BLACKROCK FUNDS, 485APOS, 1999-08-06

BLACKROCK FUNDS
485APOS, 1999-08-06

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<PAGE>

As filed with the Securities and Exchange Commission on August 6, 1999
Registration No. 33-26305
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

PRE-EFFECTIVE AMENDMENT NO. ___ [ ]

POST-EFFECTIVE AMENDMENT NO. 43 [X]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

AMENDMENT NO. 45 [X]

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

BLACKROCK FUNDS/SM/

(Exact Name of Registrant as Specified in Charter)

<TABLE>
<S> <C> <C>
Bellevue Corporate Center Brian Kindelan, Esq. copy to:
400 Bellevue Parkway BlackRock Advisors, Inc. Gary S. Schpero, Esq.
Suite 100 1600 Market Street, 28th Floor Simpson Thacher & Bartlett
Wilmington, Delaware 19809 Philadelphia, PA 19103 425 Lexington Avenue
(Address of Principal (Name and Address of New York, New York 10017
Executive Offices) Agent for Service)
Registrant's Telephone Number
(302) 792-2555
</TABLE>

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

It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.

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

EXPLANATORY NOTE
----------------

The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Low Duration Bond, Intermediate Government Bond,
Intermediate Bond, Core Bond, High Yield Bond, GNMA, Government Income, Managed
Income, International Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New
Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, Delaware
Tax-Free Income, Money Market, Municipal Money Market, U.S. Treasury Money
Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Virginia Municipal Money Market, New Jersey
Municipal Money Market, Large Cap Value Equity, Large Cap Growth Equity, Index
Equity, Small Cap Value Equity, Mid-Cap Value Equity, International Equity,
International Emerging Markets, International Small Cap Equity, Balanced, Small
Cap Growth Equity, Mid-Cap Growth Equity, Micro-Cap Equity and Select Equity
Portfolios, each dated January 28, 1999, are incorporated by reference to the
Registrant's filing of definitive copies under Rule 497 under the Securities Act
on February 3, 1999.

The prospectus for the BlackRock Shares of the Low Duration Bond, Core Bond,
Intermediate Bond and High Yield Bond Portfolios, dated January 28, 1999, is
incorporated by reference to the Registrant's filing of a definitive copy under
Rule 497 under the Securities Act on February 3, 1999.

The prospectus for the shares of the BlackRock Strategic Portfolio I and the
BlackRock Strategic Portfolio II, dated November 25, 1998, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No.
39 to its Registration Statement on Form N-1A on November 25, 1998.

The prospectus for the shares of the Multi-Sector Mortgage Securities Portfolio
III, dated November 25, 1998, is incorporated by reference to the Registrant's
filing of Post-Effective Amendment No. 39 to its Registration Statement on Form
N-1A on November 25, 1998.

The prospectus for the shares of the Multi-Sector Mortgage Securities Portfolio
IV, dated June 11, 1999, is incorporated by reference to the Registrant's filing
of Post-Effective Amendment No. 42 to its Registration Statement on Form N-1A on
June 11, 1999.

The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the Low Duration Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, High Yield Bond, Government
Income, Managed Income, International Bond, Tax-Free Income, Pennsylvania
Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky
Tax-Free Income, Delaware Tax-Free Income, GNMA, Money Market, Municipal Money
Market, U.S. Treasury Money Market, Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, New Jersey Municipal Money Market, Large Cap Value
Equity, Large Cap Growth Equity, Index Equity, Small Cap Value Equity, Mid-Cap
Value Equity, International Equity, International Emerging Markets,
International Small Cap Equity, Balanced, Small Cap Growth Equity, Mid-Cap
Growth Equity, Select Equity and Micro-Cap Equity
<PAGE>

Portfolios, and the BlackRock Shares of the Low Duration Bond, Core Bond,
Intermediate Bond and High Yield Bond Portfolios, dated January 28, 1999, is
incorporated by reference to the Registrant's filing of a definitive copy under
Rule 497 under the Securities Act on February 3, 1999.

The statement of additional information for the shares of the BlackRock
Strategic Portfolio I and the BlackRock Strategic Portfolio II, dated November
25, 1998, is incorporated by reference to the Registrant's filing of
Post-Effective Amendment No. 39 to its Registration Statement on Form N-1A on
November 25, 1998.

The statement of additional information for the shares of the Multi-Sector
Mortgage Securities Portfolio III, dated November 25, 1998, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No.
39 to its Registration Statement on Form N-1A on November 25, 1998.

The statement of additional information for the shares of the Multi-Sector
Mortgage Securities Portfolio IV, dated June 11, 1999, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 42 to its
Registration Statement on Form N-1A on June 11, 1999.
<PAGE>

BLACKROCK FUNDS/SM/
MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS
CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Item Number Form N-1A, Prospectus
Part A Caption
- ------ -------

<S> <C>
1(a) Cover Page

1(b) Back Cover Page

2 Investment Goal; Primary Investment Strategies; Key Risks; Risk/Return
Information

3 Expenses and Fees

4 Investment Goal; Primary Investment Strategies; Key Risks

5 Not Applicable

6 About Your Investment - Management

7 About Your Investment - What Price Per Share Will You Pay?; - When Must
You Pay?; - How Much is the Minimum
Investment?; - How to Sell Shares;
Expedited Redemptions; - The Company's
Rights; - Accounts with Low Balances; -
Dividends and Distributions; - Taxation
of Distributions

8 About Your Investment - Distribution and Service Plan

9 Not Applicable
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part B Information Caption
- ------ -------------------

<S> <C>
10 Cover Page

11 Miscellaneous

12 Investment Policies; Additional Investment Limitations; Miscellaneous

13 Trustees and Officers

14 Trustees and Officers; Miscellaneous

15 Investment Advisory, Administration, Distribution and Servicing Arrangements

16 Portfolio Transactions

17 Shareholder and Trustee Liability of the Fund; Purchase and Redemption
Information; Additional Information Concerning Shares; Miscellaneous

18 Purchase and Redemption Information; Valuation of Portfolio Securities

19 Taxes

20 Investment Advisory, Administration, Distribution and Servicing Arrangements

21 Performance Information

22 Financial Statements
</TABLE>

Part C
- ------

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>

Welcome to the Prospectus for the new Hilliard Lyons share class (the HL
Shares) of the BlackRock Money Market Portfolio and BlackRock Municipal Money
Market Portfolio, portfolios of the BlackRock Funds (the Company).

It's easy to use and we've tried to make it easy to understand.

The prospectus has been written to provide you with the information you need
to make an informed decision about whether to invest in the HL Shares.

Hilliard Lyons, a wholly owned subsidiary of PNC Bank Corp., was founded in
1854 to provide investment brokerage and services to individuals. Hilliard
Lyons offers its clients a vast array of investment products including stocks,
bonds and money market mutual funds, such as the one offered in this Prospec-
tus.

This prospectus contains information on the BlackRock Money Market and Munici-
pal Money Market Portfolios.

Table of
Contents

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Money Market Portfolio...................................................... 1
Municipal Money Market Portfolio............................................ 7
About Your Investment....................................................... 13
</TABLE>
<PAGE>

Money Market
Portfolio

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

Investment Goal
The fund seeks as high a level of current income as is consistent with main-
taining liquidity and stability of principal.

Primary Investment Strategies
In pursuit of this goal, the fund invests in a broad range of short term, high
quality, U.S. dollar-denominated instruments, including government, bank, com-
mercial and other obligations.

Specifically, the fund may invest in:

1) U.S. dollar-denominated obligations issued or supported by the credit of
U.S. or foreign banks or savings institutions with total assets of more than
$1 billion (including obligations of foreign branches of such banks).

2) High quality commercial paper and other obligations issued or guaranteed by
U.S. and foreign corporations and other issuers rated (at the time of
purchase) A-2 or higher by Standard and Poor's, Prime-2 or higher by
Moody's, D-2 or higher by Duff & Phelps, F-2 or higher by Fitch or TBW-2 or
higher by Thomson BankWatch, as well as high quality corporate bonds rated
AA (or Aa) or higher at the time of purchase by those rating agencies.

3) Unrated notes, paper and other instruments that are determined by the fund
manager to be of comparable quality to the instruments described above.

4) Asset-backed securities (including interests in pools of assets such as
mortgages, installment purchase obligations and credit card receivables).

5) Securities issued or guaranteed by the U.S. Government or by its agencies or
authorities.

6) Dollar-denominated securities issued or guaranteed by foreign governments or
their political subdivisions, agencies or authorities.

IMPORTANT DEFINITIONS

Asset-Backed Securi-
ties: Debt securities
that are backed by a
pool of assets, usually
loans such as install-
ment sale contracts or
credit card receiv-
ables.

Commercial Paper:
Short-term securities
with maturities of 1 to
270 days which are
issued by banks, corpo-
rations and others.

Dollar Weighted Average
Maturity: The average
maturity of the fund is
the average amount of
time until the organi-
zations that issued the
debt securities in the
fund's portfolio must
pay off the principal
amount of the debt.
"Dollar weighted" means
the larger the dollar
value of debt security
in the fund, the more
weight it gets in
calculating this aver-
age.

Liquidity: Liquidity is
the ability to easily
convert investments
into cash without los-
ing a significant
amount of money in the
process.

Net Asset Value (NAV):
The value of everything
the fund owns, minus
everything it owes,
divided by the number
of shares held by
investors.

Repurchase Agreement: A
special type of a
short-term investment.
A dealer sells securi-
ties to a fund and
agrees to buy them back
later at a set price.
In effect, the dealer
is borrowing the fund's
money for a short time,
using the securities as
collateral.

Variable or Floating
Rate Securities: Secu-
rities whose interest
rates adjust automati-
cally after a certain
period of time and/or
whenever a predeter-
mined standard interest
rate changes.

1
<PAGE>

7) Securities issued or guaranteed by state or local governmental bodies.

8) Repurchase agreements relating to the above instruments.

The fund seeks to maintain a net asset value of $1.00 per share.

Quality
The fund manager, under guidelines established by the Company's Board of
Trustees, will only purchase securities that have short-term debt ratings at
the time of purchase in the two highest rating categories from at least two
national rating agencies, or one such rating if the security is rated by only
one agency. Securities that are unrated must be determined by the fund manager
to be of comparable quality.

Maturity
The fund is managed so that the dollar-weighted average maturity of all its
investments will be 90 days or less. The fund will buy only those securities
which have remaining maturities of 397 days or less (except for certain vari-
able and floating rate instruments and securities collateralizing repurchase
agreements). The fund's securities may not earn as high a level of income as
longer term or lower quality securities, which generally have greater risk and
more fluctuation in value.

Normally, the fund may hold up to 20% of its assets in uninvested cash
reserves. Uninvested cash will not earn income.

The fund may lend some of its securities on a short-term basis in order to
earn extra income. The fund will receive collateral in cash or high quality
securities equal to the current value of the loaned securities. These loans
will be limited to 33 1/3% of the value of the fund's total assets.

Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
2
<PAGE>

Key Risks Key Risks
The value of money market investments tends to fall when prevailing interest
rates rise, although they're generally less sensitive to interest rate changes
than longer-term securities.

The fund's ability to concentrate its investments in the banking industry could
increase risks. The profitability of banks depends largely on the availability
and cost of funds, which can change depending upon economic conditions. Banks
are also exposed to losses if borrowers get into financial trouble and can't
repay their loans.

The obligations of foreign banks and other foreign issuers may involve certain
risks in addition to those of domestic issuers, including higher transaction
costs, less complete financial information, political and economic instability,
less stringent regulatory requirements and less market liquidity.

Treasury obligations differ only in their interest rates, maturities and time
of issuance. Obligations of U.S. Government agencies and authorities are sup-
ported by varying degrees of credit. No assurance can be given that the U.S.
Government will provide financial support to its agencies and authorities if it
is not obligated by law to do so.

The fund could lose money if a seller under a repurchase agreement defaults or
declares bankruptcy.

The fund may purchase variable and floating rate instruments. The absence of an
active market for these securities could make it difficult for the fund to dis-
pose of them if the issuer defaults.

Securities loans involve the risk of a delay in receiving additional collateral
if the value of the securities goes up while they are on loan. There is also
the risk of delay in recovering the loaned securities and of losing rights to
the collateral if a borrower goes bankrupt.

3
<PAGE>

mine their systems' ability to handle Year 2000 problems. There is no guaran-
tee, however, that systems will work properly on January 1, 2000. Year 2000
problems may also hurt issuers whose securities the fund holds or securities
markets generally.

Although the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund. When you invest
in this fund you are not making a bank deposit. Your investment is not insured
or guaranteed by the Federal Deposit Insurance Corporation or by any bank or
governmental agency.
4
<PAGE>

Risk / Return Information

The chart and table below give you a picture of the fund's long-term perfor-
mance for the Investor A Shares since the HL Shares have only recently been
introduced as of the date of this Prospectus. Although the chart shows returns
for the Investor A Shares which are not offered in this prospectus, the returns
for the Investor A Shares would have substantially similar annual returns as
the HL Shares offered in this prospectus because the Investor A Shares and the
HL Shares are invested in the same portfolio of securities and the annual
returns would differ only to the extent that the Investor A Shares and the HL
Shares do not have the same expenses. The information shows you how the fund's
performance has varied year by year and provides some indication of the risks
of investing in the fund. The chart and the table both assume reinvestment of
dividends and distributions. As with all such investments, past performance is
not an indication of future results.

The performance for the period before the Investor A Shares were launched is
based upon performance for an older share class of the fund. The Investor A
Shares were launched in January 1993. The actual return of the Investor A
Shares would have been lower than shown because the Investor A Shares have
higher expenses than the older class.

[BAR GRAPH APPEARS HERE]

As of 12/31 Investor A Shares
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

Best Quarter
Q2 '90: 1.96%

Worst Quarter
Q4 '93: 0.64%

The bars for 1990-1993 are based
upon performance for Service Shares
of the fund.

- --------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
7.97% 5.93% 3.51% 2.64% 3.68% 5.32% 4.91% 5.07% 4.96%
- --------------------------------------------------------------------------------

As of 12/31/98
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
Since Inception
1 Year 3 Years 5 Years Inception Date
- --------------------------------------------------------------------------------
Money Market; Inv A 4.96% 4.98% 4.79% 4.97% 10/04/89
- --------------------------------------------------------------------------------

5
<PAGE>

Expenses
and Fees
IMPORTANT DEFINITIONS

Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.

Distribution Fees: A
method of charging dis-
tribution-related
expenses against fund
assets.

Other Expenses: Include
administration, trans-
fer agency, custody,
professional fees and
registration fees.

Service Fees: Fees that
are paid to Hilliard
Lyons for shareholder
account service and
maintenance.

Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets and are reflected in the fund's price.

The table below describes the estimated fees and expenses that you may pay if
you buy and hold the HL Shares of the fund. "Advisory Fees" are estimated based
on the advisory fees incurred by the fund for the most recent fiscal year.
"Other expenses" are estimated based on expenses for the Investor A Shares for
the most recent fiscal year.

Estimated Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
<S> <C>
HL Shares
</TABLE>

<TABLE>
<S> <C>
Advisory Fees (estimated) .41%
Distribution and Service (12b-1) fees [ ]%
Other expenses (estimated) [ ]%
Total annual fund operating expenses (estimated) [ ]%
Fee Waivers and Expense Reimbursements* [ ]%
Net Expenses* (estimated) [ ]%
</TABLE>

* BlackRock has contractually agreed to waive or reimburse fees or expenses in
order to limit certain (but not all) fund expenses for the next year. The
fund may have to repay these waivers and reimbursements to BlackRock in the
following two years if the repayment can be made within these expense lim-
its. In addition, BlackRock Distributors, Inc., the fund's distributor, and
BlackRock have contractually agreed to the following waivers on distribution
and service fees for the next year: [ ]% of average daily net assets with
respect to the HL Shares. "Net Expenses" in the table have been restated to
reflect these waivers and reimbursements.

The table does not reflect charges or credits which investors might incur if
they invest through a financial institution.

Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses (except for the waivers in the first year discussed above) and redemp-
tion at the end of each time period. Although your actual cost may be higher or
lower, based on these assumptions your costs would be:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
HL Shares $[ ] $[ ] $[ ] $[ ]
</TABLE>

6
<PAGE>

Municipal Money
Market Portfolio

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- --------------------------------------------------------------------------------
Investment Goal
The fund seeks as high a level of current income exempt from Federal income tax
as is consistent with maintaining liquidity and stability of principal.

Primary Investment Strategies
In pursuit of this goal, the fund invests primarily in Municipal Securities.

Specifically, the fund may invest in:

1) Fixed and variable rate notes and similar debt instruments rated MIG-2,
VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by Standard &
Poor's, D-2 or higher by Duff & Phelps, or F-2 or higher by Fitch.

2) Tax-exempt commercial paper and similar debt instruments rated Prime-2 or
higher by Moody's, A-2 or higher by Standard & Poor's, D-2 or higher by Duff
& Phelps, or F-2 or higher by Fitch.

3) Municipal bonds rated Aa or higher by Moody's or AA or higher by Standard &
Poor's, Duff & Phelps or Fitch.

4) Unrated notes, paper and other instruments that are determined by the fund
manager to be of comparable quality to the instruments described above.

5) Municipal bonds and notes whose principal and interest payments are
guaranteed by the U.S. Government or one of its agencies or authorities or
which otherwise depend on the credit of the United States.

The fund seeks to maintain a net asset value of $1.00 per share.

The fund normally invests at least 80% of its net assets in Municipal Securi-
ties and other instruments whose interest is exempt from federal income tax.
The other 20% can be invested in securities which are subject to regular fed-
eral income tax or the Federal Alternative Minimum Tax.

IMPORTANT DEFINITIONS

Dollar Weighted Average
Maturity: The average
maturity of the fund is
the average amount of
time until the organi-
zations that issued the
debt securities in the
fund's portfolio must
pay off the principal
amount of the debt.
"Dollar weighted" means
the larger the dollar
value of debt security
in the Fund, the more
weight it gets in cal-
culating this average.

General Obligation
Bonds: Bonds which are
secured by the issuer's
pledge of its full
faith, credit and tax-
ing power for the pay-
ment of principal and
interest.

Liquidity: Liquidity is
the ability to easily
convert investments
into cash without los-
ing a significant
amount of money in the
process.

Municipal Lease Obliga-
tions: These provide
participation in munic-
ipal lease agreements
and installment pur-
chase contracts, but
are not part of the
general obligations of
the municipality.

Municipal Security: A
short-term obligation
issued by or on behalf
of states and posses-
sions of the United
States, their political
subdivisions and their
agencies and authori-
ties.

Net Asset Value (NAV):
The value of everything
the fund owns, minus
everything it owes,
divided by the number
of shares held by
investors.

IMPORTANT DEFINITIONS

Revenue Bonds: Bonds
which are secured only
by the revenues from a
particular facility or
class of facilities,
such as a water or
sewer system, or from
the proceeds of a spe-
cial excise tax or
other revenue source.

Tax-Exempt Commercial
Paper: Short-term
Municipal Securities
with maturities of 1 to
270 days.

Variable or Floating
Rate Securities: Secu-
rities whose interest
rates adjust automati-
cally after a certain
period of time and/or
whenever a predeter-
mined standard interest
rate changes.

The fund intends to invest so that less than 25% of its total assets are
Municipal Securities of issuers located in the same state.

Normally, the fund may hold up to 20% of its assets in uninvested cash
reserves. Uninvested cash will not earn income. It is possible that in extreme
market conditions the fund may invest more than 20% of its assets in securi-
ties that are not Municipal Securities (and therefore are subject to regular
federal income tax) and may hold an unlimited amount of uninvested cash
reserves. If market conditions improve, these strategies could result in
reducing the potential gain from the market upswing, thus reducing the fund's
opportunity to achieve its investment objective.

Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is

8
<PAGE>

made. The fund may not change the requirement that it normally invest at least
80% of its net assets in Municipal Securities and other instruments whose
interest is exempt from federal income tax without shareholder approval.

Municipal Securities include revenue bonds, general obligation bonds and munic-
ipal lease obligations. Revenue bonds include private activity bonds, which are
not payable from the general revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved. To the extent that the
fund's assets are invested in private activity bonds, the fund will be subject
to the particular risks presented by the laws and economic conditions relating
to such projects and bonds to a greater extent than if its assets were not so
invested. Moral obligation bonds are normally issued by special purpose public
authorities. If the issuer of moral obligation bonds is unable to pay its debts
from current revenues, it may draw on a reserve fund the restoration of which
is a moral but not a legal obligation of the state or municipality which cre-
ated the issuer. Municipal lease obligations are not guaranteed by the issuer
and are generally less liquid than other securities.

There may be less information available on the financial condition of issuers
of Municipal Securities than for public corporations. The market for municipal
bonds may be less liquid than for taxable bonds. This means that it may be
harder to buy and sell Municipal Securities, especially on short notice.

The fund may invest in bonds the interest on which may be subject to the Fed-
eral Alternative Minimum Tax. The fund may invest up to 20% of its total assets
in these bonds when added together with any of the fund's other taxable invest-
ments. Interest on these bonds that is received by taxpayers subject to the
Federal Alternative Minimum Tax is taxable.

The fund may invest 25% or more of its assets in Municipal Securities whose
interest is paid solely from revenues of similar projects.
9
<PAGE>

For example, the fund may invest more than 25% of its assets in Munici-
pal Securities related to water or sewer systems. This type of concentration
exposes the fund to the legal and economic risks relating to those projects.

The fund will rely on legal opinions of counsel to issuers of Municipal Secu-
rities as to the tax-free status of investments and will not do its own analy-
sis.

The fund may purchase variable and floating rate instruments. The absence of
an active market for these securities could make it difficult for the fund to
dispose of them if the issuer defaults.

Securities loans involve the risk of a delay in receiving additional collat-
eral if the value of the securities goes up while they are on loan. There is
also the risk of delay in recovering the loaned securities and of losing
rights to the collateral if a borrower goes bankrupt.

The fund, like any business, could be affected if the computer systems on
which it relies do not properly process information beginning on January 1,
2000. While Year 2000 issues could have a negative effect on the fund, Black-
Rock, the fund's investment adviser, is currently working to avoid such prob-
lems. BlackRock is also working with other systems providers and vendors to
determine their systems' ability to handle Year 2000 problems. There is no
guarantee, however, that systems will work properly on January 1, 2000. Year
2000 problems may also hurt issuers whose securities the fund holds or securi-
ties markets generally.

Risk / Return Information

The chart and table below give you a picture of the fund's long-term perfor-
mance for the Investor A Shares since the HL Shares have only recently been
introduced as of the date of this Propsectus. Although the chart shows returns
for the Investor A Shares which are not offered in this prospectus, the returns
for the Investor A Shares would have substantially similar annual returns as
the HL Shares offered in this prospectus because the Investor A Shares and the
HL Shares are invested in the same portfolio of securities and the annual
returns would differ only to the extent that the Investor A Shares and the HL
Shares do not have the same expenses. The information shows you how the fund's
performance has varied year by year and provides some indication of the risks
of investing in the fund. The chart and the table both assume reinvestment of
dividends and distributions. As with all such investments, past performance is
not an indication of future results.

The performance for the period before the Investor A Shares were launched is
based upon performance for an older share class of the fund. The Investor A
Shares were launched in November 1992. The actual return of the Investor A
Shares would have been lower than shown because the Investor A Shares have
higher expenses than the older class.

[BAR CHART APPEARS HERE]

Best Quarter
Q4 '90: 1.36%

Worst Quarter
Q1 '94: 0.41%

The bars for 1990-1992 are based
upon performance for Service Shares
of the fund.

- --------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
5.42% 4.02% 2.49% 1.89% 2.25% 3.22% 2.80% 2.98% 2.70%
- --------------------------------------------------------------------------------

As of 12/31/98
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
Since Inception
1 Year 3 Years 5 Years Inception Date
- --------------------------------------------------------------------------------
Municipal MM; Inv A 2.70% 2.82% 2.79% 3.13% 11/01/89

11
<PAGE>

Expenses
and Fees

IMPORTANT DEFINITIONS

Advisory Fees: Fees
paid to the investment
adviser for portfolio
management services.

Distribution Fees: A
method of charging dis-
tribution-related
expenses against fund
assets.

Other Expenses: Include
administration, trans-
fer agency, custody,
professional fees and
registration fees.

Service Fees: Fees that
are paid to Hilliard
Lyons for shareholder
account service and
maintenance.

Expenses and Fees
As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets and are reflected in the fund's price.

Estimated Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)

<TABLE>
<CAPTION>
HL Shares

<S> <C>
Advisory Fees (estimated) .45%
Distribution and service (12b-1) fees [ ]%
Other expenses (estimated) [ ]%
Total annual fund operating expenses (estimated) [ ]%

Fee waivers and expense reimbursements* [ ]%
Net Expenses* (estimated) [ ]%
</TABLE>

* BlackRock has contractually agreed to waive or reimburse fees or expenses
in order to limit certain (but not all) fund expenses for the next year.
The fund may have to repay these waivers and reimbursements to BlackRock in
the following two years if the repayment can be made within these expense
limits. In addition, BlackRock Distributors, Inc., the fund's distributor,
and BlackRock have contractually agreed to the following waiver on
distribution and service fees for the next year: [ ]% of average daily net
assets with respect to the HL Shares. "Net Expenses" in the table have been
restated to reflect these waivers and reimbursements.

The table does not reflect charges or credits which investors might incur if
they invest through a financial institution.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years

<S> <C> <C> <C> <C>
HL Shares $[ ] $[ ] $[ ] $[ ]
</TABLE>

12
<PAGE>

About Your Investment

The Company believes that investors can benefit from the advice and ongoing
assistance of a registered investment professional. Your Hilliard Lyons Finan-
cial Consultant is a registered representative and can help you to buy shares
by telephone or in person. Before you place your order make sure that you have
read the prospectus and have a discussion with your registered representative
about the details of your investment.

As a shareholder you pay certain fees and expenses. Annual fund operating
expenses are paid out of fund assets and are reflected in the fund's price.

Hilliard Lyons is responsible for the prompt transmission of purchase and
redemption orders. Hilliard Lyons may independently establish and charge addi-
tional amounts to its clients for its services, which charges would reduce its
clients' yield or return. Hilliard Lyons may also hold the HL Shares in nominee
or street name as agent for and on behalf of its clients. In such instances,
the Company's transfer agent will have no information with respect to or con-
trol over the accounts of specific shareholders. Such shareholders may obtain
access to their accounts and information about their accounts only from
Hilliard Lyons. Hilliard Lyons may participate in a program allowing them
access to its clients' accounts for servicing including transfers of registra-
tion and dividend payee changes; and may perform functions such as generation
of confirmation statements and disbursement of cash dividends. This Prospectus
should be read in connection with Hilliard Lyons material regarding its fees
and services.

13
<PAGE>

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

What Price Per Share Will You Pay?

A mutual fund is a pool of investors' money that is used to purchase a portfolio
of securities, which in turn is owned in common by the investors. Investors put
money into a mutual fund by buying shares. If a mutual fund has a portfolio
worth $5 million dollars and has 5 million shares outstanding, the net asset
value (NAV) per share is $1.00. When you buy the HL Shares you pay the
NAV/share. Although each fund described in this prospectus seeks to maintain an
NAV of $1.00 per share, there is no guarantee it will be able to do so.

The funds' investments are valued based on the amortized cost method described
in the SAI.

The Company's transfer agent, PFPC, will receive your order from Hilliard
Lyons. Please call 1-800-444-1854 for a purchase application. Purchase orders
received by the transfer agent before the close of regular trading on the New
York Stock Exchange (NYSE) (currently 4 p.m. (Eastern time)) on each day the
NYSE and the Federal Reserve Bank of Philadelphia are open will be priced based
on the next NAV calculated on that day.

NAV is calculated at 12 noon and 4 p.m. (Eastern time) each day the NYSE and
the Federal Reserve Bank of Philadelphia are open. Shares will not be priced on
days the NYSE or the Federal Reserve Bank of Philadelphia are closed.
- --------------------------------------------------------------------------------

When Must You Pay?

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

Payment for an order must be made on your behalf by Hilliard Lyons in immedi-
ately available funds by 4 p.m. (Eastern time) on the business day following
PFPC's receipt of the order. If payment is not received by this time, the order
will be canceled and you and your registered representative will be responsible
for any loss to a fund. The Company does not accept third party checks. You may
also wire Federal funds to the transfer agent to purchase shares. If you desire
to do this, please contact your Hilliard Lyons Financial Consultant for spe-
cific details.

14
<PAGE>

The minimum investment for the initial purchase of the HL Shares is $1,000.
There is a $100 minimum for all later investments. The Company permits a lower
initial investment if you are an employee of the Company or one of its service
providers or if you participate in the Automatic Investment Plan in which you
make regular, periodic investments through a savings or checking account. Your
Hilliard Lyons Financial Consultant can advise you on how to begin an Automatic
Investment Plan. The fund may reject any purchase order, modify or waive the
minimum investment requirements and suspend and resume the sale of shares at
any time.

- --------------------------------------------------------------------------------
Distribution and Service Plan

The Company has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the Plan) that allows the Company to pay distribution and other fees for
the sale of its shares and for certain services provided to its shareholders.
Under the Plan, the HL Shares pay a fee (distribution fees) to BlackRock Dis-
tributors, Inc. (the Distributor) or affiliates of PNC Bank for distribution
and sales support services. The distribution fees may be used to pay the Dis-
tributor for distribution services and to pay the Distributor and PNC Bank
affiliates for sales support services provided in connection with the sale of
the HL Shares. The distribution fees may also be used to pay Hilliard Lyons for
sales support services and related expenses. The HL Shares pay a maximum dis-
tribution fee of [ ]% per year of the average daily net asset value of each
fund. The Plan also allows the Distributor, PNC Bank affiliates and other com-
panies that receive fees from the Company to make payments relating to distri-
bution and sales support activities out of their past profits or other sources
available to them.

Under the Plan, the Company has entered into an arrangement with Hilliard
Lyons. Under this arrangement, Hilliard Lyons will

15
<PAGE>

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

provide certain support services to its customers who own the HL Shares. The
Company will pay a shareholder servicing fee to Hilliard Lyons of up to [ ]%
per year of the average daily net asset value of the HL Shares owned by each of
Hilliard Lyons' clients.

In return for that fee, Hilliard Lyons will provide one or more of the follow-
ing services:

(1) Responding to investors' questions on the services performed by
Hilliard Lyons and investments in the HL Shares;

(2) Assisting investors in choosing and changing dividend options,
account designations and addresses; and
(3) Providing other similar shareholder liaison services.

For a separate shareholder processing fee of up to [ ]% per year of the aver-
age daily net asset value of the HL Shares owned by each of Hilliard Lyons'
clients, Hilliard Lyons may provide one or more of these additional services:

(1) Processing purchase and redemption requests from customers and plac-
ing orders with the Company's transfer agent or the Distributor;
(2) Processing dividend payments from the Company on behalf of customers;

(3) Providing sub-accounting for the HL Shares beneficially owned by cus-
tomers or the information necessary for sub-accounting; and
(4) Providing other similar services.

Hilliard Lyons may charge its clients additional fees for account services.
Clients of Hilliard Lyons who own the HL Shares should keep the terms and fees
governing their accounts with Hilliard Lyons in mind as they read this prospec-
tus.
16
<PAGE>

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

The shareholder servicing fees and shareholder processing fees payable pursuant
to the Plan are fees payable for the administration and servicing of share-
holder accounts and not costs which are primarily intended to result in the
sale of a fund's shares.

Because the fees paid by the Company under the Plan are paid out of Company
assets on an on-going basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.

- --------------------------------------------------------------------------------
How to Sell Shares

You can redeem shares at any time (although certain verification may be required
for redemptions in excess of $25,000 or in certain other cases). The Company
will redeem your shares at the next net asset value (NAV) calculated after your
order is received by the fund's transfer agent. The Company will not charge for
redemptions. Investors interested in redeeming shares should contact their
Hilliard Lyons Financial Consultant for specific instructions.

Unless another option is requested, payment for redeemed shares is normally
made by check mailed within seven days after PFPC receives the redemption
request. If the shares to be redeemed have been recently purchased by check,
PFPC may delay the payment of redemption proceeds for up to 15 days after the
purchase date to make sure that the check has cleared.

Upon request, the Company will provide the holders of the HL Shares with
checkwriting privileges. An investor who wants to use this checkwriting redemp-
tion procedure must complete the checkwriting application and signature card
when completing the account application. Investors interested in obtaining the
checkwriting option on existing accounts may contact their Hilliard Lyons
Financial Consultant.

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

17
<PAGE>

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

Expedited Redemptions

If a shareholder has given authorization for expedited redemption, shares can be
redeemed by telephone and the proceeds sent by check to the shareholder or by
Federal wire transfer to a single previously designated bank account. Please
contact your Hilliard Lyons Financial Consultant to assist you. You are respon-
sible for any charges imposed by your bank for this service. Once authorization
is on file, PFPC will honor requests by telephone at (800) 441-7762. The Com-
pany is not responsible for the efficiency of the Federal wire system or the
shareholder's firm or bank. The Company may refuse a telephone redemption
request if it believes it is advisable to do so and may use reasonable proce-
dures to make sure telephone instructions are genuine. The Company and its
service providers will not be liable for any loss that results from acting upon
telephone instructions that they reasonably believed to be genuine in accor-
dance with those procedures. The Company may alter the terms of or terminate
this expedited redemption privilege at any time.

- --------------------------------------------------------------------------------
The Company's Rights
- --------------------------------------------------------------------------------
The Company may:
.Suspend the right of redemption
.Postpone date of payment upon redemption
.Redeem shares involuntarily
.Redeem shares for property other than cash

in accordance with its rights under the Investment Company Act of 1940.

- --------------------------------------------------------------------------------
Accounts with Low Balances
- --------------------------------------------------------------------------------
The Company may redeem a shareholder's account in any fund at any time the net
asset value of the account in such fund falls below the required minimum ini-
tial investment as the result of a redemption or an exchange request. The
shareholder will be notified in writing that the value of the account is less
than the required amount and the shareholder will be allowed 30 days to make
additional investments before the redemption is processed.

18
<PAGE>

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

The Company's Adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was
organized in 1994 to perform advisory services for investment companies and is
located at 345 Park Avenue, New York, NY 10154. BlackRock is a subsidiary of
PNC Bank Corp., one of the largest diversified financial services companies in
the United States. BlackRock Institutional Management Corporation (BIMC), an
affiliate of BlackRock located at 400 Bellevue Parkway, Wilmington, DE 19809,
acts as sub-adviser to the Company.

For their investment advisory and sub-advisory services, BlackRock and BIMC are
entitled to fees computed daily on a fund-by-fund basis and payable monthly.
For the fiscal year ended September 30, 1998, the aggregate advisory fees paid
by the funds to BlackRock as a percentage of average daily net assets were:

<TABLE>
<S> <C>
Money Market 0.17%
Municipal Money Market 0.12%
</TABLE>

The maximum annual advisory fees that can be paid to BlackRock on behalf of
each fund (as a percentage of average daily net assets) are as follows:

<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT
ASSETS ADVISORY FEE
<S> <C>
First $1 billion .450%
$1 billion-$2 billion .400%
$2 billion-$3 billion .375%
more than $3 billion .350%
</TABLE>

BlackRock is a global money management firm with expertise in domestic and
international equities, domestic and global fixed income, cash management and
risk management services. BlackRock has over $140 billion in assets under man-
agement and currently manages money for over half of the Fortune 100, including
seven out of ten of the largest Fortune 100 companies.
Management

IMPORTANT DEFINITIONS

Adviser: The Adviser of
a mutual fund is
responsible for the
overall investment man-
agement of the Fund.
The Adviser for the
funds is BlackRock
Advisors, Inc.

Sub-Adviser: The sub-
adviser of a fund is
responsible for its
day-to-day management
and will generally make
all buy and sell deci-
sions. Sub-advisers
also provide research
and credit analysis.
The sub-adviser for the
funds is BlackRock
Institutional Manage-
ment Corporation.

19
<PAGE>

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

BlackRock and the Company have entered into an expense limitation agreement.
The agreement sets a limit on certain of the operating expenses of each fund
for the next year and requires BlackRock to waive or reimburse fees or
expenses if these operating expenses exceed that limit. These expense limits
(which apply to expenses charged on fund assets as a whole, but not expenses
separately charged to the different share classes of a fund) as a percentage
of average daily net assets are:

<TABLE>
<S> <C>
Money Market .310%
Municipal Money Market .295%
</TABLE>

If in the following two years the operating expenses of a fund that previously
received a waiver or reimbursement from BlackRock are less than the expense
limit for that fund, the fund is required to repay BlackRock up to the amount
of fees waived or expenses reimbursed under the agreement if: (1) the fund has
more than $50 million in assets, (2) BlackRock continues to be the fund's
investment adviser and (3) the Board of Trustees of the Company has approved
the payments to BlackRock on a quarterly basis.
- -------------------------------------------------------------------------------

Dividends and Distributions

The funds make two kinds of distributions to shareholders: dividends and net
capital gain.

Dividends are the net investment income derived by a fund and are declared
daily and paid monthly within five business days after the end of the month.
The Company's Board of Trustees may change the timing of dividend payments.
Shareholders whose purchase orders are executed at 12 noon (Eastern time)
receive dividends for that day. Shareholders whose redemption orders have been
received by 12 noon (Eastern time) do not receive dividends for that day.

Net capital gain occurs when the fund manager sells securities at a profit.
Net capital gain (if any) is distributed to shareholders at
20
<PAGE>

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

least annually at a date determined by the Company's Board of Trustees.

Your distributions will be reinvested at net asset value in new HL Shares.
There are no sales charges on these reinvestments.

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

Taxation of Distributions

Fund dividends and distributions are taxable to investors as ordinary income or
capital gains. Unless your fund shares are in an IRA or other tax-advantaged
account, you are required to pay taxes on distributions whether you receive
them in cash or in the form of additional shares.

Distributions paid out of a fund's "net capital gain" will be taxed to share-
holders as long-term capital gains, regardless of how long a shareholder has
owned shares. All other distributions will be taxed to shareholders as ordinary
income.

Your annual tax statement from the Company will present in detail the tax sta-
tus of your distributions for each year.

The Municipal Money Market Portfolio intends to pay most of its dividends as
exempt interest dividends, which means such dividends are exempt from regular
federal income tax (but not necessarily other federal taxes). These dividends
will generally be subject to state and local taxes. The state or municipality
where you live may not charge you state and local taxes on dividends earned on
certain securities. The fund will have to meet certain requirements in order
for its dividends to be exempt from these federal, state and local taxes. Divi-
dends earned on securities issued by the U.S. government and its agencies may
also be exempt from some types of state and local taxes.

The Municipal Money Market Portfolio may invest a portion of their assets in
securities that generate income that is not exempt

21
<PAGE>

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

from federal, state or local income tax. Any capital gains distributed by the
fund may be taxable as well.

Because every investor has an individual tax situation, and also because the
tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares
of the Company.

- --------------------------------------------------------------------------------
22
<PAGE>

[This page intentionally left blank]
<PAGE>

For More Information:

This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the funds is available free, upon request, including:

Annual/Semi-Annual Report

These reports contain additional information about each of the funds'
investments, describe the funds' performance, list portfolio holdings, and
discuss recent market conditions, economic trends and Fund strategies for the
last fiscal year.

Statement of Additional Information (SAI)

A Statement of Additional Information, dated October , 1999 has been filed
with the Securities and Exchange Commission (SEC). The SAI, which includes
additional information about the funds, may be obtained free of charge, along
with the Company's annual and semi-annual reports, by calling (800) 441-7762.
The SAI, as supplemented from time to time, is incorporated by reference into
this Prospectus.

Shareholder Account Service Representatives

Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Your Hilliard
Lyons Financial Consultant can also assist you. Hours: 8 a.m. to 6 p.m. (Eastern
time), Monday-Friday. Call: (800) 441-7762

Purchases and Redemptions

Call your Hilliard Lyons Financial Consultant or (800) 444-1854.

World Wide Web

Access general fund information and specific fund performance. Request mutual
fund prospectuses and literature. Forward mutual fund inquiries. Available 24
hours a day, 7 days a week. http://www.blackrock.com. You may also access your
Hilliard Lyons account on the world wide web at http://www.hilliard.com.

Request prospectuses, SAI, Annual or Semi-Annual Reports and literature. Forward
mutual fund inquiries. Available 24 hours a day, 7 days a week.
Mail to: [email protected]

Written Correspondence

Post Office Address: BlackRock Funds c/o PFPC Inc., PO Box 8907, Wilmington, DE
19899-8907
Street Address: BlackRock Funds, c/o PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809

Internal Wholesalers/Broker Dealer Support

Available to support investment professionals 9 a.m. to 6 p.m. (Eastern time),
Monday-Friday. Call: (888) 8BLACKROCK

Securities and Exchange Commission (SEC)

You may also view information about the BlackRock Funds, including the SAI, by
visiting the SEC Web site (http://www.sec.gov) or the SEC's Public Reference
Room in Washington, D.C. Information about the operation of the public reference
room can be obtained by calling the SEC directly at 1-800-SEC-0330. Copies of
this information can be obtained, for a duplicating fee, by writing to the
Public Reference Section of the SEC, Washington, D.C. 20549-6009.

INVESTMENT COMPANY ACT FILE NO. 811-05742

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.

Subject to Completion, Dated August 6, 1999

Money Market Funds
Hilliard Lyons Share Class

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

PROSPECTUS
October , 1999

[LOGO]
- --------------------------------------------------------------------------------
HILLIARD LYONS
- --------------------------------------------------------------------------------
J.J.B. Hilliard, W.L. Lyons, Inc. . Member NYSE and SIPC
- --------------------------------------------------------------------------------
Investments Since 1854
- --------------------------------------------------------------------------------

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>

APPENDIX A
----------

Commercial Paper Ratings
- ------------------------

A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:

"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."

"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."

"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.

"B" - Issue has only a speculative capacity for timely payment.

"C" - Issue has a doubtful capacity for payment.

"D" - Issue is in payment default.

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 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:

"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.

"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.

"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.

"Not Prime" - Issuer does not fall within any of the Prime rating
categories.

The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:

"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.

"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.

A-1
<PAGE>

"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.

"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.

"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.

"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.

Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:

"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.

"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."

"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.

"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.

"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.

"D" - Securities are in actual or imminent payment default.

Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.

Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:

"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.

"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."

"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.

"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.

IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:

A-2
<PAGE>

"A1+" - Obligations which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.

"A1" - Obligations are supported by the highest capacity for timely
repayment.

"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.

"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.

"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.

"C" - Obligations for which there is a high risk of default or which
are currently in default.

Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------

The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:

"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.

"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.

"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.

"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit 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.

"BB," "B," "CCC," "CC" and "C" - Debt 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.

"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.

"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.

"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.

"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.

"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.

"CI" - This rating is reserved for income bonds on which no interest is
being paid.

A-3
<PAGE>

"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

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

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

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

"Aa" - Bonds 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.

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

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

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.

Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

(P) - When applied to forward delivery bonds, indicates that the rating
is provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.

The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:

"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

A-4
<PAGE>

"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.

"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.

"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.

"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.

To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.

The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:

"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.

"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."

"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.

"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.

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

IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:

"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.

"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.

A-5
<PAGE>

"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.

"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.

"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.

IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.

Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:

"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.

"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.

Municipal Note Ratings
- ----------------------

A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:

"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.

"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.

"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:

A-6
<PAGE>

"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.

"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.

"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.

"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.

"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.

Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.

A-7
<PAGE>

The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.

Subject to Completion, Dated August 6, 1999

BLACKROCK FUNDS/SM/

STATEMENT OF ADDITIONAL INFORMATION

HL SHARE CLASS

This Statement of Additional Information provides supplementary
information pertaining to shares representing interests in HL Shares of the
Money Market and Municipal Money Market Portfolios (collectively, the
"Portfolios") of BlackRock FundsSM (the "Fund"). This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with the
Prospectus of the Fund dated October [___], 1999, as amended from time to time
(the "Prospectus"). Certain information contained in the Fund's annual reports
to shareholders is incorporated by reference herein. The Prospectus and current
shareholder reports of the Fund may be obtained from the Fund's distributor at
no charge by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated October [__], 1999.
<PAGE>

TABLE OF CONTENTS

Page

INVESTMENT POLICIES.........................................................1
ADDITIONAL INVESTMENT LIMITATIONS..........................................10
TRUSTEES AND OFFICERS......................................................12
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND..............................15
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS....................................15
EXPENSES...................................................................21
PORTFOLIO TRANSACTIONS.....................................................21
PURCHASE AND REDEMPTION INFORMATION........................................22
VALUATION OF PORTFOLIO SECURITIES..........................................24
PERFORMANCE INFORMATION....................................................24
TAXES......................................................................29
ADDITIONAL INFORMATION CONCERNING SHARES...................................32
MISCELLANEOUS..............................................................33
FINANCIAL STATEMENTS.......................................................35
APPENDIX A............................................................... A-1

No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or the
Prospectus in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus does not
constitute an offering by the Fund or by the Fund's distributor in any
jurisdiction in which such offering may not lawfully be made.
<PAGE>

INVESTMENT POLICIES

The following supplements information contained in the Prospectus
concerning the Portfolios' investment policies. Except as indicated, the
information below relates only to a Portfolio that is authorized to invest in
the instruments or securities described below.

Additional Information on Investment Strategy

Money Market Portfolio. The investment objective of the Money Market
Portfolio is to provide as high a level of current interest income as is
consistent with maintaining liquidity and stability of principal. The Portfolio
may invest in a broad range of short-term, high quality, U.S. dollar-denominated
instruments, such as government, bank, commercial and other obligations, that
are available in the money markets. In particular, the Portfolio may invest in:

(a) U.S. dollar-denominated obligations issued or supported by the
credit of U.S. or foreign banks or savings institutions with total
assets in excess of $1 billion (including obligations of foreign
branches of such banks);

(b) high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers
rated (at the time of purchase) A-2 or higher by S&P, Prime-2 or
higher by Moody's, Duff 2 or higher by Duff & Phelps Credit Co.
("D&P"), F-2 or higher by Fitch Investors Service, Inc. ("Fitch")
or TBW-2 or higher by Thomson BankWatch, Inc. ("TBW"), as well as
high quality corporate bonds rated (at the time of purchase) AA or
higher by S&P, D&P, Fitch or TBW or AA or higher by Moody's;

(c) unrated notes, paper and other instruments that are of comparable
quality as determined by the Portfolio's sub-adviser under
guidelines established by the Fund's Board of Trustees;

(d) asset-backed securities (including interests in pools of assets
such as mortgages, installment purchase obligations and credit
card receivables);

(e) securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities and
related custodial receipts;

(f) dollar-denominated securities issued or guaranteed by foreign
governments or their political subdivisions, agencies or
instrumentalities;

(g) guaranteed investment contracts issued by highly-rated U.S.
insurance companies;

(h) securities issued or guaranteed by state or local governmental
bodies; and

(i) repurchase agreements relating to the above instruments.

Municipal Money Market Portfolio. The investment objective of the Municipal
Money Market Portfolio is to provide as high a level of current interest income
exempt from Federal income taxes as is consistent with maintaining liquidity and
stability of principal. It pursues this objective by investing substantially all
of its assets in short-term obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia, and
their political subdivisions, agencies, instrumentalities and authorities
("Municipal Obligations").

The Municipal Money Market Portfolio seeks to achieve its investment
objectives by primarily investing in:

(a) fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or
higher by S&P, D-2 or higher by D&P or F-2 or higher by Fitch;

(b) tax-exempt commercial paper and similar debt instruments rated
Prime-2 or higher by Moody's, A-2 or higher by S&P, Duff 2 or
higher by D&P or F-2 or higher by Fitch;

(d) unrated notes, paper or other instruments that are of comparable
quality as determined by the Portfolio's sub-adviser under
guidelines established by the Fund's Board of Trustees; and

(e) municipal bonds and notes which are guaranteed as to principal and
interest by the U.S. Government or an agency or instrumentality
thereof or which otherwise depend directly or indirectly on the
credit of the United States.

1
<PAGE>

All securities acquired by the Portfolios will be determined at the time of
purchase by the Portfolios' sub-adviser, under guidelines established by the
Fund's Board of Trustees, to present minimal credit risks and will be "Eligible
Securities" as defined by the SEC. Eligible Securities are (a) securities that
either (i) have short-term debt ratings at the time of purchase in the two
highest rating categories by at least two unaffiliated nationally recognized
statistical rating organizations ("NRSROs") (or one NRSRO if the security is
rated by only one NRSRO), or (ii) are comparable in priority and security with
an instrument issued by an issuer which has such ratings, and (b) securities
that are unrated (including securities of issuers that have long-term but not
short-term ratings) but are of comparable quality as determined in accordance
with guidelines approved by the Board of Trustees.

Each Portfolio is managed so that the average maturity of all instruments
held by it (on a dollar-weighted basis) will not exceed 90 days. In no event
will a Portfolio purchase securities which mature more than 397 days from the
date of purchase (except for certain variable and floating rate instruments and
securities collateralizing repurchase agreements). Securities in which the
Portfolios invest may not earn as high a level of income as longer term or lower
quality securities, which generally have greater market risk and more
fluctuation in market value.

Additional Information on Portfolio Investments

Reverse Repurchase Agreements. Each Portfolio may enter into reverse
repurchase agreements for temporary purposes (such as to obtain cash to meet
redemption requests when the liquidation of portfolio securities is deemed
disadvantageous or inconvenient). Under reverse repurchase agreements,
Portfolios sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price. A
Portfolio may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse Purchase Agreements are
considered to be borrowings under the Investment Company Act of 1940 (the "1940
Act"). If the securities held by a Portfolio should decline in value while
borrowings are outstanding, the net asset value of the Portfolio's outstanding
shares will decline in value by proportionately more than the decline in value
suffered by the Portfolio's securities. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds will
be less than the interest expense, that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, a
Portfolio will maintain a segregated account with the Fund's custodian
containing cash, U.S. Government or other appropriate liquid securities having a
value at least equal to the repurchase price. A Portfolio's reverse repurchase
agreements, together with any other borrowings, will not exceed, in the
aggregate, 33 1/3% of the value of its total assets.

Variable and Floating Rate Instruments. Each Portfolio may purchase rated
and unrated variable and floating rate instruments, which may have a stated
maturity in excess of 13 months but will, in any event, permit a Portfolio to
demand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instruments
may include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Issuers of unrated variable and floating rate instruments must
satisfy the same criteria as set forth above for the particular Portfolio. The
absence of an active secondary market with respect to particular variable and
floating rate instruments, however, could make it difficult for a Portfolio to
dispose of a variable or floating rate instrument if the issuer defaulted on its
payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.

With respect to purchasable variable and floating rate instruments, the
adviser or sub-adviser will consider the earning power, cash flows and liquidity
ratios of the issuers and guarantors of such instruments and, if the instruments
are subject to a demand feature, will monitor their financial status to meet
payment on demand. Such instruments may include variable amount master demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. The absence of an active
secondary market with respect to particular variable and floating rate
instruments could make it difficult for a Portfolio to dispose of a variable or
floating rate note if the issuer defaulted on its payment obligation or during
periods that the Portfolio is not entitled to exercise its demand rights, and
the Portfolio could, for these or other reasons, suffer a loss with respect to
such instruments. In determining average-weighted portfolio maturity, an
instrument will be deemed to have a maturity equal to either the period
remaining until the next interest rate adjustment or the time the Portfolio
involved can recover payment of principal as specified in the instrument,
depending on the type of instrument involved.

Money Market Obligations of Domestic Banks, Foreign Banks and Foreign
Branches of U.S. Banks. Each Portfolio may purchase bank obligations, such as
certificates of deposit, notes, bankers' acceptances and time deposits,
including

2
<PAGE>

instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions having total assets at the time of purchase in excess of $1
billion. These obligations may be general obligations of the parent bank or may
be limited to the issuing branch or subsidiary by the terms of a specific
obligation or by government regulation. The assets of a bank or savings
institution will be deemed to include the assets of its domestic and foreign
branches for purposes of each Portfolio's investment policies. Investments in
short-term bank obligations may include obligations of foreign banks and
domestic branches of foreign banks, and also foreign branches of domestic banks.

To the extent consistent with its investment objectives, the Money Market
Portfolio may invest in debt obligations of domestic or foreign corporations and
banks, and may acquire commercial obligations issued by Canadian corporations
and Canadian counterparts of U.S. corporations, as well as Europaper, which is
U.S. dollar-denominated commercial paper of a foreign issuer. The Money Market
Portfolio may also make interest-bearing savings deposits in commercial and
savings banks in amounts not in excess of 5% of their respective total assets.

Mortgage Related and Asset-Backed Securities. Although under normal market
conditions they do not expect to do so, each Portfolio may invest in
mortgage-related securities issued by the U.S. Government or its agencies or
instrumentalities or issued by private companies.

Asset-backed securities, such as mortgage-related securities, are generally
issued as pass-through certificates, which represent undivided fractional
ownership interests in an underlying pool of assets, or as debt instruments,
which are also known as collateralized obligations, and are generally issued as
the debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.

The yield and maturity characteristics of mortgage-related and other
asset-backed securities differ from traditional debt securities. A major
difference is that the principal amount of the obligations may normally be
prepaid at any time because the underlying assets (i.e., loans) generally may be
prepaid at any time. In calculating the average weighted maturity of a
Portfolio, the maturity of mortgage-related securities held by the Portfolio
will be based on estimates of average life which take prepayments into account.
The average life of a mortgage-related instrument, is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities
as the result of scheduled principal payments and mortgage prepayments. Like
other fixed-income securities, when interest rates rise the value of an
asset-backed security generally will decline; however, when interest rates
decline, the value of an asset-backed security with prepayment features may not
increase as much as that of other fixed-income securities.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by the Federal National Mortgage Association
("FNMA") include FNMA guaranteed Mortgage Pass-Through Certificates (also known
as "Fannie Maes") which are solely the obligations of the FNMA, are not backed
by or entitled to the full faith and credit of the United States and are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.

U.S. Government Obligations. The Portfolios (to the extent consistent with
their investment objectives) may purchase obligations issued or guaranteed by
the U.S. Government and U.S. Government agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury. Others are
supported by the right of the issuer to borrow from the U.S. Treasury; and still
others are supported only by the credit

3
<PAGE>

of the agency or instrumentality issuing the obligation. No assurance can be
given that the U.S. Government will provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Certain U.S. Treasury and agency securities may be held by trusts that issue
participation certificates (such as Treasury income growth receipts ("TIGRs")
and certificates of accrual on Treasury certificates ("CATs")). These
instruments are issued at a discount to their "face value" and may (particularly
in the case of stripped mortgage-backed securities) exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.

Examples of the types of U.S. Government obligations which the Portfolios
may hold include U.S. Treasury bills, Treasury instruments and Treasury bonds
and the obligations of Federal Home Loan Banks, Federal Farm Credit Banks,
Federal Land Banks, the Federal Housing Administration, the Farmers Home
Administration, the Export-Import Bank of the United States, the Small Business
Administration, FNMA, GNMA, the General Services Administration, the Student
Loan Marketing Association, the Central Bank for Cooperatives, FHLMC, the
Federal Intermediate Credit Banks, the Maritime Administration, the
International Bank for Reconstruction and Development (the "World Bank"), the
Asian-American Development Bank and the Inter-American Development Bank.

Supranational Organization Obligations. The Portfolios may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development.

Lease Obligations. The Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").

The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the
Sub-Adviser will consider, among other factors, the following: (i) whether the
lease can be cancelled; (ii) the degree of assurance that assets represented by
the lease could be sold; (iii) the strength of the lessee's general credit
(e.g., its debt, administrative, economic, and financial characteristics); (iv)
the likelihood that the municipality would discontinue appropriating funding for
the leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.

The Municipal Money Market Portfolio will only invest in lease obligations
with puts that (i) may be exercised at par on not more than seven days notice,
and (ii) are issued by institutions deemed by the sub-adviser to present minimal
credit risks. Such obligations will be considered liquid. However, a number of
puts are not exercisable at the time the put would otherwise be exercised if the
municipal borrower is not contractually obligated to make payments (e.g., an
event of nonappropriation with a "nonappropriation" lease obligation). Under
such circumstances, the lease obligation while previously considered liquid
would become illiquid, and a Portfolio might lose its entire investment in such
obligation.

Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to a Portfolio, and could result in a reduction in the value of the
municipal lease experiencing non-payment and a potential decrease in the net
asset value of a Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, a Portfolio could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and a Portfolio
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund might take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase a Portfolio's
operating expenses and adversely affect the net asset value of a Portfolio. When
the lease contains a non-appropriation clause, however, the failure to pay would
not be a default and a Portfolio would not have the right to take possession of
the assets. Any income derived from a Portfolio's ownership or operation of such
assets may not be tax-exempt. In addition, a Portfolio's intention to qualify as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended, may limit the extent to which a Portfolio may exercise its rights by
taking possession of such assets, because as a regulated investment company a
Portfolio is subject to certain limitations on its investments and on the nature
of its income.

Commercial Paper. The Portfolios may purchase commercial paper rated in one
of the two highest rating categories of a nationally recognized statistical
rating organization ("NRSRO").

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Commercial paper purchasable by each Portfolio includes "Section 4(2)
paper," a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.

Repurchase Agreements. Each Portfolio may enter into repurchase agreements.
The securities held subject to a repurchase agreement by a Portfolio may have
stated maturities exceeding 13 months, so long as the repurchase agreement
itself matures in less than 13 months.

The repurchase price under the repurchase agreements generally equals the
price paid by a Portfolio involved plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on securities
underlying the repurchase agreement). The financial institutions with which a
Portfolio may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the Portfolio's adviser or sub-adviser. A Portfolio's
adviser or sub-adviser will continue to monitor creditworthiness of the seller
under a repurchase agreement, and will require the seller to maintain during the
term of the agreement the value of the securities subject to the agreement to
equal at least the repurchase price (including accrued interest). In addition,
the Portfolio's adviser or sub-adviser will require that the value of this
collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, be equal to or greater than the repurchase
price (including accrued premium) provided in the repurchase agreement. The
accrued premium is the amount specified in the repurchase agreement or the daily
amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. The Portfolio's adviser or
sub-adviser will mark-to-market daily the value of the securities. Securities
subject to repurchase agreements will be held by the Fund's custodian (or
sub-custodian) in the Federal Reserve/Treasury book-entry system or by another
authorized securities depository. Repurchase agreements are considered to be
loans by the Portfolios under the 1940 Act.

The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, a Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, a
Portfolio's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that a Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, a Portfolio may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.

Investment Grade Debt Obligations. Each of the Portfolios may invest in
securities in the two highest rating categories of NRSROs.

See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.

When-Issued Purchases and Forward Commitments. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment," including "TBA" (to be announced) basis. These
transactions involve a commitment by a Portfolio to purchase or sell particular
securities with payment and delivery taking place at a future date (perhaps one
or two months later), and permit a Portfolio to lock in a price or yield on a
security it owns or intends to purchase, regardless of future changes in
interest rates or market action. When-issued and forward commitment transactions
involve the risk, however, that the price or yield obtained in a transaction may
be less favorable than the price or yield available in the market when the
securities delivery takes place.

When a Portfolio agrees to purchase securities on this basis, the custodian
will set aside liquid assets equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Portfolio may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the
Portfolio's commitments. It may be expected that the market value of a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its

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forward commitments and commitments to purchase when-issued or TBA securities
will not exceed 25% of the value of its total assets absent unusual market
conditions.

If deemed advisable as a matter of investment strategy, a Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.

When a Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.

The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.

Foreign Investments. Investing in foreign securities involves
considerations not typically associated with investing in securities of
companies organized and operated in the United States. Because foreign
securities generally are denominated and pay dividends or interest in foreign
currencies, the value of a Portfolio that invests in foreign securities as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates.

A Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Portfolio's
operations.

In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. While the volume of
transactions effected on foreign stock exchanges has increased in recent years,
it remains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.

The expense ratios of the Portfolios investing significantly in foreign
securities can be expected to be higher than those of Portfolios investing
primarily in domestic securities. The costs attributable to investing abroad are
usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.

The Euro. On January 1, 1999, 11 European countries implemented a new
currency unit, the Euro, which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. The
countries that initially converted or tied their currencies to the Euro are
Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan means that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Participating governments will issue their bonds in Euros, and monetary policy
for participating countries will be uniformly managed by a new central bank, the
European Central Bank.

Although it is not possible to predict the impact of the Euro
implementation plan on the Portfolios, the transition to the Euro may change the
economic environments and behavior of investors, particularly in European
markets. For example, investors may begin to view those countries using the Euro
as a single entity, and the Portfolios' sub-advisers may need to adapt its
investment strategy accordingly. The process of implementing the Euro also may
adversely affect financial markets world-wide and may result in changes in the
relative strength and value of the U.S. dollar or other major currencies, as
well as possible adverse tax consequences. The transition to the Euro is likely
to have a significant impact on fiscal and monetary policy in the participating
countries and may produce unpredictable effects on trade and commerce generally.
These resulting uncertainties could create increased volatility in financial
markets world-wide.

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Foreign Currency Transactions. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Portfolio to establish a rate of exchange for a future point in time. A
Portfolio may use forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the "ECU" used in the
European Community) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A Portfolio may
enter into forward foreign currency exchange contracts when deemed advisable by
its adviser or sub-adviser under two circumstances. First, when entering into a
contract for the purchase or sale of a security, a Portfolio may enter into a
forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S.
dollar or other foreign currency.

Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. With respect to any forward foreign currency contract,
it will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date the
forward contract is entered into and the date it matures. In addition, while
forward contracts may offer protection from losses resulting from declines in
the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. A Portfolio
will also incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.

A Portfolio may also engage in proxy hedging transactions to reduce the
effect of currency fluctuations on the value of existing or anticipated holdings
of portfolio securities. Proxy hedging is often used when the currency to which
the Portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a Portfolio is engaging in proxy hedging. A Portfolio may
also cross-hedge currencies by entering into forward contracts to sell one or
more currencies that are expected to decline in value relative to other
currencies to which the Portfolio has or in which the Portfolio expects to have
portfolio exposure. For example, a Portfolio may hold both French government
bonds and German government bonds, and the Adviser or Sub-Adviser may believe
that French francs will deteriorate against German marks. The Portfolio would
sell French francs to reduce its exposure to that currency and buy German marks.
This strategy would be a hedge against a decline in the value of French francs,
although it would expose the Portfolio to declines in the value of the German
mark relative to the U.S. dollar.

In general, currency transactions are subject to risks different from those
of other portfolio transactions, and can result in greater losses to a Portfolio
than would otherwise be incurred, even when the currency transactions are used
for hedging purposes.

A separate account of a Portfolio consisting of liquid assets equal to the
amount of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above, will
be established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Portfolio.

Stand-by Commitments. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Portfolio at any time before the maturity of
the underlying Municipal Obligations and may be sold, transferred or assigned
only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Portfolio may pay
for such a stand-by commitment either separately in cash or by paying a higher
price for Municipal Obligations which are acquired subject to the commitment for
Municipal Obligations (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments for Municipal Obligations held by a Portfolio will not
exceed 1/2 of 1% of the value of such Portfolio's total assets calculated
immediately after each stand-by commitment is acquired.

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<PAGE>

Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in a sub-adviser's opinion, present minimal credit risks.
A Portfolio will acquire stand-by commitments solely to facilitate portfolio
liquidity and not to exercise its rights thereunder for trading purposes.
Stand-by commitments will be valued at zero in determining net asset value.
Accordingly, where a Portfolio pays directly or indirectly for a stand-by
commitment, its cost will be reflected as an unrealized loss for the period
during which the commitment is held by such Portfolio and will be reflected as a
realized gain or loss when the commitment is exercised or expires.

Municipal Investments. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds which
are not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of private activity bonds is usually directly related to the
credit standing of the corporate user of the facility involved. Municipal
Obligations may also include "moral obligation" bonds, which are normally issued
by special purpose public authorities. If the issuer of moral obligation bonds
is unable to meet its debt service obligations from current revenues, it may
draw on a reserve fund the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.

Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations are not general obligations of
the issuer for which the state or other governmental body's unlimited taxing
power is pledged, certain lease obligations are backed by a covenant to
appropriate money to make the lease obligation payments. However, under certain
lease obligations, the state or governmental body has no obligation to make
these payments in future years unless money is appropriated on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that is
not yet as marketable as more conventional securities.

The Municipal Money Market Portfolio may acquire "stand-by commitments"
with respect to Municipal Obligations held by it. Under a stand-by commitment, a
dealer agrees to purchase, at the Portfolio's option, specified Municipal
Obligations at a specified price. The acquisition of a stand-by commitment may
increase the cost, and thereby reduce the yield, of the Municipal Obligations to
which the commitment relates. The Municipal Money Market Portfolio may also
invest in tax-exempt derivative securities relating to Municipal Obligations,
including tender option bonds, participations, beneficial interests in trusts
and partnership interests.

The amount of information regarding the financial condition of issuers of
Municipal Obligations may be less extensive than the information for public
corporations, and the secondary market for Municipal Obligations may be less
liquid than that for taxable obligations. Accordingly, the ability of a
Portfolio to buy and sell Municipal Obligations may, at any particular time and
with respect to any particular securities, be limited. In addition, Municipal
Obligations purchased by a Portfolio include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions.

Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal and state income tax are rendered by
counsel to the respective issuers and sponsors of the obligations at the time of
issuance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.

Tax-Exempt Derivatives. The Municipal Money Market Portfolio may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. A number of different structures have been used. For example, interests
in long-term fixed-rate municipal debt obligations, held by a bank as trustee or
custodian, are coupled with tender option, demand and other features when the
tax-exempt derivatives are created. Together, these features entitle the holder
of the interest to tender (or put) the underlying municipal debt obligation to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, municipal debt obligations are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying securities held by the custodian. Under
such arrangements, the holder of the custodial receipt has the option to tender
the underlying securities at their face value to the sponsor (usually a bank or
broker dealer or other financial institution), which is paid periodic fees equal
to the difference between the securities' fixed coupon rate and the rate that
would cause the securities,

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coupled with the tender option, to trade at par on the date of a rate
adjustment. The Portfolio may hold tax-exempt derivatives, such as participation
interests and custodial receipts, for municipal debt obligations which give the
holder the right to receive payment of principal subject to the conditions
described above. The Internal Revenue Service has not ruled on whether the
interest received on tax-exempt derivatives in the form of participation
interests or custodial receipts is tax-exempt, and accordingly, purchases of any
such interests or receipts are based on the opinions of counsel to the sponsors
of such derivative securities. Neither the Fund nor its investment adviser or
sub-advisers will review the proceedings related to the creation of any
tax-exempt derivatives or the basis for such opinions.

Securities Lending. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recovering
the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.

A Portfolio would continue to accrue interest on loaned securities and
would also earn income on investment collateral for such loans. Any cash
collateral received by a Portfolio in connection with such loans may be invested
in a broad range of high quality, U.S. dollar-denominated money market
instruments that meet Rule 2a-7 restrictions for money market funds.
Specifically, cash collateral may be invested in any of the following
instruments: (a) securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities and related
custodial receipts; (b) "first tier" quality commercial paper and other
obligations issued or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) in the highest rating category by at
least two NRSRO's, or one if only rated by one NRSRO; (c) U.S.
dollar-denominated obligations issued or supported by the credit of U.S. or
foreign banks or savings institutions with total assets in excess of $1 billion
(including obligations of foreign branches of such banks) (i.e. CD's, BA's and
time deposits); (d) repurchase agreements relating to the above instruments, as
well as corporate debt; and (e) unaffiliated money market funds. Any such
investments must be rated "first tier" and must have a maturity of 397 days or
less from the date of purchase.

Yields and Ratings. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"), Fitch
Investor Services, Inc. ("Fitch") and S&P represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices. Subsequent to its purchase by a Portfolio, a rated security may cease to
be rated. A Portfolio's adviser or sub-adviser will consider such an event in
determining whether the Portfolio should continue to hold the security.

Investment Companies. The Portfolios may invest in securities issued by
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. Securities of other investment companies
will be acquired by a Portfolio within the limits prescribed by the 1940 Act. As
a shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory fees and other expenses the Portfolio bears directly in connection with
its own operations.

Each Portfolio currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (i) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or by the Fund as a whole.

Guaranteed Investment Contracts. The Money Market Portfolio may make
limited investments in guaranteed investment contracts ("GICs") issued by highly
rated U.S. insurance companies. Under these contracts, a Portfolio makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Portfolio, on a monthly basis, interest
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market
Portfolio does not expect to invest more than 5% of its net assets in GICs at
any time during the current fiscal year.

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Liquidity Management. Portfolios may hold uninvested cash reserves pending
investment during temporary defensive periods or if, in the opinion of the
Portfolios' sub-adviser, suitable obligations are unavailable. During normal
market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.

Illiquid Securities. Neither Portfolio will invest more than 10% of the
value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to these
limits. Each Portfolio may purchase securities which are not registered under
the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act. These
securities will not be considered illiquid so long as it is determined by the
adviser or sub-adviser that an adequate trading market exists for the
securities. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.

Portfolio Turnover Rates. A Portfolio's annual portfolio turnover rate will
not be a factor preventing a sale or purchase when the adviser or sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular year.
High portfolio turnover rates (i.e., 100% or more) will generally result in
higher transaction costs to a Portfolio and may result in the realization of
short-term capital gains that are taxable to shareholders as ordinary income.

ADDITIONAL INVESTMENT LIMITATIONS

Each Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Portfolio only by a
vote of the holders of a majority of such Portfolio's outstanding shares (as
defined below under "Miscellaneous").

1) Neither Portfolio may purchase securities of any one issuer (other than
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or certificates of deposit for any such securities) if more
than 5% of the value of the Portfolio's total assets (taken at current value)
would be invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Portfolio or the
Fund, except that up to 25% of the value of the Portfolio's total assets (taken
at current value) may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the value of the Portfolio's total assets.

2) Neither Portfolio may borrow money or issue senior securities, except
that the Portfolios may borrow from banks and the Money Market Portfolio may
enter into reverse repurchase agreements for temporary purposes in amounts up to
one-third of the value of its total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets, except in connection with any such
borrowing and then in amounts not in excess of one-third of the value of the
Portfolio's total assets at the time of such borrowing. The Money Market
Portfolio will not purchase securities while its aggregate borrowings (including
reverse repurchase agreements and borrowings from banks) are in excess of 5% of
its total assets are outstanding. Securities held in escrow or separate accounts
in connection with the Portfolio's investment practices are not deemed to be
pledged for purposes of this limitation.

3) The Municipal Money Market Portfolio may not purchase securities which
would cause 25% or more of the value of its total assets at the time of purchase
to be invested in the securities of one or more issuers conducting their
principal business activities in the same industry. The Money Market Portfolio,
on the other hand, may not purchase any securities which would cause, at the
time of purchase, less than 25% of the value of its total assets to be invested
in the obligations of issuers in the banking industry, or in obligations, such
as repurchase agreements, secured by such obligations (unless the Portfolio is
in a temporary defensive position) or which would cause, at the time of
purchase, more than 25% of the value of its total assets to be invested in the
obligations of issuers in any other industry. In applying the investment
limitations stated in this paragraph, (i) there is no limitation with respect to
the purchase of (a) instruments issued (as defined in Investment Limitation
number 1 above) or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, (b)
instruments issued by domestic banks (which may include U.S. branches of foreign
banks) and (c) repurchase agreements secured by the instruments described in
clauses (a) and (b); (ii) 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; and (iii) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will be each considered a separate industry.

10
<PAGE>

4) The Municipal Money Market Portfolio will invest at least 80% of its net
assets in instruments the interest on which is exempt from regular Federal
income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.

5) Neither Portfolio may purchase or sell real estate, except that each
Portfolio may purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real estate.

6) Neither Portfolio may acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise permitted by the 1940
Act.

7) Neither Portfolio may act as an underwriter of securities within the
meaning of the Securities Act of 1933 except to the extent that the purchase of
obligations directly from the issuer thereof, or the disposition of securities,
in accordance with the Portfolio's investment objective, policies and
limitations may be deemed to be underwriting.

8) Neither Portfolio may write or sell put options, call options,
straddles, spreads, or any combination thereof, except for transactions in
options on securities, securities indices, futures contracts and options on
futures contracts.

9) Neither Portfolio may purchase securities of companies for the purpose
of exercising control.

10) Neither Portfolio may purchase securities on margin, make short sales
of securities or maintain a short position, except that (a) this investment
limitation shall not apply to a Portfolio's transactions in futures contracts
and related options or a Portfolio's sale of securities short against the box,
and (b) a Portfolio may obtain short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.

11) Neither Portfolio may purchase or sell commodity contracts, or invest
in oil, gas or mineral exploration or development programs, except that each
Portfolio may, to the extent appropriate to its investment policies, purchase
publicly traded securities of companies engaging in whole or in part in such
activities and may enter into futures contracts and related options.

12) Neither Portfolio may make loans, except that each Portfolio may
purchase and hold debt instruments and enter into repurchase agreements in
accordance with its investment objective and policies and may lend portfolio
securities.

13) Neither Portfolio may purchase or sell commodities except that each
Portfolio may, to the extent appropriate to its investment policies, purchase
securities of companies engaging in whole or in part in such activities, may
engage in currency transactions and may enter into futures contracts and related
options.

11
<PAGE>

TRUSTEES AND OFFICERS

The business and affairs of the Fund are managed under the direction of its
Board of Trustees. The trustees and executive officers of the Fund, and their
business addresses and principal occupations during the past five years, are:

<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------

<S> <C> <C>
William O. Albertini Trustee Retired; Executive Vice President and Chief Financial
698 Strafford Circle Officer from August, 1997-May, 1999, Bell Atlantic Global
Strafford, PA 19087 Wireless (global wireless communications); Executive Vice
Age: 55 President, Chief Financial Officer and Director from
February 1995-August 1997, Vice President and Chief
Financial Officer from January 1991 - February 1995, Bell
Atlantic Corporation (a diversified telecommunications
company); Director, Groupo Iusacell, S.A. de C.V.
(cellular communications company) since June 1994;
Director, American Waterworks, Inc. (water utility) since
May 1990; Trustee, The Carl E. & Emily I. Weller
Foundation since October 1991.

*Raymond J. Clark Trustee, President Treasurer of Princeton University since 1987; Trustee,
Office of the Treasurer and Treasurer The Compass Capital Group of Funds from 1987 to 1996;
Princeton University Trustee, Chemical Bank, New Jersey Advisory Board from
3 New South Building 1994 until 1995; Trustee, American Red Cross - Mercer
P.O. Box 35 County Chapter since 1995; Trustee, Medical Center of
Princeton, NJ 08540 Princeton; and Trustee, United Way-Greater Mercer County
Age: 63 from 1996-1997.

Robert M. Hernandez Trustee Director since 1991, Vice Chairman and Chief Financial
USX Corporation Officer since 1994, Executive Vice President -Accounting
600 Grant Street and Finance and Chief Financial Officer from 1991 to
6105 USX Tower 1994, USX Corporation (a diversified company principally
Pittsburgh, PA 15219 engaged in energy and steel businesses); Director and
Age: 54 Chairman of the Executive Committee, ACE Limited
(insurance company); Trustee, Allegheny University
Hospitals, Allegheny General; and Allegheny University
Hospitals-West, Director, Marinette Marine Corporation;
Director, Transtar, Inc. (transportation company) since
1996; and Director and Chairman of the Board, RTI
International Metals, Inc.

Anthony M. Santomero Vice Chairman of the Deputy Dean from 1990 to 1994, Richard K. Mellon
The Wharton School Board Professor of Finance since April 1984, Director, Wharton
University of Pennsylvania Financial Institutions Center since July 1995, and Dean's
Room 2344 Advisory Council Member since July 1984, The Wharton
Steinberg Hall-Dietrich Hall School, University of Pennsylvania; Associate Editor,
Philadelphia, Journal of Banking and Finance since June 1978; Associate
PA 19104-6367 Editor, Journal of Economics and Business since October
Age: 52 1979; Associate Editor, Journal of Money, Credit and
Banking since January 1980; Research Associate, New York
University Center for Japan - U.S. Business and Economic
Studies since July 1989; Editorial Advisory
</TABLE>

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

* This trustee may be deemed an "interested person" of the Fund as defined
in the 1940 Act.

12
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------

<S> <C> <C>
Board, Open Economics Review since November 1990;
Director, The Zweig Fund and The Zweig Total Return Fund;
Director of Municipal Fund for California Investors, Inc.
and Municipal Fund for New York Investors, Inc.

David R. Wilmerding, Jr. Chairman of the Chairman, Gee, Wilmerding & Associates, Inc. (investment
One Aldwyn Center Board advisers) since February 1989; Director, Beaver
Villanova, PA 19085 Management Corporation (land management corporation);
Age: 63 Managing General Partner, Chestnut Street Exchange Fund;
Director, Independence Square Income Securities, Inc.;
Director, The Mutual Fire, Marine and Inland Insurance
Company; Director, U.S. Retirement Communities, Inc.;
Director, Trustee or Managing General Partner of a number
of investment companies advised by BIMC and its
affiliates.

Karen H. Sabath Assistant Secretary Managing Director, BlackRock Advisors, Inc. since
BlackRock Advisors, Inc. February 1998; President, Compass Capital Group, Inc.
345 Park Avenue from 1995 to March 1998; Managing Director of BlackRock
New York, NY 10154 Financial Management, Inc. since 1993; prior to 1993,
Age: 33 Vice President of BlackRock Financial Management, Inc.

Ellen L. Corson Assistant Treasurer Vice President and Director of Mutual Fund Accounting and
PFPC Inc. Administration, PFPC Inc. since November 1997; Assistant
103 Bellevue Parkway Vice President, PFPC Inc. from March 1997 to November
Wilmington, DE 19809 1997; Senior Accounting Officer, PFPC Inc. from March
Age: 34 1993 to March 1997.

Brian P. Kindelan Secretary Vice President and Senior Counsel, BlackRock Financial
BlackRock Financial Management, Inc. Management, Inc. since April 1998; Senior Counsel, PNC
1600 Market Street Bank Corp. from May 1995 to April 1998; Associate,
28th Fl. Stradley, Ronon, Stevens & Young, LLP from March 1990 to
Philadelphia, PA 19103 May 1995.
Age: 39
</TABLE>

The Fund pays trustees who are not affiliated with BlackRock Advisors,
Inc. ("BlackRock") or BlackRock Distributors, Inc. ("BDI" or the "Distributor")
$20,000 annually ($30,000 annually in the event that the assets of the Fund
exceed $40 billion) and $350 per Portfolio for each full in-person meeting of
the Board that they attend. The Fund pays the Chairman and Vice Chairman of the
Board an additional $10,000 and $5,000 per year, respectively, for their service
in such capacities. Trustees who are not affiliated with BlackRock or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. The term of office of each
trustee will automatically terminate when such trustee reaches 72 years of age.
No officer, director or employee of BlackRock, BlackRock Institutional
Management Corporation ("BIMC"), BlackRock Financial Management, Inc. ("BFM"),
BlackRock International, Ltd. ("BIL"), PFPC Inc. ("PFPC") (with BlackRock, the
"Administrators"), BDI, or PNC Bank, National Association ("PNC Bank") currently
receives any compensation from the Fund. As of the date of this Statement of
Additional Information, the trustees and officers of the Fund, as a group, owned
less than 1% of the outstanding shares of each class of each Portfolio.

13
<PAGE>

The table below sets forth the compensation actually received from the
Fund and the Fund Complex of which the Fund is a part by the trustees for the
fiscal year ended September 30, 1998:

<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from Fund and Fund
Aggregate Benefits Accrued Estimated Complex1
Compensation as Part Annual Benefits Paid to
Name of Person, Position from Fund of Fund Expenses upon Retirement Trustees
------------------------ --------- ---------------- --------------- -------------------

<S> <C> <C> <C> <C>
Anthony M. Santomero, Vice $57,675 N/A N/A (3)2 $70,175
Chairman of the Board

David R. Wilmerding, Jr., $62,675 N/A N/A (3)2 $76,675
Chairman of the Board

William O. Albertini, Trustee $52,675 N/A N/A (1)2 $52,675

Raymond J. Clark, Trustee $52,675 N/A N/A (1)2 $52,675

Robert M. Hernandez, Trustee $52,675 N/A N/A (1)2 $52,675
</TABLE>

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

1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser of
any of the other investment companies.

2. Total number of investment company boards trustees served on within the Fund
Complex.

14
<PAGE>

SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND

Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Fund's Declaration of Trust provides that
shareholders shall not be subject to any personal liability in connection with
the assets of the Fund for the acts or obligations of the Fund, and that every
note, bond, contract, order or other undertaking made by the Fund shall contain
a provision to the effect that the shareholders are not personally liable
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.

The Declaration of Trust further provides that all persons having any
claim against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the Fund
to the same extent that trustees are entitled to indemnification.

INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS

Advisory and Sub-Advisory Agreements. The advisory and sub-advisory
services provided by BlackRock, BIMC, BFM and BIL, as applicable, and the fees
received by BlackRock for such services, are described in the Prospectus.

For their advisory and subadvisory services, BlackRock, BIMC, BFM and
BIL are entitled to fees, computed daily on a portfolio-by-portfolio basis and
payable monthly, at the maximum annual rates set forth below.

MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR THE PORTFOLIOS (BEFORE WAIVERS)

<TABLE>
<CAPTION>
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee to BIMC

<S> <C> <C>
first $1 billion .450% .400%
$1 billion -- $2 billion .400 .350
$2 billion -- $3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>

BlackRock, a majority-owned indirect subsidiary of PNC Bank Corp., renders
advisory services to each of the Portfolios pursuant to an Investment Advisory
Agreement. From the commencement of operations of each Portfolio until January
4, 1996, BIMC served as adviser.

BIMC renders sub-advisory services to the Portfolios pursuant to
Sub-Advisory Agreements. The Investment Advisory Agreement with BlackRock and
the above-referenced Sub-Advisory Agreements are collectively referred to as the
"Advisory Contracts."

PNC Bank served as sub-adviser for the Money Market Portfolio from October
4, 1989 (commencement of operations) to January 4, 1996 and for the Municipal
Money Market Portfolio from September 10, 1993 to January 4, 1996.

Under the relevant Advisory Contracts, BlackRock, BIMC, BFM and BIL are not
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Advisory
Contracts. Under the Advisory Contracts, BlackRock, BIMC, BFM and BIL are liable
for a loss resulting from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard of their
respective duties and obligations thereunder. Each of the Advisory Contracts is
terminable as to a Portfolio by vote of the Fund's Board of Trustees or by the
holders of a majority of the outstanding voting securities of the relevant
Portfolio, at any time without penalty, on 60 days' written

15
<PAGE>

notice to BlackRock, BIMC, BFM or BIL, as the case may be. BlackRock, BIMC, BFM
and BIL may also terminate their advisory relationship with respect to a
Portfolio on 60 days' written notice to the Fund. Each of the Advisory Contracts
terminates automatically in the event of its assignment.

For the period from October 1, 1997 through September 30, 1998, the Fund
paid BlackRock advisory fees, and BlackRock waived advisory fees and reimbursed
expenses, as follows:

<TABLE>
<CAPTION>
Fees Paid
Portfolios (After-Waivers) Waivers Reimbursements
- ------------------------------------------------------ ----------------------------- ---------------- -----------------------

<S> <C> <C> <C>
Money Market...................................... $4,995,812 $6,990,461 $0
Municipal Money Market............................ 589,271 1,560,040 0

Totals............................................ $5,585,083 $8,550,501 $0
</TABLE>

For the period from October 1, 1996 through September 30, 1997, the Fund
paid BlackRock advisory fees, and BlackRock waived advisory fees and reimbursed
expenses, as follows:

<S> <C> <C> <C>
Money Market...................................... $2,648,951 $8,355,021 $0
Municipal Money Market............................ 247,591 1,482,338 0
</TABLE>

For the period from October 1, 1995 through January 4, 1996, the Fund paid
BIMC advisory fees, and BIMC waived advisory fees and reimbursed expenses, as
follows:

<S> <C> <C> <C>
Money Market...................................... $321,268 $1,818,401 $0
Municipal Money Market............................ 46,804 304,226 0
</TABLE>

For the period from January 5, 1996 through September 30, 1996, the Fund
paid BlackRock advisory fees, and BlackRock waived advisory fees and reimbursed
expenses, as follows:

<S> <C> <C> <C>
Money Market...................................... $1,443,913 $6,290,596 $0
Municipal Money Market............................ 158,379 1,029,459 0
</TABLE>

For the period from October 1, 1997 through September 30, 1998, BlackRock
paid sub-advisory fees to the specified Portfolios' sub-advisers, after waivers,
and such sub-advisers waived sub-advisory fees, as follows:

<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ------------------------------------------------------------------------ -------------------------- --------------------------

<S> <C> <C>
Money Market........................................................... $1,473,942 $0
Municipal Money Market................................................. 258,731 0
</TABLE>

For the period from October 1, 1996 through September 30, 1997, BlackRock
paid sub-advisory fees to the specified Portfolios' sub-advisers, after waivers,
and such sub-advisers waived sub-advisory fees as follows:

16
<PAGE>

<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ------------------------------------------------------------------------ -------------------------- --------------------------

<S> <C> <C>
Money Market.................................................. $ 1,300,023 $9,370,873
Municipal Money Market........................................ 212,376 1,325,338
</TABLE>

For the period from October 1, 1995 through January 4, 1996, BIMC paid
sub-advisory fees to the specified Portfolios' sub-advisers, after waivers, and
such sub-advisers waived sub-advisory fees as follows:

<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ------------------------------------------------------------------------ -------------------------- --------------------------

<S> <C> <C>
Money Market..................................................... $0 $235,363
Municipal Money Market........................................... 0 38,613
</TABLE>

For the period from January 5, 1996 through September 30, 1996, BlackRock
paid sub-advisory fees to the specified Portfolios' sub-advisers, after waivers,
and such sub-advisers waived sub-advisory fees as follows:

<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ------------------------------------------------------------------------ -------------------------- --------------------------

<S> <C> <C>
Money Market...................................................... $1,443,913 $5,342,421
Municipal Money Market............................................ 158,382 897,064
</TABLE>

Administration Agreement. BlackRock and PFPC serve as the Fund's
co-administrators pursuant to an administration agreement (the "Administration
Agreement"). PFPC has agreed to maintain office facilities for the Fund; furnish
the Fund with statistical and research data, clerical, accounting, and
bookkeeping services; provide and supervise the operation of an automated data
processing system to process purchase and redemption orders; provide information
and distribute written communications to shareholders; handle shareholder
problems and calls; research issues raised by financial intermediaries relating
to investments in a Portfolio's shares; review and provide advice with respect
to communications for a Portfolio's shares; monitor the investor programs that
are offered in connection with a Portfolio's shares; provide oversight and
related support services that are intended to ensure the delivery of quality
service to the holders of the Portfolio's shares; and provide certain other
services required by the Fund. The Administrators may from time to time
voluntarily waive administration fees with respect to a Portfolio and may
voluntarily reimburse the Portfolios for expenses.

Under the Administration Agreement, the Fund pays to BAI and PFPC on behalf
of each Portfolio a fee, computed daily and payable monthly, at an aggregate
annual rate of (i) .085% of the first $500 million of each Portfolio's average
daily net assets, .075% of the next $500 million of each Portfolio's average
daily net assets and .065% of the average daily net assets of each Portfolio in
excess of $1 billion and (ii) .145% of the first $500 million of average daily
net assets allocated to each class of shares of each Portfolio, .135% of the
next $500 million of such average daily net assets and .125% of the average
daily net assets allocated to each class of shares of each Portfolio in excess
of $1 billion.

Under the Administration Agreement, BlackRock is responsible for: (i) the
supervision and coordination of the performance of the Fund's service providers;
(ii) the negotiation of service contracts and arrangements between the Fund and
its service providers; (iii) acting as liaison between the trustees of the Fund
and the Fund's service providers; and (iv) providing ongoing business management
and support services in connection with the Fund's operations. Pursuant to the
terms of the Administration Agreement, BlackRock has delegated certain of its
duties thereunder to BDI.

The Administration Agreement provides that BlackRock and PFPC will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations thereunder. In addition,
the Fund will indemnify each of BAI

17
<PAGE>

and PFPC and their affiliates against any loss arising in connection with their
provision of services under the Administration Agreement, except that neither
BAI nor PFPC nor their affiliates shall be indemnified against any loss arising
out of willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties under the Administration Agreement.

From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators to the Fund. From January
16, 1996 until September 30, 1997, PFPC and BDI served as co-administrators to
the Fund. From December 1, 1995 to September 30, 1997, Compass Capital Group,
Inc. ("CCG") served as co-administrator to the Fund. BlackRock became
co-administrator to the Fund on January 28, 1998. For the purposes of the
following fee information, CCG and BDI are also considered "Administrators."

For the period from October 1, 1997 through September 30, 1998, the Fund
paid the Administrators combined administration fees (after waivers), and the
Administrators waived combined administration fees and reimbursed expenses, as
follows:

<S> <C> <C> <C>
Money Market.............................................. $3,868,646 $2,843 $0
Municipal Money Market.................................... 772,350 0 0

Totals.................................................... 4,640,996 2,843 0
</TABLE>

For the period from October 1, 1996 through September 30, 1997, the Fund
paid the Administrators combined administration fees (after waivers), and the
Administrators waived combined administration fees and reimbursed expenses, as
follows:

<S> <C> <C> <C>
Money Market.............................................. $3,006,036 $161,687 $ 0
Municipal Money Market.................................... 510,438 66,205 0
</TABLE>

For the period from October 1, 1995 through January 13, 1996, the Fund paid
CCG, PFPC and PDI combined administration fees (after waivers), and CCG, PFPC
and PDI waived combined administration fees and reimbursed expenses, as follows:

<S> <C> <C> <C>
Money Market............................................... $645,001 $51,681 $0
Municipal Money Market..................................... 117,010 8,088 0
</TABLE>

For the period from January 14, 1996 through September 30, 1996, the Fund
paid the Administrators combined administration fees (after waivers), and the
Administrators waived combined administration fees and reimbursed expenses, as
follows:

<S> <C> <C> <C>
Money Market............................................. $2,319,935 $460,119 $0
Municipal Money Market................................... 303,192 171,943 0
</TABLE>

The Fund and its service providers may engage third party plan
administrators who provide trustee, administrative and recordkeeping services
for certain employee benefit, profit-sharing and retirement plans as agent for
the Fund with respect to such plans, for the purpose of accepting orders for the
purchase and redemption of shares of the Fund.

Custodian and Transfer Agency Agreements. Pursuant to the terms of a
custodian agreement (the "Custodian Agreement") between the Fund and PNC Bank,
as of January 1, 1999 PNC Bank has assigned its rights and delegated its duties

18
<PAGE>

as the Fund's custodian to its affiliate, PFPC Trust Company ("PTC"). Under the
Custodian Agreement, PTC or a sub-custodian (i) maintains a separate account or
accounts in the name of each Portfolio, (ii) holds and transfers portfolio
securities on account of each Portfolio, (iii) accepts receipts and makes
disbursements of money on behalf of each Portfolio, (iv) collects and receives
all income and other payments and distributions on account of each Portfolio's
securities and (v) makes periodic reports to the Board of Trustees concerning
each Portfolio's operations. PTC is authorized to select one or more banks or
trust companies to serve as sub-custodian on behalf of the Fund, provided that,
with respect to sub-custodians other than sub-custodians for foreign securities,
PTC remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Fund harmless from the acts and omissions of
any sub-custodian. Citibank, N.A. serves as the international sub-custodian for
various Portfolios of the Fund.

For its services to the Fund under the Custodian Agreement, PTC receives a
fee which is calculated based upon each investment portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PTC is
also entitled to out-of-pocket expenses and certain transaction charges.

PFPC, which has its principal offices at 400 Bellevue Parkway, Wilmington,
DE 19809 and is an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, Institutional and BlackRock classes of shares in each Portfolio, (ii)
addresses and mails all communications by each Portfolio to record owners of its
shares, including reports to shareholders, dividend and distribution notices and
proxy materials for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Board of Trustees concerning the operations of each Portfolio. PFPC may, on 30
days' notice to the Fund, assign its duties as transfer and dividend disbursing
agent to any other affiliate of PNC Bank Corp. For its services with respect to
the Fund's Institutional and Service Shares under the Transfer Agency Agreement,
PFPC receives fees at the annual rate of .03% of the average net asset value of
outstanding Institutional and Service Shares in each Portfolio, plus per account
fees and disbursements. For its services with respect to the Fund's BlackRock
Shares under the Transfer Agency Agreement, PFPC receives fees at the annual
rate of .01% of the average net asset value of outstanding BlackRock Shares in
each Portfolio, plus per account fees and disbursements. For its services under
the Transfer Agency Agreement with respect to Investor Shares, PFPC receives per
account fees, with minimum annual fees of $24,000 for each series of Investor
Shares in each Portfolio, plus disbursements. Until further notice, the transfer
agency fees for each series of Investor Shares in each Portfolio will not exceed
the annual rate of .10% of the series' average daily net assets.

PTC serves as the Trust's custodian and PFPC serves as the Trust's transfer
and dividend disbursing agent.

Distributor and Distribution and Service Plan. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of each Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares. The Distributor's
principal business address is Four Falls Corporate Center, 6th Floor, West
Conshohocken, PA 19428-2961.

Pursuant to the Fund's HL Share Class Distribution and Service Plan (the
"Plan"), the Fund may pay the Distributor and/or BlackRock or any other
affiliate of PNC Bank fees for distribution and sales support services relating
to the HL Shares. Currently, as described further below, the HL Shares bear the
expense of distribution fees under the Plan. In addition, the Fund may pay
BlackRock fees for the provision of personal services to shareholders and the
processing and administration of shareholder accounts. BlackRock, in turn,
determines the amount of the service fee and shareholder processing fee to be
paid to Hilliard Lyons. The Plan provides, among other things, that: (i) the
Board of Trustees shall receive quarterly reports regarding the amounts expended
under the Plan and the purposes for which such expenditures were made; (ii) the
Plan will continue in effect for so long as its continuance is approved at least
annually by the Board of Trustees in accordance with Rule 12b-1 under the 1940
Act; (iii) any material amendment thereto must be approved by the Board of
Trustees, including 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 operation of the Plan or any agreement entered into in
connection with the Plan (the "12b-1 Trustees"), acting in person at a meeting
called for said purpose; (iv) any amendment to increase materially the costs
which HL Shares may bear for distribution services pursuant to the Plan shall be
effective only upon approval by a vote of a majority of the outstanding HL
Shares and by a majority of the 12b-1 Trustees; and (v) while the Plan remains
in effect, the selection and nomination of the Fund's trustees who are not
"interested persons" of the Fund shall be committed to the discretion of the
Fund's non-interested trustees.

The Plan is terminable without penalty at any time by a vote of a majority
of the 12b-1 Trustees, or by vote of the holders of a majority of the HL Shares.

19
<PAGE>

With respect to the HL Shares, the distribution fee payable under the Plan
(at a maximum annual rate of [ ]% of the average daily net asset value of each
Portfolio's outstanding HL Shares) are used to pay commissions and other fees
payable to Hilliard Lyons and other broker/dealers who sell HL Shares.

The Distributor, BlackRock and their affiliates may pay broker/dealers
and/or their salespersons certain compensation for the sale and distribution of
shares of the Fund or for services to the Fund. These payments ("Additional
Payments") would be in addition to the payments by the Fund described in this
Statement of Additional Information for distribution and shareholder servicing
and processing. These Additional Payments may take the form of "due diligence"
payments for a dealer's examination of the Portfolios and payments for providing
extra employee training and information relating to Portfolios; "listing" fees
for the placement of the Portfolios on a dealer's list of mutual funds available
for purchase by its customers; "finders" or "referral" fees for directing
investors to the Fund; "marketing support" fees for providing assistance in
promoting the sale of the Funds' shares; and payments for the sale of shares
and/or the maintenance of share balances. In addition, the Distributor,
BlackRock and their affiliates may make Additional Payments to affiliated and
unaffiliated entities for subaccounting, administrative and/or shareholder
processing services that are in addition to the shareholder servicing and
processing fees paid by the Fund. The Additional Payments made by the
Distributor, BlackRock and their affiliates may be a fixed dollar amount, may be
based on the number of customer accounts maintained by a financial institution
or broker/dealer, or may be based on a percentage of the value of shares sold
to, or held by, customers of the affiliated and unaffiliated financial
institutions or dealers involved, and may be different for different
institutions and dealers. Furthermore, the Distributor, BlackRock and their
affiliates may contribute to various non-cash and cash incentive arrangements to
promote the sale of shares, and may sponsor various contests and promotions
subject to applicable NASD regulations in which participants may receive prizes
such as travel awards, merchandise and cash. The Distributor, BlackRock and
their affiliates may also pay for the travel expenses, meals, lodging and
entertainment of broker/dealers, financial institutions and their salespersons
in connection with educational and sales promotional programs subject to
applicable NASD regulations.

Hilliard Lyons may charge its clients additional fees for account-related
services.

The Fund intends to enter into service arrangements with Hilliard Lyons
pursuant to which Hilliard Lyons will render certain support services to its
customers ("Customers") who are the beneficial owners of HL Shares. Such
services will be provided to Customers who are the beneficial owners of HL
Shares and are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of a service fee of up to [ ]% (on an annualized
basis) of the average daily net asset value of the HL Shares owned beneficially
by its Customers, Hilliard Lyons may provide general shareholder liaison
services, including, but not limited to (i) answering customer inquiries
regarding account status and history, the manner in which purchases, exchanges
and redemptions of shares may be effected and certain other matters pertaining
to the Customers' investments; and (ii) assisting Customers in designating and
changing dividend options, account designations and addresses. In consideration
for payment of a shareholder processing fee of up to a separate [ ]% (on an
annualized basis) of the average daily net asset value of HL Shares owned
beneficially by its Customers, Hilliard Lyons may provide one or more of these
additional services to such Customers: (i) providing necessary personnel and
facilities to establish and maintain Customer accounts and records; (ii)
assistance in aggregating and processing purchase, exchange and redemption
transactions; (iii) placement of net purchase and redemption orders with the
Distributor; (iv) arranging for wiring of funds; (v) transmitting and receiving
funds in connection with Customer orders to purchase or redeem shares; (vi)
processing dividend payments; (vii) verifying and guaranteeing Customer
signatures in connection with redemption orders and transfers and changes in
Customer-designated accounts, as necessary; (viii) providing periodic statements
showing Customers' account balances and, to the extent practicable, integrating
such information with other Customer transactions otherwise effected through or
with Hilliard Lyons; (ix) furnishing (either separately or on an integrated
basis with other reports sent to a shareholder by Hilliard Lyons ) monthly and
year-end statements and confirmations of purchases, exchanges and redemptions;
(x) transmitting on behalf of the Fund, proxy statements, annual reports,
updating prospectuses and other communications from the Fund to Customers; (xi)
receiving, tabulating and transmitting to the Fund proxies executed by Customers
with respect to shareholder meetings; (xii) providing subaccounting with respect
to shares beneficially owned by Customers or the information to the Fund
necessary for subaccounting; (xiii) providing sub-transfer agency services; and
(xiv) providing such other similar services as the Fund or a Customer may
request.

20
<PAGE>

EXPENSES

Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to BlackRock, PFPC, transfer agency fees, fees and
expenses of officers and trustees who are not affiliated with BlackRock, the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their shares for distribution under federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, fidelity bond and trustees and
officers liability insurance premiums, the expense of independent pricing
services and other expenses which are not expressly assumed by BlackRock or the
Fund's service providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular investment portfolio
will be allocated among all investment portfolios by or under the direction of
the Board of Trustees in a manner the Board determines to be fair and equitable.

PORTFOLIO TRANSACTIONS

In executing portfolio transactions, the adviser and sub-advisers seek to
obtain the best price and most favorable execution for a Portfolio, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While the adviser and sub-advisers generally
seek reasonably competitive commission rates, payment of the lowest commission
or spread is not necessarily consistent with obtaining the best price and
execution in particular transactions. Payments of commissions to brokers who are
affiliated persons of the Fund (or affiliated persons of such persons) will be
made in accordance with Rule 17e-1 under the 1940 Act.

Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.

Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Portfolio
intends to purchase only securities with remaining maturities of 13 months or
less as determined in accordance with the rules of the SEC. As a result, the
portfolio turnover rates of a Portfolio will be relatively high. However,
because brokerage commissions will not normally be paid with respect to
investments made by a Portfolio, the turnover rates should not adversely affect
the Portfolio's net asset values or net income.

Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.

The adviser or sub-advisers may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that a Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.

Neither Portfolio has any obligation to deal with any broker or group of
brokers in the execution of Portfolio transactions. The adviser and sub-advisers
may, consistent with the interests of a Portfolio, select brokers on the basis
of the research, statistical and pricing services they provide to a Portfolio
and the adviser's or sub-adviser's other clients. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by the adviser and sub-advisers under their
respective contracts. A commission paid to such brokers may be higher than that
which another qualified broker would have charged for effecting the same
transaction, provided that the adviser or sub-adviser determines in good faith
that such commission is reasonable in terms either of the transaction or the
overall responsibility of the adviser or sub-adviser to a Portfolio and its
other clients and that the total commissions paid by a Portfolio will be
reasonable in relation to the benefits to a Portfolio over the long-term.

21
<PAGE>

Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).

The Portfolios paid no brokerage commissions for the years or periods ended
September 30, 1996, 1997 and 1998.

Investment decisions for each Portfolio and for other investment accounts
managed by the adviser or sub-advisers are made independently of each other in
light of differing conditions. However, the same investment decision may be made
for two or more such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect upon the price or value of the
security as far as a Portfolio is concerned, in other cases it could be
beneficial to a Portfolio. A Portfolio will not purchase securities during the
existence of any underwriting or selling group relating to such securities of
which BlackRock, BIMC, BFM, PNC Bank, PTC, BIL, the Administrators, the
Distributor or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Board of Trustees in
accordance with Rule 10f-3 under the 1940 Act. In no instance will portfolio
securities be purchased from or sold to BlackRock Advisors, Inc., BIMC, BFM, PNC
Bank, PTC, BIL, PFPC, the Distributor or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.

The portfolio turnover rate of a Portfolio is calculated by dividing the
lesser of a Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year.

The Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
the Fund as of the end of its most recent fiscal year. As of September 30, 1998,
the Money Market Portfolio held the following securities:

<TABLE>
<CAPTION>
Issues Security Value
- ------------------------------------------------ ----------------------------------------------------- -----------------------

<S> <C> <C>
Bear Stearns & Company Variable Rate Obligation $ 12,004,916
Lehman Brothers, Inc. Commercial Paper 138,302,472
Merrill Lynch & Co. Commercial Paper 98,703,149
Morgan Stanley & Co., Inc. Variable Rate Obligation 10,002,416
Paine Webber, Jackson & Curtis, Inc. Paine Webber Liquid Institutional Reserves
Money Market Fund 5,396,776
</TABLE>

PURCHASE AND REDEMPTION INFORMATION

HL Shares

Purchase of Shares. The minimum investment for the initial purchase of
shares is $1,000; there is a $100 minimum for subsequent investments. Purchases
through the Automatic Investment Plan are subject to a lower initial purchase
minimum. In addition, the minimum initial investment for employees of the Fund,
the Fund's investment adviser, sub-advisers, Distributor or transfer agent or
employees of their affiliates is $100, unless payment is made through a payroll
deduction program in which case the minimum investment is $25.

Other Purchase Information. Shares of each Portfolio of the Fund are sold
on a continuous basis by BDI as the Distributor. BDI maintains its principal
offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA
19428-2961. Purchases may be effected on weekdays on which the New York Stock
Exchange is open for business (a "Business Day"). Payment for orders which are
not received or accepted will be returned after prompt inquiry. The issuance of
shares is recorded on the books of the Fund. No certificates will be issued for
shares. Payments for shares of a Portfolio may, in the discretion of the Fund's
investment adviser, be made in the form of securities that are permissible
investments for that Portfolio. The Fund reserves the right to reject any
purchase order, to modify or waive the minimum initial or subsequent investment
requirement and to suspend and resume the sale of any share class of any
Portfolio at any time.

Redemption of Shares. Except as noted below, a request for redemption must
be signed by all persons in whose names the shares are registered. Signatures
must conform exactly to the account registration. If the proceeds of the
redemption would

22
<PAGE>

exceed $25,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the shareholder is a corporation, partnership, trust or
fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution.

A signature guarantee is designed to protect the shareholders and the
Portfolio against fraudulent transactions by unauthorized persons. A signature
guarantee may be obtained from a domestic bank or trust company, recognized
broker, dealer, clearing agency, savings association who are participants in a
medallion program by the Securities Transfer Association, credit unions,
national securities exchanges and registered securities associations. The three
recognized medallion programs are Securities Transfer Agent Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a
part of these programs will not be accepted. Please note that a notary public
stamp or seal is not acceptable.

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. Shareholders holding HL Share certificates
must send their certificates with the redemption request. Additional documentary
evidence of authority is required by PFPC in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administrator.

Shareholders of HL Shares of the Portfolios may redeem their shares through
the check writing privilege. Upon receipt of the check writing application and
signature card by PFPC, checks will be forwarded to the investor. The minimum
amount of a check is $100. If more than one shareholder owns the account, each
shareholder must sign each check, unless an election has been made to permit
check writing by a limited number of signatures and such election is on file
with PFPC. HL Shares represented by a check redemption will continue to earn
daily income until the check is presented for payment. PNC bank, as the
investor's agent, will cause the Fund to redeem a sufficient number of HL Shares
owned to cover the check. When redeeming HL Shares by check, an investor should
make certain that there is an adequate number of HL Shares in the account to
cover the amount of the check. If an insufficient number of HL Shares is held or
if checks are not properly endorsed, they may not be honored and a service
charge may be incurred. Checks may not be presented for cash payments at the
offices of PNC Bank. This limitation does not affect checks used for the payment
of bills or cash at other banks.

Payment of Redemption Proceeds. The Fund may suspend the right of
redemption or postpone the date of payment upon redemption for such periods as
are permitted under the 1940 Act, and may redeem shares involuntarily or make
payment for redemption in securities or other property when determined
appropriate in light of the Fund's responsibilities under the 1940 Act.

The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase of a Portfolio's
shares by making payment in whole or in part in securities chosen by the Fund
and valued in the same way as they would be valued for purposes of computing a
Portfolio's net asset value. If payment is made in securities, a shareholder may
incur transaction costs in converting these securities into cash. The Fund has
elected, however, to be governed by Rule 18f-1 under the 1940 Act so that a
Portfolio is obligated to redeem its shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any one
shareholder of a Portfolio.

Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)

The Fund may redeem shares involuntarily to reimburse a Portfolio for any
loss sustained by reason of the failure of a shareholder to make full-payment
for shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder. The Fund reserves the
express right to redeem shares of each Portfolio involuntarily at any time if
the Fund's Board of Trustees determines, in its sole discretion, that failure to
do so may have adverse consequences to the holders of shares in the Portfolio.
Upon such redemption the holders of shares so redeemed shall have no further
right with respect thereto other than to receive payment of the redemption
price.

Dividends and Distributions

Shareholders are entitled to dividends and distributions arising from the
net income and capital gains, if any, earned on investments held by the
Portfolio in which they invest. Each Portfolio's net income is declared daily as
a dividend. Shareholders whose purchase orders are executed at 12:00 noon
(Eastern Time) receive dividends for that day. On the other hand, shareholders
whose redemption orders have been received by 12:00 noon (Eastern Time) do not
receive dividends for that day, while

23
<PAGE>

shareholders of each Portfolio whose redemption orders are received after 12:00
noon (Eastern Time) do receive dividends for that day.

Dividends are paid monthly by check, or by wire transfer if requested in
writing by the shareholder, within five business days after the end of the
month. Net short-term capital gains, if any, will be distributed at least
annually. The period for which dividends are payable and the time for payment
are subject to change by the Fund's Board of Trustees. The Portfolios do not
expect to realize net long-term capital gains.

Dividends are reinvested in additional full and fractional HL Shares,
unless a shareholder elects to receive dividends in cash. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after receipt by PFPC.

VALUATION OF PORTFOLIO SECURITIES

In determining the market value of portfolio investments, the Fund may
employ outside organizations, which may use, without limitation, a matrix or
formula method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had
the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Fund's books at their face value. Other assets, if
any, are valued at fair value as determined in good faith under the supervision
of the Board of Trustees.

The net asset value for each class of each share of the Portfolios for the
purpose of pricing purchase and redemption orders is determined twice each day,
once as of 12:00 noon (Eastern Time) and once as of 4:00 p.m. (Eastern Time) on
each day the NYSE is open for business (a "Business Day"). Each Portfolio's net
asset value per share is calculated by adding the value of all securities, cash
and other assets of the respective classes of the Portfolio, subtracting the
liabilities and dividing the result by the number of outstanding shares of such
classes. The net asset value per share of each class of each Portfolio is
determined independently of the other classes and the other Portfolios.

The Fund seeks to maintain for each of the Portfolios a net asset value of
$1.00 per share for purposes of purchase and redemptions and values their
portfolio securities on the basis of the amortized cost method of valuation.

Under this method the market value of an instrument is approximated by
amortizing the difference between the acquisition cost and value at maturity of
the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account. The market value of
debt securities usually reflects yields generally available on securities of
similar quality. When such yields decline, market values can be expected to
increase, and when yields increase, market values can be expected to decline.

As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Portfolio would receive if the security were sold prior to maturity. The Fund's
Board of Trustees has established procedures for the purpose of maintaining a
constant net asset value of $1.00 per share for each Portfolio, which include a
review of the extent of any deviation of net asset value per share, based on
available market quotations, from the $1.00 amortized cost per share. Should
that deviation exceed 1/2 of 1% for a Portfolio, the Fund's Board of Trustees
will promptly consider whether any action should be initiated to eliminate or
reduce material dilution or other unfair results to shareholders. Such action
may include redeeming shares in kind, selling portfolio securities prior to
maturity, reducing or withholding dividends, shortening the average portfolio
maturity, reducing the number of outstanding shares without monetary
consideration, and utilizing a net asset value per share as determined by using
available market quotations.

Each Portfolio will maintain a dollar-weighted average portfolio maturity
of 90 days or less, will not purchase any instrument with a deemed maturity
under Rule 2a-7 of the 1940 Act greater than 13 months, and will limit portfolio
investments, including repurchase agreements, to those instruments that the
adviser or sub-adviser determines present minimal credit risks pursuant to
guidelines adopted by the Fund's Board of Trustees. There can be no assurance
that a constant net asset value will be maintained for any Portfolio.

PERFORMANCE INFORMATION

A Portfolio may quote performance in various ways. All performance
information supplied by a Portfolio in advertising is historical and is not
intended to indicate future returns.

24
<PAGE>

Each of the Portfolios may advertise its "yield", "effective yield" and
total return for HL Shares. These performance figures are based on historical
earnings and are not intended to indicate future performance. "Yield" refers to
the income generated by an investment in shares over a seven-day period. This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. "Effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
shares is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounded effect of this assumed
reinvestment. The Municipal Money Market Portfolio's "tax equivalent yield" may
also be quoted, which shows the level of taxable yield needed to produce an
after-tax equivalent to the Portfolio's tax-free yield for shares.

The performance of shares of a Portfolio may be compared to the performance
of mutual funds with similar investment objectives and to relevant indices, as
well as to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the yield of shares of a Portfolio may be compared to data prepared
by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. and
Weisenberger Investment Company Service. Performance information may also
include evaluations of the Portfolios published in nationally recognized ranking
services, and information as reported by financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.

Performance quotations for shares of a Portfolio represent past performance
and should not be considered as representative of future results. The yield of
any investment is generally a function of portfolio quality and maturity, type
of investment and operating expenses. Yields will fluctuate and are not
necessarily representative of future results. Any fees charged by affiliates of
the Portfolio's investment adviser or other institutions directly to their
customers' accounts in connection with investments in the Portfolios will not be
included in the Portfolios' calculations of yield and performance.

Each Portfolio's current and effective yields for shares are computed
separately using standardized methods required by the SEC. The annualized yield
for shares is computed by: (a) determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of a
seven-calendar day period; (b) dividing the net change by the value of the
account at the beginning of the period to obtain the base period return; and (c)
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares
purchased with dividends declared and all dividends declared on both the
original share and such additional shares, but does not include realized gains
and losses or unrealized appreciation and depreciation. Compound effective
yields are computed by adding 1 to the base period return (calculated as
described above) raising the sum to a power equal to 365/7 and subtracting 1. In
addition, a standardized "tax-equivalent current yield" may be quoted for shares
in the Municipal Money Market Portfolio, which is computed separately for each
class by: (a) dividing that portion of the Fund's yield (as calculated above)
that is exempt from Federal or State income tax by one minus a stated Federal or
state income tax rate; and (b) adding the quotient to that portion of the Fund's
yield that is not tax-exempt. A standardized "tax equivalent effective yield
quotation" may be computed separately for each class by:(a) dividing the portion
of the Portfolio's effective yield for shares (as calculated above) that is
exempt from Federal or state income tax by one minus a stated Federal or state
income tax rate; and (b) adding the figure resulting from (a) above to that
portion, if any, of the effective yield that is not exempt from Federal and
state income tax.

From time to time, in advertisements, sale literature, reports to
shareholders and other materials, the yields of a Portfolio's shares may be
quoted and compared to those of other mutual funds with similar investment
objectives and relevant securities indexes. For example, the yield of a
Portfolio's shares may be compared to the Donoghue's Money Fund Average, which
is an average compiled by IBC/Donoghue's MONEY FUND REPORT(R), a
widely-recognized independent publication that monitors the performance of money
market funds, the average yields reported by the Bank Rate Monitor from money
market deposit accounts offered by the 50 leading banks and thrift institutions
in the top five standard metropolitan statistical areas, or to the data prepared
by Lipper Analytical Services, Inc., a widely-recognized independent service
that monitors the performance of mutual funds. Yield may also be compared to
yields set forth in the weekly statistical release H.15(519) or the monthly
statistical release designated G.13(415) published by the Board of Governors of
the Federal Reserve system. In addition, each Portfolio may quote from time to
time its total return in accordance with SEC regulations.

Other Information Regarding Investment Returns. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of a Portfolio over a specified period of time, the Fund may
provide certain other information demonstrating hypothetical investment returns.
Such information may include, but is not limited to, illustrating the
compounding effects of dividends in a dividend reinvestment plan or the impact
of tax-free investing.

The Portfolios may illustrate in advertising, sales literature,
communications to shareholders and other materials the benefits of tax-free
investing. For example, the following Table shows taxpayers how to translate
Federal tax savings from investments

25
<PAGE>

the income on which is not subject to Federal income tax into an equivalent
yield from a taxable investment. The yields below are for illustration purposes
only and are not intended to represent current or future yields for the
Portfolios, which may be higher or lower than the yields shown. The following
information regarding tax rates and tax-exempt yields is as of January 1, 1999.

26
<PAGE>

TABLE - Federal Only
- ----- ------------

<TABLE>
<CAPTION>
1999 Taxable Income Bracket Federal
- -------------------------------------------------------------- Marginal TAX-EXEMPT YIELD
Single Return Joint Return Tax Rate* 3.0% 3.5% 4.0%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 - $ 25,350 $ 0 - $ 42,350 15.0% 3.529% 4.118% 4.706%
$ 25,351 - $ 61,400 $ 42,351 - $102,300 28.0% 4.167% 4.861% 5.556%
$ 61,401 - $ 128,100 $102,301 - $155,950 31.0% 4.348% 5.072% 5.797%
$128,101 - $ 278,450 $155,951 - $278,450 36.0% 4.688% 5.469% 6.250%
Over $278,450 Over $278,450 39.6% 4.967% 5.795% 6.623%

<CAPTION>
1999 Taxable Income Bracket
- -------------------------------------------------------------- TAX-EXEMPT YIELD
Single Return Joint Return 4.5% 5.0% 5.5% 6.0%
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 - $ 25,350 $ 0 - $ 42,350 5.294% 5.882% 6.471% 7.059%
$ 25,351 - $ 61,400 $ 42,351 - $102,300 6.250% 6.944% 7.639% 8.333%
$ 61,401 - $ 128,100 $102,301 - $155,950 6.522% 7.246% 7.971% 8.696%
$128,101 - $ 278,450 $155,951 - $278,450 7.031% 7.812% 8.594% 9.375%
Over $278,450 Over $278,450 7.450% 8.278% 9.106% 9.934%
</TABLE>

*Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1998, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $124,500 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $124,500 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,700 (or fraction thereof) of adjusted gross income in the phase-out zone. For
single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1998 is estimated to be from $124,500 to $247,000 and for married
taxpayers filing a joint return from $186,800 to $309,300. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1998.

27
<PAGE>

Miscellaneous. Yields on shares of a Portfolio may fluctuate daily and
do not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses and whether there are any
special account charges which may reduce the effective yield. The fees which may
be imposed by Hilliard Lyons and other institutions on Hilliard Lyons' customers
are not reflected in the calculations of total returns or yields for the
Portfolios.

When comparing a Portfolio's performance to stock, bond, and money
market mutual fund performance indices prepared by Lipper or other
organizations, it is important to remember the risk and return characteristics
of each type of investment. For example, while stock mutual funds may offer
higher potential returns, they also carry the highest degree of share price
volatility. Likewise, money market funds may offer greater stability of
principal, but generally do not offer the higher potential returns from stock
mutual funds.

From time to time, a Portfolio's performance may also be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example a Portfolio may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating service that
rates mutual funds on the basis of risk-adjusted performance. Rankings that
compare the performance of Portfolios to one another in appropriate categories
over specific periods of time may also be quoted in advertising.

Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk- versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
compilations or indices that may be developed and made available in the future.

The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, (including materials that describe general principles of investing,
such as asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives)
investment management techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Portfolio), as well as the views of the Portfolios'
adviser and/or sub-advisers as to current market, economy, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Portfolio. In
addition, selected indices may be used to illustrate historic performance of
select asset classes. The Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
Treasury bills and shares of a Portfolio. In addition, advertisements, sales
literature, shareholder communications or other materials may include a
discussion of certain attributes or benefits to be derived by an investment in a
Portfolio and/or other mutual funds, benefits, characteristics or services
associated with a particular class of shares, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and investment alternative to certificates of deposit

28
<PAGE>

and other financial instruments. Such advertisements or communicators may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. Materials may include lists of
representative clients of the Portfolios' investment adviser and sub-advisers.
Materials may refer to the CUSIP numbers of the various classes of the
Portfolios and may illustrate how to find the listings of the Portfolios in
newspapers and periodicals. Materials may also include discussions of other
Portfolios, products, and services.

Charts and graphs using net asset values, adjusted net asset values,
and benchmark indices may be used to exhibit performance. An adjusted NAV
includes any distributions paid and reflects all elements of return. Unless
otherwise indicated, the adjusted NAVs are not adjusted for sales charges, if
any.

A Portfolio may illustrate performance using moving averages. A
long-term moving average is the average of each week's adjusted closing NAV for
a specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.

A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.

Momentum indicators indicate a Portfolio's price movements over
specific periods of time. Each point on the momentum indicator represents the
Portfolio's percentage change in price movements over that period.

A Portfolio may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share can be
lower than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels. A Portfolio may be
available for purchase through retirement plans or other programs offering
deferral of, or exemption from, income taxes, which may produce superior
after-tax returns over time.

A Portfolio may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.

Advertisements and sales materials relating to a Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.

TAXES

The following is only a summary of certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.

Each Portfolio of the Fund has elected and intends to qualify for
taxation as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Portfolio generally is exempt from federal income tax on its net
investment income (i.e., its investment company taxable income as that term is
defined in the Code without regard to the deduction for dividends paid) and net
capital gain (i.e., the excess of its net long-term capital gain over its net
short-term capital loss) that it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of (a) 90% of its net investment
income and (b) 90% of its net tax-exempt interest income, if any, for the year
(the "Distribution Requirement") and satisfies certain other requirements of the
Code that are described below. Distributions of net investment income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.

29
<PAGE>

In addition to satisfaction of the Distribution Requirement, each
Portfolio must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (including, but
not limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").

In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.

The Municipal Money Market Portfolio is designed to provide investors
with tax-exempt interest income. Shares of the Municipal Money Market Portfolio
would not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Portfolio's dividends being tax-exempt but also such dividends would be
taxable when distributed to the beneficiary. In addition, the Municipal Money
Market Portfolio may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and (a) whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, (b) who occupies more than 5%
of the entire usable area of such facilities, or (c) for whom such facilities or
a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.

In order for the Municipal Money Market Portfolio to pay exempt
interest dividends for any taxable year, at the close of each quarter of the
taxable year at least 50% of the value of such Portfolio must consist of exempt
interest obligations. Exempt interest dividends distributed to shareholders are
not included in the shareholder's gross income for regular Federal income tax
purposes. However, gain realized by such Portfolio from the disposition of a
tax-exempt bond that was acquired after April 30, 1993 for a price less than the
principal amount of the bond is taxable to shareholders as ordinary income to
the extent of accrued market discount. Also, all shareholders required to file a
Federal income tax return are required to report the receipt of exempt interest
dividends and other exempt interest on their returns. Moreover, while such
dividends and interest are exempt from regular Federal income tax, they may be
subject to alternative minimum tax (currently imposed at the rate of 26% (28% on
the taxable excess over $175,000) in the case of non-corporate taxpayers and at
the rate of 20% in the case of corporate taxpayers) in two circumstances. First,
exempt interest dividends derived from certain "private activity" bonds issued
after August 7, 1986, generally will constitute an item of tax preference for
both corporate and non-corporate taxpayers. Second, exempt interest dividends
derived from all bonds, regardless of the date of issue, must be taken into
account by corporate taxpayers in determining certain adjustments for
alternative minimum tax purposes. Receipt of exempt interest dividends may
result in collateral Federal income tax consequences to certain other taxpayers,
including financial institutions, property and casualty insurance companies,
individual recipients of Social Security or Railroad Retirement benefits, and
foreign corporations engaged in trade or business in the United States.
Prospective investors should consult their own tax advisors as to such
consequences.

If the Municipal Money Market Portfolio distributes exempt interest
dividends during the shareholder's taxable year, no deduction generally will be
allowed for any interest expense on indebtedness incurred to purchase or carry
shares of such Portfolio.

Distributions of net investment income will be taxable (other than the
possible allowance of the dividends received deduction described below) to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any
distribution from a Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. The Municipal
Money Market Portfolio may purchase

30
<PAGE>

securities that do not bear tax-exempt interest. Any income on such securities
recognized by the Portfolio will be distributed and will be taxable to its
shareholders.

Each Portfolio intends to distribute to shareholders any of its net
capital gain for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless of
the length of time the shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares.

Under current law, ordinary income of individuals will be taxable at a
maximum marginal rate of 39.6%, but because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. Under
recently enacted legislation, long-term capital gains of individuals are taxed
at a maximum rate of 20% with respect to capital assets held for more than one
year (10% for gains otherwise taxed at 15%). Capital gains and ordinary income
of corporate taxpayers are both taxed at a maximum nominal rate of 35%.

Investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gain dividends have been paid
with respect to such shares. Any loss incurred on the sale or exchange of a
Portfolio's shares, held six months or less, will be disallowed to the extent of
exempt interest dividends paid with respect to such shares, and any loss not so
disallowed will be treated as a long-term capital loss to the extent of capital
gain dividends received with respect to such shares.

If a Portfolio purchases shares in a "passive foreign investment
company" (a "PFIC"), such Portfolio may be subject to U.S. federal income tax on
a portion of any "excess distribution" or gain from the disposition of such
shares even if such income is distributed as a taxable dividend by the Portfolio
to its shareholders. Additional charges in the nature of interest may be imposed
on a Portfolio in respect of deferred taxes arising from such distributions or
gains. If a Portfolio were to invest in a PFIC and elected to treat the PFIC as
a "qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Portfolio would be required to include in income each year a
portion of the ordinary earnings and net capital gain of the qualified electing
fund, even if not distributed to the Portfolio. Alternatively, a Portfolio can
elect to mark-to-market at the end of each taxable year its shares in a PFIC; in
this case, the Portfolio would recognize as ordinary income any increase in the
value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, a Portfolio might be required to recognize in a year income in excess
of its distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year, and such income would nevertheless be subject to the
Distribution Requirement and would be taken into account for purposes of the 4%
excise tax (described below).

Investment income that may be received by certain of the Portfolios
from sources within foreign countries may be subject to foreign taxes withheld
at the source. The United States has entered into tax treaties with many foreign
countries which entitle any such Portfolio to a reduced rate of, or exemption
from, taxes on such income. For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Portfolio representing income derived from foreign sources. No deduction for
foreign taxes could be claimed by an individual shareholder who does not itemize
deductions. In certain circumstances, a shareholder that (i) has held shares of
the Portfolio for less than a specified minimum period during which it is not
protected from risk of loss or (ii) is obligated to make payments related to the
dividends, will not be allowed a foreign tax credit for foreign taxes deemed
imposed on dividends paid on such shares. Additionally, such Portfolio must also
meet this holding period requirement with respect to its foreign stocks and
securities in order for "creditable" taxes to flow-through. Each shareholder
should consult his own tax adviser regarding the potential application of
foreign tax credits.

Ordinary income dividends paid by a Portfolio will qualify for the 70%
dividends-received deduction generally available to corporations to the extent
of the amount of "qualifying dividends" received by a Portfolio from domestic
corporations for the taxable year. A dividend received by a Portfolio will not
be treated as a qualifying dividend (i) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock) during the 90 day period beginning on the
date which is 45 days before the date on which such share becomes ex-dividend
with respect to such dividend (during the 180 day period beginning 90 days
before such date in the case of certain preferred stock), (ii) to the extent
that a Portfolio is under an obligation to make related payments with respect to
positions in substantially similar or related property or (iii) to the extent
the stock on which the dividend is paid is treated as debt-financed. Moreover,
the dividends-received deduction for a corporate shareholder

31
<PAGE>

may be disallowed if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of a Portfolio.

If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal Obligations)
will be taxable as ordinary dividends to the extent of such Portfolio's current
and accumulated earnings and profits. Such distributions will be eligible for
the dividends received deduction in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Portfolio intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.

The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund when required to do so
that he is not subject to backup withholding or that he is an "exempt
recipient."

Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.

The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.

Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the federal income tax consequences
described above.

ADDITIONAL INFORMATION CONCERNING SHARES

Shares of each class of each Portfolio of the Fund bear their pro rata
portion of all operating expenses paid by a Portfolio, except transfer agency
fees, certain administrative/servicing fees and amounts payable under the Fund's
Amended and Restated Distribution and Service Plan. Each share of a Portfolio of
the Fund has a par value of $.001, represents an interest in that Portfolio and
is entitled to the dividends and distributions earned on that Portfolio's assets
that are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held, and will vote in the aggregate and
not by class, except where otherwise required by law or as determined by the
Board of Trustees.

Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment, shares will be fully paid and non-assessable by the
Fund.

There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.

Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an

32
<PAGE>

investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.

The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Fund. As stated herein, certain expenses of a
Portfolio may be charged to a specific class of shares representing interests in
that Portfolio.

The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be paid in cash or by distribution of the securities or
other consideration received from the sale and conveyance; (ii) sell and convert
the assets belonging to one or more classes of shares into money and, in
connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of shares
if the Board of Trustees reasonably determines that such combination will not
have a material adverse effect on the shareholders of any class participating in
such combination and, in connection therewith, to cause all outstanding shares
of any such class to be redeemed or converted into shares of another class of
shares at their net asset value. The Board of Trustees may authorize the
liquidation and termination of any Portfolio or class of shares. Upon any
liquidation of a Portfolio, Shareholders of each class of the Portfolio are
entitled to share pro rata in the net assets belonging to that class available
for distribution.

MISCELLANEOUS

The Fund. The Fund was organized as a Massachusetts business trust on
December 22, 1988 and is registered under the 1940 Act as an open end,
management investment company. Each of the Portfolios is diversified. Effective
January 31, 1998, the Fund changed its name from Compass Capital FundsSM to
BlackRock FundsSM.

Counsel. The law firm of Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, New York 10017, serves as the Fund's counsel. The law firm of
Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia,
Pennsylvania 19103, serves as the Trust's counsel.

Independent Accountants. PricewaterhouseCoopers LLP, with offices
located at 2400 Eleven Penn Center, Philadelphia, Pennsylvania, serves as the
Fund's and the Trust's independent accountants.

Five Percent Owners. The name, address and percentage ownership of each
person that on January 12, 1999 owned of record or beneficially 5% or more of
the outstanding shares of a Portfolio which had commenced operations as of that
date was as follows:

Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 76.677%; BHC Securities Inc., One Commerce
Square, 2005 Market Street, Philadelphia, PA 19103-3212, 12.598%;

Municipal Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court
- --------------------------------
2, 200 Stevens Dr., Lester, PA 19113, 79.331%; PNC Bank Ohio, Attn: Corporate
Services, 201 East Fifth Street, 9th Fl., Cincinnati, OH 45202, 6.675%.

On January 13, 1999, PNC Bank, which has its principal offices at 1600
Market Street, Philadelphia, Pennsylvania 19103, held of record approximately
72% of the Fund's outstanding shares, and may be deemed a controlling person of
the Fund under the 1940 Act. PNC Bank is a national bank organized under the
laws of the United

33
<PAGE>

States. All of the capital stock of PNC Bank is owned by PNC Bancorp, Inc. All
of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp., a
publicly-held bank holding company.

Banking Laws. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. BlackRock, BIMC, BFM, BIL, PNC Bank, PTC and other
institutions that are banks or bank affiliates are subject to such banking laws
and regulations.

BlackRock, BIMC, BFM, BIL, PNC Bank and PTC believe they may perform
the services for the Fund contemplated by their respective agreements with the
Fund without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent these companies from continuing
to perform such services for the Fund. If such were to occur, it is expected
that the Board of Trustees would recommend that the Fund enter into new
agreements or would consider the possible termination of the Fund. Any new
advisory or sub-advisory agreement would normally be subject to shareholder
approval. It is not anticipated that any change in the Fund's method of
operations as a result of these occurrences would affect its net asset value per
share or result in a financial loss to any shareholder.

Shareholder Approvals. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.

34
<PAGE>

FINANCIAL STATEMENTS

The audited financial statements and notes thereto in the Fund's Annual
Report to Shareholders for the fiscal year ended September 30, 1998 (the "1998
Annual Report") are incorporated in this Statement of Additional Information by
reference. No other parts of the 1998 Annual Report are incorporated by
reference herein. The financial statements included in the 1998 Annual Report
have been audited by the Fund's independent accountants, PricewaterhouseCoopers
LLP. The reports of PricewaterhouseCoopers LLP are incorporated herein by
reference. Such financial statements have been incorporated herein in reliance
upon such reports given upon their authority as experts in accounting and
auditing. Additional copies of the 1998 Annual Report may be obtained at no
charge by telephoning the Distributor at the telephone number appearing on the
front page of this Statement of Additional Information.

35
<PAGE>

BLACKROCK FUNDS/SM/
PART C
OTHER INFORMATION

Item 23. Exhibits

(1) Articles of Incorporation

(a) Declaration of Trust of the Registrant dated December 22, 1988
is incorporated herein by reference to Exhibit (1)(a) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(b) Amendment No. 1 to Declaration of Trust dated May 4, 1989 is
incorporated herein by reference to Exhibit (1)(b) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(c) Amendment No. 2 to the Declaration of Trust dated December 23,
1993 is incorporated herein by reference to Exhibit (1)(c) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(d) Amendment No. 3 to the Declaration of Trust dated January 5,
1996 is incorporated by reference to Exhibit 1(d) of
Post-Effective Amendment No. 23 to Registrant's Registration
Statement on Form N-1A (No. 33-26305) filed on October 18, 1996.

(e) Amendment No. 4 to the Declaration of Trust dated December 23,
1997 is incorporated herein by reference to Exhibit (1)(e) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(2) By-laws

(a) Amended and Restated Code of Regulations of the Registrant is
incorporated herein by reference to Exhibit 2(a) of
Post-Effective Amendment No. 42 to Registrant's Registration
Statement on Form N-1A filed on June 11, 1999.

(3) Instruments Defining Rights of Security Holders

(a) Sections V, VIII and IX of Registrant's Declaration of Trust
dated December 22, 1988 are incorporated herein by reference to
Exhibit (1)(a)
<PAGE>

of Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998; Article II of
Registrant's Code of Regulations is incorporated herein by
reference to Exhibit (2) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(4) Investment Advisory Contracts

(a) Investment Advisory Agreement between Registrant and PNC Asset
Management Group, Inc. relating to all Portfolios except the
Multi-Sector Mortgage Securities Portfolio III and Index Equity
Portfolio is incorporated herein by reference to Exhibit (5)(a)
of Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.

(b) Investment Advisory Agreement between Registrant and BlackRock
Financial Management, Inc. with respect to the Multi-Sector
Mortgage Securities Portfolio III is incorporated herein by
reference to Exhibit (5)(b) of Post-Effective Amendment No. 21
to Registrant's Registration Statement on Form N-1A filed on May
30, 1996.

(c) Addendum No. 1 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to
the Mid-Cap Value Equity and Mid-Cap Growth Equity Portfolios is
incorporated herein by reference to Exhibit 5(c) of
Post-Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1997.

(d) Form of Addendum No. 1 to Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc. with respect
to BlackRock Strategic Portfolio I and BlackRock Strategic
Portfolio II is incorporated herein by reference to Exhibit 5(d)
of Post-Effective Amendment No. 26 to Registrant's Registration
Statement on Form N-1A filed on December 18, 1996.

(e) Form of Addendum No. 2 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to
the International Small Cap Equity Portfolio is incorporated
herein by reference to Exhibit 5(e) of Post-Effective Amendment
No. 30 to Registrant's Registration Statement on Form N-1A filed
on August 19, 1997.

(f) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and BlackRock Financial Management, Inc. with respect to the
Managed Income, Tax-Free Income, Intermediate Government Bond,
Ohio Tax-Free

C-2
<PAGE>

Income, Pennsylvania Tax-Free Income, Low Duration Bond,
Intermediate Bond, Government Income, New Jersey Tax-Free Income
and Core Bond Portfolios is incorporated herein by reference to
Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on May
30, 1996.

(g) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and Provident Capital Management, Inc. with respect to the Large
Cap Value Equity, Small Cap Value Equity and Select Equity
Portfolios is incorporated herein by reference to Exhibit (5)(c)
of Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.

(h) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and PNC Equity Advisors Company with respect to the Large Cap
Growth Equity and Small Cap Growth Equity Portfolios is
incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.

(i) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and PNC Institutional Management Corporation with respect to the
Money Market, U.S. Treasury Money Market, Municipal Money
Market, Pennsylvania Municipal Money Market, Ohio Municipal
Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market
Portfolios is incorporated herein by reference to Exhibit (5)(c)
of Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.

(j) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and CastleInternational Asset Management Limited with respect to
the International Equity and International Emerging Markets
Portfolios is incorporated herein by reference to Exhibit (5)(c)
of Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.

(k) Sub-Advisory Agreement among PNC Asset Management Group, Inc.,
Provident Capital Management, Inc. and BlackRock Financial
Management, Inc. with respect to the Balanced Portfolio is
incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.

(l) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and Provident Capital Management, Inc. with respect to the
Mid-Cap

C-3
<PAGE>

Value Equity Portfolio is incorporated herein by reference to
Exhibit 5(k) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January 28, 1997.

(m) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and PNC Equity Advisors Company with respect to the Mid-Cap
Growth Equity Portfolio is incorporated herein by reference to
Exhibit 5(l) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January 28, 1997.

(n) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and BlackRock Financial Management, Inc. with respect to the
International Bond Portfolio is incorporated herein by reference
to Exhibit 5(m) of Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A filed on
January 28, 1997.

(o) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and CastleInternational Asset Management Limited
with respect to the International Small Cap Equity Portfolio is
incorporated herein by reference to Exhibit 5(o) of
Post-Effective Amendment No. 30 to Registrant's Registration
Statement on Form N-1A filed on August 19, 1997.

(p) Form of Addendum No. 3 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to
the Micro-Cap Equity Portfolio, GNMA Portfolio, Delaware
Tax-Free Income Portfolio and Kentucky Tax-Free Income Portfolio
is incorporated herein by reference to Exhibit (5)(p) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(q) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with respect to the
Micro-Cap Equity Portfolio is incorporated herein by reference
to Exhibit (5)(q) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(r) Form of Sub-Advisory Agreement between BlackRock, Inc. and
BlackRock Financial Management, Inc. with respect to the GNMA,
Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios
is incorporated herein by reference to Exhibit (5)(r) of
Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A filed on February 13, 1998.

C-4
<PAGE>

(s) Form of Addendum No. 4 to Investment Advisory Agreement between
Registrant and BlackRock Advisors, Inc. with respect to the High
Yield Bond Portfolio is incorporated herein by reference to
Exhibit 5(s) of Post-Effective Amendment No. 37 to Registrant's
Registration Statement on Form N-1A filed on August 7, 1998.

(t) Form of Sub-Advisory Agreement between BlackRock Advisors, Inc.
and BlackRock Financial Management, Inc. with respect to the
High Yield Bond Portfolio is incorporated herein by reference to
Exhibit 5(t) of Post-Effective Amendment No. 37 to Registrant's
Registration Statement on Form N-1A filed on August 7, 1998.

(u) Form of Addendum No. 2 to Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc. with respect
to the Multi-Sector Mortgage Securities Portfolio IV is
incorporated herein by reference to Exhibit 4(u) of
Post-Effective Amendment No. 42 to Registrant's Registration
Statement on Form N-1A filed on June 11, 1999.

(5) Underwriting Contracts

(a) Distribution Agreement between Registrant and Provident
Distributors, Inc. dated January 31, 1994 is incorporated herein
by reference to Exhibit (6)(a) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(b) Form of Appendix A to Distribution Agreement between Registrant
and BlackRock Distributors, Inc.

(c) Amendment No. 2 to the Distribution Agreement between Registrant
and Provident Distributors, Inc. dated October 18, 1994 is
incorporated herein by reference to Exhibit (6)(c) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(d) Amendment No. 3 to the Distribution Agreement between Registrant
and Provident Distributors, Inc. is incorporated herein by
reference to Exhibit (6)(d) of Post-Effective Amendment No. 21
to Registrant's Registration Statement on Form N-1A filed on May
30, 1996.

(6) Bonus or Profit Sharing Contracts

None.

(7) Custodian Agreements

C-5
<PAGE>

(a) Custodian Agreement dated October 4, 1989 between Registrant and
PNC Bank, National Association is incorporated herein by
reference to Exhibit (8)(a) of Post-Effective Amendment No. 33
to Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(b) Amendment No. 1 to Custodian Agreement between Registrant and
PNC Bank, National Association is incorporated herein by
reference to Exhibit (8)(b) of Post-Effective Amendment No. 33
to Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(c) Amendment No. 2 dated March 1, 1993 to Custodian Agreement
between Registrant and PNC Bank, National Association with
respect to the Short-Term Bond, Intermediate-Term Bond, Core
Equity, Small Cap Growth Equity and North Carolina Municipal
Money Market Portfolios is incorporated herein by reference to
Exhibit (8)(c) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(d) Form of Appendix B to Custodian Agreement between Registrant and
PFPC Trust Company is incorporated herein by reference to
Exhibit 7(d) of Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-1A filed on June 11, 1999.

(e) Sub-Custodian Agreement dated April 27, 1992 among the
Registrant, PNC Bank, National Association and The Chase
Manhattan Bank is incorporated herein by reference to Exhibit
(8)(e) of Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed on February 13, 1998.

(f) Global Custody Agreement between Barclays Bank PLC and PNC Bank,
National Association dated October 28, 1992 is incorporated
herein by reference to Exhibit (8)(f) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form
N-1A filed on January 27, 1998.

(g) Custodian Agreement between State Street Bank and Trust Company
and PNC Bank, National Association dated June 13, 1983 is
incorporated herein by reference to Exhibit (8)(g) of
Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A filed on February 13, 1998.

(h) Amendment No. 1 to Custodian Agreement between State Street Bank
and Trust Company and PNC Bank, National Association dated
November 21, 1989 is incorporated herein by reference to Exhibit
(8)(h) of Post-Effective

C-6
<PAGE>

Amendment No. 34 to Registrant's Registration Statement on Form
N-1A filed on February 13, 1998.

(i) Subcustodial Services Agreement dated January 10, 1996 between
PNC Bank, National Association and Citibank, N.A. is
incorporated herein by reference to Exhibit 8(j) of
Post-Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1997.

(8) Other Material Contracts

(a) Form of Administration Agreement among Registrant, BlackRock
Advisors, Inc. and PFPC Inc. is incorporated herein by reference
to Exhibit 8(a) of Post-Effective Amendment No. 42 to
Registrant's Registration Statement on Form N-1A filed on June
11, 1999.

(b) Forms of Appendix A and Appendix B to Administration Agreement
among Registrant, BlackRock Advisors, Inc. and PFPC Inc. to be
filed by amendment.

(c) Transfer Agency Agreement dated October 4, 1989 between
Registrant and PFPC Inc. is incorporated herein by reference to
Exhibit (9)(e) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(d) Amendment No. 1 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC Inc. relating to the Tax-Free
Income Portfolio is incorporated herein by reference to Exhibit
(9)(f) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.

(e) Amendment No. 2 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC Inc. relating to the
Pennsylvania Municipal Money Market, Ohio Municipal Money
Market, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Large Cap Value Equity, Index
Equity and Small Cap Value Equity Portfolios is incorporated
herein by reference to Exhibit (9)(g) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form
N-1A filed on January 27, 1998.

(f) Amendment No. 3 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC Inc. relating to the Short-Term
Bond, Intermediate-Term Bond, Core Equity, Small Cap Growth
Equity and North Carolina Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit (9)(h) of
Post-Effective Amendment No. 33 to

C-7
<PAGE>

Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.

(g) Amendment No. 4 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC Inc. relating to Series B
Investor Shares of the Money Market, Managed Income, Tax-Free
Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Large Cap Value Equity, Large Cap
Growth Equity, Index Equity, Small Cap Value Equity,
Intermediate-Term Bond, Small Cap Growth Equity, Core Equity,
International Fixed Income, Government Income, International
Emerging Markets, International Equity and Balanced Portfolios
is incorporated herein by reference to Exhibit (9)(i) of
Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.

(h) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is incorporated herein by reference to
Exhibit 8(h) of Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-1A filed on June 11, 1999.

(i) License Agreement dated as of December 1, 1995 between the
Registrant and Compass Capital Group, Inc. is incorporated
herein by reference to Exhibit 9(q) of Post-Effective Amendment
No. 27 to Registrant's Registration Statement on Form N-1A filed
on January 28, 1997.

(j) Share Acquisition Agreement dated April 29, 1998 by and among
Registrant and PNC Bank, National Association and PNC Bank,
Delaware, respectively, each as trustee for certain of the
common trust funds listed therein is incorporated herein by
reference to Exhibit 9(l) of Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A filed on April
29, 1998.

(k) Form of Expense Limitation Agreement dated as of January 28,
1999 between Registrant and BlackRock Advisors, Inc. is
incorporated herein by reference to Exhibit 8(k) of
Post-Effective Amendment No. 41 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1999.

(9) Legal Opinion

(a) To be filed by amendment.

(10) Other Opinions

(a) None.

C-8
<PAGE>

(11) Omitted Financial Statements

(a) None.

(12) Initial Capital Agreements

(a) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes A-1, B-1, C-1, D-2, E-2, F-2,
G-2, H-2, I-1, I-2, J-1, J-2, K-2, L-2, M-2, N-2, O-2, P-2, D-1,
E-1, F-1, G-1, H-1, K-1, L-1, M-1, N-1, O-1, P-1, A-2, B-2, C-2,
I-2, J-2, A-3, B-3, C-3, D-3, E-3, F-3, G-3, H-3, I-3, J-3, K-3,
L-3, M-3, N-3, O-3, P-3, Q-1, Q-2, Q-3, R-1, R-2, R-3, S-1, S-2,
S-3, T-1, T-2, T-3, U-1, U-2, U-3, A-4, D-4, E-4, F-4, G-4, H-4,
K-4, L-4, M-4, N-4, O-4, P-4, R-4, S-4, T-4, U-4, W-4, X-4, Y-4,
V-1, V-2, V-3, W-1, W-2, W-3, X-1, X-2, X-3, Y-1, Y-2, Y-3, Z-1,
Z-2, Z-3, AA-1, AA-2, AA-3, AA-4, AA-5, BB-1, BB-2, BB-3, BB-4,
BB-5, CC-3, A-5, B-4, B-5, C-4, C-5, I-4, I-5, J-4, J-5, Q-4,
Q-5, V-4, V-5, Z-4, Z-5, X-1, X-3, D-5, E-5, F-5, G-5, H-5, K-5,
L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5, Y-5,
DD-1, DD-2, DD-3, DD-4, DD-5, EE-1, EE-2, EE-3, EE-4, EE-5, R-6,
BB-6, FF-3, GG-3, HH-1, HH-2, HH-3, HH-4, HH-5, II-1, II-2,
II-3, II-4, II-5, S-6, JJ-1, JJ-2, JJ-3, JJ-4, JJ-5, KK-1, KK-2,
KK-3, KK-4, KK-5, LL-1, LL-2, LL-3, LL-4 and LL-5 is
incorporated herein by reference to Exhibit (13)(a) of
Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A filed on February 13, 1998.

(b) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes MM-1, MM-2, MM-3, MM-4, MM-5 and
MM-6 is incorporated herein by reference to Exhibit 13(b) of
Post-Effective Amendment No. 37 to Registrant's Registration
Statement on Form N-1A filed on August 7, 1998.

(c) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Class NN-3 is incorporated herein by
reference to Exhibit 12(c) of Post-Effective Amendment No. 42 to
Registrant's Registration Statement on Form N-1A filed on June
11, 1999.

(d) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes A-7 and C-7.

(13) Rule 12b-1 Plan

(a) Amended and Restated Distribution and Service Plan for Service,
Series A Investor, Series B Investor, Series C Investor,
Institutional and BlackRock Shares is incorporated herein by
reference to Exhibit (15) of Post-Effective

C-9
<PAGE>

Amendment No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.

(b) Form of Appendix A to Amended and Restated Distribution and
Service Plan to be filed by amendment.

(14) Intentionally Omitted.

(15) Rule 18f-3 Plan

(a) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation
of a Multi-Class Distribution System is incorporated herein by
reference to Exhibit 15(a) of Post-Effective Amendment No.40 to
Registrant's Registration Statement on form N-1A filed on
November 25, 1998.

(99) (a) Power of Attorney of David R. Wilmerding dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.

(b) Power of Attorney of William O. Albertini dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.

(c) Power of Attorney of Raymond J. Clark dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.

(d) Power of Attorney of Robert M. Hernandez dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.

(e) Power of Attorney of Anthony M. Santomero dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H.
Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on form
N-1A filed on February 18, 1997.

C-10
<PAGE>

Item 24. Persons Controlled by or under Common Control with the Fund.

None.

Item 25. Indemnification

Indemnification of Registrant's principal underwriter against
certain losses is provided for in Section 7 of the Distribution Agreement
incorporated by reference herein as Exhibit 5(a). Indemnification of
Registrant's Custodian, Transfer Agent and Administrators is provided for,
respectively, in Section 22 of the Custodian Agreement incorporated by reference
herein as Exhibit 7(a), Section 17 of the Transfer Agency Agreement incorporated
by reference herein as Exhibit 8(c) and Section 11 of the Administration
Agreement incorporated by reference herein as Exhibit 8(a). Registrant intends
to obtain from a major insurance carrier a trustees' and officers' liability
policy covering certain types of errors and omissions. In addition, Section 9.3
of the Registrant's Declaration of Trust incorporated by reference herein as
Exhibit 1(a) provides as follows:

Indemnification of Trustees, Officers, Representatives and
----------------------------------------------------------
Employees. The Trust shall indemnify each of its Trustees against all
---------
liabilities and expenses (including amounts paid in satisfaction of
judgments, in compromise, as fines and penalties, and as counsel fees)
reasonably incurred by him in connection with the defense or disposition
of any action, suit or other proceeding, whether civil or criminal, in
which he may be involved or with which he may be threatened, while as a
Trustee or thereafter, by reason of his being or having been such a
Trustee except with respect to any matter as to which he shall have been
------
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties, provided that as to any
--------
matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment
or for any other expenses shall be provided unless the Trust shall have
received a written opinion from independent legal counsel approved by
the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the
matter of bad faith had been adjudicated, it would in the opinion of
such counsel have been adjudicated in favor of such person. The rights
accruing to any person under these provisions shall not exclude any
other right to which he may be lawfully entitled, provided that no
--------
person may satisfy any right of indemnity or reimbursement hereunder
except out of the property of the Trust. The Trustees may make advance
payments in connection with the indemnification under this Section 9.3,
provided that the indemnified person shall have given a written
--------
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification.

The Trustee shall indemnify officers, representatives and
employees of the Trust to the same extent that Trustees are entitled to
indemnification pursuant to this Section 9.3.

C-11
<PAGE>

Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

Section 9.6 of the Registrant's Declaration of Trust, filed
herein as Exhibit 1(a), also provides for the indemnification of shareholders of
the Registrant. Section 9.6 states as follows:

Indemnification of Shareholders. In case any Shareholder or
-------------------------------
former Shareholder shall be held to be personally liable solely by
reason of his being or having been a Shareholder and not because of his
acts or omissions or for some other reason, the Shareholder or former
Shareholder (or his heirs, executors, administrators or other legal
representatives or, in the case of a corporation or other entity, its
corporate or other general successor) shall be entitled out of the
assets belonging to the classes of Shares with the same alphabetical
designation as that of the Shares owned by such Shareholder to be held
harmless from and indemnified against all loss and expense arising from
such liability. The Trust shall, upon request by the Shareholder, assume
the defense of any claim made against any Shareholder for any act or
obligations of the Trust and satisfy any judgment thereon from such
assets.

Item 26. Business and Other Connections of Investment Advisers

(a) BlackRock Advisors, Inc. is an indirect majority-owned
subsidiary of PNC Bank Corp. BlackRock Advisors, Inc. was organized in 1994 for
the purpose of providing advisory services to investment companies. The list
required by this Item 26 of officers and directors of BlackRock Advisors, Inc.,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV, filed by BlackRock Advisors, Inc. pursuant to the Investment Advisers
Act of 1940 (SEC File No. 801-47710).

(b) BlackRock Institutional Management Corporation (formerly
PNC Institutional Management Corporation) ("BIMC") is an indirect majority-owned
subsidiary of PNC Bank Corp. The list required by this Item 26 of officers and
directors of BIMC, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by

C-12
<PAGE>

reference to Schedules A and D of Form ADV, filed by BIMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-13304).

(c) BlackRock Financial Management, Inc. ("BlackRock") is an
indirect majority-owned subsidiary of PNC Bank Corp. BlackRock currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. The list required
by this Item 26 of officers and directors of BlackRock, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and D of Form ADV, filed by
BlackRock pursuant to the Investment Advisers Act of 1940 (SEC File No.
801-48433).

(d) BlackRock International, Ltd. (formerly CastleInternational
Asset Management Limited) ("BIL") is an indirect majority-owned subsidiary of
PNC Bank Corp. The list required by this Item 26 of officers and directors of
BIL, together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV, filed by BIL pursuant to the Investment Advisers Act of 1940 (SEC File
No. 801-51087).

Item 27. Principal Underwriters

(a) Not applicable.

(b) The information required by this Item 27 with respect to
each director, officer or partner of BlackRock Distributors, Inc. (formerly
Compass Distributors, Inc.) is incorporated by reference to Schedule A of FORM
BD filed by BlackRock Distributors, Inc. with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (File No. 8-48775).

Item 28. Location of Accounts and Records

(1) PFPC Trust Company, Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19102 (records
relating to its functions as custodian).

(2) BlackRock Distributors, Inc., Four Falls
Corporate Center, 6th Floor, West Conshohocken,
PA 19428-2961 (records relating to its functions
as distributor).

(3) BlackRock Advisors, Inc. (formerly BlackRock,
Inc.), 345 Park Avenue, New York, New York 10154
(records relating to its functions as investment
adviser and co-administrator).

C-13
<PAGE>

(4) BlackRock Institutional Management Corporation
(formerly PNC Institutional Management
Corporation), Bellevue Corporate Center, 103
Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as investment
sub-adviser).

(5) BlackRock Financial Management, Inc., 345 Park
Avenue, New York, New York 10154; 30 South 17th
Street, Philadelphia, Pennsylvania 19103; and
1600 Market Street, 29th Floor, Philadelphia,
Pennsylvania 19103 (records relating to its
functions as investment adviser and
sub-adviser).

(6) PFPC Inc., Bellevue Corporate Center, 400
Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as
co-administrator, transfer agent and dividend
disbursing agent).

(7) The Chase Manhattan Bank, N.A., 1285 Avenue of
the Americas, New York, New York 10019 (records
relating to its function as sub-custodian).

(8) State Street Bank and Trust Company, P.O. Box
1631, Boston, Massachusetts (records relating to
its function as sub-custodian).

(9) Barclays Bank PLC, 75 Wall Street, New York, New
York 10265 (records relating to its function as
sub-custodian).

(10) BlackRock International, Ltd. (formerly
CastleInternational Asset Management Limited), 7
Castle Street, Edinburgh, Scotland, EH2 3AH
(records relating to its functions as investment
sub-adviser).

(11) Citibank, N.A., 111 Wall Street, 23rd Floor,
Zone 6, New York, NY 10043 (records relating to
its functions as sub-custodian).

(12) PNC Bank Corp., 1600 Market Street, 28th Floor,
Philadelphia, PA 19103 (Registrant's declaration
of trust, code of regulations and minute books).

Item 29. Management Services

None.

Item 30. Undertakings

None.

C-14
<PAGE>

EXHIBIT INDEX
-------------

Exhibit No. Description
- ----------- -----------

5(b) Form of Appendix A to the Distribution Agreement
between Registrant and BlackRock Distributors, Inc.

12(d) Form of Purchase Agreement between Registrant and
BlackRock Distributors, Inc. relating to shares of
Classes A-7 and C-7.

<PAGE>

Exhibit 5(b)

APPENDIX A
to the
DISTRIBUTION AGREEMENT

BETWEEN

BlackRock Funds/SM/
and
BlackRock Distributors, Inc.

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

Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares, Series C Investor Shares and HL Shares)

Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and HL
Shares)

U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Ohio Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series Investor C Shares)

New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)

Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)

North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)

Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>

Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Core Bond Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares, Series C Investor Shares and BlackRock Shares)

Low Duration Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)

Intermediate Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)

Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)

Large Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

Large Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)

Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

-2-
<PAGE>

Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)

Small-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)

International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Mid-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

Mid-Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

BlackRock Strategic Portfolio I (Institutional Shares)

BlackRock Strategic Portfolio II (Institutional Shares)

International Small Cap Equity Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Micro-Cap Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)

GNMA Portfolio (Institutional Shares, Service Shares, Series A Investor Shares,
Series B Investor Shares and Series C Investor Shares)

Delaware Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)

Kentucky Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)

High Yield Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)

Multi-Sector Mortgage Securities Portfolio IV (Institutional Shares)

-3-
<PAGE>

Release. "BlackRock Funds" and "Trustees of BlackRock Funds" refer respectively
- -------
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust dated December
22, 1988 which is hereby referred to and a copy of which is on file at the
office of the State Secretary of the Commonwealth of Massachusetts and at the
principal office of the Company. The obligations of "BlackRock Funds" entered
into in the name or on behalf thereof by any of the Trustees, officers,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, shareholders, officers,
representatives or agents of the Company personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Company must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Company.

[End of Text]

-4-
<PAGE>

Agreed to and accepted as of August __, 1999.

BLACKROCK FUNDS/SM/

By:
-----------------------
Name:
Title:

BLACKROCK DISTRIBUTORS, INC.

By:
-----------------------
Name:
Title:

-5-

<PAGE>

Exhibit 12(d)

PURCHASE AGREEMENT
------------------

BlackRock Funds/SM/ (the "Fund"), a Massachusetts business
trust, and BlackRock Distributors, Inc. ("BDI"), a Delaware corporation, hereby
agree as follows:

1. The Fund hereby offers BDI and BDI hereby purchases ten
shares of the HL Shares of the Fund's Money Market Portfolio and ten shares of
the HL Shares of the Fund's Municipal Money Market Portfolio (collectively, the
"Shares") for $10 per Share. The Fund hereby acknowledges receipt from BDI of
funds in full payment for the foregoing Shares.

2. BDI represents and warrants to the Fund that the foregoing
Shares are being acquired for investment purposes and not with a view to the
distribution thereof.

3. "BlackRock Funds" and "Trustees of BlackRock Funds" refer
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"BlackRock Funds" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.

IN AGREEMENT WHEREOF, and intending to be legally bound
hereby, the parties hereto have executed this Purchase Agreement as of _________
__, 1999.

BLACKROCK FUNDS/SM/

By:
--------------------------
Name:
Title:

BLACKROCK DISTRIBUTORS, INC.

By:
--------------------------
Name:
Title: