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                             THE BEAR STEARNS FUNDS
                            LARGE CAP VALUE PORTFOLIO
                            SMALL CAP VALUE PORTFOLIO
                                INCOME PORTFOLIO
                        HIGH YIELD TOTAL RETURN PORTFOLIO
                      CLASS A, CLASS B, CLASS C AND CLASS Y
                                     PART B
                      (STATEMENT OF ADDITIONAL INFORMATION)
                                October 16, 1998

                           as Supplemented May 18, 1999

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         This  Statement of Additional  Information,  which is not a prospectus,
supplements  and  should  be read  in  conjunction  with  the  current  relevant
prospectus (the  "Prospectus")  dated October 16, 1998 of The Bear Stearns Funds
(the "Fund"),  as each may be revised from time to time, offering shares of four
diversified  portfolios  (each, a  "Portfolio"):  Large Cap Value  Portfolio and
Small Cap Value Portfolio (together, the "Equity Portfolios"),  Income Portfolio
(the "Income  Portfolio") and High Yield Total Return Portfolio (the "High Yield
Portfolio"). To obtain a free copy of such Prospectus,  please write to the Fund
at  PFPC  Inc.  ("PFPC"),   Attention:  [Name  of  Portfolio],  P.O.  Box  8960,
Wilmington, Delaware 19899-8960, call 1-800-447-1139 or call Bear, Stearns & Co.
Inc. ("Bear Stearns") at 1-800-766-4111.

         Bear  Stearns  Asset  Management  Inc.  ("BSAM"  or the  "Adviser"),  a
wholly-owned  subsidiary  of The Bear  Stearns  Companies  Inc.,  serves as each
Portfolio's investment adviser.

         Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned  subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolios. Bear
Stearns, an affiliate of BSAM, serves as distributor of each Portfolio's shares.

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

Investment Objective and Management Policies...........................     B-2
Management of the Fund.................................................     B-34
Management Arrangements................................................     B-37
Purchase and Redemption of Shares......................................     B-43
Determination of Net Asset Value.......................................     B-46
Dividends, Distributions and Taxes.....................................     B-47
Portfolio Transactions.................................................     B-55
Performance Information................................................     B-58
Code of Ethics.........................................................     B-60
Information About the Fund.............................................     B-61
Custodian, Transfer and Dividend Disbursing Agent,
  Counsel and Independent Auditors.....................................     B-65
Financial Statements...................................................     B-66
Appendix...............................................................     B-67


                                      B-1



                  INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

         The following information supplements and should be read in conjunction
with the section in the  Portfolios'  Prospectus  entitled  "Description  of the
Portfolios."

Portfolio Securities

         Bank Obligations.  (All Portfolios) Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal  Reserve  System and to have their
deposits  insured by the Federal  Deposit  Insurance  Corporation  (the "FDIC").
Domestic  banks  organized  under state law are supervised and examined by state
banking  authorities  but are members of the Federal Reserve System only if they
elect to join. In addition,  state banks whose  certificates  of deposit ("CDs")
may be  purchased  by each  Portfolio  are  insured by the FDIC  (although  such
insurance  may not be of  material  benefit  to a  Portfolio,  depending  on the
principal amount of the CDs of each bank held by such Portfolio) and are subject
to Federal  examination and to a substantial body of Federal law and regulation.
As a result of Federal  or state  laws and  regulations,  domestic  branches  of
domestic  banks  whose CDs may be  purchased  by each  Portfolio  generally  are
required,  among other things,  to maintain  specified  levels of reserves,  are
limited in the amounts which they can loan to a single  borrower and are subject
to other regulation designed to promote financial soundness. However, not all of
such laws and regulations apply to the foreign branches of domestic banks.

         Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic and foreign  branches of foreign  banks,  such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition  to the  issuing  branch,  or may be limited by the terms of a specific
obligation  and  governmental  regulation.   Such  obligations  are  subject  to
different  risks than are those of domestic  banks.  These risks include foreign
economic and political developments,  foreign governmental restrictions that may
adversely affect payment of principal and interest on the  obligations,  foreign
exchange  controls and foreign  withholding and other taxes on interest  income.
These foreign branches and subsidiaries are not necessarily  subject to the same
or  similar  regulatory  requirements  that  apply to  domestic  banks,  such as
mandatory reserve requirements,  loan limitations, and accounting,  auditing and
financial  record keeping  requirements.  In addition,  less  information may be
publicly  available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.

         Obligations  of United States  branches of foreign banks may be general
obligations  of the parent bank in addition  to the  issuing  branch,  or may be
limited by the terms of a specific  obligation or by Federal or state regulation
as well as governmental  action in the country in which the foreign bank has its
head  office.  A domestic  branch of a foreign  bank with assets in excess of $1
billion may be subject to reserve  requirements  imposed by the Federal  Reserve
System or by the state in which the branch is located if the branch is  licensed
in that state.

         In  addition,  Federal  branches  licensed  by the  Comptroller  of the
Currency and  branches  licensed by certain  states  ("State  Branches")  may be
required to:


                                      B-2



(1) pledge to the regulator,  by depositing assets with a designated bank within
the state,  a certain  percentage  of their assets as fixed from time to time by
the appropriate  regulatory authority;  and (2) maintain assets within the state
in an  amount  equal  to a  specified  percentage  of the  aggregate  amount  of
liabilities  of the foreign  bank  payable at or through all of its  agencies or
branches within the state. The deposits of Federal and State Branches  generally
must be  insured  by the  FDIC if  such  branches  take  deposits  of less  than
$100,000.

         In view of the foregoing  factors  associated  with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic  branches of
foreign  banks,  BSAM  carefully  evaluates  such  investments on a case-by-case
basis.

         Bank Debt (High Yield  Portfolio).  The High Yield Portfolio may invest
in bank debt which includes  interests in loans to companies or their affiliates
undertaken  to  finance  a  capital   restructuring   or  in   connection   with
recapitalizations,   acquisitions,  leveraged  buyouts,  refinancings  or  other
financially  leveraged  transactions and may include loans which are designed to
provide  temporary  or  "bridge"  financing  to a borrower  pending  the sale of
identified assets, the arrangement of longer-term loans or the issuance and sale
of debt obligations.  These loans,  which may bear fixed or floating rates, have
generally  been  arranged  through  private  negotiations  between  a  corporate
borrower and one or more financial  institutions  ("Lenders"),  including banks.
The  Portfolio's  investment  may be in the  form  of  participations  in  loans
("Participations")  or of  assignments  of all or a portion  of loans from third
parties ("Assignments").

         Participations  differ both from the public and private debt securities
typically held by the Portfolio and from  Assignments.  In  Participations,  the
Portfolio  has a  contractual  relationship  only with the Lender,  not with the
borrower.  As a result,  the  Portfolio  has the right to  receive  payments  of
principal,  interest  and any fees to which it is entitled  only from the Lender
selling the  Participation  and only upon  receipt by the Lender of the payments
from the borrower. In connection with purchasing  Participations,  the Portfolio
generally  will have no right to enforce  compliance  by the  borrower  with the
terms of the loan  Agreement  relating  to the loan,  nor any  rights of set-off
against  the  borrower,  and the  Portfolio  may not benefit  directly  from any
collateral  supporting  the loan in which it has  purchased  the  Participation.
Thus, the Portfolio  assumes the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender,
the  Portfolio  may be treated as a general  creditor  of the Lender and may not
benefit from any set-off between the Lender and the borrower. In Assignments, by
contrast, the Portfolio acquires direct rights against the borrower, except that
under certain  circumstances  such rights may be more limited than those held by
the assigning Lender.

         Investments  in  Participations  and  Assignments  otherwise bear risks
common to other debt  securities,  including the risk of nonpayment of principal
and  interest  by the  borrower,  the risk that any loan  collateral  may become
impaired  and that the  Portfolio  may obtain  less than the full value for loan
interests  sold because they are illiquid.  The  Portfolio  may have  difficulty
disposing  of  Assignments  and  Participations.  Because  the  market  for such
instruments  is  not  highly  liquid,   the  Portfolio   anticipates  that  such


                                      B-3



instruments  could be sold only to a limited number of institutional  investors.
The lack of a highly liquid  secondary  market may have an adverse impact on the
value of such  instruments  and will have an adverse  impact on the  Portfolio's
ability to dispose of particular  Assignments or Participations in response to a
specific  economic event, such as deterioration in the  creditworthiness  of the
borrower.  In addition to the creditworthiness of the borrower,  the Portfolio's
ability to receive  payment of principal  and interest is also  dependent on the
creditworthiness  of any institution  (i.e., the Lender)  interposed between the
Portfolio and the borrower.

Mortgage-Related Securities

         U.S.  Government Agency Securities.  (Income and High Yield Portfolios)
Mortgage-related   securities   issued  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.

         U.S. Government Related Securities.  (Income and High Yield Portfolios)
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 and are not
backed by or  entitled  to the full faith and credit of the United  States.  The
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").  The 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 Bank 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. The FHLMC guarantees either ultimate  collection or timely payment of all
principal  payments on the underlying  mortgage  loans.  When the 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.

         Asset-Backed  Securities  (Income  and  High  Yield  Portfolios).  Each
Portfolio  may  invest  in  asset-backed   securities  in  accordance  with  its
investment  objective  and  policies.   Asset-backed   securities  represent  an
undivided  ownership  interest  in a pool of  installment  sales  contracts  and
installment loans collateralized by, among other things, credit card receivables
and  automobiles.  In  general,   asset-backed  securities  and  the  collateral
supporting  them are of  shorter  maturity  than  mortgage  loans.  As a result,
investment in these securities  should result in greater price stability for the
Portfolios.


                                      B-4



         Asset-backed  securities are often structured with one or more types of
credit  enhancement.   The  Portfolios  will  not  limit  their  investments  to
asset-backed   securities  with  credit  enhancements.   Although   asset-backed
securities  are not generally  traded on a national  securities  exchange,  such
securities are widely traded by brokers and dealers, and to such extent will not
be  considered  illiquid  for the  purposes  of the  Portfolios'  limitation  on
investment in illiquid securities.

         Repurchase  Agreements.  (All Portfolios) Each Portfolio's custodian or
sub-custodian  will have  custody  of,  and will hold in a  segregated  account,
securities  acquired by the Portfolio under a repurchase  agreement.  Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the  Portfolio.  In an attempt to reduce the risk of  incurring a
loss on a  repurchase  agreement,  each  Portfolio  will enter  into  repurchase
agreements  only with domestic  banks with total assets in excess of one billion
dollars,  or primary  government  securities  dealers  reporting  to the Federal
Reserve Bank of New York,  with respect to  securities of the type in which each
Portfolio may invest,  and will require that additional  securities be deposited
with it if the  value of the  securities  purchased  should  decrease  below the
resale price.  BSAM will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase  price. Each Portfolio
will consider on an ongoing basis the  creditworthiness of the institutions with
which it enters into repurchase agreements.

         Reverse Repurchase  Agreements (Income and High Yield Portfolios).  The
High Yield Portfolio may borrow by entering into reverse repurchase  agreements.
Pursuant to such  agreements,  a Portfolio  would sell  portfolio  securities to
financial  institutions,  such  as  banks  and  broker-dealers,   and  agree  to
repurchase  them at an agreed  upon  date,  price  and  interest  payment.  When
effecting reverse repurchase  transactions,  securities of a dollar amount equal
in value to the  securities  subject to the  agreement  will be  maintained in a
segregated  account  with  the  Portfolio's   custodian.  A  reverse  repurchase
agreement  involves the risk that the market value of the  portfolio  securities
sold by the  Portfolio  may  decline  below  the  price  of the  securities  the
Portfolio  is  obligated  to  repurchase,  which  price is fixed at the time the
Portfolio enters into such agreement.

         Municipal  Obligations.  (Income and High Yield  Portfolios)  Municipal
obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal  and  interest.  Revenue bonds are
payable  from  the  revenue  derived  from a  particular  facility  or  class of
facilities  or, in some cases,  from the  proceeds of a special  excise or other
specific  revenue  source,  but not from the general  taxing  power.  Industrial
development  bonds, in most cases,  are revenue bonds and generally do not carry
the  pledge  of the  credit  of the  issuing  municipality,  but  generally  are
guaranteed  by the corporate  entity on whose behalf they are issued.  Notes are
short-term  instruments  which are obligations of the issuing  municipalities or
agencies and are sold in  anticipation  of a bond sale,  collection  of taxes or
receipt   of   other   revenues.   Municipal   obligations   include   municipal
lease/purchase  agreements which are similar to installment  purchase  contracts
for  property  or  equipment  issued  by   municipalities.   Certain   municipal
obligations  are  subject to  redemption  at a date  earlier  than their  stated
maturity pursuant to call options, which may be separated from


                                      B-5



the related municipal  obligation and purchased and sold separately.  The Income
Portfolio will invest in municipal obligations,  the ratings of which correspond
with the ratings of other permissible Income Portfolio investments.

         Trade  Claims.  (High Yield  Portfolio)  The High Yield  Portfolio  may
invest in trade claims, which are non-securitized rights of payment arising from
obligations other than borrowed funds. Trade claims typically arise when, in the
ordinary course of business, vendors and suppliers extend credit to a company by
offering  payment  terms.  Generally,   when  a  company  files  for  bankruptcy
protection,  payments  on trade  claims  cease and the  claims  are  subject  to
compromise along with the other debts of the company. Trade claims typically are
bought and sold at a discount  reflecting the degree of uncertainty with respect
to the  timing  and  extent of  recovery.  In  addition  to the risks  otherwise
associated  with  low-quality  obligations,   trade  claims  have  other  risks,
including  (i) the  possibility  that the amount of the claim may be disputed by
the  obligor,  (ii) the debtor may have a variety of defenses to assert  against
the claim under the bankruptcy code, (iii) volatile pricing due to a less liquid
market,  including  a small  number  of  brokers  for trade  claims  and a small
universe of potential  buyers,  (iv) the  possibility  that the Portfolio may be
obligated to purchase a trade claim larger than initially  anticipated,  and (v)
the risk of  failure  of  sellers of trade  claims to  indemnify  the  Portfolio
against  loss  due  to  the  bankruptcy  or  insolvency  of  such  sellers.  The
negotiation and enforcement of rights in connection with trade claims may result
in higher  legal  expenses  to the  Portfolio,  which may reduce  return on such
investments.  It is not unusual  for trade  claims to be priced at a discount to
publicly  traded  securities  that  have  an  equal  or  lower  priority  claim.
Additionally,  trade claims may be treated as non-securities  investments.  As a
result, any gains may be considered  "non-qualifying" under the Internal Revenue
Code of 1986, as amended (the "Code").

         Securities of  Financially  and  Operationally  Troubled  Issuers (High
Yield  Portfolio).  The  High  Yield  Portfolio  may  invest  in debt or  equity
securities of financially troubled or bankrupt companies  ("financially troubled
issuers") and in debt or equity securities of companies that in the view of BSAM
are currently  undervalued,  out-of-favor or price  depressed  relative to their
long-term  potential for growth and income  ("operationally  troubled  issuers")
(collectively "distressed securities").

         The securities of financially and  operationally  troubled  issuers may
require  active  monitoring  and at times may  require  BSAM to  participate  in
bankruptcy or  reorganization  proceedings  on behalf of the  Portfolio.  To the
extent BSAM becomes involved in such proceedings,  the Portfolio may have a more
active  participation in the affairs of the issuer than is generally  assumed by
an investor and such  participation  may subject the Portfolio to the litigation
risks described below.  However, the Portfolio does not invest in the securities
of financially or  operationally  troubled issuers for the purpose of exercising
day-to-day management of any issuer's affairs.

         Bankruptcy  and Other  Proceedings - Litigation  Risks.  When a company
seeks relief under the Federal  Bankruptcy Code (or has a petition filed against
it),  an  automatic  stay  prevents  all  entities,  including  creditors,  from
foreclosing  or taking other actions to enforce  claims,  perfect liens or reach
collateral  securing such claims.  Creditors who have claims against the company
prior to the date of the  bankruptcy  filing must  petition  the court to permit
them to


                                      B-6



take any  action to  protect  or  enforce  their  claims or their  rights in any
collateral.  Such  creditors  may be  prohibited  from  doing  so if  the  court
concludes  that the value of the  property in which the creditor has an interest
will be "adequately protected" during the proceedings. If the bankruptcy court's
assessment of adequate protection is inaccurate,  a creditor's collateral may be
wasted without the creditor being afforded the opportunity to preserve it. Thus,
even if the Portfolio holds a secured claim, it may be prevented from collecting
the liquidation  value of the collateral  securing its debt,  unless relief from
the automatic stay is granted by the court.

         Security  interests  held by  creditors  are  closely  scrutinized  and
frequently  challenged in bankruptcy  proceedings  and may be invalidated  for a
variety of reasons. For example, security interests may be set aside because, as
a technical  matter,  they have not been  perfected  properly  under the Uniform
Commercial Code or other applicable law. If a security  interest is invalidated,
the secured  creditor  loses the value of the collateral and because loss of the
secured status causes the claim to be treated as an unsecured  claim, the holder
of such  claim  will  almost  certainly  experience  a  significant  loss of its
investment.  While the Portfolio  intends to scrutinize  any security  interests
that secure the debt it purchases,  there can be no assurance  that the security
interests will not be challenged vigorously and found defective in some respect,
or that the Portfolio will be able to prevail against the challenge.

         Moreover, debt may be disallowed or subordinated to the claims of other
creditors  if the  creditor  is found  guilty  of  certain  inequitable  conduct
resulting  in harm to other  parties  with  respect to the  affairs of a company
filing  for  protection  from  creditors  under  the  Federal  Bankruptcy  Code.
Creditors'   claims  may  be  treated  as  equity  if  they  are  deemed  to  be
contributions  to capital,  or if a creditor  attempts to control the outcome of
the business affairs of a company prior to its filing under the Bankruptcy Code.
If a creditor  is found to have  interfered  with the  company's  affairs to the
detriment of other  creditors or  shareholders,  the creditor may be held liable
for damages to injured parties. While the Portfolio will attempt to avoid taking
the types of action  that  would lead to  equitable  subordination  or  creditor
liability,  there can be no  assurance  that such claims will not be asserted or
that the Portfolio will be able successfully to defend against them.

         While the challenges to liens and debt  described  above normally occur
in a  bankruptcy  proceeding,  the  conditions  or conduct that would lead to an
attack in a  bankruptcy  proceeding  could in  certain  circumstances  result in
actions brought by other creditors of the debtor,  shareholders of the debtor or
even the debtor itself in other state or federal proceedings.  As is the case in
a bankruptcy proceeding,  there can be no assurance that such claims will not be
asserted or that the Portfolio will be able successfully to defend against them.
To the extent that the Portfolio  assumes an active role in any legal proceeding
involving  the  debtor,  the  Portfolio  may  be  prevented  from  disposing  of
securities  issued by the debtor due to the Portfolio's  possession of material,
non-public information concerning the debtor.

         Zero Coupon,  Pay-In-Kind Or Deferred  Payment  Securities  (Income and
High Yield  Portfolios).  The High Yield  Portfolio  may invest in zero  coupon,
pay-in-kind  or  deferred  payment   securities.   Zero  coupon  securities  are
securities  that are  sold at a  discount  to par  value  and on which  interest
payments are not made


                                      B-7



during  the life of the  security.  Upon  maturity,  the holder is  entitled  to
receive the par value of the security.  While interest  payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom  income." A Portfolio  accrues income with respect to these  securities
for  federal  income tax and  accounting  purposes  prior to the receipt of cash
payments.  Pay-in-kind  securities are securities that have interest  payable by
delivery of  additional  securities.  Upon  maturity,  the holder is entitled to
receive the aggregate par value of the securities.  Deferred payment  securities
are securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals.  Zero coupon,  pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse  market  conditions  than  comparable  rated  securities  paying cash
interest at regular intervals.

         There  are  certain   risks   related  to  investing  in  zero  coupon,
pay-in-kind and deferred payment securities. These securities generally are more
sensitive  to movements  in interest  rates and are less liquid than  comparably
rated securities paying cash interest at regular intervals.  Consequently,  such
securities may be subject to greater  fluctuation  in value.  During a period of
severe market  conditions,  the market for such  securities may become even less
liquid.  In  addition,  as  these  securities  do not  pay  cash  interest,  the
Portfolio's  investment exposure to these securities and their risks,  including
credit  risk,  will  increase  during  the time these  securities  are held in a
Portfolio's  portfolio.  Further, to maintain its qualification for pass-through
treatment  under the federal tax laws,  each Portfolio is required to distribute
income  to its  shareholders  and,  consequently,  may  have to  dispose  of its
portfolio securities under  disadvantageous  circumstances to generate the cash,
or may  have  to  leverage  itself  by  borrowing  the  cash  to  satisfy  these
distributions,  as they relate to the  distribution of "phantom  income" and the
value of the paid-in-kind interest. The required distributions will result in an
increase in the Portfolios' exposure to such securities.

         Depository  Receipts  and  Depository  Shares  (All  Portfolios).  Each
Portfolio may invest in American  Depository  Receipts ("ADRs") or other similar
securities,  such as American  Depository Shares and Global  Depository  Shares,
convertible  into  securities  of  foreign  issuers.  These  securities  may not
necessarily be  denominated  in the same currency as the  securities  into which
they may be  converted.  ADRs are receipts  typically  issued by a U.S.  bank or
trust company evidencing ownership of the underlying securities. Generally, ADRs
in registered form are designed for use in U.S.  securities markets. As a result
of the absence of established securities markets and publicly-owned corporations
in certain foreign  countries as well as  restrictions  on direct  investment by
foreign entities,  a Portfolio may be able to invest in such countries solely or
primarily through ADRs or similar securities and government  approved investment
vehicles.  The  Adviser  expects  that  the  Portfolio,  to  the  extent  of its
investment  in  ADRs,  will  invest  predominantly  in  ADRs  sponsored  by  the
underlying  issuers.  Each Portfolio,  however,  may invest in unsponsored ADRs.
Issuers of the stock of unsponsored ADRs are not obligated to disclose  material
information in the United States and, therefore,  there may not be a correlation
between such information and the market value of such ADRs.

         Securities of Foreign  Issuers.  (All  Portfolios)  Each  Portfolio may
invest a portion of its assets in the securities of foreign issuers. Each Equity


                                      B-8



Portfolio may invest up to 10% of its total assets in foreign securities and the
High  Yield  Portfolio  may  invest  up to 25% of its total  assets  in  foreign
securities. American and global depository receipts are not included in this 25%
limitation.

         The Portfolio  believes that in many instances such foreign  securities
may provide higher yields than securities of domestic issuers which have similar
maturities and quality.  Many of these  investments  currently  enjoy  increased
liquidity,  although,  under certain market  conditions,  such securities may be
less liquid than the securities of United States corporations, and are certainly
less  liquid  than  securities   issued  or  guaranteed  by  the  United  States
Government, its instrumentalities or agencies.

         Foreign  investment  involves certain risks, which should be considered
carefully  by an investor in the  Portfolio.  These risks  include  political or
economic  instability  in the country of issue,  the  difficulty  of  predicting
international  trade  patterns and the  possibility  of  imposition  of exchange
controls.  Such securities also may be subject to greater  fluctuations in price
than securities issued by United States  corporations or issued or guaranteed by
the United States Government,  its  instrumentalities or agencies.  In addition,
there may be less publicly  available  information  about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting,  auditing and  financial  reporting  standards  comparable  to those
applicable to domestic companies.  There is generally less government regulation
of securities exchanges,  brokers and listed companies abroad than in the United
States,  and, with respect to certain foreign countries,  there is a possibility
of expropriation or confiscatory taxation or diplomatic developments which could
affect  investment  in those  countries.  In the event of a default  of any such
foreign debt  obligations,  it may be more difficult for the Portfolio to obtain
or to  enforce a  judgment  against  the  issuers  of such  securities.  Foreign
currency  denominated  securities  may be affected  favorably or  unfavorably by
changes in currency rates and in exchange control regulations,  and costs may be
incurred in connection with conversions between various  currencies.  It may not
be possible to hedge against the risks of currency fluctuations.

         Emerging  Market  Securities  (Income and High Yield  Portfolios).  The
Income  and High Yield  Portfolios  may each  invest in a limited  extent in the
securities of issuers located in emerging  market  countries.  "Emerging  market
countries" are countries that are considered to be emerging or developing by the
World Bank, the International Finance Corporation, or the United Nations and its
authorities. A company is considered to be an emerging market company if (i) its
securities are  principally  traded in the capital markets of an emerging market
country;  (ii) it derives at least 50% of its total  revenue  from either  goods
produced or services rendered in emerging market countries or from sales made in
emerging


                                      B-9



market  countries,  regardless  of where the  securities  of such  companies are
principally traded;  (iii) it maintains 50% or more of its assets in one or more
emerging market  countries;  or (iv) it is organized under the laws of, or has a
principal office in, an emerging market country.

         The securities  markets of certain emerging market countries are marked
by a high  concentration of market  capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration  of ownership of such securities by a limited number of investors.
The markets for  securities  in certain  emerging  market  countries  are in the
earliest  stages of their  development.  Even the markets for relatively  widely
traded  securities in emerging markets may not be able to absorb,  without price
disruptions,  a  significant  increase  in  trading  volume  or trades of a size
customarily  undertaken by institutional  investors in the securities markets of
developed  countries.  Additionally,  market making and arbitrage activities are
generally  less  extensive in such  markets,  which may  contribute to increased
volatility  and reduced  liquidity  of such  markets.  The limited  liquidity of
emerging markets may also affect the Portfolio's ability to accurately value its
portfolio  securities  or to acquire or dispose of  securities  at the price and
time it wishes to do so or in order to meet redemption requests.

         Transaction costs,  including brokerage commissions or dealer mark-ups,
in emerging  market  countries may be higher than in the United States and other
developed  securities  markets.  In addition,  existing laws and regulations are
often  inconsistently  applied.  As legal systems in emerging  market  countries
develop,  foreign investors may be adversely affected by new or amended laws and
regulations.  In circumstances where adequate laws exist, it may not be possible
to obtain swift and equitable enforcement of the law.

         Political and economic structures in many emerging market countries may
be undergoing  significant evolution and rapid development,  and emerging market
countries may lack the social,  political and economic stability  characteristic
of more developed  countries.  Certain emerging market countries may have in the
past failed to recognize private property rights and have at times  nationalized
or  expropriated  the  assets  of  private  companies.  As a  result,  the risks
described  above,  including the risks of  nationalization  or  expropriation of
assets, may be heightened. 

         Certain emerging market countries require  governmental  approval prior
to investments by foreign persons or limit investment by foreign persons to only
a specified percentage of an issuer's outstanding securities or a specific class
of securities  which may have less  advantageous  terms  (including  price) than
securities of the company available for purchase by nationals.  In addition, the
repatriation of both investment  income and capital from several of the emerging
market  countries  is  subject  to  restrictions  such as the need  for  certain
governmental   consents.   Even  where  there  is  no  outright  restriction  on
repatriation  of capital,  the  mechanics  of  repatriation  may affect  certain
aspects of the  operation  of the  Portfolios.  A  Portfolio  may be required to
establish  special custodial or other  arrangements  before investing in certain
emerging market countries.

         Emerging  market  countries  may be  subject  to a  greater  degree  of
economic,  political  and  social  instability  than is the  case in the  United
States,  Japan and most Western European countries.  Such instability may result
from,  among other things,  the  following:  (i)  authoritarian  governments  or
military  involvement  in political  and  economic  decision  making,  including
changes or attempted changes in governments through  extra-constitutional means;
(ii) popular unrest associated with demands for improved political,  economic or
social  conditions;  (iii) internal  insurgencies;  (iv) hostile  relations with
neighboring  countries;  and (v) ethnic,  religious and racial  disaffection  or
conflict.  Such  economic,  political and social  instability  could disrupt the
principal  financial  markets in which the  Portfolios  may invest and adversely
affect the value of the Portfolios' assets.


                                      B-10



         The economies of emerging market countries may differ  unfavorably from
the U.S. economy in such respects as growth of gross domestic  product,  rate of
inflation,  capital  reinvestment,  resources,  self-sufficiency  and balance of
payments.  Many emerging  market  countries  have  experienced  in the past, and
continue to experience,  high rates of inflation. In certain countries inflation
has at  times  accelerated  rapidly  to  hyperinflationary  levels,  creating  a
negative  interest rate environment and sharply eroding the value of outstanding
financial  assets in those  countries.  The  economies of many  emerging  market
countries are heavily  dependent upon  international  trade and are  accordingly
affected by  protective  trade  barriers  and the economic  conditions  of their
trading partners.  In addition,  the economies of some emerging market countries
are vulnerable to weakness in world prices for their commodity exports.

         A  Portfolio's  income and, in some cases,  capital  gains from foreign
stocks and securities  will be subject to applicable  taxation in certain of the
countries in which it invests,  and treaties between the U.S. and such countries
may not be available in some cases to reduce the otherwise applicable tax rates.

         Foreign   markets  also  have   different   clearance  and   settlement
procedures,  and in certain markets there have been times when  settlements have
been unable to keep pace with the volume of securities  transactions,  making it
difficult to conduct such  transactions.  Such delays in settlement could result
in temporary  periods when a portion of the assets of a Portfolio is  uninvested
and no return is earned on such  assets.  The  inability  of a Portfolio to make
intended  security  purchases or sales due to settlement  problems  could result
either in losses to the  Portfolio  due to  subsequent  declines in value of the
portfolio  securities  or, if the  Portfolio has entered into a contract to sell
the securities, could result in possible liability to the purchaser.

         Brady  Bonds  (Income and High Yield  Portfolios).  Each  Portfolio  is
permitted to invest in debt  obligations  commonly  known as "Brady Bonds" which
are created  through the exchange of existing  commercial  bank loans to foreign
entities for new obligations in connection with debt restructurings under a plan
introduced  by former U.S.  Secretary  of the  Treasury,  Nicholas F. Brady (the
Brady Plan).  Brady Bonds have been issued in connection with the  restructuring
of the bank loans,  for example,  of the  governments  of Mexico,  Venezuela and
Argentina.

         Brady Bonds have been issued only recently,  and,  accordingly,  do not
have a long payment history.  They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.

         Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally  collateralized in full
as to principal due at maturity by U.S.  Treasury zero coupon  obligations which
have the same  maturity  as the Brady  Bonds.  Interest  payments on these Brady
Bonds generally are  collateralized  by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling  interest
payments based on the  applicable  interest rate at that time and is adjusted at
regular  intervals  thereafter.  Certain  Brady  Bonds  are  entitled  to "value
recovery  payments"  in  certain  circumstances,   which  in  effect  constitute


                                      B-11



supplemental interest payments but generally are not collateralized. Brady Bonds
are  often  viewed  as  having  three  or  four  valuation  components:  (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments;  (iii) the uncollateralized  interest payments;  and (iv) any
uncollateralized  repayment  of principal  at maturity  (these  uncollateralized
amounts  constitute the "residual risk"). In the event of a default with respect
to  collateralized  Brady Bonds as a result of which the payment  obligations of
the issuer are accelerated,  the U.S.  Treasury zero coupon  obligations held as
collateral  for the payment of principal  will not be  distributed to investors,
nor will such obligations be sold and the proceeds  distributed.  The collateral
will be held by the collateral agent to the scheduled  maturity of the defaulted
Brady  Bonds,  which will  continue  to be  outstanding,  at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course.  In addition,  in light of the
residual risk of Brady Bonds and, among other  factors,  the history of defaults
with  respect  to  commercial  bank  loans by public  and  private  entities  of
countries  issuing Brady Bonds,  investments  in Brady Bonds are to be viewed as
speculative.

         Commercial  Paper  and Other  Short-Term  Corporate  Obligations.  (All
Portfolios)  Variable  rate demand notes include  variable  amount master demand
notes,  which are obligations  that permit each Portfolio to invest  fluctuating
amounts at varying rates of interest pursuant to direct  arrangements  between a
Portfolio, as lender, and the borrower.  These notes permit daily changes in the
amounts  borrowed.  As mutually  agreed  between the  parties,  a Portfolio  may
increase the amount  under the notes at any time up to the full amount  provided
by the note agreement,  or decrease the amount, and the borrower may repay up to
the full amount of the note  without  penalty.  Because  these  obligations  are
direct  lending  arrangements  between  the lender and the  borrower,  it is not
contemplated that such instruments generally will be traded, and there generally
is no  established  secondary  market for these  obligations,  although they are
redeemable at face value, plus accrued interest, at any time. Accordingly, where
these  obligations  are not secured by letters of credit or other credit support
arrangements,  a Portfolio's  right to redeem is dependent on the ability of the
borrower to pay  principal and interest on demand.  In connection  with floating
and variable rate demand obligations,  BSAM will consider,  on an ongoing basis,
earning power,  cash flow and other  liquidity  ratios of the borrower,  and the
borrower's  ability to pay  principal and interest on demand.  Such  obligations
frequently are not rated by credit rating  agencies,  and a Portfolio may invest
in them only if at the time of an investment the borrower meets the criteria set
forth in the Portfolio's Prospectus for other commercial paper issuers.

         Illiquid Securities. (All Portfolios) Each Portfolio may hold up to 15%
of its net assets in repurchase  agreements  that have a maturity of longer than
seven  days or in  other  illiquid  securities,  including  securities  that are
illiquid by virtue of the absence of a readily  available  market (either within
or outside of the United States) or legal or contractual restrictions on resale.
Historically,   illiquid   securities  have  included   securities   subject  to
contractual  or  legal  restrictions  on  resale  because  they  have  not  been
registered under the Securities Act of 1933, as amended (the "Securities  Act"),
securities which are otherwise not readily marketable and repurchase  agreements
having a maturity  of longer  than seven  days.  Securities  which have not been
registered  under the  Securities  Act are referred to as private  placements or
restricted  securities  and are  purchased  directly  from the  issuer


                                      B-12



or in the secondary  market.  Mutual funds do not  typically  hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and  uncertainty  in valuation.  Limitations  on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to  dispose  of  restricted  or other  illiquid  securities
promptly  or at  reasonable  prices  and  might  thereby  experience  difficulty
satisfying  redemptions  within  seven  days.  A mutual  fund might also have to
register such  restricted  securities  in order to dispose of them  resulting in
additional  expense and delay.  Adverse  market  conditions  could impede such a
public offering of securities.

         In recent years,  however, a large  institutional  market has developed
for  certain  securities  that  are not  registered  under  the  Securities  Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities,  convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient  institutional market in which the unregistered
security can be readily  resold or on an issuer's  ability to honor a demand for
repayment.  The fact that there are contractual or legal  restrictions on resale
to the general  public or to certain  institutions  may not be indicative of the
liquidity of such investments.

         Rule 144A under the Securities  Act allows for a broader  institutional
trading market for securities  otherwise subject to restriction on resale to the
general  public.  Rule 144A  establishes a "safe  harbor" from the  registration
requirements  of the  Securities  Act  for  resales  of  certain  securities  to
qualified  institutional  buyers.  BSAM  anticipates that the market for certain
restricted  securities  such  as  institutional  commercial  paper  and  foreign
securities  will  expand  further  as  a  result  of  this  regulation  and  the
development  of automated  systems for the trading,  clearance and settlement of
unregistered  securities  of domestic  and foreign  issuers,  such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

         Restricted  securities  eligible for resale pursuant to Rule 144A under
the Securities Act and commercial  paper for which there is a readily  available
market will not be deemed to be  illiquid.  BSAM will  monitor the  liquidity of
such restricted  securities subject to the supervision of the Board of Trustees.
In reaching liquidity decisions,  BSAM will consider,  inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers  wishing to  purchase  or sell the  security  and the number of other
potential purchasers;  (3) dealer undertakings to make a market in the security;
and (4) the  nature of the  security  and the nature of the  marketplace  trades
(e.g.,  the time  needed to dispose of the  security,  the method of  soliciting
offers and the mechanics of the transfer).  In addition, in order for commercial
paper that is issued in reliance  on Section  4(2) of the  Securities  Act to be
considered  liquid,  (i) it  must be  rated  in one of the  two  highest  rating
categories   by  at  least  two   nationally   recognized   statistical   rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated,  be of comparable  quality in the view of BSAM; and (ii) it must
not be  "traded  flat"  (i.e.,  without  accrued  interest)  or in default as to
principal or  interest.  Repurchase  agreements  subject to demand are deemed to
have a maturity equal to the notice period.

         The  staff of the  Securities  and  Exchange  Commission  has taken the
position that  purchased  over-the-counter  (OTC) options and the assets used as
"cover" for written OTC options are illiquid securities unless the Portfolio and
the


                                      B-13



counterparty have provided for the Portfolio,  at the Portfolio's  election,  to
unwind the OTC option.  The exercise of such an option would ordinarily  involve
the payment by the Portfolio of an amount designed to reflect the counterparty's
economic loss from an early  termination,  but does allow the Portfolio to treat
the securities used as "cover" as liquid.

         Ratings of Debt. (Income  Portfolio)  Subsequent to its purchase by the
Income  Portfolio,  a debt  issue  may  cease to be rated or its  rating  may be
reduced below the minimum required for purchase by the Income Portfolio. Neither
event will require the sale of such securities by the Income Portfolio, but BSAM
will  consider such event in  determining  whether the Income  Portfolio  should
continue to hold the securities. To the extent that the ratings given by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, a division
of The  McGraw-Hill  Companies,  Inc.  ("S&P"),  Fitch Investors  Service,  L.P.
("Fitch") or Duff & Phelps Credit Rating Co.  ("Duff") may change as a result of
changes in such organizations or their rating systems, the Income Portfolio will
attempt to use comparable ratings as standards for its investments in accordance
with the investment  policies  contained in the Portfolio's  Prospectus and this
Statement of Additional Information.

Management Policies

         The Portfolios may engage in the following  practices in furtherance of
their objectives.

         Options  Transactions.  (All Portfolios).  Each Portfolio may engage in
options transactions, such as purchasing or writing covered call or put options.
A Portfolio  may purchase  put and call  options and write  covered put and call
options  on debt and  equity  securities,  financial  indices  (including  stock
indices),  U.S. and foreign  government debt securities and foreign  currencies.
These may include options traded on U.S. or foreign exchanges and options traded
on U.S. or foreign  over-the-counter  markets  ("OTC  options"),  including  OTC
options  with primary  U.S.  government  securities  dealers  recognized  by the
Federal Reserve Bank of New York.

         The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
"exercise  price" or "strike  price").  By writing a call  option,  a  Portfolio
becomes obligated during the term of the option, upon exercise of the option, to
deliver the underlying securities or a specified amount of cash to the purchaser
against receipt of the exercise price.  When the Portfolio writes a call option,
the  Portfolio  loses the  potential  for gain on the  underlying  securities in
excess of the exercise  price of the option during the period that the option is
open.

         The purchaser of a put option has the right,  for a specified period of
time, to sell the  securities  subject to the option to the writer of the put at
the specified  exercise  price. By writing a put option,  the Portfolio  becomes
obligated  during  the term of the  option,  upon  exercise  of the  option,  to
purchase  the  securities  underlying  the  option at the  exercise  price.  The
Portfolio might,  therefore,  be obligated to purchase the underlying securities
for more than their current market price.


                                      B-14



         The writer of an option  retains  the amount of the  premium,  although
this amount may be offset or exceeded,  in the case of a covered call option, by
a decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.

         The principal  reason for writing covered call options,  which are call
options  with  respect to which a  Portfolio  owns the  underlying  security  or
securities,  is to realize,  through the receipt of premiums,  a greater  return
than  would be  realized  on a  Portfolio's  securities  alone.  In return for a
premium,  the  writer  of a  covered  call  option  forfeits  the  right  to any
appreciation in the value of the underlying  security above the strike price for
the  life  of the  option  (or  until  a  closing  purchase  transaction  can be
effected).  Nevertheless,  the call writer  retains the risk of a decline in the
price of the underlying  security.  Similarly,  the principal reason for writing
covered put options is to realize income in the form of premiums.  The writer of
a  covered  put  option  accepts  the  risk of a  decline  in the  price  of the
underlying  security.  The size of the premiums that a Portfolio may receive may
be  adversely  affected  as  new  or  existing  institutions,   including  other
investment companies, engage in or increase their option-writing activities.

         A Portfolio may wish to protect certain portfolio  securities against a
decline  in  market  value  at a time  when  put  options  on  those  particular
securities are not available for purchase.  A Portfolio may therefore purchase a
put  option on other  carefully  selected  securities,  the values of which BSAM
expects  will have a high degree of positive  correlation  to the values of such
portfolio securities. If BSAM's judgment is correct, changes in the value of the
put  options  should  generally  offset  changes  in the value of the  portfolio
securities  being hedged.  If BSAM'S  judgment is not correct,  the value of the
securities  underlying  the put  option  may  decrease  less than the value of a
Portfolio's  investments  and therefore the put option may not provide  complete
protection  against a decline in the value of the Portfolio's  investments below
the level sought to be protected by the put option.

         A Portfolio may similarly  wish to hedge  against  appreciation  in the
value of  securities  that it intends to acquire at a time when call  options on
such  securities are not available.  A Portfolio may,  therefore,  purchase call
options on other carefully selected  securities the values of which BSAM expects
will have a high degree of positive  correlation to the values of the securities
that the Portfolio intends to acquire.  In such circumstances the Portfolio will
be subject to risks  analogous to those  summarized  above in the event that the
correlation  between the value of call options so purchased and the value of the
securities  intended  to be  acquired  by  the  Portfolio  is not  as  close  as
anticipated  and  the  value  of the  securities  underlying  the  call  options
increases less than the value of the securities to be acquired by the Portfolio.

         A  Portfolio  may  write  options  on  securities  in  connection  with
buy-and-write  transactions;  that is, the Portfolio may purchase a security and
concurrently  write a call option against that  security.  If the call option is
exercised,  the  Portfolio's  maximum  gain will be the premium it received  for
writing the option,  adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the option.
If the  option  is not  exercised  and  the  price  of the  underlying  security
declines,  the amount of the decline will be offset in part, or entirely, by the
premium received.


                                      B-15



         The  exercise  price of a call  option  may be below  ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of the
underlying   security  at  the  time  the  option  is   written.   Buy-and-write
transactions  using  in-the-money  call  options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period.  Buy-and-write  transactions  using  at-the-money call
options  may be used  when it is  expected  that  the  price  of the  underlying
security will remain fixed or advance  moderately  during the option  period.  A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected  that the premium  received from writing the call option plus the
appreciation  in the market price of the underlying  security up to the exercise
price  will be  greater  than the  appreciation  in the price of the  underlying
security  alone.  If the call option is  exercised  in such a  transaction,  the
Portfolio's  maximum  gain will be the  premium  received  by it for writing the
option,  adjusted upwards or downwards by the difference between the Portfolio's
purchase  price of the  security and the  exercise  price of the option.  If the
option is not exercised and the price of the underlying  security declines,  the
amount of the  decline  will be  offset in part,  or  entirely,  by the  premium
received.

         Options written by the Portfolios ordinarily will have expiration dates
between one and nine months from the date  written.  The  exercise  price of the
options  may be below,  equal to or above the  market  values of the  underlying
securities  at the time the options are  written.  In the case of call  options,
these  exercise  prices are referred to as  "in-the-money,"  "at-the-money"  and
"out-of-the-money," respectively. Each Portfolio may write (a) in-the-money call
options when BSAM expects that the price of the underlying  security will remain
stable or decline  moderately  during the option period,  (b) at-the-money  call
options when BSAM expects that the price of the underlying  security will remain
stable or advance  moderately during the option period and (c)  out-of-the-money
call options when BSAM expects that the premiums  received from writing the call
option plus the  appreciation  in market price of the underlying  security up to
the  exercise  price will be greater than the  appreciation  in the price of the
underlying  security alone. In these  circumstances,  if the market price of the
underlying  security  declines and the security is sold at this lower price, the
amount of any  realized  loss will be  offset  wholly or in part by the  premium
received.  Out-of-the-money,  at-the-money  and  in-the-money  put options  (the
reverse of call  options as to the relation of exercise  price to market  price)
may be utilized in the same market  environments that such call options are used
in equivalent transactions.

         So  long  as a  Portfolio's  obligation  as  the  writer  of an  option
continues,   such   Portfolio  may  be  assigned  an  exercise   notice  by  the
broker-dealer  through  which the option was sold,  requiring  the  Portfolio to
deliver,  in the case of a call,  or take delivery of, in the case of a put, the
underlying  security  against  payment of the exercise  price.  This  obligation
terminates  when the option  expires or a Portfolio  effects a closing  purchase
transaction.  A Portfolio  can no longer effect a closing  purchase  transaction
with respect to an option once it has been assigned an exercise notice.

         While it may choose to do  otherwise,  each  Portfolio  generally  will
purchase or write only those options for which BSAM believes  there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that  sufficient  trading  interest  to  create a liquid  secondary  market


                                      B-16



on a  securities  exchange  will  exist  for  any  particular  option  or at any
particular  time,  and for some options no such  secondary  market may exist.  A
liquid  secondary  market  in an option  may  cease to exist  for a  variety  of
reasons.  In the past, for example,  higher than anticipated trading activity or
order flow, or other unforeseen  events, at times have rendered certain clearing
facilities  inadequate and resulted in the  institution  of special  procedures,
such as trading  rotations,  restrictions  on certain types of orders or trading
halts or  suspensions  in one or more  options.  There can be no assurance  that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing  transactions in particular  options. If as a covered call option
writer a  Portfolio  is unable to effect a  closing  purchase  transaction  in a
secondary market, it will not be able to sell the underlying  security until the
option  expires or it  delivers  the  underlying  security  upon  exercise or it
otherwise covers its position.

         Prior to being notified of the exercise of the option, the writer of an
exchange-traded  option that wishes to  terminate  its  obligation  may effect a
"closing  purchase  transaction"  by buying an option of the same  series as the
option previously written.  (Options of the same series are options with respect
to the same  underlying  security,  having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's  position will be
canceled  by the  exchange's  affiliated  clearing  organization.  Likewise,  an
investor who is the holder of an exchange-traded option may liquidate a position
by  effecting  a  "closing  sale  transaction"  by selling an option of the same
series as the option previously  purchased.  There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.

         Exchange-traded   options   are  issued  by  a  clearing   organization
affiliated  with the  exchange on which the option is listed  which,  in effect,
gives its guarantee to every  exchange-traded  option transaction.  In contrast,
OTC  options are  contracts  between a Portfolio  and its  contra-party  with no
clearing organization guarantee. Thus, when a Portfolio purchases an OTC option,
it relies on the dealer  from which it has  purchased  the OTC option to make or
take delivery of the securities underlying the option.  Failure by the dealer to
do so would result in the loss of the premium  paid by the  Portfolio as well as
the loss of the expected benefit of the transaction.

         When a Portfolio  writes an OTC option,  it  generally  will be able to
close out the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Portfolio originally wrote the
OTC option.  While a Portfolio  will enter into OTC  options  only with  dealers
which agree to, and which are expected to be capable of,  entering  into closing
transactions  with the  Portfolio,  there can be no assurance that the Portfolio
will be able to liquidate  an OTC option at a favorable  price at any time prior
to  expiration.  Until  a  Portfolio  is  able  to  effect  a  closing  purchase
transaction in a covered OTC call option the Portfolio has written,  it will not
be able to  liquidate  securities  used as cover until the option  expires or is
exercised or different cover is  substituted.  In the event of insolvency of the
contra-party,  the  Portfolio  may be unable to  liquidate  an OTC  option.  See
"Illiquid Securities" below.

         OTC  options  purchased  by a  Portfolio  will be treated  as  illiquid
securities subject to any applicable  limitation on such securities.  Similarly,
the assets


                                      B-17



used to "cover" OTC options written by the Portfolio will be treated as illiquid
unless  the OTC  options  are  sold to  qualified  dealers  who  agree  that the
Portfolio  may  repurchase  any OTC options it writes for a maximum  price to be
calculated  by a formula set forth in the option  Agreement.  The "cover" for an
OTC option written subject to this procedure  would be considered  illiquid only
to the extent that the maximum  repurchase  price under the formula  exceeds the
intrinsic value of the option. See "Illiquid Securities" below.

         A Portfolio may write only "covered"  options.  This means that so long
as the  Portfolio is  obligated as the writer of a call option,  it will own the
underlying  securities  subject to the option or an option to purchase  the same
underlying  securities,  having  an  exercise  price  equal to or less  than the
exercise price of the "covered"  option, or will establish and maintain with its
custodian  for the term of the option a segregated  account  consisting of cash,
U.S.  Government  securities,  equity  securities or other liquid,  unencumbered
assets,  marked-to-market  daily,  having a value  equal to or greater  than the
exercise  price  of the  option.  In  the  case  of a  straddle  written  by the
Portfolio,  the  amount  maintained  in the  segregated  account  will equal the
amount, if any, by which the put is "in-the-money."

         Stock Index Options.  (Equity Portfolios and High Yield Portfolio) Each
Equity  Portfolio  and the High Yield  Portfolio  may purchase and write put and
call options on stock indexes listed on U.S. or foreign securities  exchanges or
traded in the over-the-counter  market. A stock index fluctuates with changes in
the market values of the stocks included in the index.

         Options on stock  indexes are  similar to options on stock  except that
(a) the expiration  cycles of stock index options are generally  monthly,  while
those  of  stock  options  are  currently   quarterly,   and  (b)  the  delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed  exercise  price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise,  multiplied  by (ii) a fixed "index  multiplier."
Receipt of this cash amount  will  depend  upon the  closing  level of the stock
index upon which the option is based being  greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. The amount
of cash received will be equal to such  difference  between the closing price of
the index and the  exercise  price of the option  expressed  in dollars  times a
specified  multiple.  The writer of the option is  obligated,  in return for the
premium  received,  to make  delivery of this amount.  The writer may offset its
position in stock index  options  prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.

         When a Portfolio  writes an option on a  securities  index,  it will be
required to deposit with its custodian, and mark-to-market,  eligible securities
equal  in  value to 100% of the  exercise  price  in the  case of a put,  or the
contract  value in the case of a call. In addition,  where a Portfolio  writes a
call option on a securities  index at a time when the contract value exceeds the
exercise  price,  the Portfolio  will  segregate and  mark-to-market,  until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.


                                      B-18



         Options on a  securities  index  involve  risks  similar to those risks
relating to transactions in financial futures contracts  described below.  Also,
an option  purchased  by a  Portfolio  may expire  worthless,  in which case the
Portfolio would lose the premium paid therefor.

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

         Reasons  for the  absence of a liquid  secondary  market on an exchange
include the following: (a) insufficient trading interest in certain options; (b)
restrictions  on  transactions  imposed  by  an  exchange;  (c)  trading  halts,
suspensions or other restrictions  imposed with respect to particular classes or
series of options  or  underlying  securities;  (d)  interruption  of the normal
operations on an exchange;  (e)  inadequacy of the  facilities of an exchange or
clearinghouse,  such as The Options Clearing  Corporation (the "O.C.") to handle
current  trading  volume;  or  (f) a  decision  by  one  or  more  exchanges  to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist,  although outstanding options on that exchange
that had been  issued by the O.C. as a result of trades on that  exchange  would
generally continue to be exercisable in accordance with their terms.

         In the event of the  bankruptcy  of a broker  through which a Portfolio
engages in options  transactions,  the Portfolio could experience  delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin  deposits with the broker.  Similarly,
in the event of the  bankruptcy  of the writer of an OTC option  purchased  by a
Portfolio,  the Portfolio could experience a loss of all or part of the value of
the option.  Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by BSAM.

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

         Risks of Options on Foreign  Currencies.  (All  Portfolios)  Options on
foreign  currencies  involve  the  currencies  of  two  nations  and  therefore,
developments in either or both countries affect the values of options on foreign
currencies.  Risks include  government  actions affecting currency valuation and
the


                                      B-19



movements of  currencies  from one country to another.  The quantity of currency
underlying  option  contracts  represent  odd  lots  in a  market  dominated  by
transactions between banks; this can mean extra transaction costs upon exercise.
Option markets may be closed while  round-the-clock  interbank  currency markets
are open, and this can create price and rate discrepancies.

         Futures  Contracts and Options on Futures  Contracts.  (All Portfolios)
Each Portfolio may trade futures  contracts and options on futures  contracts in
U.S. domestic markets,  such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange,  or, to the extent permitted
under  applicable law, on exchanges  located outside the United States,  such as
the London  International  Financial  Futures  Exchange  and the Sydney  Futures
Exchange  Limited.  Foreign  markets  may offer  advantages  such as  trading in
commodities  that are not  currently  traded in the United  States or  arbitrage
possibilities not available in the United States.

         A "purchase" of a futures contract (or a "long" futures position) means
the  assumption of a contractual  obligation to acquire a specified  quantity of
the  securities  underlying  the  contract at a  specified  price at a specified
future date.  A "sale" of a futures  contract  (or a "short"  futures  position)
means the assumption of a contractual obligation to deliver a specified quantity
of the securities  underlying  the contract at a specified  price at a specified
future date.

         Initially,  when purchasing or selling futures  contracts,  a Portfolio
will be required to deposit with the Fund's  custodian  in the broker's  name an
amount of cash or cash equivalents up to approximately 5% to 10% of the contract
amount.  This  amount is subject to change by the  exchange or board of trade on
which the contract is traded and members of such  exchange or board of trade may
impose their own higher  requirements.  This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio  upon  termination  of the futures  position,
assuming all contractual  obligations have been satisfied.  Subsequent payments,
known as  "variation  margin,"  to and from the broker will be made daily as the
price of the index or securities  underlying  the futures  contract  fluctuates,
making  the  long and  short  positions  in the  futures  contract  more or less
valuable,  a  process  known as  "marking-to-market."  At any time  prior to the
expiration of a futures contract,  the Portfolio may elect to close the position
by taking an opposite position, at the then prevailing price, which will operate
to terminate the Portfolio's existing position in the contract.

         Some futures  contracts by their terms may call for the actual delivery
or  acquisition  of the  underlying  assets and other futures  contracts must be
"cash settled." In most cases the contractual  obligation is extinguished before
the  expiration of the contract by buying (to offset an earlier sale) or selling
(to offset an earlier  purchase)  an  identical  futures  contract  calling  for
delivery  or  acquisition  in the  same  month.  The  purchase  (or  sale) of an
offsetting futures contract is referred to as a "closing transaction."

         Although each Portfolio  intends to purchase or sell futures  contracts
only if there is an active market for such contracts,  no assurance can be given
that a liquid market will exist for any  particular  contract at any  particular
time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day.


                                      B-20



         Once the daily  limit has been  reached in a  particular  contract,  no
trades  may be made that day at a price  beyond  that  limit or  trading  may be
suspended for specified  periods during the trading day. Futures contract prices
could move to the limit for several  consecutive  trading days with little or no
trading,   thereby  preventing  prompt  liquidation  of  futures  positions  and
potentially subjecting a Portfolio to substantial losses. If it is not possible,
or a Portfolio  determines  not, to close a futures  position in anticipation of
adverse  price  movements,  the  Portfolio  will be  required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the  Portfolio  being  hedged,  if any,  may offset  partially or
completely  losses on the futures contract.  However,  no assurance can be given
that the price of the  securities  being  hedged will  correlate  with the price
movements  in a futures  contract  and thus  provide  an offset to losses on the
futures contract.

         In  addition,  to the  extent a  Portfolio  is  engaging  in a  futures
transaction  as a hedging  device,  due to the risk of an imperfect  correlation
between  securities  owned by the  Portfolio  that are the  subject of a hedging
transaction and the futures  contract used as a hedging  device,  it is possible
that the hedge will not be fully  effective in that, for example,  losses on the
portfolio securities may be in excess of gains on the futures contract or losses
on the futures  contract may be in excess of gains on the  portfolio  securities
that were the subject of the hedge. In futures  contracts based on indexes,  the
risk of imperfect  correlation  increases as the  composition  of a  Portfolio's
investments varies from the composition of the index. In an effort to compensate
for the imperfect  correlation of movements in the price of the securities being
hedged and movements in the price of futures  contracts,  a Portfolio may buy or
sell  futures  contracts  in a greater or lesser  dollar  amount than the dollar
amount of the  securities  being  hedged  if the  historical  volatility  of the
futures  contract  has been less or greater  than that of the  securities.  Such
"over  hedging"  or "under  hedging"  may  adversely  affect a  Portfolio's  net
investment  results if market movements are not as anticipated when the hedge is
established.

         Upon  exercise  of an option on a futures  contract,  the writer of the
option  will  deliver to the holder of the option the futures  position  and the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise  price of the option
on the futures  contract.  The potential loss related to the purchase of options
on  futures  contracts  is  limited to the  premium  paid for the  option  (plus
transaction  costs).  Because  the  value of the  option is fixed at the time of
sale,  there are no daily cash  payments to reflect  changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of a Portfolio.

         A  Portfolio's  ability to establish and close out positions in futures
contracts and options on futures contracts would be impacted by the liquidity of
these markets.  Although a Portfolio generally would purchase or sell only those
futures  contracts and options  thereon for which there  appeared to be a liquid
market, there is no assurance that a liquid market on an exchange will exist for
any particular  futures  contract or option at any particular time. In the event
no liquid market exists for a particular  futures  contract or option thereon in
which a Portfolio  maintains  a  position,  it would not be possible to


                                      B-21



effect a closing  transaction  in that  contract  or to do so at a  satisfactory
price and the  Portfolio  would have to either make or take  delivery  under the
futures  contract  or, in the case of a written  call  option,  wait to sell the
underlying securities until the option expired or was exercised, or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures  contract  which the  Portfolio had written and which the
Portfolio  was unable to close,  the  Portfolio  would be  required  to maintain
margin deposits on the futures  contract or option and to make variation  margin
payments until the contract is closed.

         Risks inherent in the use of these strategies include (1) dependence on
BSAM's  ability to predict  correctly  movements  in the  direction  of interest
rates,  securities  prices and markets;  (2) imperfect  correlation  between the
price of futures contracts and options thereon and movement in the prices of the
securities  being  hedged;  (3) the fact  that the  skills  needed  to use these
strategies are different from those needed to select portfolio  securities;  (4)
the possible absence of a liquid secondary market for any particular  instrument
at any time; (5) the possible need to defer closing out certain hedged positions
to  avoid  adverse  tax  consequences;  and (6) the  possible  inability  of the
Portfolio  to sell a  portfolio  security  at a time  that  otherwise  would  be
favorable for it to do so. In the event it did sell the security and  eliminated
its  "cover," it would have to replace its "cover" with an  appropriate  futures
contract or option or segregate securities with the required value, as described
below under  "Limitations  on the  Purchase  and Sale of Futures  Contracts  and
Related Options--Segregation Requirements."

         Although  futures prices  themselves have the potential to be extremely
volatile,  in the case of any strategy involving interest rate futures contracts
and  options  thereon  when BSAM's  expectations  are not met,  assuming  proper
adherence to the  segregation  requirement,  the  volatility of a Portfolio as a
whole  should be no greater  than if the same  strategy  had been pursued in the
cash market.

         Exchanges on which futures and related  options trade may impose limits
on the  positions  that a  Portfolio  may  take  in  certain  circumstances.  In
addition,  the hours of trading  of  financial  futures  contracts  and  options
thereon may not conform to the hours  during which the  Portfolio  may trade the
underlying  securities.  To the  extent the  futures  markets  close  before the
securities  markets,  significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.

         Pursuant to the requirements of the Commodity  Exchange Act, as amended
(the "Commodity  Exchange Act"), all futures  contracts and options thereon must
be traded on an exchange.  Since a clearing corporation  effectively acts as the
counterparty  on every futures  contract and option  thereon,  the counter party
risk  depends  on  the  strength  of  the  clearing  or  settlement  corporation
associated  with the exchange.  Additionally,  although the exchanges  provide a
means  of  closing  out a  position  previously  established,  there  can  be no
assurance  that a liquid  market  will  exist  for a  particular  contract  at a
particular  time.  In the case of options on futures,  if such a market does not
exist, a Portfolio, as the holder of an option on futures contracts,  would have
to  exercise  the  option  and  comply  with  the  margin  requirements  for the
underlying futures contract to utilize any profit, and if the Portfolio were the
writer of the  option,  its  obligation  would not  terminate  until the  option
expired or the Portfolio was assigned an exercise notice.


                                      B-22



Limitations on the Purchase and Sale of Futures Contracts and Related Options.

         CFTC Limits.  In accordance with Commodity  Futures Trading  Commission
(CFTC) regulations, the Portfolios are not permitted to purchase or sell futures
contracts or options thereon for return enhancement or risk management  purposes
if immediately  thereafter the sum of the amounts of initial margin  deposits on
the Portfolio's existing futures and premiums paid for options on futures exceed
5% of the  liquidation  value of such  Portfolio's  total  assets  (the "5% CFTC
limit").  This  restriction  does not apply to the  purchase and sale of futures
contracts and options thereon for bona fide hedging purposes.

         Segregation Requirements. To the extent a Portfolio enters into futures
contracts,  it is required by the Securities and Exchange Commission to maintain
a segregated asset account with its custodian (or a futures commission merchant)
sufficient  to cover the  Portfolio's  obligations  with respect to such futures
contracts,  which will consist of cash,  U.S.  government  securities,  or other
liquid,  unencumbered assets  marked-to-market  daily, in an amount equal to the
difference  between the fluctuating  market value of such futures  contracts and
the aggregate  value of the initial  margin  deposited by the Portfolio with the
custodian  (or a futures  commission  merchant)  with  respect  to such  futures
contracts.  Offsetting the contract by another identical contract eliminates the
segregation requirement.

         With  respect  to  options  on  futures,   there  are  no   segregation
requirements  for options that are purchased and owned by a Portfolio.  However,
written options,  since they involve potential  obligations of a Portfolio,  may
require  segregation  of  Portfolio  assets if the options are not  "covered" as
described  under "Options on Futures  Contracts."  If a Portfolio  writes a call
option that is not  "covered," it must segregate and maintain with the custodian
(or a futures  commission  merchant)  for the term of the option  cash or liquid
securities  equal  to the  fluctuating  value  of  the  optioned  futures.  If a
Portfolio writes a put option that is not "covered," the segregated amount would
have to be at all times  equal in value to the  exercise  price of the put (less
any initial  margin  deposited by the Portfolio  with the custodian or a futures
commission merchant) with respect to such option.

         Uses of Interest Rate Futures Contracts. Futures contracts will be used
for bona fide hedging, risk management and return enhancement purposes.

         Position  Hedging.   A  Portfolio  might  sell  interest  rate  futures
contracts to protect the Portfolio  against a rise in interest rates which would
be expected to decrease the value of debt securities  which the Portfolio holds.
This would be considered a bona fide hedge and, therefore, is not subject to the
5% CFTC limit.  For example,  if interest  rates are  expected to increase,  the
Portfolio might sell futures  contracts on debt securities,  the values of which
historically have correlated closely or are expected to correlate closely to the
values of the Portfolio's portfolio securities. Such a sale would have an effect
similar to selling an equivalent value of the Portfolio's  portfolio securities.
If interest rates increase, the value of a Portfolio's portfolio securities will
decline,  but the value of the futures  contracts to the Portfolio will increase
at  approximately  an equivalent rate thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise  would have. A Portfolio  could
accomplish similar results by selling debt


                                      B-23



securities with longer  maturities and investing in debt securities with shorter
maturities  when  interest  rates are expected to increase.  However,  since the
futures  market  may be more  liquid  than the cash  market,  the use of futures
contracts  as a hedging  technique  would  allow the  Portfolio  to  maintain  a
defensive  position  without  having to sell  portfolio  securities.  If in fact
interest rates decline rather than rise, the value of the futures  contract will
fall but the value of the bonds should rise and should offset all or part of the
loss.  If  futures  contracts  are used to hedge 100% of the bond  position  and
correlate precisely with the bond position, there should be no loss or gain with
a rise (or fall) in interest rates. However, if only 50% of the bond position is
hedged with  futures,  then the value of the  remaining 50% of the bond position
would be subject to change  because of interest rate  fluctuations.  Whether the
bond positions and futures contracts  correlate  precisely is a significant risk
factor.

         Anticipatory  Position  Hedging.  Similarly,  when it is expected  that
interest rates may decline and a Portfolio  intends to acquire debt  securities,
the Portfolio might purchase  interest rate futures  contracts.  The purchase of
futures  contracts  for this purpose  would  constitute  an  anticipatory  hedge
against increases in the price of debt securities  (caused by declining interest
rates) which the Portfolio subsequently acquires and would normally qualify as a
bona fide hedge not  subject to the 5% CFTC  limit.  Since  fluctuations  in the
value of appropriately selected futures contracts should approximate that of the
debt securities that would be purchased, a Portfolio could take advantage of the
anticipated  rise in the cost of the debt  securities  without  actually  buying
them. Subsequently,  the Portfolio could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.

         Risk Management and Return Enhancement. A Portfolio might sell interest
rate futures contracts covering bonds. This has the same effect as selling bonds
in the  portfolio  and holding cash and reduces the  duration of the  portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates. The
longer the  duration,  the greater the impact of  interest  rate  changes on the
portfolio's  price.)  This  should  lessen the risks  associated  with a rise in
interest rates. In some circumstances,  this may serve as a hedge against a loss
of principal, but is usually referred to as an aspect of risk management.

         A Portfolio  might buy interest rate futures  contracts  covering bonds
with a longer maturity than its portfolio  average.  This would tend to increase
the duration and should  increase the gain in the overall  portfolio if interest
rates fall.  This is often  referred to as risk  management  rather than hedging
but, if it works as intended,  has the effect of increasing  principal value. If
it does not work as intended  because  interest  rates rise instead of fall, the
loss will be greater than would otherwise have been the case.  Futures contracts
used for these purposes are not considered bona fide hedges and, therefore,  are
subject to the 5% CFTC limit.

         Options on Futures  Contracts.  A Portfolio  may enter into  options on
futures  contracts for certain bona fide  hedging,  risk  management  and return
enhancement purposes. This includes the ability to purchase put and call options
and write (i.e.,  sell) "covered" put and call options on futures contracts that
are traded on commodity and futures exchanges.


                                      B-24



         If a Portfolio  purchases an option on a futures  contract,  it has the
right  but not the  obligation,  in return  for the  premium  paid,  to assume a
position  in a futures  contract  (a long  position if the option is a call or a
short position if the option is a put) at a specified exercise price at any time
during the option exercise period.

         Unlike purchasing an option,  which is similar to purchasing  insurance
to  protect  against a  possible  rise or fall of  security  prices or  currency
values, the writer or seller of an option undertakes an obligation upon exercise
of the  option to either  buy or sell the  underlying  futures  contract  at the
exercise  price. A writer of a call option has the  obligation  upon exercise to
assume a short futures  position and a writer of a put option has the obligation
to assume a long futures position.  Upon exercise of the option,  the assumption
of offsetting  futures  positions by the writer and holder of the option will be
accompanied by delivery of the accumulated  cash balance in the writer's futures
margin  account  which  represents  the amount by which the market  price of the
futures contract at exercise exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the futures contract.  If
there is no balance in the writer's  margin  account,  the option is "out of the
money" and will not be exercised. A Portfolio,  as the writer, has income in the
amount it was paid for the option.  If there is a margin balance,  the Portfolio
will have a loss in the amount of the  balance  less the premium it was paid for
writing the option.

         When a Portfolio writes a put or call option on futures contracts,  the
option must either be "covered" or, to the extent not "covered," will be subject
to  segregation  requirements.  A Portfolio  will be considered  "covered"  with
respect to a call option it writes on a futures  contract if the Portfolio  owns
the securities or currency which is deliverable under the futures contract or an
option to purchase that futures  contract having a strike price equal to or less
than the strike price of the "covered" option.

         To the extent a Portfolio  is not  "covered"  as  described  above with
respect to written  options,  it will  segregate and maintain with its custodian
for the term of the option cash or liquid  securities  as described  above under
"Limitations  of the  Purchase  and Sale of the  Futures  Contracts  and Related
Options--Segregation Requirements."

         Uses of  Options  on Futures  Contracts.  Options on futures  contracts
would be used for bona fide  hedging,  risk  management  and return  enhancement
purposes.

         Position Hedging. A Portfolio may purchase put options on interest rate
or  currency  futures  contracts  to hedge its  portfolio  against the risk of a
decline  in the  value of the debt  securities  it owns as a  result  of  rising
interest rates.

         Anticipatory  Hedging.  A Portfolio  may also  purchase call options on
futures  contracts as a hedge against an increase in the value of securities the
Portfolio might intend to acquire as a result of declining interest rates.

         Writing  a put  option  on a  futures  contract  may serve as a partial
anticipatory  hedge  against an  increase  in the value of debt  securities  the
Portfolio  might intend to acquire.  If the futures  price at  expiration of the
option is above the exercise price, the Portfolio retains the full amount of the
option premium which provides a partial hedge against any increase that


                                      B-25



may have occurred in the price of the debt securities the Portfolio  intended to
acquire.  If the market price of the  underlying  futures  contract is below the
exercise price when the option is exercised,  the Portfolio  would incur a loss,
which may be  wholly or  partially  offset by the  decrease  in the value of the
securities the Portfolio might intend to acquire.

         Whether options on futures  contracts are subject to or exempt from the
5% CFTC limit depends on whether the purposes of the options  constitutes a bona
fide hedge.

         Risk Management and Return Enhancement.  Writing a put option that does
not relate to  securities  a  Portfolio  intends  to  acquire  would be a return
enhancement strategy which would result in a loss if interest rates rise.

         Similarly,  writing a covered call option on a futures contract is also
a return  enhancement  strategy.  If the market price of the underlying  futures
contract  at  expiration  of a written  call is below the  exercise  price,  the
Portfolio  would  retain the full amount of the option  premium  increasing  the
income of the  Portfolio.  If the futures  price when the option is exercised is
above the exercise  price,  however,  the  Portfolio  would sell the  underlying
securities  which were the  "cover"  for the  contract  and incur a gain or loss
depending on the cost basis for the underlying asset.

         Writing a covered call option as in any return enhancement strategy can
also be  considered  a  partial  hedge  against  a  decrease  in the  value of a
Portfolio's portfolio  securities.  The amount of the premium received acts as a
partial hedge against any decline that may have occurred in the Portfolio's debt
securities.

         There can be no assurance that a Portfolio's  use of futures  contracts
and related  options will be successful  and the  Portfolios may incur losses in
connection with the purchase and sale of future contracts and related options.

         Forward Foreign Currency Exchange  Contracts.  The Portfolios may enter
into forward foreign currency exchange contracts in several circumstances.  When
a  Portfolio  enters  into a  contract  for the  purchase  or sale of a security
denominated in a foreign currency,  or when a Portfolio  anticipates the receipt
in a foreign  currency of dividends or interest  payments on a security which it
holds,  the  Portfolio  may desire to  "lock-in"  the U.S.  dollar  price of the
security or the U.S. dollar equivalent of such dividend or interest payment,  as
the case may be. By  entering  into a  forward  contract  for a fixed  amount of
dollars,  for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Portfolio may be able to protect itself against
a possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest  payment
is declared, and the date on which such payments are made or received.

         Additionally,  when BSAM  believes  that the  currency of a  particular
foreign  country may suffer a substantial  decline  against the U.S.  dollar,  a
Portfolio  may enter into a forward  contract for a fixed amount of dollars,  to
sell the amount of foreign  currency  approximating  the value of some or all of
the Portfolio's portfolio securities  denominated in such foreign currency.  The
precise matching of the forward contract amounts and the value of the


                                      B-26



securities  involved  will not  generally be possible  since the future value of
securities  in  foreign  currencies  will  change  as a  consequence  of  market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures.  The  projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain.  If a Portfolio enters into a
position  hedging  transaction,  the transaction will be covered by the position
being  hedged or the  Portfolio's  custodian  will place cash,  U.S.  Government
securities,  equity  securities  or  other  liquid,  unencumbered  assets  in  a
segregated account of the Portfolio (less the value of the "covering" positions,
if  any) in an  amount  equal  to the  value  of the  Portfolio's  total  assets
committed to the consummation of the given forward  contract.  The assets placed
in the segregated  account will be  marked-to-market  daily, and if the value of
the securities  placed in the segregated  account  declines,  additional cash or
securities  will be placed in the  account on a daily basis so that the value of
the  account  will,  at all  times,  equal  the  amount of the  Portfolio's  net
commitment with respect to the forward contract.

         A Portfolio  generally  will not enter into a forward  contract  with a
term of  greater  than one year.  At the  maturity  of a forward  contract,  the
Portfolio  may either  sell the  portfolio  security  and make  delivery  of the
foreign  currency,  or it may retain the security and terminate its  contractual
obligation  to deliver  the  foreign  currency  by  purchasing  an  "offsetting"
contract with the same currency  trader  obligating it to purchase,  on the same
maturity date, the same amount of the foreign currency.

         It is impossible  to forecast with absolute  precision the market value
of a particular  portfolio  security at the expiration of the forward  contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign  currency that a Portfolio is obligated to deliver,  then it would be
necessary for the Portfolio to purchase  additional foreign currency on the spot
market (and bear the expense of such purchase).

         If a  Portfolio  retains  the  portfolio  security  and  engages  in an
offsetting transaction,  the Portfolio will incur a gain or a loss to the extent
that there has been movement in forward contract prices. Should forward contract
prices decline during the period between the Portfolio's entering into a forward
contract  for the sale of a  foreign  currency  and the date it  enters  into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the  extent  that the price of the  currency  it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract  prices  increase,  the Portfolio will suffer a loss to the extent that
the price of the  currency  it has agreed to  purchase  exceeds the price of the
currency it has agreed to sell.

         A Portfolio's  dealing in forward foreign currency  exchange  contracts
will generally be limited to the  transactions  described  above.  Of course,  a
Portfolio  is not  required to enter into such  transactions  with regard to its
foreign currency-denominated  securities. It also should be recognized that this
method of protecting the value of a Portfolio's  portfolio  securities against a
decline  in the  value of a  currency  does not  eliminate  fluctuations  in the
underlying  prices of the  securities  which are  unrelated  to exchange  rates.
Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they


                                      B-27



tend to limit any  potential  gain which might  result  should the value of such
currency increase.

         Although  the  Portfolios  value  their  assets  daily in terms of U.S.
dollars, they do not intend physically to convert holdings of foreign currencies
into U.S.  dollars  on a daily  basis.  They  will do so from time to time,  and
investors should be aware of the costs of currency conversion.  Although foreign
exchange  dealers do not charge a fee for  conversion,  they do realize a profit
based on the difference (the spread) between the prices at which they are buying
and  selling  various  currencies.  Thus,  a dealer  may offer to sell a foreign
currency to the Portfolio at one rate,  while offering a lesser rate of exchange
should the Portfolio desire to resell that currency to the dealer.

         At or before the maturity of a forward contract, a Portfolio either may
sell a security and make  delivery of the  currency,  or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency which it is obligated to deliver. If a Portfolio
retains the portfolio  security and engages in an offsetting  transaction,  such
Portfolio, at the time of execution of the offsetting transaction,  will incur a
gain or loss to the extent  movement  has occurred in forward  contract  prices.
Should forward prices decline during the period between the Portfolio's entering
into a forward  contract  for the sale of a currency and the date it enters into
an  offsetting  contract for the purchase of the currency,  the  Portfolio  will
realize a gain to the  extent  the price of the  currency  it has agreed to sell
exceeds the price of the  currency  it has agreed to  purchase.  Should  forward
prices increase, the Portfolio will suffer a loss to the extent the price of the
currency  it has agreed to  purchase  exceeds  the price of the  currency it has
agreed to sell.

         The cost to each Portfolio of engaging in currency  transactions varies
with factors such as the currency  involved,  the length of the contract  period
and the market  conditions  then  prevailing.  Because  transactions in currency
exchange  usually are conducted on a principal basis, no fees or commissions are
involved.  The use of forward  currency  exchange  contracts  does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. If a devaluation  generally
is anticipated,  a Portfolio may not be able to contract to sell the currency at
a price  above  the  devaluation  level it  anticipates.  The  requirements  for
qualification as a regulated  investment company under the Internal Revenue Code
of 1986, as amended (the  "Code"),  may cause the Fund to restrict the degree to
which  each  Portfolio  engages  in  currency   transactions.   See  "Dividends,
Distributions and Taxes."

         Lending  Portfolio  Securities.  (All  Portfolios) To a limited extent,
each Portfolio may lend its portfolio  securities to brokers,  dealers and other
financial institutions,  provided it receives cash collateral which at all times
is maintained in an amount equal to at least 100% of the current market value of
the  securities  loaned.  By lending its portfolio  securities,  a Portfolio can
increase its income through the investment of the cash collateral.  For purposes
of this policy, a Portfolio considers  collateral  consisting of U.S. Government
securities or  irrevocable  letters of credit  issued by banks whose  securities
meet the standards  for  investment  by such  Portfolio to be the  equivalent of
cash. From time to time, a Portfolio may return to the borrower or a third party
which is  unaffiliated  with such


                                      B-28



Portfolio,  and which is acting as a "placing  broker,"  a part of the  interest
earned from the investment of collateral received for securities loaned.

         The  Securities  and Exchange  Commission  currently  requires that the
following  conditions must be met whenever portfolio  securities are loaned: (1)
each Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower  must  increase  such  collateral  whenever the market value of the
securities rises above the level of such collateral;  (3) each Portfolio must be
able to  terminate  the  loan at any  time;  (4)  each  Portfolio  must  receive
reasonable  interest on the loan,  as well as any  dividends,  interest or other
distributions  payable  on the loaned  securities,  and any  increase  in market
value;  (5) each Portfolio may pay only reasonable  custodian fees in connection
with the loan; and (6) while voting rights on the loaned  securities may pass to
the borrower,  the Fund's Board of Trustees  must  terminate the loan and regain
the right to vote the  securities if a material  event  adversely  affecting the
investment occurs. These conditions may be subject to future  modification.  The
Portfolios have appointed  Custodial Trust Company (CTC) an affiliate of BSAM as
the Lending Agent. CTC received a fee for its services.

         When-Issued and Delayed Delivery  Securities (Income Portfolio and High
Yield  Portfolio).  From time to time, in the ordinary  course of business,  the
Income Portfolio and the High Yield Portfolio may purchase or sell securities on
a when-issued or delayed delivery basis,  that is, delivery and payment can take
place a month or more after the date of the transaction.  The purchase price and
the interest rate payable on the securities are fixed on the  transaction  date.
The securities so purchased are subject to market  fluctuation,  and no interest
accrues to the Portfolio  until  delivery and payment take place.  At the time a
Portfolio  makes the  commitment  to purchase  securities  on a  when-issued  or
delayed  delivery basis,  it will record the transaction and thereafter  reflect
the value of such  securities in  determining  its net asset value each day. The
Portfolio will make commitments for such when-issued  transactions only with the
intention of actually  acquiring the  securities.  A Portfolio's  custodian will
maintain,  in a  separate  account  of  the  Portfolio,  cash,  U.S.  Government
securities,   equity   securities   or  other   liquid,   unencumbered   assets,
marked-to-market   daily,   having  a  value  equal  to  or  greater  than  such
commitments.  If a  Portfolio  chooses  to  dispose  of the  right to  acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of  any  other  portfolio  security,   incur  a  gain  or  loss  due  to  market
fluctuations.

         Currency Swaps,  Mortgage  Swaps,  Index Swaps and Interest Rate Swaps,
Caps,  Floors and Collars.  (Income and High Yield  Portfolios).  Each Portfolio
may, with respect to up to 5% of its net assets,  enter into currency  swaps for
both  hedging  purposes and to seek to increase  total  return.  In addition,  a
Portfolio may, with respect to 5% of its net assets, enter into mortgage,  index
and interest rate swaps and other interest rate swap  arrangements  such as rate
caps,  floors and  collars,  for hedging  purposes or to seek to increase  total
return.  Currency swaps involve the exchange by the Portfolio with another party
of their respective rights to make or receive payments in specified  currencies.
Interest rate swaps involve the exchange by the Portfolio  with another party of
their respective commitments to pay or receive interest,  such as an exchange of
fixed rate payments for floating rate  payments.  Mortgage  swaps are similar to
interest  rate  swaps in that  they  represent  commitments  to pay and  receive
interest. The notional principal amount, however, is tied to a reference pool or
pools of mortgages. Index


                                      B-29



swaps involve the exchange by the Portfolio with another party of the respective
amounts  payable with respect to a notional  principal  amount at interest rates
equal to two  specified  indices.  The purchase of an interest rate cap entitles
the  purchaser,  to the extent that a specified  index  exceeds a  predetermined
interest  rate, to receive  payment of interest on a notional  principal  amount
from the party  selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined  interest  rate,  to receive  payments  of  interest on a notional
principal  amount from the party  selling the interest  rate floor.  An interest
rate  collar is the  combination  of a cap and a floor that  preserves a certain
return within a predetermined range of interest rates.

         A Portfolio  will enter into  interest  rate,  mortgage and index swaps
only on a net basis,  which means that the two  payment  streams are netted out,
with the Portfolio  receiving or paying, as the case may be, only the net amount
of the two payments.  Interest rate, index and mortgage swaps do not involve the
delivery of securities,  other underlying assets or principal.  Accordingly, the
risk of loss with respect to interest rate,  index and mortgage swaps is limited
to the net amount of  interest  payments  that the  Portfolio  is  contractually
obligated  to make.  If the other party to an interest  rate,  index or mortgage
swap  defaults,  the  Portfolio's  risk of loss  consists  of the net  amount of
interest  payments that the Portfolio is contractually  entitled to receive.  In
contrast,  currency swaps usually involve the delivery of a gross payment stream
in one  designated  currency in exchange for the gross payment stream in another
designated currency.  Therefore, the entire payment stream under a currency swap
is  subject  to the risk that the other  party to the swap will  default  on its
contractual  delivery  obligations.  To the extent  that the net amount  payable
under an  interest  rate,  index or mortgage  swap and the entire  amount of the
payment  stream  payable by the  Portfolio  under a currency swap or an interest
rate floor, cap or collar is held in a segregated  account consisting of cash or
liquid  assets,  BSAM believes that swaps do not  constitute  senior  securities
under the 1940 Act and, accordingly, will not treat them as being subject to the
Portfolio's borrowing restrictions.

         A Portfolio will not enter into swap transactions  unless the unsecured
commercial  paper,  senior  debt or claims  paying  ability  of the other  party
thereto is considered to be investment grade by BSAM.

         The use of interest rate,  mortgage,  index and currency swaps, as well
as interest  rate caps,  floors and collars,  is a highly  specialized  activity
which involves  investment  techniques and risks different from those associated
with ordinary  portfolio  securities  transactions.  If BSAM is incorrect in its
forecasts of market values,  interest  rates and currency  exchange  rates,  the
investment performance of a Portfolio would be less favorable than it would have
been if this investment technique were not used. The staff of the Securities and
Exchange  Commission  currently take the position that swaps,  caps,  floors and
collars are illiquid  and thus  subject to the  Portfolio's  15%  limitation  on
investments in illiquid securities.


                                      B-30



         Investment Restrictions (Equity Portfolios and Income Portfolio).  Each
Equity  Portfolio and the Income Portfolio has adopted  investment  restrictions
numbered 1 through 10 as  fundamental  policies.  These  restrictions  cannot be
changed,  as to a Portfolio,  without  approval by the holders of a majority (as
defined in the  Investment  Company Act of 1940, as amended (the "1940 Act")) of
such Portfolio's outstanding voting shares.  Investment restrictions numbered 11
through 16 are not fundamental policies and may be changed by vote of a majority
of the Trustees at any time. No Portfolio may:

         1.  Invest  more  than 25% of the  value  of its  total  assets  in the
securities  of issuers in any single  industry,  provided that there shall be no
limitation  on the  purchase of  obligations  issued or  guaranteed  by the U.S.
Government, its agencies or sponsored enterprises.

         2. Invest more than 5% of its assets in the  obligations  of any single
issuer,  except that up to 25% of the value of the Portfolio's  total assets may
be invested, and securities issued or guaranteed by the U.S. Government,  or its
agencies or sponsored  enterprises may be purchased,  without regard to any such
limitation.

         3. Hold  more  than 10% of the  outstanding  voting  securities  of any
single issuer.  This Investment  Restriction applies only with respect to 75% of
the Portfolio's total assets.

         4. Invest in  commodities,  except that each Portfolio may purchase and
sell options, forward contracts, futures contracts,  including those relating to
indexes, and options on futures contracts or indexes.

         5.  Purchase,  hold  or  deal  in  real  estate,  real  estate  limited
partnership  interests,  or oil, gas or other mineral  leases or  exploration or
development  programs,  but each Portfolio may purchase and sell securities that
are  secured by real estate or issued by  companies  that invest or deal in real
estate or real estate investment trusts.

         6. Borrow money, except to the extent permitted under the 1940 Act. The
1940 Act permits an  investment  company to borrow in an amount up to 33-1/3% of
the value of such  company's  total  assets.  For  purposes  of this  Investment
Restriction,  the entry into  options,  forward  contracts,  futures  contracts,
including those relating to indexes, and options on futures contracts or indexes
shall not constitute borrowing.

         7.  Make  loans  to  others,   except  through  the  purchase  of  debt
obligations and the entry into repurchase  agreements.  However,  each Portfolio
may lend its  portfolio  securities  in an amount  not to exceed  33-1/3% of the
value of its  total  assets.  Any  loans of  portfolio  securities  will be made
according to guidelines  established by the  Securities and Exchange  Commission
and the Fund's Board of Trustees.

         8. Act as an underwriter of securities of other issuers,  except to the
extent each Portfolio may be deemed an  underwriter  under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.

         9. Issue any senior  security (as such term is defined in Section 18(f)
of the 1940 Act).


                                      B-31



         10. Purchase  securities on margin,  but each Portfolio may make margin
deposits in connection with transactions in options, forward contracts,  futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.

         Non-Fundamental Restrictions.

         11. Pledge,  mortgage or hypothecate  its assets,  except to the extent
necessary  to secure  permitted  borrowings  and to the  extent  related  to the
purchase of  securities  on a when-issued  or forward  commitment  basis and the
deposit of assets in escrow in  connection  with  writing  covered  put and call
options and collateral and initial or variation margin arrangements with respect
to options,  forward contracts,  futures contracts,  including those relating to
indexes, and options on futures contracts or indexes.

         12. Purchase, sell or write puts, calls or combinations thereof, except
as  described  in  the  Portfolios'   Prospectus  and  Statement  of  Additional
Information.

         13. Enter into repurchase  agreements  providing for settlement in more
than seven days after notice or purchase  securities which are illiquid,  if, in
the  aggregate,  more  than  15% of the  value  of its net  assets  would  be so
invested.

         14. Purchase  securities of other investment  companies,  except to the
extent permitted under the 1940 Act.

         The following investment restrictions numbered 15 and 16, which are not
fundamental  policies,  apply  only to the Equity  Portfolios.  Neither of these
Portfolios may:

         15.  Purchase  securities of any company  having less than three years'
continuous operations (including operations of any predecessor) if such purchase
would  cause  the  value  of the  Equity  Portfolio's  investments  in all  such
companies to exceed 5% of the value of its total assets.

         16. Invest in the securities of a company for the purpose of exercising
management or control,  but each Equity  Portfolio  will vote the  securities it
owns in its portfolio as a shareholder in accordance with its views.

         Investment   Restrictions  (High  Yield  Portfolio).   The  High  Yield
Portfolio  has  adopted  investment   restrictions   numbered  1  through  7  as
fundamental policies. These restrictions cannot be changed, as to the Portfolio,
without approval by the holders of a majority (as defined in the 1940 Act of the
Portfolio's  outstanding  voting  shares.  Investment  restrictions  numbered  8
through 12 are not fundamental policies and may be changed by vote of a majority
of the Trustees at any time. The High Yield Portfolio may not:


                                      B-32



         1. Issue any senior  security (as such term is defined in Section 18(f)
of the 1940 Act) except that (a) the Portfolio may engage in  transactions  that
may result in the issuance of senior  securities to the extent  permitted  under
applicable  regulations  and  interpretations  of the 1940  Act or an  exemptive
order; (b) the Portfolio may acquire other securities,  the acquisition of which
may result in the issuance of a senior  security,  to the extent permitted under
applicable  regulations or  interpretations  of the 1940 Act; (c) subject to the
restrictions  set forth below,  the  Portfolio may borrow money as authorized by
the 1940 Act.

         2. Purchase any securities that would cause 25% or more of the value of
its total assets at the time of such  purchase to be invested in the  securities
of one or more issuers  conducting  their principal  business  activities in the
same industry,  provided that there is no limitation with respect to investments
in U.S. Government securities.

         3.  Purchase,  hold  or  deal  in  real  estate,  real  estate  limited
partnership  interests,  or oil, gas or other mineral  leases or  exploration or
development  programs,  but the Portfolio may purchase and sell  securities that
are  secured by real estate or issued by  companies  that invest or deal in real
estate or real estate investment trusts.

         4. Borrow money, except to the extent permitted under the 1940 Act. The
1940 Act permits an  investment  company to borrow in an amount up to 33-1/3% of
the value of such  company's  total  assets.  For  purposes  of this  Investment
Restriction,  the entry into  options,  forward  contracts,  futures  contracts,
including those relating to indexes, and options on futures contracts or indexes
shall not constitute borrowing.

         5.  Make  loans  to  others,   except  through  the  purchase  of  debt
obligations and the entry into repurchase  agreements.  The Portfolio,  however,
may lend its  portfolio  securities  in an amount  not to exceed  33-1/3% of the
value of its  total  assets.  Any  loans of  portfolio  securities  will be made
according to guidelines  established by the  Securities and Exchange  Commission
and the Fund's Board of Trustees.

         6. Act as an underwriter of securities of other issuers,  except to the
extent the Portfolio may be deemed an  underwriter  under the  Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.

         7. Invest in  commodities,  except that the  Portfolio may purchase and
sell options, forward contracts, futures contracts,  including those relating to
indexes, and options on futures contracts or indices.

         Non-Fundamental Restrictions.

         8.  Knowingly  invest  more  than 15% of the  value of the  Portfolio's
assets  in  securities  that may be  illiquid  because  of legal or  contractual
restrictions  on resale or securities  for which there are no readily  available
market quotations.

         9.  Purchase  securities  on margin,  but the Portfolio may make margin
deposits in connection with transactions in options, forward contracts,  futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.


                                      B-33



         10. Pledge,  mortgage or hypothecate  its assets,  except to the extent
necessary  to secure  permitted  borrowings  and to the  extent  related  to the
purchase of  securities  on a when-issued  or forward  commitment  basis and the
deposit of assets in escrow in  connection  with  writing  covered  put and call
options and collateral and initial or variation margin arrangements with respect
to options,  forward contracts,  futures contracts,  including those relating to
indices, and options on futures contracts or indexes.

         11. Purchase  securities of other investment  companies,  except to the
extent permitted under the 1940 Act.

         12. Make additional  investments when borrowing exceeds 5% of Portfolio
assets.

         If a percentage restriction is adhered to at the time of investment,  a
later change in percentage  resulting from a change in values or assets will not
constitute a violation of such restriction.


                             MANAGEMENT OF THE FUND

         Trustees  and officers of the Fund,  together  with  information  as to
their principal  business  occupations  during at least the last five years, are
shown below. Each Trustee who is an "interested  person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.



Name and Address                   Position               Principal Occupation
(and age)                          with Fund              During Past Five Years

                                                      
Peter M. Bren (64)                 Trustee                President  of The Bren Co. since 1969;
126 East 56th Street                                      President   of   Koll,   Bren   Realty
New York, NY  10021                                       Advisors   and  Senior   Partner   for
                                                          Lincoln Properties prior thereto.

Alan J. Dixon* (70)                Trustee                Partner of Bryan  Cave,  a law firm in
7535 Claymont Court                                       St. Louis since January  1993;  United
Apt. #2                                                   States  Senator of Illinois  from 1981
Belleville, IL  62223                                     to 1993.

John R. McKernan, Jr. (50)         Trustee                Chairman and Chief  Executive  Officer
P.O. Box 15213                                            of McKernan  Enterprises since January
Portland, ME  02110                                       1995; Governor of Maine prior thereto.

M.B. Oglesby, Jr. (56)             Trustee                Consultant     since    March    1998;
700 13th Street, N.W.                                     President    and    Chief    Executive
Suite 400                                                 Officer.   Association   of   American
Washington, D.C.  20005                                  


                                              B-34



                                                          Railroads  from  June  1997  to  March
                                                          1998;   Vice  Chairman  of  Cassidy  &
                                                          Associates  from February 1996 to June
                                                          1997;  Senior  Vice  President  of RJR
                                                          Nabisco,   Inc.  from  April  1989  to
                                                          February 1996;  Former Deputy Chief of
                                                          Staff-White House from 1988 to January
                                                          1989.

Michael Minikes* (56)              Trustee                Senior   Managing   Director  of  Bear
245 Park Avenue                    Chairman               Sterns since September 1985;  Chairman
New York, NY  10167                                       of   BSFM   since    December    1997;
                                                          Treasurer   of   Bear   Sterns   since
                                                          January  1986;  Treasurer  of the Bear
                                                          Sterns  Companies Inc. since September
                                                          1985;  Director  of  The  Bear  Sterns
                                                          Companies Inc. since October 1989.

Doni L. Fordyce (39)               President              Senior   Managing   Director  of  Bear 
575 Lexington Avenue                                      Stearns  since March 1996;  previously 
New York, NY  10022                                       Group,    Vice    President,     Asset 
                                                          Management  Goldman Sachs from 1986 to 
                                                          1996.                                  

Barry Sommers (30)                 Executive Vice         Managing    Director   and   Head   of  
575 Lexington Avenue               President              President Marketing and Sales for Bear  
New York, NY  10022                                       Sterns in Funds since March 1997; Vice  
                                                          Mutual  Fund Sales,  Goldman,  Sachs &  
                                                          Co.  from May 1995 to May  1997;  Vice   
                                                          President, Putnam Investments from May   
                                                          1992 to May 1995.                        

Stephen A. Bornstein (55)          Secretary              Managing  Director,  Legal Department;
575 Lexington Avenue                                      General  Counsel,  Bear Stearns  Asset
New York, NY  10022                                       Management.

Frank J. Maresca (40)              Vice President         Managing Director of Bear Stearns since
575 Lexington Avenue               and Treasurer          September 1994; Chief Executive Officer
New York, NY  10022                                       and  President  of BSFM since  December
                                                          1997; Associate Director of           


                                              B-35


                                                          Bear  Stearns  from  September  1993 to
                                                          September  1994; Vice President of Bear
                                                          Stearns  from March  1992 to  September
                                                          1993.

Vincent L. Pereira (33)            Assistant              Associate   Director  of  Bear  Stearns 
575 Lexington Avenue               Treasurer              since  September  1995;  Treasurer  and 
New York, NY  10022                                       Vice  Secretary of BSFM since  December 
                                                          1997;  Vice  President  of Bear Stearns 
                                                          from  May  1993  to   September   1995; 
                                                          Assistant  Vice  President  of Mitchell 
                                                          Hutchins  Asset  Management  Inc.  from 
                                                          October 1992 to May 1993.               



         The Fund pays its  non-affiliated  Board members an annual  retainer of
$5,000 and a per meeting fee of $500 and reimburses them for their expenses. The
Fund does not compensate its officers. The aggregate amount of compensation paid
to each  Board  member  by the Fund and by all other  funds in the Bear  Stearns
Family of Funds for which such person is a Board  member (the number of which is
set forth in parenthesis next to each Board member's total compensation) for the
fiscal year ended March 31, 1998 is as follows:




            (1)                     (2)                   (3)                    (4)                   (5)
       Name of Board             Aggregate            Pension or          Estimated Annual            Total
          Member                Compensation      Retirement Benefits       Benefits Upon       Compensation from
                                from Fund *       Accrued as Part of         Retirement           Fund and Fund
                                                    Fund's Expenses                              Complex Paid to
                                                                                                  Board Members

                                                                                       
Peter M. Bren                      $8,000                None                   None               $20,000 (2)

Alan J. Dixon                      $8,000                None                   None               $ 8,000 (1)

John R. McKernan, Jr.              $8,000                None                   None               $20,000 (2)

M.B. Oglesby, Jr.                  $8,000                None                   None               $20,000 (2)

Robert S. Reitzes**                 None                 None                   None                  None

Michael Minikes**                   None                 None                   None                  None


- ----------

*    Amount does not include  reimbursed  expenses for attending Board meetings,
     which  amounted to  approximately  $8,600 Board  members of the Fund,  as a
     group.

**   Robert S. Reitzes resigned as a Director to the Fund effective September 8,
     1997.  Michael  Minikes  was  appointed  as  replacement  for  Mr.  Reitzes
     effective September 8, 1997.


         Board members and officers of the Fund, as a group,  owned less than 1%
of each Portfolio's shares outstanding on June 30, 1998.

         For so long as the Plan described in the section captioned  "Management
Arrangements--Distribution Plans" remains in effect, the Fund's Trustees who


                                      B-36



are not  "interested  persons" of the Fund,  as defined in the 1940 Act, will be
selected and nominated by the Trustees who are not  "interested  persons" of the
Fund.

         No  meetings  of  shareholders  of the  Fund  will be held for the sole
purpose of electing  Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders,  at which time
the Trustees then in office will call a  shareholders'  meeting for the election
of  Trustees.  Under  the 1940  Act,  shareholders  of  record  of not less than
two-thirds of the outstanding  shares of the Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose.  Under the Fund's  Agreement  and  Declaration  of Trust,  the
Trustees  are  required  to call a meeting of  shareholders  for the  purpose of
voting  upon the  question  of removal of any such  Trustee  when  requested  in
writing  to do so by the  shareholders  of  record  of not less  than 10% of the
Fund's outstanding shares.


                             MANAGEMENT ARRANGEMENTS

         The following information supplements and should be read in conjunction
with the  section in the  Portfolios'  Prospectus  entitled  "Management  of the
Portfolios."

         General.  On December 3, 1997, BSFM, the registered  investment adviser
of the Portfolios,  changed its name to BSAM. On December 4, 1997, BSFM formed a
new  corporate  entity  under  the  laws of  Delaware  to  conduct  mutual  fund
administrative  work  for The  Bear  Stearns  Funds  and  other  affiliated  and
non-affiliated investment companies.

         Investment  Advisory  Agreement.   BSAM  provides  investment  advisory
services to each Portfolio pursuant to Investment  Advisory  Agreements (each an
"Agreement")  with the Fund. As to each Portfolio,  each Agreement is subject to
annual  approval by (i) the Fund's  Board of Trustees or (ii) vote of a majority
(as  defined  in the  1940  Act) of the  outstanding  voting  securities  of the
Portfolio,  provided that in either event the continuance  also is approved by a
majority of the Board of Trustees who are not  "interested  persons" (as defined
in the 1940 Act) of the Fund or BSAM, by vote cast in person at a meeting called
for the purpose of voting on such approval. Each Agreement is terminable,  as to
each  Portfolio,  without  penalty,  on 60 days' notice,  by the Fund's Board of
Trustees or by vote of the holders of a majority of the Portfolio's  shares, or,
on not less than 90 days' notice,  by BSAM. As to the relevant  Portfolio,  each
Agreement  will  terminate  automatically  in the  event of its  assignment  (as
defined in the 1940 Act).

         BSAM is a wholly owned  subsidiary of The Bear Stearns  Companies  Inc.
The following  persons are directors  and/or  senior  officers of BSAM:  Mark A.
Kurland,  President,  Chairman  of the Board and  Director;  Robert S.  Reitzes,


                                      B-37



         Executive Vice President and Director; Doni L. Fordyce, Vice President,
Chief  Operating  Officer and Director;  Stephen A.  Bornstein,  Secretary;  and
Warren J. Spector and Robert M. Steinberg, Directors.

         BSAM  provides  investment  advisory  services  to  each  Portfolio  in
accordance with its stated policies,  subject to the approval of the Board. BSAM
provides each Portfolio with a portfolio management team authorized by the Board
to  execute  purchases  and sales of  securities.  All  purchases  and sales are
reported for the Board of  Trustees'  review at the meeting  subsequent  to such
transactions.

         As compensation for BSAM's advisory services, each Equity Portfolio has
agreed to pay BSAM a monthly  fee at the annual  rate of 0.75 of 1% of the value
of such Equity  Portfolio's  average daily net assets.  The Income Portfolio has
agreed to pay BSAM a monthly  fee at the annual  rate of 0.45 of 1% of the value
of the Income Portfolio's average daily net assets. The High Yield Portfolio has
agreed  to pay  BSAM a  monthly  fee at the  annual  rate  of  0.60 of 1% of the
Portfolio's  average daily net assets. For the fiscal year ended March 31, 1997,
the investment advisory fees payable by the Large Cap Value Portfolio, Small Cap
Value  Portfolio  and the Income  Portfolio  amounted to $151,578,  $285,539 and
$98,957,  respectively. For the fiscal year ended March 31, 1998, the investment
advisory  fees  payable  by the  Large  Cap  Value  Portfolio,  Small  Cap Value
Portfolio and the Income Portfolio  amounted to $140,641,  $425,409 and $91,715,
respectively.  These  amounts were waived  pursuant to an  undertaking  by BSAM,
resulting  in no fees  being  paid by the Large Cap Value  Portfolio,  Small Cap
Value Portfolio and the Income Portfolio. In addition, BSAM reimbursed $161,196,
$86,666 and $280,261 for Large Cap Value  Portfolio,  Small Cap Value  Portfolio
and the Income  Portfolio,  respectively,  in order to  maintain  the  voluntary
expense  limitation  for the fiscal year ended March 31, 1997.  BSAM  reimbursed
$185,275,  $20,648 and $275,119 for Large Cap Value  Portfolio,  Small Cap Value
Portfolio  and the Income  Portfolio,  respectively,  in order to  maintain  the
voluntary expense limitation,  for the fiscal year ended March 31, 1998. For the
period from January 2, 1998  (commencement  of  investment  operations)  through
March 31, 1998, the investment advisory fees payable amounted to $28,723.  These
amounts were waived pursuant to a voluntary undertaking by BSAM, resulting in no
fees being paid by the High Yield  Portfolio,  respectively.  In  addition,  the
Adviser   reimbursed   $41,870  in  order  to  maintain  the  voluntary  expense
limitation.

         Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated February 22, 1995, as
revised  April 11,  1995,  June 2, 1997,  September 8, 1997 and February 4, 1998
with the Fund. As to each Portfolio,  the Administration Agreement will continue
until February 22, 1999 and thereafter will be subject to annual approval by (i)
the Fund's  Board of Trustees or (ii) vote of a majority (as defined in the 1940
Act) of the  outstanding  voting  securities of the Portfolio,  provided that in
either event its continuance  also is approved by a majority of the Fund's Board
members  who are not  "interested  persons"  (as defined in the 1940 Act) of the
Fund or BSFM,  by vote cast in person at a meeting  called  for the  purpose  of
voting on such approval. The Administration Agreement is terminable,  as to each
Portfolio,  without penalty,  on 60 days' notice, by the Fund's Board or by vote
of the holders of a majority of the


                                      B-38



Portfolio's  shares or, upon not less than 90 days'  notice,  by BSFM. As to the
relevant Portfolio, the Administration Agreement will terminate automatically in
the event of its assignment (as defined in the 1940 Act).

         As compensation for BSFM's administrative services, the Fund has agreed
to pay BSFM a monthly fee at the annual  rate of 0.15 of 1% of each  Portfolio's
average  daily net  assets.  For the  fiscal  year  ended  March 31,  1997,  the
administration fees amounted to $30,232, $57,108 and $32,986,  respectively, for
the Large Cap Value Portfolio,  Small Cap Value Portfolio and Income  Portfolio.
For the fiscal  year ended  March 31,  1998,  the  administration  fees  accrued
amounted to $28,128, $85,085 and $30,572,  respectively, for the Large Cap Value
Portfolio,  Small Cap Value Portfolio and Income Portfolio.  For the period from
January 2, 1998 (commencement of investment  operations)  through March 31, 1998
the administration fees payable by the High Yield Portfolio amounted to $7,181.

         Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the  Administrative  Services  Agreement  dated
February  22,  1995,   as  revised   September  8,  1997  with  the  Fund.   The
Administrative  Services  Agreement is terminable  upon 60 days notice by either
the Fund or PFPC.  PFPC may assign its rights or delegate  its duties  under the
Administrative  Services  Agreement  to  any  wholly-owned  direct  or  indirect
subsidiary of PNC Bank,  National  Association or PNC Bank Corp.,  provided that
(i) PFPC gives the Fund 30 days notice;  (ii) the delegate (or assignee)  agrees
with PFPC and the Fund to comply with all relevant  provisions  of the 1940 Act;
and (iii) PFPC and such  delegate (or  assignee)  promptly  provide  information
requested by the Fund in connection with such delegation.

         As compensation for PFPC's administrative services, the Fund has agreed
to pay PFPC a monthly fee at the rate set forth in the  Portfolios'  Prospectus.
For the fiscal year ended  March 31,  1997,  the  administrative  services  fees
payable by the Large Cap Value  Portfolio,  Small Cap Value Portfolio and Income
Portfolio amounted to $99,570, $119,822 and $99,469,  respectively,  as a result
of a waiver of fees by PFPC.  For the fiscal  year  ended  March 31,  1998,  the
administrative services fees for the Large Cap Value Portfolio,  Small Cap Value
Portfolio  and Income  Portfolio  amounted to  $100,107,  $134,255  and $98,944,
respectively, as a result of a waiver of fees by PFPC.

         Distribution  Plans.  Rule 12b-1 (the "Rule") adopted by the Securities
and Exchange Commission under the 1940 Act provides, among other things, that an
investment company may bear expenses of distributing its shares only pursuant to
a plan  adopted in  accordance  with the Rule.  The Fund's Board of Trustees has
adopted a distribution  plan with respect to Class A, Class B and Class C shares
of each  Portfolio  (the  "Distribution  Plan").  The Fund's  Board of  Trustees
believes that there is a reasonable  likelihood that the Distribution  Plan will
benefit  each  Portfolio  and the  holders  of its Class A,  Class B and Class C
shares.

         A quarterly report of the amounts expended under the Distribution Plan,
and the purposes for which such expenditures were incurred,  must be made to the
Trustees for their review.  In addition,  the Distribution Plan provides that it
may not be amended to increase  materially the costs which holders of a class of
shares  may  bear  pursuant  to such  Plan  without  approval  of such  effected
shareholders and that other material  amendments of the Plan must be approved by
the Board of Trustees,  and by the Trustees who are neither


                                      B-39



"interested  persons"  (as  defined  in the  1940  Act) of the Fund nor have any
direct or indirect  financial  interest in the  operation  of the Plan or in the
related  Plan  agreements,  by vote cast in person at a meeting  called  for the
purpose of  considering  such  amendments.  In addition,  because Class B shares
automatically  convert  into  Class A  shares  after  eight  years,  the Fund is
required by a Securities and Exchange  Commission rule to obtain the approval of
Class  B as well  as  Class  A  shareholders  for a  proposed  amendment  to the
Distribution Plan that would materially  increase the amount to be paid by Class
A  shareholders  under such Plan.  Such  approval must be by a "majority" of the
Class A and Class B shares (as defined in the 1940 Act),  voting  separately  by
class.  The  Distribution  Plan and  related  agreements  is  subject  to annual
approval  by such vote cast in person at a meeting  called  for the  purpose  of
voting on such Plan. The Distribution Plan was so approved on September 8, 1997,
February 4, 1998 and amended and restated on February 10, 1999. The Distribution
Plan is terminable at any time, as to each class of each Portfolio, by vote of a
majority of the Trustees who are not "interested persons" and who have no direct
or  indirect  financial  interest  in the  operation  of the Plan or in the Plan
agreements or by vote of holders of a majority of the relevant class' shares.  A
Plan  agreement  is  terminable,  as to each  class of each  Portfolio,  without
penalty,  at any time, by such vote of the Trustees,  upon not more than 60 days
written  notice to the parties to such  agreement or by vote of the holders of a
majority  of the  relevant  class'  shares.  A  Plan  agreement  will  terminate
automatically,  as to the  relevant  class of a  Portfolio,  in the event of its
assignment (as defined in the 1940 Act).

         For the period from April 3, 1995 (commencement of operations)  through
March 31, 1996,  the Large Cap Value  Portfolio,  Small Cap Value  Portfolio and
Income Portfolio paid Bear Stearns $13,300,  $22,762 and $14,093,  respectively,
with respect to Class A shares and $23,300,  $37,577 and $11,638,  respectively,
with respect to Class C shares under the Plan.  Of such  amounts,  the following
amounts were paid as indicated for Class A and C shares of each Portfolio:



                          Large Cap Value Portfolio       Small Cap Value Portfolio           Income Portfolio
                          -------------------------       -------------------------           ----------------
                           Class A         Class C         Class A         Class C         Class A         Class C
                           -------         -------         -------         -------         -------         -------

                                                                                         
Payments to
Brokers or Dealers         $13,300            ----         $22,762            ----         $14,093            ----

Payments to                   ----         $23,300            ----         $37,577            ----         $11,638
Underwriters



For period from January 2, 1998 (commencement of investment  operations) through
March 31, 1998, the High Yield  Portfolio paid Bear Stearns  $8,354,  $7,019 and
$13,194,  respectively,  with respect to Class A, B and C shares under the Plan.
Of such amounts, the following amounts were paid as indicated for Class A, B and
C shares of the High Yield Portfolio:


                                     Class A       Class B       Class C
                                     -------       -------       -------

Payments to Brokers or Dealers        $5,967         ----         ----
Payments to Underwriters              $2,387        $7,019       $13,194


         For the  fiscal  year  ended  March  31,  1997,  the  Large  Cap  Value
Portfolio,  Small Cap Value  Portfolio  and Income  Portfolio  paid Bear Stearns
$27,440,


                                      B-40



$57,907 and $15,344,  respectively,  with respect to Class A shares and $37,332,
$111,111  and  $12,483,  respectively,  with respect to Class C shares under the
Plan. Of such amounts,  the following amounts were paid as indicated for Class A
and C shares of each Portfolio:



                       Large Cap Value Portfolio       Small Cap Value Portfolio            Income Portfolio
                       -------------------------       -------------------------            ----------------
                        Class A         Class C         Class A         Class C         Class A          Class C
                        -------         -------         -------         -------         -------          -------

                                                                                       
Payments to
Brokers or Dealers      $27,440         $15,234         $57,907         $30,062         $15,344          $6,904

Payments to                ----         $22,098         $81,049         $81,049            ----          $5,579
Underwriters


         For the  fiscal  year  ended  March  31,  1998,  the  Large  Cap  Value
Portfolio,  Small Cap Value  Portfolio  and Income  Portfolio  paid Bear Stearns
$32,237,  $95,967 and  $11,111,  respectively,  with  respect to Class A shares,
$271,  $830 and $21,  respectively,  with respect to Class B shares and $40,215,
$145,963  and  $10,434,  respectively,  with respect to Class C shares under the
Plan. Of such amounts, the following amounts were paid as indicated for Class A,
B and C shares of each Portfolio:




                                      Large Cap Value Portfolio     Small Cap Value Portfolio          Income Portfolio
                                      -------------------------     -------------------------          ----------------
                                     Class A    Class B  Class C   Class A    Class B  Class C   Class A    Class B   Class C
                                     -------    -------  -------   -------    -------  -------   -------    -------   -------

                                                                                           
Payments to Brokers and              $16,119      ----   $31,566   $47,984      ----   $95,103    $7,936      ----    $8,499
Dealers

Payments for Advertising,            $16,119      ----      ----   $47,984      ----      ----    $3,175      ----      ----
Printing, Mailing of
Prospectuses to prospective
shareholders, compensation
to sales personnel, and
interest carrying, or other
financing charges

Payments to Underwriters                ----      $271    $8,649      ----      $830   $50,860      ----       $21    $1,935



                                      B-41



         For period from January 2, 1998 (commencement of investment operations)
through  March 31, 1998,  the High Yield  Portfolio  paid Bear  Stearns  $8,354,
$7,019 and $13,194, respectively,  with respect to Class A, B and C shares under
the Plan.  Of such  amounts,  the  following  amounts were paid as indicated for
Class A, B and C shares of the High Yield Portfolio:

                                                Class A      Class B     Class C
                                                -------      -------     -------

Payments to Brokers or Dealers                  $5,967         ----         ----
Payments to Underwriters                        $2,387       $7,019      $13,194

         Shareholder   Servicing  Plan.  The  Fund  has  adopted  a  shareholder
servicing plan on behalf of the Portfolios'  Class A, Class B and Class C shares
(the "Shareholder Servicing Plan"). In accordance with the Shareholder Servicing
Plan,  the Fund may enter into  shareholder  service  agreements  under  which a
Portfolio pays fees of up to 0.25% of the average daily net assets of Class A, B
or C shares of the Portfolio  for fees incurred in connection  with the personal
service and maintenance of accounts  holding  Portfolio shares for responding to
inquiries of, and furnishing assistance to, shareholders  regarding ownership of
the shares or their  accounts  or similar  services  not  otherwise  provided on
behalf of the Portfolio.  Prior to February, 1999 service fees were paid through
the  Distribution  Plan of Class A and C of the Income  Portfolio and the Equity
Portfolios.

         Expenses.  All expenses incurred in the operation of the Fund are borne
by the Fund,  except to the extent  specifically  assumed by BSAM.  The expenses
borne  by  the  Fund  include:   organizational  costs,  taxes,  interest,  loan
commitment  fees,  interest and  distributions  paid on  securities  sold short,
brokerage  fees  and  commissions,  if any,  fees of Board  members  who are not
officers,  directors,  employees  or  holders  of 5% or more of the  outstanding
voting securities of BSAM or its affiliates,  Securities and Exchange Commission
fees,  state Blue Sky  qualification  fees,  advisory,  administrative  and fund
accounting fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance  premiums,  industry  association fees, outside auditing
and  legal  expenses,  costs  of  maintaining  the  Fund's  existence,  costs of
independent   pricing   services,   costs   attributable  to  investor  services
(including,  without  limitation,  telephone and personnel  expenses),  costs of
shareholders'  reports and  meetings,  costs of preparing  and printing  certain
prospectuses  and statements of additional  information,  and any  extraordinary
expenses.  Expenses  attributable to a particular  portfolio are charged against
the assets of that portfolio; other expenses of the Fund are allocated among the
portfolios on the basis determined by the Board of Trustees,  including, but not
limited to, proportionately in relation to the net assets of each Portfolio.

         Expense  Limitation.  BSAM  agreed  that if, in any  fiscal  year,  the
aggregate expenses of a Portfolio,  exclusive of taxes,  brokerage  commissions,
interest on borrowings  and (with prior written  consent of the necessary  state
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having  jurisdiction over the Portfolio,  the Fund may deduct from the
payment to be made to BSAM,  such excess expense to the extent required by state
law. Such deduction or payment,  if any, will be estimated daily, and reconciled
and effected or paid,  as the case may be, on a monthly  basis.  No such expense
limitations currently apply to any Portfolio.


                                      B-42



         Activities of BSAM and its  Affiliates  and Other  Accounts  Managed by
BSAM.  The  involvement  of BSAM,  Bear  Stearns  and  their  affiliates  in the
management  of, or their  interests in, other  accounts and other  activities of
BSAM and Bear  Stearns may present  conflicts  of interest  with  respect to the
Portfolios or limit the Portfolios'  investment  activities.  BSAM, Bear Stearns
and its affiliates  engage in proprietary  trading and advise accounts and funds
which have investment objectives similar to those of the Portfolios and/or which
engage  in and  compete  for  transactions  in the  same  types  of  securities,
currencies  and  instruments  as the  Portfolios.  BSAM,  Bear  Stearns  and its
affiliates  will not have any obligation to make available any accounts  managed
by them, for the benefit of the management of the Portfolios. The results of the
Portfolios'  investment  activities,  therefore,  may differ  from those of Bear
Stearns and its affiliates and it is possible that the Portfolios  could sustain
losses during  periods in which BSAM,  Bear Stearns and its affiliates and other
accounts achieve  significant profits on their trading for proprietary and other
accounts.  From time to time, the Portfolios'  activities may be limited because
of regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.

                        PURCHASE AND REDEMPTION OF SHARES

         The following information supplements and should be read in conjunction
with the sections in the Portfolios' Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."

         The Distributor.  Bear Stearns serves as the Portfolios' distributor on
a best efforts  basis  pursuant to an  agreement  dated  February  22, 1995,  as
revised September 8, 1997 and February 4, 1998, which is renewable annually. For
the period April 3, 1995  (commencement  of operations)  through March 31, 1996,
Bear  Stearns  retained  $72,  $388 and $10,549  from the sales loads on Class A
shares  of the  Large Cap Value  Portfolio,  Small Cap Value  Portfolio  and the
Income Portfolio, respectively, and $110, $583 and $185 from contingent deferred
sales charges ("CDSC") on Class C shares of the Large Cap Value Portfolio, Small
Cap Value Portfolio and the Income Portfolio,  respectively. For the fiscal year
ended March 31, 1997, Bear Stearns retained  $68,262,  $214,826 and $11,400 from
the sales  loads on Class A shares of the Large Cap Value  Portfolio,  Small Cap
Value Portfolio and the Income  Portfolio,  respectively,  and $552,  $4,052 and
$100 from  contingent  deferred sales charges  ("CDSC") on Class C shares of the
Large Cap Value Portfolio,  Small Cap Value Portfolio and the Income  Portfolio,
respectively.  For the fiscal year ended March 31, 1998,  Bear Stearns  retained
$68,262,  $214,826  and  $11,400  from the sales  loads on Class A shares of the
Large Cap Value Portfolio,  Small Cap Value Portfolio and the Income  Portfolio,
respectively, and $552, $4,052 and $100 from CDSC on Class C shares of the Large
Cap Value  Portfolio,  Small  Cap  Value  Portfolio  and the  Income  Portfolio,
respectively. For the period from December 29, 1997 (commencement of operations)
through March 31, 1998, Bear Stearns  received  $155,705 from the sales loads on
Class A  shares  of the  High  Yield  Portfolio  and $0 and $0  from  contingent
deferred  sales  charges  ("CDSC")  on  Class B and C shares  of the High  Yield
Portfolio. In some states, banks or other institutions effecting transactions in
Portfolio shares may be required to register as dealers pursuant to state law.

         Purchase  Order Delays.  The effective  date of a purchase order may be
delayed if PFPC,  the  Portfolios'  transfer  agent,  is unable to  process  the


                                      B-43



purchase  order  because  of an  interruption  of  services  at  its  processing
facilities.  In such event,  the purchase  order would  become  effective at the
purchase price next determined after such services are restored.

         Sales  Loads--Class  A. Set forth  below is an example of the method of
computing  the  offering  price of the  Class A shares  of each  Portfolio.  The
example  assumes a  purchase  of Class A shares  aggregating  less than  $50,000
subject to the schedule of sales charges set forth in the  Prospectus at a price
based upon the net asset value of the Class A shares on March 31, 1998.

         EQUITY PORTFOLIOS:                 Large Cap Value    Small Cap Value
                                               Portfolio          Portfolio
                                               ---------          ---------

Net Asset Value per Share                       $ 20.83            $ 23.65
                                                =======            =======

Per Share Sales Charge - 5.50%
  of offering price (5.82% of
  net asset value per share)                       1.21               1.38
                                                -------            -------

Per Share Offering Price to
   the Public                                   $ 22.04            $ 25.03
                                                =======            =======

         INCOME PORTFOLIO:

Net Asset Value per Share                         12.37
                                                =======

Per Share Sales Charge - 4.50%
  of offering price (4.71% of
  net asset value per share)                       0.58
                                                -------

Per Share Offering Price to
  the Public                                    $ 12.95
                                                =======

         HIGH YIELD PORTFOLIO

Net Asset Value per Share                       $ 12.73
Per Share Sales Charge - 4.50%
         of offering price ($5.81%) of
         net asset value per share)                0.60

Per Share Offering Price to
         the Public                             $ 13.33
                                                =======

         Redemption  Commitment.  Each Portfolio has committed  itself to pay in
cash all redemption  requests by any  shareholder  of record,  limited in amount
during any 90-day  period to the  lesser of  $250,000  or 1% of the value of the
Portfolio's  net assets at the  beginning of such  period.  Such  commitment  is
irrevocable   without  the  prior   approval  of  the  Securities  and  Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of  Trustees  reserves  the right to make  payments in whole or in part in
securities  or  other  assets  in  case  of an  emergency  or  any  time  a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in


                                      B-44



the  same  manner  as the  Portfolio  is  valued.  If the  recipient  sold  such
securities, brokerage charges would be incurred.

         Suspension of Redemptions.  The right of redemption may be suspended or
the date of payment  postponed  (a)  during  any period  when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets each Portfolio ordinarily utilizes is restricted, or when
an emergency  exists as determined by the Securities and Exchange  Commission so
that disposal of a Portfolio's  investments  or  determination  of its net asset
value is not  reasonably  practicable,  or (c) for  such  other  periods  as the
Securities  and  Exchange  Commission  by order may permit to protect  Portfolio
shareholders.

         Alternative Sales  Arrangements - Class A, Class B, Class C and Class Y
Shares.  The  availability  of three classes of shares to  individual  investors
permits  an  investor  to choose the method of  purchasing  shares  that is more
beneficial to the investor  depending on the amount of the purchase,  the length
of time the investor  expects to hold shares and other  relevant  circumstances.
Investors should  understand that the purpose and function of the deferred sales
charge and  asset-based  sales charge with respect to Class B and Class C shares
are the  same as those of the  initial  sales  charge  with  respect  to Class A
shares.  Any  salesperson or other person entitled to receive  compensation  for
selling Portfolio shares may receive different  compensation with respect to one
class of shares  than the  other.  Bear  Stearns  will not  accept  any order of
$500,000  or more of Class B shares or $1 million or more of Class C shares,  on
behalf of a single  investor  (not  including  dealer  "street  name" or omnibus
accounts)  because  generally it will be more  advantageous for that investor to
purchase Class A shares of a Portfolio  instead. A fourth class of shares may be
purchased only by certain  institutional  investors at net asset value per share
(the "Class Y shares").

         The four  classes of shares  each  represent  an  interest  in the same
portfolio  investments  of  a  Portfolio.  However,  each  class  has  different
shareholder  privileges and features. The net income attributable to Class B and
Class C shares and the  dividends  payable on Class B and Class C shares will be
reduced by  incremental  expenses  borne  solely by that  class,  including  the
asset-based sales charge to which Class B and Class C shares are subject.

         The  methodology  for  calculating  the net asset value,  dividends and
distributions  of each  Portfolio's  Class A, B, C and Y shares  recognizes  two
types of expenses.  General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class,  based on the  percentage of
the net assets of such class to the Portfolio's  total assets,  and then equally
to each  outstanding  share within a given class.  Such general expenses include
(i) management fees, (ii) legal,  bookkeeping and audit fees, (iii) printing and
mailing costs of  shareholder  reports,  Prospectuses,  Statements of Additional
Information  and  other  materials  for  current  shareholders,   (iv)  fees  to
independent trustees,  (v) custodian expenses,  (vi) share issuance costs, (vii)
organization  and  start-up  costs,   (viii)   interest,   taxes  and  brokerage
commissions,  and (ix) non-recurring  expenses,  such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution Plan
and Shareholder  Servicing Plan fees, (b)  incremental  transfer and shareholder
servicing  agent fees and expenses,  (c)  registration  fees and (d) shareholder
meeting  expenses,  to the extent that


                                      B-45



such  expenses  pertain to a specific  class  rather than to the  Portfolio as a
whole.

         None of the  instructions  described  elsewhere  in the  Prospectus  or
Statement of Additional Information for the purchase, redemption,  reinvestment,
exchange,  or transfer of shares of a  Portfolio,  the  selection  of classes of
shares, or the reinvestment of dividends apply to Class Y shares.


                        DETERMINATION OF NET ASSET VALUE

         The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "How to Buy Shares."

         Valuation  of  Portfolio   Securities.   Equity  Portfolio  securities,
including covered call options written by an Equity Portfolio, are valued at the
last sale price on the  securities  exchange  or national  securities  market on
which such securities primarily are traded. Securities not listed on an exchange
or  national   securities   market,   or  securities  in  which  there  were  no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open  short  positions  where the asked  price is used for
valuation  purposes.  Bid price is used when no asked  price is  available.  Any
assets or liabilities  initially  expressed in terms of foreign currency will be
converted  into U.S.  dollars at the  prevailing  market  rates for  purposes of
calculating  net asset  value.  Because  of the need to obtain  prices as of the
close of trading  on various  exchanges  throughout  the world for such  foreign
securities,   the   calculation   of  net  asset   value  does  not  take  place
contemporaneously  with the determination of prices of such securities.  Forward
currency  contracts  will  be  valued  at the  current  cost of  offsetting  the
contract.  Short-term  investments  (investments  with  maturities of 60 days or
less) are carried at amortized cost, which approximates value. Any securities or
other assets for which recent market  quotations  are not readily  available are
valued  at fair  value  as  determined  in good  faith  by the  Fund's  Board of
Trustees.  Expenses and fees, including the investment advisory,  administration
and distribution  fees, are accrued daily and taken into account for the purpose
of determining the net asset value of an Equity Portfolio's  shares.  Because of
the differences in operating  expenses incurred by each class, the per share net
asset value of each class will differ.

         Substantially  all of the  investments of the Income  Portfolio and the
High Yield Portfolio (including short-term investments) are valued each business
day by one or more independent  pricing services (the "Service") approved by the
Fund's Board of Trustees.  Securities valued by the Service for which quoted bid
prices  in  the  judgment  of  the  Service  are  readily   available   and  are
representative  of the bid side of the market are valued at the mean between the
quoted bid prices (as obtained by the Service  from dealers in such  securities)
and asked prices (as  calculated by the Service based upon its evaluation of the
market for such securities).  Any assets or liabilities  initially  expressed in
terms of foreign  currency will be converted into U.S. dollars at the prevailing
market rates for purposes of calculating net asset value. Because of the need to
obtain  prices as of the close of trading on various  exchanges  throughout  the
world for such foreign  securities,  the calculation of net asset value does not
take  place   contemporaneously   with  the  determination  of  prices  of  such
securities. Other investments valued by the Service are carried at fair value as
determined  by the Service,  based on


                                      B-46



methods  which  include  consideration  of:  yields or prices of  securities  of
comparable  quality,  coupon,  maturity and type;  indications as to values from
dealers; and general market conditions. Short-term investments (investments with
maturities  of 60 days or less)  which are not valued by the Service are carried
at amortized cost,  which  approximate  value.  Other  investments  that are not
valued by the Service are valued at the average of the most recent bid and asked
prices in the market in which such investments are primarily  traded,  or at the
last sales price for securities  traded primarily on an exchange or the national
securities  market.  In the  absence of  reported  sales of  investments  traded
primarily on an exchange or the national  securities  market, the average of the
most recent bid and asked prices is used.  Bid price is used when no asked price
is   available.   Expenses  and  fees,   including  the   investment   advisory,
administration  and distribution  fees, are accrued daily and taken into account
for the purpose of  determining  the net asset  value of the Income  Portfolio's
shares. Because of the differences in operating expenses incurred by each class,
the per share net asset value of each class will differ.

         Each Portfolio's restricted securities,  as well as securities or other
assets for which market quotations are not readily available,  or are not valued
by a pricing service approved by the Board of Trustees, are valued at fair value
as determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of  valuation on a current  basis.  In making their good faith
valuation of restricted  securities,  the Board of Trustees  generally will take
the following factors into consideration:  (i) restricted  securities which are,
or are convertible into,  securities of the same class of securities for which a
public  market  exists  usually  will be valued at  market  value  less the same
percentage   discount  at  which   purchased  (this  discount  will  be  revised
periodically  by the Board of Trustees if the Board of Trustees  believe that it
no longer  reflects the value of the  restricted  securities);  (ii)  restricted
securities  not of the same class as securities for which a public market exists
usually will be valued  initially at cost; and (iii) any  subsequent  adjustment
from cost will be based  upon  considerations  deemed  relevant  by the Board of
Trustees.

         New York Stock Exchange  Closings.  The holidays (as observed) on which
the New York Stock  Exchange is closed  currently  are:  New Year's Day,  Martin
Luther King Jr. Day,  Presidents' Day, Good Friday,  Memorial Day,  Independence
Day, Labor Day, Thanksgiving and Christmas.


                       DIVIDENDS, DISTRIBUTIONS AND TAXES

         The following information supplements and should be read in conjunction
with  the  section  in  each   Portfolio's   Prospectus   entitled   "Dividends,
Distributions and Taxes."

         The following is only a summary of certain  additional  federal  income
tax  considerations  generally  affecting the Portfolios and their  shareholders
that are not  described  in the  Prospectuses.  No  attempt is made to present a
detailed   explanation   of  the  tax  treatment  of  the  Portfolios  or  their
shareholders,  and the discussions here and in the Prospectuses are not intended
as substitutes for careful tax planning.


                                      B-47



         Qualification  as a Regulated  Investment  Company.  Each Portfolio has
elected to be taxed as a regulated  investment company under Subchapter M of the
Internal  Revenue  Code  of  1986,  as  amended  (the  "Code").  As a  regulated
investment  company,  a Portfolio  is not  subject to federal  income tax on the
portion of its net  investment  income (i.e.,  taxable  interest,  dividends and
other  taxable  ordinary  income,  net of expenses)  and capital gain net income
(i.e.,  the excess of capital gains over capital  losses) that it distributes to
shareholders,  provided  that it  distributes  at  least  90% of its  investment
company  taxable  income  (i.e.,  net  investment  income  and the excess of net
short-term  capital gain over net  long-term  capital loss) for the taxable year
(the  "Distribution  Requirement"),  and satisfies certain other requirements of
the Code that are described below.  Distributions by a Portfolio made during the
taxable year or, under specified  circumstances,  within twelve months after the
close of the taxable year, will be considered  distributions of income and gains
of the  taxable  year and will,  therefore,  count  toward  satisfaction  of the
Distribution Requirement.

         In addition to satisfying  the  Distribution  Requirement,  a regulated
investment  company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated  investment  company's
principal  business  of  investing  in stock or  securities)  and  other  income
(including,  but  not  limited  to,  gains  from  options,  futures  or  forward
contracts)  derived  with  respect to its  business of  investing in such stock,
securities or currencies (the "Income Requirement").

         In general,  gain or loss  recognized by a Portfolio on the disposition
of an asset will be a capital gain or loss. In addition, gain will be recognized
as a result of certain  constructive  sales,  including short sales "against the
box." However, gain recognized on the disposition of a debt obligation purchased
by a  Portfolio  at a  market  discount  (generally,  at a price  less  than its
principal  amount)  will be  treated  as  ordinary  income to the  extent of the
portion  of the  market  discount  which  accrued  during the period of time the
Portfolio held the debt obligation. In addition, under the rules of Code section
988, gain or loss recognized on the disposition of a debt obligation denominated
in a foreign  currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency  exchange  rates),  and gain or loss
recognized on the disposition of a foreign  currency forward  contract,  futures
contract, option or similar financial instrument, or of foreign currency itself,
except for regulated  futures  contracts or non-equity  options  subject to Code
section 1256 (unless the Portfolio elects otherwise),  generally will be treated
as ordinary income or loss.

         Further,  the Code also  treats  as  ordinary  income a portion  of the
capital gain attributable to a transaction where substantially all of the return
realized is  attributable  to the time value of a Portfolio's  net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Portfolio and a contemporaneous  contract to sell substantially identical
property in the future;  (2) the transaction is a straddle within the meaning of
section 1092 of the Code;  (3) the  transaction is one that was marketed or sold
to the Portfolio on the basis that it would have the economic characteristics of
a loan but the  interest-like  return would be taxed as capital gain; or (4) the
transaction   is  described  as  a  conversion   transaction   in  the  Treasury
Regulations.  The amount of the gain


                                      B-48



recharacterized  generally will not exceed the amount of the interest that would
have accrued on the net investment  for the relevant  period at a yield equal to
120% of the federal long-term,  mid-term, or short-term rate, depending upon the
type of instrument at issue, reduced by an amount equal to: (1) prior inclusions
of ordinary income items from the conversion transaction and (2) the capitalized
interest on acquisition  indebtedness under Code section 263(g). Built-in losses
will be preserved where a Portfolio has a built-in loss with respect to property
that  becomes a part of a  conversion  transaction.  No  authority  exists  that
indicates that the converted  character of the income will not be passed through
to a Portfolio's shareholders.

         In general,  for purposes of determining  whether  capital gain or loss
recognized  by a  Portfolio  on the  disposition  of an  asset is  long-term  or
short-term,  the holding period of the asset may be affected if (1) the asset is
used  to  close  a  "short  sale"  (which  includes  for  certain  purposes  the
acquisition of a put option) or is  substantially  identical to another asset so
used,  (2) the asset is otherwise  held by the Portfolio as part of a "straddle"
(which  term  generally  excludes a  situation  where the asset is stock and the
Portfolio  grants a qualified  covered call option  (which,  among other things,
must not be deep-in-the-money)  with respect thereto), or (3) the asset is stock
and the  Portfolio  grants an  in-the-money  qualified  covered call option with
respect  thereto.  In  addition,  a  Portfolio  may be  required  to  defer  the
recognition of a loss on the  disposition of an asset held as part of a straddle
to the extent of any  unrecognized  gain on the  offsetting  position.  Any gain
recognized by a Portfolio on the lapse of, or any gain or loss recognized by the
Portfolio from a closing  transaction  with respect to, an option written by the
Portfolio will be treated as a short-term capital gain or loss.

         Certain  transactions  that may be engaged in by a  Portfolio  (such as
regulated futures contracts,  certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable  year,  even
though a  taxpayer's  obligations  (or  rights)  under such  contracts  have not
terminated  (by  delivery,  exercise,  entering  into a closing  transaction  or
otherwise) as of such date. Any gain or loss  recognized as a consequence of the
year-end deemed  disposition of Section 1256 contracts is taken into account for
the  taxable  year  together  with any other  gain or loss  that was  previously
recognized  upon the  termination of Section 1256 contracts  during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts  (including  any capital gain or loss arising as a consequence  of the
year-end  deemed sale of such  contracts) is generally  treated as 60% long-term
capital  gain or loss and 40%  short-term  capital  gain or loss.  A  Portfolio,
however,  may elect not to have this special tax treatment apply to Section 1256
contracts  that are part of a "mixed  straddle"  with other  investments  of the
Portfolio that are not Section 1256 contracts.

         A Portfolio may purchase securities of certain foreign investment funds
or trusts which constitute  passive foreign investment  companies  ("PFICs") for
federal  income tax  purposes.  If a Portfolio  invests in a PFIC,  it has three
separate options.  First, it may elect to treat the PFIC as a qualified electing
fund (a "QEF"), in which event the Portfolio will each year have ordinary income
equal to its pro rata share of the


                                      B-49



PFIC's  ordinary  earnings for the year and long-term  capital gain equal to its
pro rata  share of the  PFIC's  net  capital  gain for the year,  regardless  of
whether the Portfolio  receives  distributions of any such ordinary  earnings or
capital gains from the PFIC. Second, a Portfolio that invests in stock of a PFIC
may make a mark-to-market  election with respect to such stock. Pursuant to such
election,  the Portfolio will include as ordinary  income any excess of the fair
market value of such stock at the close of any taxable year over the Portfolio's
adjusted  tax basis in the stock.  If the  adjusted  tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a given  taxable  year,
such excess will be deductible as ordinary loss in an amount equal to the lesser
of the amount of such excess or the net  mark-to-market  gains on the stock that
the Portfolio  included in income in previous  years.  The  Portfolio's  holding
period with respect to its PFIC stock  subject to the election  will commence on
the first day of the next taxable year. If a Portfolio makes the  mark-to-market
election in the first  taxable  year it holds PFIC stock,  it will not incur the
tax described below under the third option.

         Finally,  if a Portfolio  does not elect to treat the PFIC as a QEF and
does  not  make a  mark-to-market  election,  then,  in  general,  (1) any  gain
recognized by the Portfolio  upon the sale or other  disposition of its interest
in the PFIC or any "excess  distribution" (as defined) received by the Portfolio
from the PFIC will be allocated  ratably over the Portfolio's  holding period of
its  interest  in the  PFIC  stock,  (2)  the  portion  of such  gain or  excess
distribution  so  allocated to the year in which the gain is  recognized  or the
excess  distribution  is received  shall be included  in the  Portfolio's  gross
income for such year as ordinary income (and the distribution of such portion by
the Portfolio to shareholders  will be taxable as an ordinary  income  dividend,
but such portion  will not be subject to tax at the  Portfolio  level),  (3) the
Portfolio  shall  be  liable  for tax on the  portions  of such  gain or  excess
distribution  so  allocated  to prior years in an amount equal to, for each such
prior  year,  (i) the amount of gain or excess  distribution  allocated  to such
prior year  multiplied  by the highest tax rate  (individual  or  corporate)  in
effect for such prior year,  plus (ii) interest on the amount  determined  under
clause (i) for the  period  from the due date for filing a return for such prior
year  until  the date for  filing  a  return  for the year in which  the gain is
recognized  or the excess  distribution  is  received,  at the rates and methods
applicable to underpayments of tax for such period,  and (4) the distribution by
the  Portfolio  to its  shareholders  of the  portions  of such  gain or  excess
distribution  so  allocated  to  prior  years  (net  of the tax  payable  by the
Portfolio  thereon)  will again be taxable to the  shareholders  as an  ordinary
income dividend.

         Treasury   Regulations  permit  a  regulated   investment  company,  in
determining  its investment  company  taxable income and net capital gain (i.e.,
the excess of net long-term  capital gain over net short-term  capital loss) for
any taxable  year,  to elect  (unless it has made a taxable  year  election  for
excise  tax  purposes  as  discussed  below) to treat all or any part of any net
capital loss,  any net long-term  capital loss or any net foreign  currency loss
(including,  to the extent provided in Treasury  Regulations,  losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.

         In  addition to  satisfying  the  requirements  described  above,  each
Portfolio  must satisfy an asset  diversification  test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of a
Portfolio's  taxable year, at least 50% of the value of the  Portfolio's


                                      B-50



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 each of which the  Portfolio has not invested more than 5% of the
value of the Portfolio's  total assets in securities of such issuer and does not
hold more than 10% of the outstanding voting securities of such issuer),  and no
more than 25% of the value of its 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 the Portfolio
controls  and which are  engaged  in the same or similar  trades or  businesses.
Generally,  an option  (call or put) with  respect to a  security  is treated as
issued by the issuer of the security, not the issuer of the option. For purposes
of asset  diversification  testing,  obligations issued or guaranteed by certain
agencies  or  instrumentalities  of the  U.S.  Government,  such as the  Federal
Agricultural Mortgage  Corporation,  the Farm Credit System Financial Assistance
Corporation,   a  Federal  Home  Loan  Bank,  the  Federal  Home  Loan  Mortgage
Corporation,  the Federal National Mortgage Association, the Government National
Mortgage  Corporation and the Student Loan Marketing  Association are treated as
U.S. Government Securities.

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

         Excise  Tax on  Regulated  Investment  Companies.  A 4%  non-deductible
excise tax is imposed on a regulated investment company that fails to distribute
in each  calendar  year an amount equal to 98% of its  ordinary  income for such
calendar  year and 98% of its capital  gain net income for the  one-year  period
ended on October 31 of such  calendar  year (or, at the  election of a regulated
investment  company having a taxable year ending November 30 or December 31, for
its taxable year (a "taxable year  election")).  The balance of such income must
be  distributed  during the next calendar year.  For the foregoing  purposes,  a
regulated  investment  company is treated  as having  distributed  any amount on
which it is subject to income tax for any taxable  year ending in such  calendar
year.

         For  purposes of  calculating  the excise  tax, a regulated  investment
company  shall:  (1) reduce its  capital  gain net income (but not below its net
capital  gain) by the amount of any net ordinary  loss for the calendar year and
(2)  exclude  foreign  currency  gains and losses and  ordinary  gains or losses
arising  as a result  of a PFIC  mark-to-market  election  (or  upon the  actual
disposition of the PFIC stock subject to such  election)  incurred after October
31 of any year (or  after the end of its  taxable  year if it has made a taxable
year  election) in  determining  the amount of ordinary  taxable  income for the
current  calendar  year  (and,  instead,   include  such  gains  and  losses  in
determining ordinary taxable income for the succeeding calendar year).

         Each  Portfolio  intends  to make  sufficient  distributions  or deemed
distributions  of its ordinary  taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Portfolio may in certain  circumstances


                                      B-51



be required to liquidate portfolio investments to make sufficient  distributions
to avoid excise tax liability.

         Portfolio   Distributions.   Each  Portfolio  anticipates  distributing
substantially  all of its  investment  company  taxable  income for each taxable
year. Such  distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal  income tax purposes,  but will qualify for the
70%  dividends-received  deduction for corporate shareholders only to the extent
discussed below.

         A Portfolio may either retain or  distribute  to  shareholders  its net
capital  gain for  each  taxable  year.  Each  Portfolio  currently  intends  to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term  capital
gain,  regardless of the length of time the  shareholder  has held his shares or
whether such gain was recognized by the Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides,  however, that under certain
conditions  only 50% (58% for  alternative  minimum tax purposes) of the capital
gain  recognized  upon a Portfolio's  disposition of domestic  "small  business"
stock will be subject to tax.

         Conversely,  if a Portfolio  elects to retain its net capital gain, the
Portfolio will be taxed thereon  (except to the extent of any available  capital
loss  carryovers) at the 35% corporate tax rate. If a Portfolio elects to retain
its net capital gain, it is expected that the Portfolio  also will elect to have
shareholders  of record on the last day of its taxable  year  treated as if each
received a distribution of his pro rata share of such gain, with the result that
each  shareholder  will be required to report his pro rata share of such gain on
his tax return as long-term  capital gain,  will receive a refundable tax credit
for his pro rata  share  of tax  paid by the  Portfolio  on the  gain,  and will
increase  the  tax  basis  for his  shares  by an  amount  equal  to the  deemed
distribution less the tax credit.

         Ordinary income dividends paid by a Portfolio with respect to a taxable
year will qualify for the 70%  dividends-received  deduction generally available
to corporations (other than corporations, such as S corporations,  which are not
eligible for the deduction  because of their special  characteristics  and other
than for purposes of special taxes such as the accumulated  earnings tax and the
personal  holding  company  tax)  to the  extent  of the  amount  of  qualifying
dividends  received by the Portfolio from domestic  corporations for the taxable
year.  A dividend  received by a Portfolio  will not be treated as a  qualifying
dividend (1) 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),  excluding  for this purpose  under the rules of Code section
246(c)(3)and (4) any period during which the Portfolio has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money  or otherwise  nonqualified option to buy,
or has otherwise  diminished  its risk of loss by holding other  positions  with
respect to, such (or substantially  identical) stock; (2) to the extent that the
Portfolio is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in  substantially  similar or related
property;  or (3) to the extent that the stock on which the  dividend is paid is
treated  as  debt-financed  under the rules of Code  section  246A.  The  46-day
holding  period must be  satisfied  during the 90-day  period  beginning 45 days
prior to each  applicable  ex-


                                      B-52



dividend date;  the 91-day  holding period must be satisfied  during the 180-day
period beginning 90 days before each applicable  ex-dividend date. Moreover, the
dividends-received  deduction for a corporate  shareholder  may be disallowed or
reduced  (1) if  the  corporate  shareholder  fails  to  satisfy  the  foregoing
requirements  with respect to its shares of a Portfolio or (2) by application of
Code section 246(b) which in general limits the dividends-received  deduction to
70% of the  shareholder's  taxable  income  (determined  without  regard  to the
dividends-received deduction and certain other items).

         Alternative  minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds,  the  regular  tax and is computed at a maximum  marginal
rate of 28% for  noncorporate  taxpayers and 20% for corporate  taxpayers on the
excess of the taxpayer's  alternative  minimum  taxable income  ("AMTI") over an
exemption   amount.   For  purposes  of  the   corporate   AMT,  the   corporate
dividends-received  deduction is not itself an item of tax preference  that must
be added back to taxable  income or is otherwise  disallowed  in  determining  a
corporation's AMTI. However, a corporate  shareholder will generally be required
to take the full amount of any dividend  received from a Portfolio  into account
(without a  dividends-received  deduction) in determining  its adjusted  current
earnings,  which are used in computing an additional  corporate  preference item
(i.e.,  75% of the excess of a corporate  taxpayer's  adjusted  current earnings
over its AMTI (determined  without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.

         Investment  income that may be received  by a  Portfolio  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 a Portfolio to a reduced rate of, or exemption from, taxes on such
income.  It is  impossible  to determine  the  effective  rate of foreign tax in
advance  since the  amount of a  Portfolio's  assets to be  invested  in various
countries is not known.

         Distributions  by a Portfolio  that do not constitute  ordinary  income
dividends  or capital gain  dividends  will be treated as a return of capital to
the extent of (and in reduction of) the  shareholder's  tax basis in his shares;
any excess  will be treated as gain from the sale of his  shares,  as  discussed
below.

         Distributions  by a Portfolio  will be treated in the manner  described
above regardless of whether such distributions are paid in cash or reinvested in
additional  shares of the Portfolios or shares of another  portfolio (or another
fund).  Shareholders  receiving a distribution in the form of additional  shares
will be treated  as  receiving  a  distribution  in an amount  equal to the fair
market value of the shares received,  determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of a
Portfolio  reflects  undistributed net investment  income or recognized  capital
gain net income,  or unrealized  appreciation  in the value of the assets of the
Portfolio,  distributions  of such amounts will be taxable to the shareholder in
the manner described above,  although they  economically  constitute a return of
capital to the shareholder.

         Ordinarily,  shareholders  are  required  to  take  distributions  by a
Portfolio into account in the year in which the distributions are made. However,
dividends  declared in October,  November or December of any year and payable to
shareholders  of record on a specified date in such month will be


                                      B-53



deemed to have been received by the shareholders  (and made by the Portfolio) on
December 31 of such calendar year if such dividends are actually paid in January
of the  following  year.  Shareholders  will be advised  annually as to the U.S.
federal income tax  consequences of  distributions  made (or deemed made) during
the year.

         A Portfolio  will be required in certain cases to withhold and remit to
the U.S.  Treasury 31% of ordinary income  dividends and capital gain dividends,
and the proceeds of redemption of shares,  paid to any  shareholder  (1) who has
failed to provide a correct taxpayer  identification  number, (2) who is subject
to backup  withholding for failure to properly report the receipt of interest or
dividend  income,  or (3) who has failed to certify to the Portfolio  that it is
not subject to backup  withholding or that it is an exempt  recipient (such as a
corporation).

         Sale or Redemption of Shares. A shareholder will recognize gain or loss
on the sale or  redemption  of shares of a Portfolio  in an amount  equal to the
difference  between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder  purchases other shares of the Portfolio within
30 days before or after the sale or  redemption.  In  general,  any gain or loss
arising from (or treated as arising  from) the sale or redemption of shares of a
Portfolio will be considered  capital gain or loss and will be long-term capital
gain or loss if the shares  were held for  longer  than one year.  However,  any
capital loss arising from the sale or  redemption  of shares held for six months
or less will be treated as a long-term  capital loss to the extent of the amount
of capital gain dividends received on such shares. For this purpose, the special
holding  period  rules of Code section  246(c)(3)  and (4)  (discussed  above in
connection with the  dividends-received  deduction for  corporations)  generally
will apply in determining  the holding  period of shares.  Capital losses in any
year are  deductible  only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

         If a  shareholder  (1)  incurs a sales  load in  acquiring  shares of a
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the same or another Portfolio or another
fund at a reduced  sales load  pursuant to a right to  reinvest at such  reduced
sales load acquired in connection  with the  acquisition of the shares  disposed
of,  then  the  sales  load on the  shares  disposed  of (to the  extent  of the
reduction in the sales load on the shares  subsequently  acquired)  shall not be
taken into  account in  determining  gain or loss on the shares  disposed of but
shall be treated  as  incurred  on the  acquisition  of the shares  subsequently
acquired.

         Foreign  Shareholders.  Taxation of a shareholder who, as to the United
States,  is a nonresident  alien  individual,  foreign trust or estate,  foreign
corporation,  or foreign partnership ("foreign  shareholder") depends on whether
the income from the Portfolio is  "effectively  connected"  with a U.S. trade or
business carried on by such shareholder.

         If the income from a Portfolio is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign  shareholder  will be subject to U.S.  withholding  tax at the
rate of 30% (or lower  applicable  treaty  rate)  upon the  gross  amount


                                      B-54



of the dividend.  Such foreign  shareholder  would generally be exempt from U.S.
federal  income  tax on gains  realized  on the sale of shares  of a  Portfolio,
capital gain dividends,  and amounts retained by a Portfolio that are designated
as undistributed capital gains.

         If the income from a Portfolio  is  effectively  connected  with a U.S.
trade or business  carried on by a foreign  shareholder,  then  ordinary  income
dividends,  capital  gain  dividends,  and any gains  realized  upon the sale of
shares of such Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.

         In the case of foreign  noncorporate  shareholders,  a Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise  exempt from  withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.

         The tax  consequences  to a foreign  shareholder  entitled to claim the
benefits  of an  applicable  tax treaty may be  different  from those  described
herein.  Foreign  shareholders  are urged to consult their own tax advisers with
respect  to the  particular  tax  consequences  to  them of an  investment  in a
Portfolio, including the applicability of foreign taxes.

         Effect of Future Legislation;  State and Local Tax Considerations.  The
foregoing general discussion of U.S. federal income tax consequences is based on
the Code and the Treasury 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.

         Rules of state and local  taxation of  ordinary  income  dividends  and
capital gain dividends from regulated  investment  companies may differ from the
rules for U.S. federal income taxation  described above.  Shareholders are urged
to consult  their tax advisers as to the  consequences  of these and other state
and local tax rules affecting investment in the Portfolios.


                             PORTFOLIO TRANSACTIONS

         BSAM assumes general  supervision  over placing orders on behalf of the
Income  Portfolio for the purchase or sale of investment  securities.  Purchases
and sales of portfolio  securities  usually are principal  transactions.  Income
Portfolio  securities  ordinarily are purchased directly from the issuer or from
an  underwriter  or a market  maker for the  securities.  Usually  no  brokerage
commissions are paid by the Income  Portfolio for such  purchases.  Purchases of
portfolio  securities from underwriters  include a commission or concession paid
by the issuer to the  underwriter  and the purchase  price paid to market makers
for the  securities  may  include the spread  between  the bid and asked  price.
Income  Portfolio  transactions  are  allocated  to  various  dealers by the its
portfolio managers in their best judgment.

         BSAM assumes general  supervision over placing orders on behalf of each
Equity Portfolio for the purchase or sale of investment  securities.  Allocation
of brokerage  transactions,  including their  frequency,  is made in


                                      B-55



BSAM's best judgment and in a manner deemed fair and reasonable to shareholders.
The primary  consideration  is prompt  execution of orders at the most favorable
net price.  Subject to this  consideration,  the brokers  selected  will include
those  that  supplement  BSAM's  research   facilities  with  statistical  data,
investment information,  economic facts and opinions. Information so received is
in addition to and not in lieu of services  required to be performed by BSAM and
BSAM's fees are not reduced as a consequence of the receipt of such supplemental
information.  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 BSAM, as applicable, determines in good faith that such commission
is reasonable in terms of the transaction or the overall  responsibility of BSAM
to the Portfolio and its other  clients and that the total  commissions  paid by
the  Portfolio  will be  reasonable in relation to the benefits to the Portfolio
over the long-term.

         Such  supplemental  information  may be useful to BSAM in serving  each
Equity  Portfolio  and  the  other  funds  which  it  advises  and,  conversely,
supplemental  information obtained by the placement of business of other clients
may be useful to BSAM in carrying out its obligations to each Equity  Portfolio.
Sales of  Portfolio  shares by a broker  may be taken  into  consideration,  and
brokers  also will be  selected  because  of their  ability  to  handle  special
executions  such as are involved in large block  trades or broad  distributions,
provided the primary  consideration  is met.  Large block trades may, in certain
cases,  result  from two or more  funds  advised or  administered  by BSAM being
engaged simultaneously in the purchase or sale of the same security.  Certain of
BSAM's  transactions  in securities of foreign  issuers may not benefit from the
negotiated  commission rates available to each Equity Portfolio for transactions
in  securities  of  domestic  issuers.  When  transactions  are  executed in the
over-the-counter market, each Portfolio will deal with the primary market makers
unless a more  favorable  price or execution  otherwise is  obtainable.  Foreign
exchange   transactions  of  each  Equity  Portfolio  are  made  with  banks  or
institutions in the interbank market at prices reflecting a mark-up or mark-down
and/or commission.

         Portfolio turnover may vary from year to year as well as within a year.
The portfolio  turnover rate for the Large Cap Value Portfolio,  Small Cap Value
Portfolio  and Income  Portfolio for the period April 3, 1995  (commencement  of
operations)  through  March 31, 1996 was 45%,  41% and 107%,  respectively.  The
portfolio  turnover rate for the fiscal year ended March 31, 1997 was 137%,  57%
and 263%, respectively. The portfolio turnover rate for the High Yield Portfolio
for the period December 29, 1997 (commencement of operations)  through March 31,
1998 was 139.61%.  This portfolio turnover rate is significantly higher than the
portfolio turnover rates of other mutual funds that invest in equity securities.
A  higher   portfolio   turnover  rate  means  that  the  Portfolio  will  incur
substantially  higher  brokerage  costs  and may  realize  a  greater  amount of
short-term  capital gains or losses.  In periods in which  extraordinary  market
conditions prevail,  BSAM will not be deterred from changing investment strategy
as rapidly  as needed,  in which case  higher  portfolio  turnover  rates can be
anticipated  which  would  result in greater  brokerage  expenses.  The  overall
reasonableness of brokerage commissions paid is evaluated by BSAM based upon its
knowledge of available  information as to the general level of commissions  paid
by other institutional investors for comparable services.


                                      B-56



         To the extent consistent with applicable provisions of the 1940 Act and
the rules and  exemptions  adopted by the  Securities  and  Exchange  Commission
thereunder,  the Board of Trustees has  determined  that  transactions  for each
Portfolio may be executed  through Bear Stearns if, in the judgment of BSAM, the
use of Bear  Stearns  is likely to  result  in price and  execution  at least as
favorable  as  those  of  other  qualified   broker-dealers,   and  if,  in  the
transaction,  Bear Stearns  charges the  Portfolio a rate  consistent  with that
charged  to  comparable  unaffiliated  customers  in  similar  transactions.  In
addition,   under  rules  recently   adopted  by  the  Securities  and  Exchange
Commission,  Bear  Stearns  may  directly  execute  such  transactions  for each
Portfolio on the floor of any  national  securities  exchange,  provided (i) the
Board  of  Trustees  has  expressly  authorized  Bear  Stearns  to  effect  such
transactions,  and (ii) Bear Stearns  annually  advises the Board of Trustees of
the  aggregate  compensation  it earned on such  transactions.  Over-the-counter
purchases and sales are transacted  directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.

         For the fiscal year ended March 31, 1997, Large Cap Value Portfolio and
Small Cap Value  Portfolio  paid total  brokerage  commissions  of  $59,523  and
$102,411,  respectively,  of which  approximately  $1,300 and $9,000 was paid to
Bear Stearns,  respectively.  The Large Cap Value  Portfolio and Small Cap Value
Portfolio  paid  2.18%  and  8.79%,  respectively,  of its  commissions  to Bear
Stearns,  and, with respect to all the securities  transactions  for each Equity
Portfolio,  2.93%  and  8.89%  of  the  transactions,   respectively,   involved
commissions  being paid to Bear Stearns.  No brokerage  commissions were paid by
the Income Portfolio.

         For the fiscal year ended March 31, 1998, Large Cap Value Portfolio and
Small Cap Value  Portfolio  paid total  brokerage  commissions  of  $26,799  and
$302,476,  respectively,  of which approximately $522 and $1,728,  respectively,
was paid to Bear  Stearns.  The Large Cap  Value  Portfolio  and Small Cap Value
Portfolio  paid  1.95%  and  0.57%,  respectively,  of its  commissions  to Bear
Stearns,  and, with respect to all the securities  transactions  for each Equity
Portfolio,  1.89%  and  1.15%  of  the  transactions,   respectively,   involved
commissions  being paid to Bear  Stearns.  For the fiscal  year ended  March 31,
1998,  the Large  Cap Value  Portfolio  and  Small Cap Value  Portfolio  paid an
average  commission  rate per share of $0.0581 and  $0.0557,  respectively.  The
percentage of commissions for which they received  research services paid by the
Large Cap Value  Portfolio and Small Cap Value  Portfolio was 98.40% and 94.95%,
respectively, of the total brokerage commissions paid by each Portfolio.


                                      B-57



                             PERFORMANCE INFORMATION

         The following information supplements and should be read in conjunction
with  the  section  in  the   Portfolios'   Prospectus   entitled   "Performance
Information."

         Current  yield for the 30-day  period ended March 31, 1998 for Class A,
Class C and  Class  Y of the  Income  Portfolio  was  5.86%,  5.21%  and  6.21%,
respectively.  The  current  yield  for  each  class  reflects  the  waiver  and
reimbursement  of certain fees and expenses by the investment  adviser,  without
which the  Portfolio's  current  yield for such period would have been 3.87% for
Class A,  3.67% for Class C and 4.42% for Class Y.  Current  yield of the Income
Portfolio  is computed  pursuant  to a formula  which  operates as follows:  The
amount of the Income Portfolio's  expenses accrued for the 30-day period (net of
reimbursements)  is  subtracted  from the amount of the  dividends  and interest
earned by the Income Portfolio during the period. That result is then divided by
the product of: (a) the average  daily number of shares  outstanding  during the
period that were  entitled to receive  dividends,  and (b) the maximum  offering
price  per share on the last day of the  period  less any  undistributed  earned
income per share  reasonably  expected  to be  declared  as a  dividend  shortly
thereafter.  The  quotient is then added to 1, and that sum is raised to the 6th
power,  after which 1 is  subtracted.  The current  yield is then  arrived at by
multiplying the result by 2.

         Average  annual  total  return  of  each  Portfolio  is  calculated  by
determining the ending redeemable value of an investment  purchased at net asset
value  (maximum  offering  price  in the  case  of  Class  A) per  share  with a
hypothetical  $1,000  payment made at the beginning of the period  (assuming the
reinvestment  of  dividends  and  distributions),  dividing by the amount of the
initial  investment,  taking  the "n"th root of the  quotient  (where "n" is the
number of years in the  period)  and  subtracting  1 from the  result.  A class'
average annual total return figures  calculated in accordance  with such formula
assume that in the case of Class A the maximum sales load has been deducted from
the  hypothetical  initial  investment at the time of purchase or in the case of
Class B the maximum  applicable CDSC has been paid upon redemption at the end of
the period.

         Total return of each Portfolio is calculated by subtracting  the amount
of the Portfolio's net asset value (maximum  offering price in the case of Class
A) per share at the  beginning  of a stated  period from the net asset value per
share at the end of the  period  (after  giving  effect to the  reinvestment  of
dividends and  distributions  during the period and any  applicable  CDSC),  and
dividing the result by the net asset value  (maximum  offering price in the case
of Class A) per share at the  beginning of the period.  Total return also may be
calculated based on the net asset value per share at the beginning of the period
instead of the maximum  offering  price per share at the beginning of the period
for Class A shares or without giving effect to any applicable CDSC at the end of
the period for Class B and C shares.  In such cases,  the calculation  would not
reflect the  deduction  of the sales load with  respect to Class A shares or any
applicable CDSC with respect to Class B and C shares, which, if reflected, would
reduce the performance quoted.



                                      B-58


         The chart below sets forth average annual total return from  inception*
through  March 31, 1998 and total  return for one-year  and  inception*  through
March 31, 1998 for Class A, Class C and Class Y:



                                                     Total return - inception* through March 31, 1998


                                   Class A                            Class B                        Class C              Class Y
                     --------------------------------   --------------------------------    --------------------------  ------------
                     Based on Maximum    Based on Net   Based on Maximum    Based on Net      Based on    Based on Net  Based on Net
Name of Portfolio     Offering Price      Asset Value    Offering Price      Asset Value    Maximum CDSC  Asset Value    Asset Value
- -----------------    ----------------    ------------   ----------------    ------------    ------------  ------------  ------------

                                                                                                     
Large Cap Value            100.86%          110.90%           8.04%            13.70%            N/A        107.85%        83.29%
Portfolio

Small Cap Value            109.93%          120.43%          11.83%            17.69%            N/A        116.88%       104.44%
Portfolio

Income Portfolio            19.32%           24.00%          (5.04%)           (0.04%)           N/A         22.47%        18.39%




                                                        Total return - one-year ended March 31, 1998


                                   Class A                            Class B                        Class C              Class Y
                     --------------------------------   --------------------------------    --------------------------  ------------
                     Based on Maximum    Based on Net   Based on Maximum    Based on Net      Based on    Based on Net  Based on Net
Name of Portfolio     Offering Price      Asset Value    Offering Price      Asset Value    Maximum CDSC  Asset Value    Asset Value
- -----------------    ----------------    ------------   ----------------    ------------    ------------  ------------  ------------

                                                                                                         
Large Cap Value             37.69%          44.59%             N/A                 N/A             N/A         43.94%        45.27%
Portfolio

Small Cap Value             39.90%          46.86%             N/A                 N/A             N/A         46.10%        47.54%
Portfolio

Income Portfolio             5.31%           9.43%             N/A                 N/A             N/A          8.92%         9.81%




                                           Average annual total return - inception* through March 31, 1998


                                   Class A                            Class B                        Class C              Class Y
                     --------------------------------   --------------------------------    --------------------------  ------------
                     Based on Maximum    Based on Net   Based on Maximum    Based on Net      Based on    Based on Net  Based on Net
Name of Portfolio     Offering Price      Asset Value    Offering Price      Asset Value    Maximum CDSC  Asset Value    Asset Value
- -----------------    ----------------    ------------   ----------------    ------------    ------------  ------------  ------------

                                                                                                        
Large Cap Value            26.20%           28.27%             N/A                 N/A             N/A         27.65%        26.75%
Portfolio

Small Cap Value            28.07%           30.18%             N/A                 N/A             N/A         29.47%        29.36%
Portfolio

Income Portfolio            6.08%            7.45%             N/A                 N/A             N/A          7.01%         6.81%



- ----------

*    Class  A and  Class  C  shares  of  Large  Cap  Value  Portfolio  commenced
     investment operations on April 4, 1995. Class A and Class C shares of Small
     Cap Value Portfolio commenced investment operations on April 3, 1995. Class
     A  and  Class  C  shares  of  the  Income  Portfolio  commenced  investment
     operations  on April 5, 1995.  The initial  public  offering of the Class Y
     shares of Large Cap Value  Portfolio,  Small Cap Value Portfolio and Income
     Portfolio  commenced  on  September  11,  June 22, and  September  8, 1995,
     respectively.



         No Average  Annual Returns for High Yield  Portfolio.  The total return
for Class A (at maximum offering price) for the fiscal year ended March 31, 1998
was 3.39%.  Based on net asset value per share, the total return for Class A was
8.30% for this  period.  The total return for Class B and C was


                                      B-59



8.13% and 8.13%,  respectively.  (With CDSC,  the total return for Class B and C
was 3.13% and 7.13%, respectively).


                                 CODE OF ETHICS

         BSAM and the Fund, on behalf of each  Portfolio,  has adopted a Code of
Ethics (each a "Code of Ethics"),  that  establishes  standards by which certain
access  persons of the Fund must abide relating to personal  securities  trading
conduct.  Under each Code of Ethics, access persons which include, among others,
trustees  and  officers  of the Fund and  employees  of the Fund and  BSAM,  are
prohibited from engaging in certain conduct, including: (1) the purchase or sale
of any security for his or her account or for any account in which he or she has
any direct or indirect beneficial  interest,  without prior approval by the Fund
or without the applicability of certain exemptions;  (2) the recommendation of a
securities transaction without disclosing his or her interest in the security or
issuer of the  security;  (3) the  commission  of fraud in  connection  with the
purchase or sale of a security held by or to be acquired by each Portfolio;  and
(4) the  purchase of any  securities  in an initial  public  offering or private
placement  transaction  eligible for purchase or sale by each Portfolio  without
prior approval by the Fund. Certain transactions are exempt from item (1) of the
previous  sentence,  including:  (1) any  securities  transaction,  or series of
related  transactions,  involving  500 or fewer  shares of (i) an issuer with an
average  monthly trading volume of 100 million shares or more, or (ii) an issuer
that has a market  capitalization of $1 billion or greater; and (2) transactions
in exempt securities or the purchase or sale of securities  purchased or sold in
exempt transactions.

         The Code of  Ethics  specifies  that  access  persons  shall  place the
interests of the shareholders of each Portfolio first,  shall avoid potential or
actual  conflicts  of interest  with each  Portfolio,  and shall not take unfair
advantage   of  their   relationship   with  each   Portfolio.   Under   certain
circumstances,  the Adviser to each Portfolio may aggregate or bunch trades with
other  clients  provided  that no client  is  materially  disadvantaged.  Access
persons are required by the Code of Ethics to file quarterly reports of personal
securities investment transactions. However, an access person is not required to
report a transaction over which he or she had no control. Furthermore, a trustee
of the Fund who is not an  "interested  person"  (as defined in the 1940 Act) of
the Fund is not required to report a transaction if such person did not know or,
in the  ordinary  course of his  duties as a Trustee  of the Fund,  should  have
known, at the time of the  transaction,  that,  within a 15 day period before or
after such  transaction,  the  security  that such person  purchased or sold was
either  purchased or sold, or was being considered for purchase or sale, by each
Portfolio.  The Code of Ethics  specifies  that certain  designated  supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion,  grant or
deny approval of transactions required by the Code of Ethics.


                                      B-60



                           INFORMATION ABOUT THE FUND

         The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "General Information."

         Each  Portfolio  share has one vote and,  when  issued  and paid for in
accordance  with the terms of the  offering,  is fully paid and  non-assessable.
Portfolio shares have no preemptive,  subscription or conversion  rights and are
freely transferable.

         The Fund will send annual and semi-annual  financial  statements to all
its shareholders.

         As of May 14,  1999,  the  following  shareholders  owned,  directly or
indirectly, 5% or more of the indicated class of the Portfolio's shares.


                                       Percent of Large Cap
Name and Address                    Class A Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.               18.2%
FBO 200-40406-10
1 Metrotech Center North
Brooklyn, NY  11201-3859


                                       Percent of Large Cap
Name and Address                    Class B Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                5.3%
FBO 905-98627-15
1 Metrotech Center North
Brooklyn, NY  11201-3859

Raymond James Assoc. Inc.                     5.7%
Edward D. Walsh Jr. IRA
6 Standish Cir.
Andover, MA  01810

Raymond James Assoc. Inc.                     8.0%
Larry A. Lafranchi IRA
14 Wabanki Way
Andover, MA  01810


                                      B-61



                                       Percent of Large Cap
Name and Address                    Class C Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                6.9%
FBO 220-43167-11
1 Metrotech Center North
Brooklyn, NY  11201-3859


                                       Percent of Large Cap
Name and Address                    Class Y Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                7.1%
FBO 039-54877-13
1 Metrotech Center North
Brooklyn, NY  11201-3859

Bear, Stearns Securities Corp.                5.4%
FBO 039-54877-13
1 Metrotech Center North
Brooklyn, NY  11201-3859

Bear, Stearns Securities Corp.                6.5%
FBO 051-37142-12
1 Metrotech Center North
Brooklyn, NY  11201-3859

Strafe & Co. FAO Trust                       14.3%
FBO Danielle Young
DTD 8/21/90 6863471800
P.O. Box 160
Westerville, OH 43086

                                       Percent of Small Cap
Name and Address                    Class A Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                5.4%
FBO 049-40985-10
1 Metrotech Center North
Brooklyn, NY  11201-3859



                                      B-62



                                       Percent of Small Cap
                                          Value Portfolio
Name and Address                    Class B Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                5.1%
FBO 984-13624-25
1 Metrotech Center North
Brooklyn, NY  01201-3859


                                       Percent of Small Cap
                                          Value Portfolio
Name and Address                    Class Y Shares Outstanding
- ----------------                    --------------------------

Custodial Trust Company                      24.0%
101 Carnegie Center
Princeton, NJ  08540

Bear Stearns Securities Corp.                 8.8%
FBO 049-40880-16
1 Metrotech Center North
Brooklyn, NY  01201-3859


                                         Percent of Income
                                            Portfolio
Name and Address                    Class A Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.               17.7%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY  11201-3859

Dorothy J. Pintar                             5.3%
140 Country View Drive
Robinson Twp., PA  15136-1251


                                         Percent of Income
                                            Portfolio
Name and Address                    Class B Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                7.2%
FBO 420-28188-13
1 Metrotech Center North
Brooklyn, NY  01201-3859

Robert W. Baird Co. Inc.                      7.8%
A C 1171-7740
777 East Wisconsin Ave.
Milwaukee, WI  53202-5391


                                      B-63




Bear, Stearns Securities Corp.                6.0%
FBO 963-95024-19
1 Metrotech Center North
Brooklyn, NY  11201-3859

Wexford Cleaning Services Corp.               8.0%
FBO UA DTD 03 07 96
22960 Cass Ave.
Woodland Hills, CA  91364-3917


                                         Percent of Income
                                            Portfolio
Name and Address                    Class C Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.                9.0%
FBO 498-00055-18
1 Metrotech Center North
Brooklyn, NY 11201-3859

Bear, Stearns Securities Corp.                5.1%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, NY 11201-3859

Bear, Stearns Securities Corp.                5.7%
FBO 498-00056-17
1 Metrotech Center North
Brooklyn, NY 11201-3859


                                         Percent of Income
                                            Portfolio
Name and Address                    Class Y Shares Outstanding
- ----------------                    --------------------------

Bear, Stearns Securities Corp.               11.6%
FBO 049-40503-13
1 Metrotech Center North
Brooklyn, NY 11201-3859

Bear, Stearns Securities Corp.               11.4%
FBO 051-98474-12
1 Metrotech Center North
Brooklyn, NY 11201-3859

Bear, Stearns Securities Corp.                9.2%
FBO 046-03216-15
1 Metrotech Center North
Brooklyn, NY 11201-3859

Bear, Stearns Securities Corp.                6.5%
FBO 049-40716-16
1 Metrotech Center North
Brooklyn, NY 11201-3859


                                      B-64



Bear, Stearns Securities Corp.                9.9%
FBO 051-35282-16
1 Metrotech Center North
Brooklyn, NY 11201-3859

Bear, Stearns Securities Corp.               15.7%
FBO 049-40863-17
1 Metrotech Center North
Brooklyn, NY 11201-3859


                                       Percent of High Yield
                                         Portfolio Class A
Name and Address                         Shares Outstanding
- ----------------                       ---------------------

Bear, Stearns Securities Corp.                7.9%
FBO 220-23312-17
One Metrotech Center North
Brooklyn, NY  11201-3859

Mark Pinto                                   10.2%
Trst Fox & Co.
DTD 12/16/67
P.O. Box 976
New York, NY  10268


                                       Percent of High Yield
                                         Portfolio Class C
Name and Address                         Shares Outstanding
- ----------------                       ---------------------

Bear, Stearns Securities Corp.                6.3%
FBO 720-57204-15
One Metrotech Center North
Brooklyn, NY  11201-3859


         A shareholder who beneficially owns, directly or indirectly,  more than
25% of a  Portfolio's  voting  Securities  may be deemed a "control  person" (as
defined in the 1940 Act) of a Portfolio.


           CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
                            AND INDEPENDENT AUDITORS

         Custodial Trust Company ("CTC"),  101 Carnegie Center,  Princeton,  New
Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian. Under
a custody agreement with each Portfolio,  CTC holds each Portfolio's  securities
and keeps all necessary  accounts and records.  For its  services,  CTC receives
from each  Portfolio  an annual fee of the greater of 0.015% of the value of the
domestic assets held in custody or $5,000,  such fee to be payable monthly based
upon the total market value of such assets,  as  determined on the last business
day of the month.  In addition,  CTC receives  certain  securities


                                      B-65



transactions charges which are payable monthly. PFPC, Bellevue Corporate Center,
400 Bellevue Parkway,  Wilmington,  Delaware 19809, is each Portfolio's transfer
agent,  dividend  disbursing  agent and registrar.  Neither CTC nor PFPC has any
part in determining the investment policies of any Portfolio or which securities
are to be purchased or sold by any Portfolio.

         Kramer Levin  Naftalis & Frankel LLP, 919 Third Avenue,  New York,  New
York 10022,  as counsel for the Fund,  has  provided  legal advice as to certain
legal matters regarding the shares of beneficial interest being sold pursuant to
the Portfolios' Prospectus.

         Deloitte & Touche LLP, Two World Financial  Center,  New York, New York
10281-1434, independent auditors, have been selected as auditors of the Fund.

                              FINANCIAL STATEMENTS

         The Portfolios' annual report to shareholders for the fiscal year ended
March 31, 1998 is a separate document supplied with this Statement of Additional
Information,  and the  financial  statements,  accompanying  notes and report of
independent  auditors  appearing therein are incorporated by reference into this
Statement of Additional Information.

                                    APPENDIX

         Description  of certain  ratings  assigned by S&P,  Moody's,  Fitch and
Duff:

S&P
Bond Ratings
- ------------

                                       AAA

         Bonds rated AAA have the highest  rating  assigned by S&P.  Capacity to
pay interest and repay principal is extremely strong.

                                       AA

         Bonds rated AA have a very strong  capacity to pay  interest  and repay
principal and differ from the highest rated issues only in small degree.

                                        A

         Bonds  rated  A have  a  strong  capacity  to pay  interest  and  repay
principal  although they are somewhat more susceptible to the adverse effects of
changes in  circumstances  and economic  conditions  than  obligations in higher
rated categories.

                                       BBB

         Bonds  rated BBB are  regarded  as having an  adequate  capacity to pay
interest and repay principal.  Whereas they 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
bonds in this category than for bonds in higher rated categories.



                                      B-66


         S&P's  letter  ratings may be modified by the addition of a plus (+) or
minus (-) sign  designation,  which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.

Commercial Paper Rating

         The  designation  A-1  by S&P  indicates  that  the  degree  of  safety
regarding  timely payment is either  overwhelming  or very strong.  Those issues
determined to possess  overwhelming  safety  characteristics  are denoted with a
plus sign (+)  designation.  Capacity  for timely  payment on issues with an A-2
designation is strong.  However, the relative degree of safety is not as high as
for issues designated A-1.


Moody's
Bond Ratings
- ------------

                                       Aaa

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

                                       Aa

         Bonds  which  are  rated Aa are  judged  to be of high  quality  by all
standards. Together with the Aaa group they comprise what generally are 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 which are rated A possess many  favorable  investment  attributes
and are to be  considered  as upper medium  grade  obligations.  Factors  giving
security to principal and interest are considered adequate,  but elements may be
present which suggest a susceptibility to impairment sometime in the future.

                                       Baa

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

         Moody's  applies the  numerical  modifiers 1, 2 and 3 to show  relative
standing  within the major rating  categories,  except in the Aaa category.  The


                                      B-67



modifier 1 indicates  a ranking  for the  security in the higher end of a rating
category;  the  modifier 2  indicates a mid-range  ranking;  and the  modifier 3
indicates a ranking in the lower end of a rating category.

Commercial Paper Rating

         The  rating  Prime-1  (P-1)  is the  highest  commercial  paper  rating
assigned  by  Moody's.  Issuers of P-1 paper must have a superior  capacity  for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by 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 earnings 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.

         Issuers (or relating supporting  institutions) rated Prime-2 (P-2) have
a strong  capacity for  repayment of  short-term  promissory  obligations.  This
ordinarily will 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  alternate  liquidity  is
maintained.


                                      B-68



Fitch
Bond Ratings
- ------------

         The ratings  represent  Fitch's  assessment of the issuer's  ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into  consideration  special  features of the issue,  its  relationship to other
obligations  of the  issuer,  the  current  financial  condition  and  operative
performance  of the issuer and of any  guarantor,  as well as the  political and
economic  environment that might affect the issuer's future  financial  strength
and credit quality.

                                       AAA

         Bonds  rated  AAA are  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 rated AA are  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 rated A are 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  rated  BBB  are  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.

         Plus (+) and minus (-) signs are used with a rating  symbol to indicate
the relative position of a credit within the rating category.


                                      B-69



Short-Term Ratings
- ------------------

         Fitch's  short-term  ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit,  medium-term notes, and municipal and investment
notes.

         Although  the  credit  analysis  is  similar  to  Fitch's  bond  rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity  necessary to meet the issuer's  obligations  in a timely
manner.

                                      F-1+

         Exceptionally  Strong Credit  Quality.  Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

                                       F-1

         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

         Good Credit  Quality.  Issues  carrying this rating have a satisfactory
degree of  assurance  for  timely  payments,  but the margin of safety is not as
great as the F-1+ and F-1 categories.


Duff
Bond Ratings
- ------------

                                       AAA

         Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.

                                       AA

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

                                        A

         Bonds rated A have  protection  factors which are average but adequate.
However,  risk  factors  are more  variable  and  greater in periods of economic
stress.


                                      B-70



                                       BBB

         Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. Considerable variability
in risk during economic cycles.

         Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating category.

Commercial Paper Rating
- -----------------------

         The rating Duff-1 is the highest  commercial  paper rating  assigned by
Duff.  Paper rated  Duff-1 is regarded as having very high  certainty  of timely
payment with  excellent  liquidity  factors  which are  supported by ample asset
protection.  Risk  factors are minor.  Paper rated  Duff-2 is regarded as having
good  certainty  of timely  payment,  good  access to capital  markets and sound
liquidity factors and company fundamentals. Risk factors are small.


                                      B-71