16 investment companies in the Keystone America Fund
Family, which offers a range of choices to serve shareholder needs. In addition
to the Fund, the Keystone America Fund 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 BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.

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

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

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

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

KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND - (Formerly Keystone Strategic
Development Fund.) Seeks long term capital growth by investing primarily in
equity securities of foreign and domestic companies involved in the natural
resources and energy industries.

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

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

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

KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term growth of capital by
investing primarily in equity securities with small market capitalizations.

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

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

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

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

- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission:

Schedule of Investments as of July 31, 1996;

Financial Highlights -- Class A shares for each of the years in the
nine-year period ended July 31, 1996 and the period from February 13, 1987
(Commencement of Operations) to July 31, 1987;

Financial Highlights -- Class B shares for each of the years in the
three-year period ended July 31, 1996 and the period from February 1, 1993
(Date of Initial Public Offering) to July 31, 1993;

Financial Highlights -- Class C shares for each of the years in the
three-year period ended July 31, 1996 and the period from February 1, 1993
(Date of Initial Public Offering) to July 31, 1993;

Statement of Assets and Liabilities as of July 31, 1996;

Statement of Operations for the year ended July 31, 1996;

Statements of Changes in Net Assets for each of the years in the two-year
period ended July 31, 1996;

Notes to Financial Statements; and

Independent Auditors' Report dated September 6, 1996.

A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.

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

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

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

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

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

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 - onds 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
he over-the-counter market or, should they commence trading, on any Exchange.

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

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

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

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

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

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

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

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

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

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

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

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

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

INDEX BASED FUTURES CONTRACTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL
FUTURES CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and other
financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.

LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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