The discussion below applies to each of the Portfolios (and, with respect to the Index Equity Portfolio, its investment in the Index Master Portfolio) un- less otherwise noted.

EQUITY SECURITIES. During normal market conditions each Portfolio, except the Balanced Portfolio, will normally invest at least 80% of the value of its total assets in equity securities. The Portfolios will invest primarily in equity se- curities of U.S. issuers, except the International Equity, International Emerg- ing Markets and International Small Cap Equity Portfolios, which will invest primarily in foreign issuers. Equity securities include common stock and pre- ferred stock (including convertible preferred stock); bonds, notes and deben- tures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depositary receipts.

ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental De- pository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either foreign or domestic un- derlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized independently and without the cooperation of the issuer of the underlying securities. As a result, available information con- cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment considerations as described below under "In- ternational Portfolios."

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio (other than the Index Master Portfolio) may write (i.e. sell) covered call options, buy put options, buy call options and write secured put options for the purpose of hedging or earning additional income, which may be deemed speculative or, with respect to the International Equity, Interna- tional Emerging Markets and International Small Cap Equity Portfolios, cross- hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securi- ties, securities indices, or the yield differential between two securities, or, in the case of the International Equity, International Emerging Markets and In- ternational Small Cap Equity Portfolios, foreign currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections af- forded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or, except with re- spect to the Index Master Portfolio, for other hedging purposes. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately af- terwards the aggregate amount of margin deposits on its existing futures posi- tions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

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Futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might other- wise result from a market decline or currency exchange fluctuation. A Portfo- lio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may uti- lize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in- struments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) a sub-adviser's inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de- termines that market conditions warrant, each Portfolio other than the Index Master Portfolio may invest without limitation in high quality money market instruments. The Portfolios may also invest in high quality money market in- struments pending investment or to meet anticipated redemption requests. The Balanced Portfolio may also invest in these securities in furtherance of its investment objective. The Index Master Portfolio may invest a portion of its assets, normally not more than 5% of its net assets, in certain short-term fixed income obligations in order to maintain liquidity or to invest temporar- ily uncommitted cash balances.

High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign issuers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and ob- ligations of supranational organizations. Generally, such obligations will ma- ture within one year from the date of settlement, but may mature within two years from the date of settlement. Under a repurchase agreement, a Portfolio agrees to purchase securities from financial institutions subject to the sell- er's agreement to repurchase them at an agreed upon time and price. Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the Index Master Portfolio) may purchase securities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These trans- actions involve a commitment by a Portfolio to purchase or sell particular se- curities with payment and delivery taking place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in in- terest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available

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REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from fi- nancial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made by each Portfolio through reverse repurchase agreements under which the Portfo- lio sells portfolio securities to financial institutions such as banks and bro- ker-dealers and agrees to repurchase them at a particular date and price. A Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agree- ment. The Index Master Portfolio does not intend to invest in reverse repur- chase agreements. The Balanced Portfolio may utilize reverse repurchase agree- ments when it is anticipated that the interest income to be earned from the in- vestment of the proceeds of the transaction is greater than the interest ex- pense of the transaction. This use of reverse repurchase agreements may be re- garded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the pro- ceeds will be less than the interest expense, that the market value of the se- curities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securities may not be re- turned to the Portfolio. During the time a reverse repurchase agreement is out- standing, a Portfolio will maintain a segregated account with the Fund's custo- dian containing cash, U.S. Government or other appropriate liquid securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets (33% in the case of the Index Master Portfolio). In addition, the Balanced Portfolio may borrow up to an additional 5% of its total assets for temporary purposes. Whenever borrowings exceed 5% of a Portfolio's total assets, the Portfolios (other than the Index Master Portfolio and the Balanced Portfolio) will not make any in- vestments.

INVESTMENT COMPANIES. In connection with the management of their daily cash po- sitions, the Portfolios (other than the Index Master Portfolio) may invest in securities issued by other investment companies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. Such Portfolios may also invest in securities issued by other investment companies with similar investment objectives. The International Equity and International Emerging Markets Portfolios may purchase shares of investment companies invest- ing primarily in foreign securities, including so-called "country funds." Coun- try funds have portfolios consisting exclusively of securities of issuers lo- cated in one foreign country. The Index Equity Portfolio may also invest in Standard & Poor's Depository Receipts (SPDRs) and shares of other investment companies that are structured to seek a similar correlation to the performance of the S&P 500 Index. Securities of other investment companies will be acquired within limits prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addi- tion to the expenses each bears directly in connection with its own operations.

SECURITIES LENDING. A Portfolio may seek additional income by lending securi- ties on a short-term basis. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or (ex- cept for the Index Master Portfolio) irrevocable bank letters of credit main- tained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in re- ceiving

23.

ILLIQUID SECURITIES. No Portfolio will invest more than 15% (10% with respect to the Index Master Portfolio) of the value of its net assets in securities that are illiquid. Variable and floating rate instruments that cannot be dis- posed of within seven days, and repurchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to these limits. Each Portfolio may purchase secu- rities which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered il- liquid so long as it is determined by the adviser or sub-adviser that an ade- quate trading market exists for the securities. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified institutional buyers become uninterested in purchas- ing these restricted securities.

SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap Growth Equity Portfolio, the Small Cap Value Equity Portfolio and the In- ternational Small Cap Equity Portfolio will invest at least 90% (and in any event at least 65%) of their respective total assets in equity securities of smaller-capitalized organizations (less than $1 billion at the time of pur- chase or, with respect to the International Small Cap Equity Portfolio, $1.5 billion for Japanese issuers). Similarly, the Mid-Cap Value Equity Portfolio and Mid-Cap Growth Equity Portfolio will invest, under normal market condi- tions, at least 90% (and in any event at least 65%) or their respective total assets in equity securities of medium-capitalized organizations (between $1 billion and $5 billion at the time of purchase). These organizations will nor- mally have more limited product lines, markets and financial resources and will be more dependent upon a limited management group than larger capitalized companies.

INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the Index Master Portfolio (in which all of the assets of the Index Equity Portfo- lio are invested) invests at least 95% of the value of its total assets in se- curities included in the Standard & Poor's 500(R) Composite Stock Price Index (the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of the stocks that comprise the S&P 500 Index in approximately the same propor- tions as they are represented in the Index. The Index Master Portfolio oper- ates as an index portfolio and, therefore, is not actively managed (through the use of economic, financial or market analysis), and adverse performance will ordinarily not result in the elimination of a stock from the Portfolio. The Portfolio will remain fully invested in common stocks even when stock prices are generally falling. Ordinarily, portfolio securities will not be sold except to reflect additions or deletions of the stocks that comprise the S&P 500 Index, including mergers, reorganizations and similar transactions and, to the extent necessary, to provide cash to pay redemptions of the Port- folio's shares. The investment performance of the Index Master Portfolio and the Index Equity Portfolio is expected to approximate the investment perfor- mance of the S&P 500 Index, which tends to be cyclical in nature, reflecting periods when stock prices generally rise or fall.

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S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN- DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER- RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM- PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRAN-TIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

INTERNATIONAL PORTFOLIOS. During normal market conditions, the International Equity Portfolio, the International Emerging Markets Portfolio and the Interna- tional Small Cap Equity Portfolio (the "International Portfolios") will invest at least 90% (and in any event at least 65%) of their total assets in equity securities of foreign issuers. Investing in foreign securities involves consid- erations not typically associated with investing in securities of companies or- ganized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

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

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

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

As stated, the International Emerging Markets Portfolio will invest its assets in countries with emerging economies or securities markets. These countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub- lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay- sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af- rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and Zimbabwe. Political and economic structures in many of these countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability characteristic of more devel- oped countries. Some of these countries may have in the past failed to recog- nize 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

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The International Equity Portfolio invests primarily in equity securities of issuers located in countries included in EAFE. Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United Kingdom are currently included in EAFE. From time to time the International Eq- uity Portfolio may invest more than 25% of its total assets in the securities of issuers located in Japan. Investments of 25% or more of the Portfolio's to- tal assets in this or any other country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries. For example, in the past events in the Japanese economy as well as social developments and natural disasters have affected Japanese secu- rities and currency markets, and have periodically disrupted the relationship of the Japanese yen with other currencies and with the U.S. dollar.

The International Small Cap Equity Portfolio invests primarily in equity secu- rities of issuers located in countries included in the Salomon Brothers Ex- tended Markets World Ex-U.S. Index. Australia, Austria, Belgium, Canada, Den- mark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United Kingdom currently comprise the Salomon Index. From time to time the Portfolio may invest more than 25% of its total assets in the securities of is- suers located in Japan or the United Kingdom. As discussed above, investments of 25% or more of the Portfolio's total assets in Japan, the United Kingdom or any other country would make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

The International Small Cap Equity Portfolio may also invest up to 20% of its assets in countries with emerging economies or securities markets which, as stated above, involves special risks. These countries may include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Republic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Africa, South Korea, Tai- wan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and Zimbabwe.

The International Portfolios may (but are not required to) use forward foreign currency exchange contracts to hedge against movements in the value of foreign currencies (including the European Currency Unit) relative to the U.S. dollar in connection with specific portfolio transactions or with respect to portfolio positions. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts do not eliminate fluctuations in the values of portfolio securities but rather allow a Portfolio to establish a rate of exchange for a future point in time.

BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio may include domestic and dollar-denominated foreign debt securities, including bonds, debentures, notes, equipment lease and trust certificates, mortgage-re- lated and asset-backed securities, guaranteed investment contracts (GICs), ob- ligations issued or guaranteed by the U.S. Government or its agencies or in- strumentalities and state and local municipal obligations. These securities will be rated at the time of purchase within the four highest rating groups as- signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat- ings Group ("S&P") or another nationally recognized statistical rating agency. If unrated, the securities will be determined at the time of purchase to be of comparable quality by the sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are generally considered to be investment grade al- though they have speculative characteristics. If a fixed income security is re- duced below Baa by Moody's or BBB by S&P, the Portfolio's sub-ad-

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The Balanced Portfolio may make significant investments in residential and com- mercial mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receiv- ables or other assets) issued by governmental entities and private issuers.

The Balanced Portfolio may acquire several types of mortgage-related securi- ties, including guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage-related securities ("ARMs") and collateralized mortgage obliga- tions ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Is- suers of CMOs frequently elect to be taxed as a pass-through entity known as real estate mortgage investment conduits, or REMICs. CMOs are issued in multi- ple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in many ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other clas- ses having an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known as "Z-Bonds"), which only accrue in- terest at a specified rate until other specified classes have been retired and are converted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured, and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustees for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may be prepaid at any time be- cause the underlying assets (i.e. loans) generally may be prepaid at any time. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools under- lying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to ex- perience substantial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Balanced Portfolio will gener- ally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that the Balanced Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Balanced Portfolio's principal investment to the extent of premium paid.

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The Balanced Portfolio may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securi- ties containing loans or mortgages originated by PNC Bank, National Associa- tion ("PNC Bank") or its affiliates. It is possible that, under some circum- stances, PNC Mortgage Securities Corp. or its affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage Securities Corp. or its affiliates.

The Balanced Fund may also purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obliga- tions of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are sup- ported by the right of the issuer to borrow from the U.S. Treasury; and still others are supported only by the credit of the agency or instrumentality issu- ing the obligation. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury income growth receipts ("TIGRs") and certificates of accrual on Treasury cer- tificates ("CATs")). The Balanced Portfolio may purchase these certificates, as well as Treasury receipts and other stripped securities, which represent beneficial ownership interests in either future interest payments or the fu- ture principal payments on U.S. Government obligations. These instruments are issued at a discount to their "face value" and may (particularly in the case of stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors.

The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount debt obligations that do not make periodic interest payments) and state and local government obligations. Zero-coupon bonds are subject to greater market fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest. Municipal obligations may be purchased when the Portfolio's sub-adviser believes that their return, on a pre-tax basis, will be comparable to the returns of other permitted in- vestments. Dividends paid by the Portfolio that are derived from interest on municipal obligations will be taxable to shareholders.

To take advantage of attractive opportunities in the mortgage market and to enhance current income, the Balanced Portfolio may enter into dollar roll transactions. A dollar roll transaction involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Port- folio to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. Dur- ing the period between the sale and repurchase, the Portfolio will not be en- titled to receive interest and principal payments on the securities sold. Pro- ceeds of the sale will be invested in additional instruments for the Portfo- lio, and the income from these investments will generate income for the Port- folio. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment per- formance of the Portfolio compared with what the performance would have been without the use of dollar rolls. At the time that the Portfolio enters into a dollar roll transaction, it will place in a segregated account maintained with its custodian cash, U.S. Government securities or other liquid securities hav- ing a value equal to the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that its value is maintained. The Portfolio's dollar rolls, together with its reverse repurchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties the Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Portfo- lio sells securities becomes insolvent, the Portfolio's right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser's ability to

28.

The Balanced Portfolio may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolio may enter into these transac- tions primarily to preserve a return or spread on a particular investment or portion of its holdings, as a duration management technique or to protect against an increase in the price of securities the Portfolio anticipates pur- chasing at a later date. The Portfolio intends to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments 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 inter- est on a notional principal amount from the party selling such interest rate floor.

The Balanced Portfolio may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. Although the Portfolio does not currently intend to do so under current market conditions, the Portfolio may invest up to 10% of its total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater re- sets in the opposite direction from the market rate of interest to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Unrated variable and floating rate instruments will be comparable in quality to investment grade securities as determined by the Portfolio's sub-advisers. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for the Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

The Portfolio may only make short sales of securities "against-the-box." A short sale is a transaction in which the Portfolio sells a security it does not own in anticipation that the market price of that security will decline. The Portfolio may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain port- folio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to acquire the identical security at no additional cost. When selling short "against-the-box," the Portfolio forgoes an opportunity for capital appreciation in the security.

The market value of the Balanced Portfolio's investments in fixed income secu- rities will change in response to changes in interest rates and the relative financial strength of each issuer. During periods of falling interest rates, the values of long-term fixed income securities generally rise. Conversely, during periods of rising interest rates the values of such securities generally decline. Changes in the financial strength of an issuer or changes in the rat- ings of any particular security may also affect the value of these investments.

PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that the annual portfolio turnover rate for the International Small Cap Equity Port- folio will not exceed 100%. The past portfolio turnover rates of the other Portfolios are set forth above under "What Are The Portfolios' Financial High- lights?" A Portfolio's annual portfolio turnover rate will not be a factor pre- venting a sale or purchase when the adviser or sub-adviser believes investment considerations warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e. 100% or more) will generally result in higher transaction costs to a Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

29.

A Portfolio's (other than the Index Master Portfolio) investment objective and policies may be changed by the Fund's Board of Trustees without shareholder ap- proval. However, shareholders will be given at least 30 days' notice before any change to a Portfolio's investment objective. The investment objective of the Index Master Portfolio may not be changed without the approval of shareholders of that Portfolio. No assurance can be provided that a Portfolio will achieve its investment objective.

Each Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of a Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolios' fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

No Portfolio may:

(1) purchase securities (except obligations of the U.S. Government and its in- strumentalities and related repurchase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of a Portfolio's total assets may be invested without regard to this 5% limitation;

(2) subject to the foregoing 25% exception (other than with respect to the In- dex Master Portfolio), purchase more than 10% of the outstanding voting se- curities of any issuer;

(3) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry; and

(4) borrow money in amounts over one-third of the value of its total assets (33% of net assets in the case of the Index Master Portfolio) at the time of such borrowing.

These investment limitations are applied at the time investment securities are purchased. Notwithstanding the investment limitations, the Index Equity Portfo- lio may invest all of its assets in shares of an open-end management investment company with substantially the same investment objective, policies and limita- tions as that Portfolio.

30.

TRUSTEES       The business and affairs of the Fund and of The DFA Investment
               Trust Company (in which the assets of the Fund's Index Equity
               Portfolio are invested) are managed under the direction of
               their separate Boards of Trustees. The following persons cur-
               rently serve as trustees of BlackRock Funds:

              William O. Albertini--Executive Vice President and Chief Finan-
              cial Officer of Bell Atlantic Global Wireless.

              Raymond J. Clark--Treasurer of Princeton University.

              Robert M. Hernandez--Vice Chairman and Chief Financial Officer
              of USX Corporation.

              Anthony M. Santomero--Professor of Finance and Director of the
              Financial Institutions Center, The Wharton School, University of
              Pennsylvania.

              David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
              ates, Inc.

               The Statement of Additional Information furnishes additional
               information about the trustees and officers of both the Fund
               and The DFA Investment Trust Company.

ADVISER AND
SUB-ADVISERS   The Adviser to BlackRock Funds is BlackRock, Inc., except with
               respect to the Index Equity Portfolio. Each of the Portfolios
               within the BlackRock Fund family (except the Index Equity Port-
               folio) is managed by a specialized portfolio manager who is a
               member of one of BlackRock, Inc.'s portfolio management
               affiliates.

               As adviser, BlackRock, Inc. is responsible for the overall in-
               vestment management of the Portfolios. The sub-advisers are re-
               sponsible for the day-to-day management of the Portfolios, and
               generally make all purchase and sale investment decisions for
               the Portfolios. The sub-advisers also provide research and
               credit analysis.

               THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

               . BlackRock Financial Management, Inc.: Domestic and non-dollar
                fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

Provident Capital Management, Inc. ("PCM"), which has its pri- mary offices at 1600 Market Street, 27th Floor, Philadelphia, Pennsylvania 19103, acts as sub-adviser to the Large Cap Value Equity, Mid-Cap Value Equity, Small Cap Value Equity and Select Equity Portfolios. PNC Equity Advisors Company ("PEAC"), which has its primary offices at 1600 Market Street, 27th Floor, Philadelphia, Pennsylvania 19103, acts as sub-adviser to the Large Cap Growth Equity, Mid-Cap Growth Equity and Small Cap Growth Equity Portfolios. CastleInternational Asset Management Limited, which has its primary offices at 7 Castle Street, Ed- inburgh, Scotland, EH2 3AH, acts as sub-adviser to the Interna- tional Equity, International Emerging Markets and International Small Cap Equity Portfolios. BlackRock Financial Management, Inc. ("BlackRock"), primary offices at 345 Park Avenue, New York, New York 10154, and PCM act as sub-advisers to the Bal- anced Portfolio.

31.

The Portfolios (other than the Index Equity Portfolio) and their investment sub-advisers and portfolio managers are as follows:

       BLACKROCK PORTFOLIO                      PORTFOLIO MANAGER
       -------------------                      -----------------
Large Cap Value Equity             Daniel B. Eagan; portfolio manager with
                                   sub-adviser since 1995; director of
                                   investment strategy at BlackRock, Inc.
                                   during 1994 and 1995; prior to 1994, served
                                   as senior research consultant for Mercer
                                   Investment Consulting; Portfolio manager
                                   since January 1997.
Large Cap Growth Equity            R. Andrew Damm; investment manager with
                                   sub-adviser since 1997; senior investment
                                   strategist with BlackRock, Inc. since 1995;
                                   portfolio manager with PNC Bank from 1988
                                   to 1995; Mr. Damm has participated in the
                                   management of the Portfolio since 1996 and
                                   has been designated Portfolio manager since
                                   September 1997.
Mid-Cap Value Equity               Christian K. Stadlinger; Vice President of
                                   sub-adviser since July 1996; prior to
                                   joining sub-adviser, Portfolio Manager and
                                   Research Analyst with Morgan Stanley Asset
                                   Management; Portfolio co-manager since
                                   inception.
                                   Daniel B. Eagan (see above); Portfolio co-
                                   manager since its inception.
Mid-Cap Growth Equity              William C. McVail; investment manager with
                                   sub-adviser since 1994; prior to joining
                                   sub-adviser, equity and fixed income
                                   analyst with PNC Bank; Portfolio co-manager
                                   since its inception.
                                   William J. Wykle; investment manager with
                                   sub-adviser since 1995; investment manager
                                   with PNC Bank, National Association since
                                   1986; Portfolio co-manager since its
                                   inception.
Small Cap Value Equity             Christian K. Stadlinger; Vice President of
                                   sub-adviser since July 1996; prior to
                                   joining sub-adviser, Portfolio Manager and
                                   Research Analyst with Morgan Stanley Asset
                                   Management; Portfolio manager since July
                                   1996.
Small Cap Growth Equity            William J. Wykle (see above); Portfolio co-
                                   manager since its inception.
                                   William C. McVail; (see above); Portfolio
                                   co-manager since inception.
International Equity               Gordon Anderson; Managing and Investment
                                   Director with sub-adviser since 1996; prior
                                   to joining sub-adviser, Investment Director
                                   of Dunedin Fund Managers Ltd.; Portfolio
                                   manager since 1996.
International Small Cap Equity     Peter J. Tait; Director and Global
                                   Strategist of sub-adviser since 1996.
                                   Director and Head of Continental European
                                   desk at Dunedin Fund Managers Ltd. from
                                   1990 to 1996. Portfolio manager since its
                                   inception.
International Emerging Markets     Euan Rae; Senior Investment Manager with
                                   sub-adviser since 1996; prior to joining
                                   sub-adviser, Head of Emerging Markets at
                                   Dunedin Fund Managers Ltd. and investment
                                   manager with Edinburgh Fund Managers;
                                   Portfolio manager since 1996.
Select Equity                      Daniel B. Eagan (see above); Portfolio
                                   manager since 1995.
Balanced                           R. Andrew Damm; senior investment
                                   strategist with BlackRock, Inc. since 1995;
                                   portfolio manager with PNC Bank from 1988
                                   to 1995; Portfolio co-manager since 1996.
                                   Robert S. Kapito; Vice Chairman of
                                   BlackRock since 1988; Portfolio co-manager
                                   since 1995.
                                   Keith T. Anderson; Managing Director and
                                   co-chair of Portfolio Management Group and
                                   Investment Strategy Committee of BlackRock
                                   since 1988; Portfolio co-manager since
                                   1995.

32.

BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 1600 Market Street, 29th Floor, Philadelphia, Pennsylvania 19103. BlackRock, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.

For their investment advisory and sub-advisory services, Black- Rock, Inc. and the Portfolios' sub-advisers are entitled to fees, computed daily on a portfolio-by-portfolio basis and pay- able monthly, at the maximum annual rates set forth below. As stated under "What Are the Expenses of the Portfolios?", with respect to certain Portfolios, BlackRock, Inc. and the sub-ad- visers intend to waive a portion of their fees during the cur- rent fiscal year. All sub-advisory fees are paid by BlackRock, Inc. and do not represent an extra charge to the Portfolios.

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                      .550%                      .400%
$1 billion--$2 billion                .500                       .350
$2 billion--$3 billion                .475                       .325
greater than $3 billion               .450                       .300

      MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE
                              EQUITY AND
          MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                      .800%                      .650%
$1 billion -- $2 billion              .700                       .550
$2 billion -- $3 billion              .675                       .500
greater than $3 billion               .625                       .475

      MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
                  EQUITY PORTFOLIO (BEFORE WAIVERS)

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                      .750%                      .600%
$1 billion -- $2 billion              .700                       .550
$2 billion -- $3 billion              .675                       .525
greater than $3 billion               .650                       .500
                 MAXIMUM ANNUAL CONTRACTUAL FEE RATE
       FOR THE INTERNATIONAL SMALL CAP EQUITY PORTFOLIO (BEFORE
                               WAIVERS)

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                      1.00%                       .85%
$1 billion -- $2 billion               .95                        .80
$2 billion -- $3 billion               .90                        .75
greater than $3 billion                .85                        .70

                            INVESTMENT  SUB-ADVISORY
AVERAGE DAILY NET ASSETS   ADVISORY FEE     FEE
first $1 billion              1.250%       1.100%
$1 billion -- $2 billion      1.200        1.050
$2 billion -- $3 billion      1.155        1.005
greater than $3 billion       1.100        0.950

33.

                  Although the advisory fee rates payable by the International
                  Emerging Markets and International Small Cap Equity Portfo-
                  lios are higher than the rates payable by mutual funds in-
                  vesting in domestic securities, the Fund believes they are
                  comparable to the rates paid by many other funds with similar
                  investment objectives and policies and is appropriate for the
                  Portfolio in light of its investment objective and policies.

                  For their last fiscal year the Portfolios paid investment ad-
                  visory fees at the following annual rates (expressed as a
                  percentage of average daily net assets) after voluntary fee
                  waivers: Large Cap Value Equity Portfolio, .48%; Large Cap
                  Growth Equity Portfolio, .52%; Mid-Cap Value Equity Portfolio
                  .79%; Mid-Cap Growth Equity Portfolio .79%; Small Cap Value
                  Equity Portfolio, .55%; Small Cap Growth Equity Portfolio,
                  .54%; International Equity Portfolio, .66%; International
                  Emerging Markets Portfolio, 1.16%; Select Equity Portfolio,
                  .52%; and Balanced Portfolio, .52%.

                  The Portfolios' sub-advisers strive to achieve best execution
                  on all transactions. Infrequently, brokerage transactions for
                  the Portfolios may be directed to registered broker/dealers
                  who have entered into dealer agreements with the Funds' dis-
                  tributor.

ADVISER TO        Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER      Avenue, 11th Floor, Santa Monica, CA 90401, serves as invest-
PORTFOLIO         ment adviser to the Index Master Portfolio.

                  DFA was organized in May 1981 and is engaged in the business
                  of providing investment management services to institutional
                  investors. DFA's assets under management totalled approxi-
                  mately $27 billion at November 30, 1997. David G. Booth and
                  Rex A. Sinquefield, both of whom are trustees and officers of
                  The DFA Investment Trust Company and directors, officers and
                  shareholders of DFA, may be deemed controlling persons of
                  DFA.

                  Investment decisions for the Index Master Portfolio are made
                  by the Investment Committee of DFA, which meets on a regular
                  basis and also as needed to consider investment issues. The
                  Investment Committee is composed of certain officers and di-
                  rectors of DFA who are elected annually. DFA provides the In-
                  dex Master Portfolio with a trading department and selects
                  brokers and dealers to effect securities transactions.

                  For the investment advisory services provided to the Index
                  Master Portfolio under the advisory agreement, DFA is enti-
                  tled to receive a fee at the annual rate of .025% of the In-
                  dex Master Portfolio's average daily net assets. For the In-
                  dex Master Portfolio's fiscal year ended November 30, 1997,
                  DFA received a monthly fee for its investment advisory serv-
                  ices which, on an annual basis, equaled .025% of the Index
                  Master Portfolio's net assets.

                                      34.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad- ministrators. BlackRock, Inc. and PFPC are indirect wholly- owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub- sidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relating to the maintenance of financial records and fund accounting. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's average daily net assets. PFPC and BDI are entitled to receive a combined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of each Portfolio's average daily net assets, .075% of the next $500 million of each Portfolio's average daily net assets and .065% of the av- erage daily net assets of each Portfolio in excess of $1 bil- lion and (ii) .115% of the first $500 million of the average daily net assets allocated to Service Shares of each Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the average daily net assets allocated to Service Shares of each Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their adminis- tration fees from a Portfolio. PFPC serves as the administra- tive services, dividend disbursing and transfer agent to the Index Master Portfolio, for which PFPC is entitled to compensa- tion at the annual rate of .015% of the Index Master Portfo- lio's net assets.

For information about the operating expenses the Portfolios paid for the most recent fiscal year, see "What Are The Ex- penses Of The Portfolios?"

AGENT,         PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND       Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING     lios' custodian and PFPC, whose principal offices are located
AGENT AND      at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN      their transfer agent and dividend disbursing agent.

SHAREHOLDER    The Fund intends to enter into service arrangements with insti-
SERVICING      tutional investors ("Institutions") (including PNC Bank and its
               affiliates) which provide that the Institutions will render
               support services to their customers who are the beneficial own-
               ers of Service Shares. These services are intended to supple-
               ment the services provided by the Fund's Administrators and
               transfer agent to the Fund's shareholders of record. In consid-
               eration for payment of a shareholder processing fee of up to
               .15% (on an annualized basis) of the average daily net asset
               value of Service Shares owned beneficially by their customers,
               Institutions may provide one or more of the following services:
               processing purchase and redemption requests from customers and
               placing orders with the Fund's transfer agent or the distribu-
               tor; processing dividend payments from the Fund on behalf of
               customers; providing sub-accounting with respect to Service
               Shares beneficially owned by customers or the information nec-
               essary for sub-accounting; and providing other similar servic-
               es. In consideration for payment of a separate shareholder ser-
               vicing fee of up to .15% (on an annualized basis) of the aver-
               age daily net asset value of Service Shares owned beneficially
               by their customers, Institutions may provide one or more of
               these additional services to such customers: responding to cus-
               tomer inquiries relating to the services performed by the In-
               stitution and to customer inquiries concerning their invest-
               ments in Service Shares; assisting customers in designating and
               changing dividend options, account designa-

                                      35.

-------------------------------------------------------------------------------
                 tions and addresses; and providing other similar shareholder
                 liaison services. Customers who are beneficial owners of
                 Service Shares should read this Prospectus in light of the
                 terms and fees governing their accounts with Institutions.

                 Conflict-of-interest restrictions may apply to the receipt
                 of compensation paid by the Fund in connection with the in-
                 vestment of fiduciary funds in Portfolio shares. Institu-
                 tions, including banks regulated by the Comptroller of the
                 Currency, Federal Reserve Board and state banking commis-
                 sions, and investment advisers and other money managers sub-
                 ject to the jurisdiction of the SEC, the Department of Labor
                 or state securities commissions, are urged to consult their
                 legal counsel before entering into agreements with the Fund.

                 The Glass-Steagall Act and other applicable laws, among
                 other things, prohibit banks from engaging in the business
                 of underwriting securities. It is intended that the services
                 provided by Institutions under their service agreements will
                 not be prohibited under these laws. Under state securities
                 laws, banks and financial institutions that receive payments
                 from the Fund may be required to register as dealers.

EXPENSES
                 Expenses are deducted from the total income of each Portfo-
                 lio before dividends and distributions are paid. Expenses
                 include, but are not limited to, fees paid to the investment
                 adviser and the Administrators, transfer agency and custo-
                 dian fees, trustee fees, taxes, interest, professional fees,
                 shareholder servicing and processing fees, fees and expenses
                 in registering and qualifying the Portfolios and their
                 shares for distribution under Federal and state securities
                 laws, expenses of preparing prospectuses and statements of
                 additional information and of printing and distributing pro-
                 spectuses and statements of additional information to exist-
                 ing shareholders, expenses relating to shareholder reports,
                 shareholder meetings and proxy solicitations, insurance pre-
                 miums, the expense of independent pricing services, and
                 other expenses which are not expressly assumed by BlackRock,
                 Inc. or the Fund's service providers under their agreements
                 with the Fund. Any general expenses of the Fund that do not
                 belong to a particular investment portfolio will be allo-
                 cated among all investment portfolios by or under the direc-
                 tion of the Board of Trustees in a manner the Board deter-
                 mines to be fair and equitable.

36.

DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous basis by BDI as distributor (the "Distributor"). BDI maintains its principal offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428- 2961.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Fund is not required or permitted under the Plan to make distribution payments with respect to Service Shares. However, the Plan permits BDI, the Administrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them which, subject to ap- plicable NASD regulations, may include contributions to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsor- ship of various educational programs, sales contests and promotions in which participants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For further information, see "In- vestment Advisory, Administration, Distribution and Servicing Arrangements" in the Statement of Additional Information.

PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu- tions acting on behalf of their customers, as well as to certain persons who were shareholders of the Compass Capital Group of Funds at the time of its com- bination with The PNC(R) Fund during the first quarter of 1996. Service Shares will normally be held of record by Institutions or in the names of nominees of Institutions. Share purchases are normally effected through a customer's ac- count at an Institution through procedures established in connection with the requirements of the account. In these cases, confirmations of share purchases and redemptions will be sent to the Institutions. Beneficial ownership of shares will be recorded by the Institutions and reflected in the account state- ments provided by such Institutions to their customers. Investors wishing to purchase shares should contact their Institutions.

Service Shares are sold at their net asset value per share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern Time) on a Business Day are priced the same day. A "Business Day" is any week- day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Business Day.

Payment for Service Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the respective Portfolios. For further information, see the Statement of Additional Information. The minimum initial investment is $5,000; however, Institutions may set a higher minimum for their customers. There is no minimum subsequent investment requirement. The Fund does not accept third party checks for initial or subsequent investments.

The Fund may in its discretion modify or waive the minimum investment amount, may reject any order for Service Shares and may suspend and resume the sale of shares of any Portfolio at any time.

REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in accordance with the procedures applicable to their accounts with the Institu- tions. These procedures will vary according to the type of account and the In- stitution involved, and customers should consult their account managers in this regard. It is the responsibility of Institutions to transmit redemption orders to PFPC and credit their customers' accounts with redemption proceeds on a timely basis. In the case of shareholders holding share certificates, the cer- tificates must accompany the redemption request.

Institutions may place redemption orders by telephoning PFPC at (800) 441-7450. Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the redemption order. The Fund, the

37.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custodian is closed is normally wired in Federal funds on the next Business Day following redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days af- ter receiving a redemption order if, in the judgment of BlackRock, Inc., an earlier payment could adversely affect a Portfolio. No charge for wiring re- demption payments is imposed by the Fund, although Institutions may charge their customer accounts for redemption services. Information relating to such redemption services and charges, if any, should be obtained by customers from their Institutions.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.

The Fund may redeem Service Shares in any Portfolio account if the account balance drops below $5,000 as the result of redemption requests and the share- holder does not increase the balance to at least $5,000 upon thirty days' written notice. If a customer has agreed with an Institution to maintain a minimum balance in his or her account with the Institution, and the balance in the account falls below that minimum, the customer may be obligated to redeem all or part of his or her shares in the Portfolios to the extent necessary to maintain the minimum balance required.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsi- bilities under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

38.

During normal market conditions, the Micro-Cap Equity Portfolio will invest at least 90% (and in any event at least 65%) of its total assets in equity securi- ties of micro cap issuers. The Portfolio defines micro cap issuers as those with $25 million to $300 million in market capitalization (the total market value of a company's outstanding equity securities) at the time of purchase. Equity securities include common stock and preferred stock (including convert- ible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depository receipts.

MICRO CAP ISSUERS. Micro cap issuers will normally have more limited product lines, markets and financial resources and will be dependent upon a more lim- ited management group than larger capitalized companies. In addition, many mi- cro cap companies are not well known to the investing public, do not have sig- nificant institutional ownership and are followed by relatively few securities analysts, with the result that there may be less publicly available information concerning such companies in comparison with the information relating to compa- nies with larger market capitalizations. Also, the securities of micro cap com- panies are often traded in the over-the-counter markets and may have fewer mar- ket makers and wider spreads between their quoted bid and asked prices, and concomitantly lower trading volumes. This may result in comparatively greater price volatility and less liquidity than the securities of larger, more estab- lished companies, particularly those traded on the New York or American Stock Exchanges.

There have been instances of fraud in the micro cap market, including the ma- nipulation of micro cap stocks by brokers, issuers and promoters to benefit themselves at the expense of investors. No assurance can be given that the Mi- cro-Cap Equity Portfolio will not suffer losses due to fraudulent activity in the market in which it invests.

ADRS, EDRS AND GDRS. The Portfolio may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence owner- ship of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence owner- ship of either foreign or domestic underlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an inter- national basis. Unsponsored ADR, EDR and GDR programs are organized indepen- dently and without the cooperation of the issuer of the underlying securities. As a result, available information concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment con- siderations as described below under "International Investing."

INTERNATIONAL INVESTING. Investing in foreign securities involves considera- tions not typically associated with investing in securities of companies orga- nized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a portfolio that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

The Portfolio's investments in foreign securities may also be adversely af- fected by changes in foreign political or social conditions, diplomatic rela- tions, confiscatory taxation, expropriation, limitation on the removal of

7.

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

Political and economic structures in countries with emerging economies or secu- rities markets may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability char- acteristic of more developed countries. Some of these 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 de- scribed above, including the risks of nationalization or expropriation of as- sets, may be heightened. In addition, unanticipated political or social devel- opments may affect the value of investments in these countries and the avail- ability to the Portfolio of additional investments in emerging market coun- tries. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these coun- tries may make investments in the countries illiquid and more volatile than in- vestments in Japan or most Western European countries. There may be little fi- nancial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such issuers.

The Portfolio may (but is not required to) use forward foreign currency ex- change contracts to hedge against movements in the value of foreign currencies (including the European Currency Unit) relative to the U.S. dollar in connec- tion with specific portfolio transactions or with respect to portfolio posi- tions. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Portfo- lio to establish a rate of exchange for a future point in time.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, the Portfolio may write (i.e. sell) covered call options, buy put op- tions, buy call options and write secured put options for the purpose of hedg- ing or earning additional income, which may be deemed speculative or cross- hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securi- ties, securities indices, or the yield differential between two securities or foreign currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. The Portfolio will not purchase put and call options when the aggregate premiums on outstand- ing options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted op- tions are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, the Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or for

8.

Futures contracts obligate the Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. The Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might other- wise result from a market decline or currency exchange fluctuation. The Portfo- lio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, the Portfolio may utilize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

The Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When the Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When the Portfolio sells an option on a futures contract, it becomes obligated to sell or buy a futures contract if the option is exercised. In con- nection with the Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by the Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolio from registration as a "commodity pool operator."

LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de- termines that market conditions warrant, the Portfolio may invest without limi- tation in high quality money market instruments. The Portfolio may also invest in high quality money market instruments pending investment or to meet antici- pated redemption requests.

High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign is- suers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and obli- gations of supranational organizations. Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date of settlement. Under a repurchase agreement, the Portfolio agrees to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price. Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose the Portfolio to possible loss because of adverse market action, ex- penses and/or delays in connection with the disposition of the underlying secu- rities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase secu- rities on a "when-issued" basis and may purchase or sell securities on a "for- ward commitment" basis. These transactions involve a commitment by the Portfo- lio to purchase or sell particular securities with payment and delivery

9.

REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from fi- nancial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose the Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Portfolio is authorized to borrow money. If the securities held by the Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made by the Portfolio through reverse repurchase agreements under which the Portfo- lio sells portfolio securities to financial institutions such as banks and bro- ker-dealers and agrees to repurchase them at a particular date and price. The Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agree- ment. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest ex- pense, that the market value of the securities sold by the Portfolio may de- cline below the price of the securities the Portfolio is obligated to repur- chase and that the securities may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, the Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid securities having a value at least equal to the re- purchase price. The Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. Whenever borrowings exceed 5% of the Portfolio's total as- sets, the Portfolio will not make any investments.

INVESTMENT COMPANIES. In connection with the management of their daily cash po- sitions, the Portfolio may invest in securities issued by other investment com- panies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. The Portfolio may also invest in securities issued by other investment companies with similar investment objectives. Secu- rities of other investment companies will be acquired within limits prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of an- other investment company, the Portfolio would bear, along with other sharehold- ers, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the expenses each bears directly in connection with its own operations.

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

ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value of its net assets in securities that are illiquid. Variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to these limits. The Port- folio may purchase securities which are

10.

PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that the annual portfolio turnover rate for the Portfolio will not exceed 150%. The Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the adviser or sub-adviser believes investment considera- tions warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e. 100% or more) will generally result in higher transaction costs to the Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

11.

The Portfolio's investment objective and policies may be changed by the Fund's Board of Trustees without shareholder approval. However, shareholders will be given at least 30 days' notice before any change to the Portfolio's investment objective. No assurance can be provided that the Portfolio will achieve its in- vestment objective.

The Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of the Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolio's fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

The Portfolio may not:

(1) purchase securities (except obligations of the U.S. Government and its in- strumentalities and related repurchase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of the Portfolio's total assets may be invested without re- gard to this 5% limitation;

(2) subject to the foregoing 25% exception, purchase more than 10% of the out- standing voting securities of any issuer;

(3) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry; and

(4) borrow money in amounts over one-third of the value of its total assets at the time of such borrowing.

These investment limitations are applied at the time investment securities are purchased.

12.

TRUSTEES       The business and affairs of BlackRock Funds are managed under
               the direction of the Board of Trustees. The following persons
               currently serve as trustees of BlackRock Funds:

               William O. Albertini--Executive Vice President and Chief Finan-
               cial Officer of Bell Atlantic Global Wireless.

               Raymond J. Clark--Treasurer of Princeton University.

               Robert M. Hernandez--Vice Chairman and Chief Financial Officer
               of USX Corporation.

               Anthony M. Santomero--Professor of Finance and Director of the
               Financial Institutions Center, The Wharton School, University
               of Pennsylvania.

               David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
               ates, Inc.

               The Statement of Additional Information furnishes additional
               information about the trustees and officers of the Fund.

ADVISER AND
SUB-ADVISER    The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
               Inc. (formerly PNC Asset Management Group, Inc.) was organized
               in 1994 to perform advisory services for investment companies,
               and has its principal offices at 1600 Market Street, 29th
               Floor, Philadelphia, Pennsylvania 19103. BlackRock, Inc. is an
               indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
               bank holding company.

               The sub-adviser to the Portfolio is PNC Equity Advisors Company
               ("PEAC"), an affiliate of BlackRock, Inc., with primary offices
               at 1600 Market Street, 27th Floor, Philadelphia, Pennsylvania
               19103. PEAC is a registered investment adviser, formed by PNC
               Bank in 1994. William J. Wykle and Thomas Callan serve as
               portfolio managers of the Portfolio. Mr. Wykle has been an
               investment manager at the sub-adviser since 1995. From 1986 to
               1995, Mr. Wykle was an investment manager with PNC Bank. Mr.
               Callan has been an investment manager at the sub-adviser since
               1996, prior to which he was an equity analyst with PNC Bank
               since 1993. Prior to 1993, Mr. Callan was a Trust Department
               Trainee at PNC Bank.

               As adviser, BlackRock, Inc. is responsible for the overall
               investment management of the Portfolio. The sub-adviser is
               responsible for the day-to-day management of the Portfolio, and
               generally makes all purchase and sale investment decisions for
               the Portfolio. The sub-adviser also provides research and
               credit analysis.

               THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

               . BlackRock Financial Management, Inc.: Domestic and non-dollar
                fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

For their investment advisory and sub-advisory services, Black- Rock, Inc. and the sub-adviser are entitled to fees, computed daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under

13.

"What Are the Expenses of the Portfolio?" BlackRock, Inc. and the sub-adviser intend to waive a portion of their fees dur- ing the current fiscal year. All sub-advisory fees are paid by BlackRock, Inc. and do not represent an extra charge to the Portfolio.

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                     1.10%                       .950%
$1 billion -- $2 billion             1.05                        .900
$2 billion -- $3 billion             1.025                       .875
greater than $3 billion              1.00                        .850

PEAC strives to achieve best execution on all transactions. Infrequently, brokerage transactions for the Portfolio may be directed to registered broker/dealers who have entered into dealer agreements with the Fund's distributor.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu- tors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock, Inc. and PFPC are indirect wholly-owned subsidiaries of PNC Bank Corp. BDI is a wholly- owned subsidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its of- ficers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relat- ing to the maintenance of financial records and fund account- ing. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable month- ly, at an annual rate of .03% of the Portfolio's average daily net assets. PFPC and BDI are entitled to receive a com- bined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of the Portfolio's average daily net assets, .075% of the next $500 million of the Portfolio's average daily net assets and .065% of the average daily net assets of the Port- folio in excess of $1 billion and (ii) .115% of the first $500 million of the average daily net assets allocated to each class of Investor Shares of the Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the average daily net assets allocated to each class of Investor Shares of the Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their administration fees from the Portfolio.

For information about the operating expenses the Portfolio expects to incur in the current fiscal year, see "What Are The Expenses Of The Portfolio?"

DIVIDEND          PNC Bank, whose principal offices are located at 1600 Market
DISBURSING        Street, Philadelphia, Pennsylvania 19103, serves as the Port-
AGENT AND         folio's custodian and PFPC serves as its transfer agent and
CUSTODIAN         dividend disbursing agent. PFPC has its principal offices at
                  400 Bellevue Parkway, Wilmington, Delaware 19809.

DISTRIBUTION
AND SERVICE       Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN              Investor Shares of the Portfolio bear the expense of payments
                  ("distribution fees") made to BDI, as the Fund's distributor
                  (the "Distributor"), or affiliates of PNC Bank, for distribu-
                  tion and sales support services. The distribution fees may be
                  used to compensate the Distributor for distribution services
                  and to compensate the Distributor and PNC Bank affiliates for
                  sales support services provided in connection with the offer-
                  ing and sale of Investor Shares. The distribution fees may
                  also be used to reimburse the Distributor

                                      14.

               and PNC Bank affiliates for related expenses, including pay-
               ments to brokers, dealers, financial institutions and industry
               professionals ("Service Organizations") for sales support serv-
               ices and related expenses. Distribution fees payable under the
               Plan will not exceed .10% (annualized) of the average daily net
               asset value of the Portfolio's outstanding Investor A Shares
               and .75% (annualized) of the average daily net asset value of
               the Portfolio's outstanding Investor B and Investor C Shares.
               Payments under the Plan are not tied directly to out-of-pocket
               expenses and therefore may be used by the recipients as they
               choose (for example, to defray their overhead expenses). The
               Plan also permits the Distributor, the Administrators and other
               companies that receive fees from the Fund to make payments re-
               lating to distribution and sales support activities out of
               their past profits or other sources available to them. For fur-
               ther information, see "Investment Advisory, Administration,
               Distribution and Servicing Arrangements" in the Statement of
               Additional Information.

               Under the Plan, the Fund intends to enter into service arrange-
               ments with Service Organizations (including PNC Bank and its
               affiliates) with respect to each class of Investor Shares pur-
               suant to which Service Organizations will render certain sup-
               port services to their customers who are the beneficial owners
               of Investor Shares. In consideration for a shareholder servic-
               ing fee of up to .25% (annualized) of the average daily net as-
               set value of Investor Shares owned by their customers, Service
               Organizations may provide one or more of the following servic-
               es: responding to customer inquiries relating to the services
               performed by the Service Organization and to customer inquiries
               concerning their investments in Investor Shares; assisting cus-
               tomers in designating and changing dividend options, account
               designations and addresses; and providing other similar share-
               holder liaison services. In consideration for a separate share-
               holder processing fee of up to .15% (annualized) of the average
               daily net asset value of Investor Shares owned by their custom-
               ers, Service Organizations may provide one or more of these ad-
               ditional services to such customers: processing purchase and
               redemption requests from customers and placing orders with the
               Fund's transfer agent or the Distributor; processing dividend
               payments from the Fund on behalf of customers; providing sub-
               accounting with respect to Investor Shares beneficially owned
               by customers or the information necessary for sub-accounting;
               and providing other similar services.

               Service Organizations may charge their clients additional fees
               for account services. Customers who are beneficial owners of
               Investor Shares should read this Prospectus in light of the
               terms and fees governing their accounts with Service Organiza-
               tions.

               The Glass-Steagall Act and other applicable laws, among other
               things, prohibit banks from engaging in the business of under-
               writing securities. It is intended that the services provided
               by Service Organizations under their service agreements will
               not be prohibited under these laws. Under state securities
               laws, banks and financial institutions that receive payments
               from the Fund may be required to register as dealers.

EXPENSES       Expenses are deducted from the total income of the Portfolio
               before dividends and distributions are paid. Expenses include,
               but are not limited to, fees paid to the investment adviser and
               the Administrators, transfer agency and custodian fees, trustee
               fees, taxes, interest, professional fees, shareholder servicing
               and processing fees, distribution fees, fees and expenses in
               registering and qualifying the Portfolio and its shares for
               distribution under Federal and state securities laws, expenses
               of preparing prospectuses and statements of additional informa-
               tion and of printing and distributing prospectuses and state-
               ments of additional information to existing shareholders,

                                      15.

expenses relating to shareholder reports, shareholder meet- ings and proxy solicitations, insurance premiums, the expense of independent pricing services, and other expenses which are not expressly assumed by BlackRock, Inc. or the Fund's serv- ice providers under their agreements with the Fund. Any gen- eral expenses of the Fund that do not belong to a particular investment portfolio will be allocated among all investment portfolios by or under the direction of the Board of Trustees in a manner the Board determines to be fair and equitable.

16.

The Portfolio offers different pricing options to investors in the form of different share classes. These options are de- scribed below:

A SHARES (FRONT-END LOAD)

One time, front-end sales charge at time of purchase No charges or fees at any time for redeeming shares Lower ongoing expenses

Free exchanges with other A Shares in the BlackRock Funds fam- ily
A Shares may make sense for investors with a long-term invest- ment horizon who prefer to pay a one-time front-end sales charge and have reduced ongoing fees.

B SHARES (BACK-END LOAD)

No front-end sales charge at time of purchase Contingent deferred sales charge (CDSC) if shares are re- deemed, declining over 6 years from a high of 4.50%

Free exchanges with other B Shares in the BlackRock Funds fam- ily
Automatically convert to A Shares eight years from purchase B Shares may make sense for investors who prefer to pay for professional investment advice on an ongoing basis (asset-based sales charge) rather than with a traditional, one-time front- end sales charge.

C SHARES (LEVEL LOAD)

No front-end sales charge at time of purchase Contingent deferred sales charge (CDSC) of 1.00% if shares are redeemed within 12 months of purchase

Free exchanges with other C Shares in the BlackRock Funds fam- ily
C Shares may make sense for shorter term (relative to both A and B Shares) investors who prefer to pay for professional in- vestment advice on an ongoing basis (asset-based sales charge) rather than with a traditional, one-time front-end sales charge. Such investors may plan to make substantial redemptions within 6 years of purchase.

                          A SHARES       B SHARES              C SHARES
Maximum Front-End Sales
 Charge                    5.00%          0.00%                 0.00%
12b-1 Fee                  0.00%*         0.75%                 0.75%
CDSC (Redemption Charge)   0.00%       4.50%-0.00%              1.00%
                                     (Depends on when   (If redeemed within 12
                                   shares are redeemed)  months of purchase)

* The Portfolio does not expect to incur 12b-1 fees in excess of .005% with respect to Investor A Shares through the fiscal year ending September 30, 1998.

Investors wishing to purchase shares of the Portfolio may do so either by mail- ing the investment application attached to this Prospectus along with a check or by wiring money as specified below under "How Are Shares Purchased?"

17.

In deciding which class of Investor Shares to purchase, investors should con- sider the following:

INTENDED HOLDING PERIOD. Over time, the cumulative distribution fees on the Portfolio's Investor B Shares and Investor C Shares will exceed the expense of the maximum initial sales charge on Investor A Shares. For example, if net as- set value remains constant, the Investor B Shares' and Investor C Shares' ag- gregate distribution fees would be equal to the Investor A Shares' initial maximum sales charge approximately 6 years after purchase. Thereafter, In- vestor B Shares and Investor C Shares would bear higher aggregate expenses. Investor B and Investor C shareholders, however, enjoy the benefit of permit- ting all their dollars to work from the time the investments are made. Any positive investment return on the additional invested amount would partially or wholly offset the higher annual expenses borne by Investor B Shares and In- vestor C Shares.

Because the Portfolio's future returns cannot be predicted, however, there can be no assurance that such a positive return will be achieved.

At the end of eight years after the date of purchase, Investor B Shares will convert automatically to Investor A Shares, based on the relative net asset values of shares of each class. Investor B Shares acquired through reinvest- ment of dividends or distributions are also converted at the earlier of these dates--eight years after the reinvestment date or the date of conversion of the most recently purchased Investor B Shares that were not acquired through reinvestment. Investor C Shares have no conversion feature.

Unless a sales charge waiver applies, Investor B shareholders pay a contingent deferred sales charge if they redeem during the first six years after pur- chase, and Investor C shareholders pay a contingent deferred sales charge if they redeem during the first twelve months after purchase. Investors expecting to redeem during these periods should consider the cost of the applicable con- tingent deferred sales charge in addition to the aggregate annual Investor B or Investor C distribution fees, as compared with the cost of the initial sales charges applicable to the Investor A Shares.

REDUCED SALES CHARGES. Because of reductions in the front-end sales charge for purchases of Investor A Shares aggregating $25,000 or more, it may be advanta- geous for investors purchasing large quantities of Investor Shares to purchase Investor A Shares. In any event, the Fund will not accept any purchase order for $1,000,000 or more of Investor B Shares or Investor C Shares.

WAIVER OF SALES CHARGES. The entire initial sales charge on Investor A Shares of the Portfolio may be waived for certain eligible purchasers allowing their entire purchase price to be immediately invested in the Portfolio. The contin- gent deferred sales charge may be waived upon redemption of certain Investor B Shares and Investor C Shares.

18.

GENERAL. Initial and subsequent purchase orders may be placed through securi- ties brokers, dealers or financial institutions ("brokers"), or the transfer agent. Generally, individual investors will purchase Investor Shares through a broker who will then transmit the purchase order directly to the transfer agent.

The minimum investment for the initial purchase of shares is $500; there is a $50 minimum for subsequent investments. Purchases through the Automatic Invest- ment Plan described below are subject to a lower initial purchase minimum. In addition, the minimum initial investment for employees of the Fund, the Fund's investment adviser, sub-adviser, Distributor or transfer agent or employees of their affiliates is $100, unless payment is made through a payroll deduction program in which case the minimum investment is $25.

When placing purchase orders, investors should specify whether the order is for Investor A, Investor B or Investor C Shares of the Portfolio. All share pur- chase orders that fail to specify a class will automatically be invested in In- vestor A Shares.

PURCHASES THROUGH BROKERS. Shares may be purchased through brokers which have entered into dealer agreements with the Distributor. Purchase orders received by a broker and transmitted to the transfer agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on a Business Day will be effected at the net asset value determined that day, plus any applicable sales charge. Payment for an order may be made by the broker in Federal funds or other funds immediately available to the Portfolio's custodian no later than 4:00 p.m. (Eastern time) on the third Business Day following re- ceipt of the purchase order.

It is the responsibility of brokers to transmit purchase orders and payment on a timely basis. If payment is not received within the period described above, the order will be canceled, notice thereof will be given, and the broker and its customers will be responsible for any loss to the Fund or its shareholders. Orders of less than $500 may be mailed by a broker to the transfer agent.

PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor Shares by completing and signing the Account Application Form and mailing it to the transfer agent, together with a check in at least the minimum initial pur- chase amount payable to BlackRock Funds. The Fund does not accept third party checks for initial or subsequent investments. An Account Application Form may be obtained by calling (800) 441-7762. The name of the Portfolio must also ap- pear on the check or Federal Reserve Draft. Investors may also wire Federal funds in connection with the purchase of shares. The wire instructions must in- clude the name of the Portfolio, specify the class of Investor Shares and in- clude the name of the account registration and the shareholder account number. Before wiring any funds, an investor must call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase orders which are received by PFPC, together with payment, before the close of regular trading hours on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on any Business Day (as defined below) are priced at the applicable net asset value next determined on that day, plus any applicable sales charge.

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

19.

REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ- ten redemption request in proper form must be sent directly to BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the con- tingent deferred sales charge, if applicable, there is no charge for a redemp- tion. Shareholders may also place redemption requests through a broker or other institution, which may charge a fee for this service.

WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIO, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B Shares or Investor C Shares in the Portfolio, the Investor A Shares will be redeemed first unless the shareholder indicates otherwise. If a redeeming shareholder owns both Investor B Shares and Investor C Shares in the Portfo- lio, the redemption order will be processed to minimize the amount of the con- tingent deferred sales charge that will be charged unless the shareholder in- dicates otherwise.

Except as noted below, a request for redemption must be signed by all persons in whose names the shares are registered. Signatures must conform exactly to the account registration. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the rec- ord address, or if the shareholder is a corporation, partnership, trust or fi- duciary, signature(s) must be guaranteed by any eligible guarantor institu- tion. Eligible guarantor institutions generally include banks, broker/dealers, credit unions, national securities exchanges, registered securities associa- tions, clearing agencies and savings associations.

Generally, a properly signed written request with any required signature guar- antee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of authority is required by PFPC in the event redemption is requested by a corporation, part- nership, trust, fiduciary, executor or administrator.

EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited redemption, shares can be redeemed by telephone and the proceeds sent by check to the shareholder or by Federal wire transfer to a single previously desig- nated bank account. Once authorization is on file, PFPC will honor requests by any person by telephone at (800) 441-7762 or other means. The minimum amount that may be sent by check is $500, while the minimum amount that may be wired is $10,000. The Fund reserves the right to change these minimums or to termi- nate these redemption privileges. If the proceeds of a redemption would exceed $25,000, the redemption request must be in writing and will be subject to the signature guarantee requirement described above. During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund is not responsible for the efficiency of the Federal wire system or the shareholder's firm or bank. The Fund does not currently charge for wire transfers. The shareholder is responsible for any charges imposed by the shareholder's bank. To change the name of the single designated bank account to receive wire redemption proceeds, it is necessary to send a written request (with a guaranteed signature as described above) to BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund reserves the right to refuse a telephone redemption if it believes it advisable to do so. The Fund, the Administrators and the Distributor will em- ploy reasonable procedures to confirm that instructions communicated by tele- phone are genuine. The Fund, the Administrators and the Distributor will not be liable for any

20.

ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold- er's account in the Portfolio at any time the net asset value of the account in the Portfolio falls below the required minimum initial investment as the result of a redemption or an exchange request. A shareholder will be notified in writ- ing that the value of the shareholder's account in the Portfolio is less than the required amount and will be allowed 30 days to make additional investments before the redemption is processed.

PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net asset value per share next determined after the request for redemption is re- ceived in proper form by BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Proceeds from the redemption of shares will be reduced by the amount of any applicable contingent deferred sales charge. Unless another payment option is used as described above, payment for redeemed shares is nor- mally made by check mailed within seven days after acceptance by PFPC of the request and any other necessary documents in proper order. Payment may, howev- er, be postponed or the right of redemption suspended as provided by the rules of the SEC. If the shares to be redeemed have been recently purchased by check, the Fund's transfer agent may delay the payment of redemption proceeds, which may be a period of up to 15 days after the purchase date, pending a determina- tion that the check has cleared.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

21.

BLACKROCK FUNDS offers shareholders many special features which enable an in- vestor to have greater investment flexibility as well as greater access to in- formation about the Fund throughout the investment period.

Additional information on each of these features is available from PFPC by calling (800) 441-7762.

EXCHANGE PRIVILEGE. Investor A, Investor B and Investor C Shares of the Portfo- lio may be exchanged for shares of the same class of other portfolios of the Fund which offer that class of shares, based on their respective net asset val- ues. Exchanges of Investor A Shares may be subject to the difference between the sales charge previously paid on the exchanged shares and the higher sales charge (if any) payable with respect to the shares acquired in the exchange.

Investor A Shares of money market portfolios of the Fund that were (1) acquired through the use of the exchange privilege and (2) can be traced back to a pur- chase of shares in one or more investment portfolios of the Fund for which a sales charge was paid, can be exchanged for Investor A Shares of a portfolio subject to differential sales charges as applicable.

The exchange of Investor B and Investor C Shares will not be subject to a CDSC, which will continue to be measured from the date of the original purchase and will not be affected by exchanges.

A shareholder wishing to make an exchange may do so by sending a written re- quest to PFPC at the address given above. Shareholders are automatically pro- vided with telephone exchange privileges when opening an account, unless they indicate on the Application that they do not wish to use this privilege. To add this feature to an existing account that previously did not provide this op- tion, a Telephone Exchange Authorization Form must be filed with PFPC. This form is available from PFPC. Once this election has been made, the shareholder may simply contact PFPC by telephone at (800) 441-7762 to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange re- quests to PFPC in writing.

If the exchanging shareholder does not currently own shares of the investment portfolio whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and broker of record as the account from which shares are exchanged, unless otherwise speci- fied in writing by the shareholder with all signatures guaranteed by an eligi- ble guarantor institution as defined above. In order to participate in the Au- tomatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an exchanging shareholder must file a specific written request.

Any share exchange must satisfy the requirements relating to the minimum ini- tial investment requirement, and must be legally available for sale in the state of the investor's residence. For Federal income tax purposes, a share ex- change is a taxable event and, accordingly, a capital gain or loss may be real- ized. Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the investment objective, policies and restrictions of the investment portfolio into which the shareholder is mak- ing an exchange, as set forth in the applicable Prospectus. Brokers may charge a fee for handling exchanges.

The Fund reserves the right to modify or terminate the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination except where notice is not required.

22.

The Fund reserves the right to reject any telephone exchange request. Telephone exchanges may be subject to limitations as to amount or frequency, and to other restrictions that may be established from time to time to ensure that exchanges do not operate to the disadvantage of any portfolio or its shareholders. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Fund, the Administrators and the Distributor will not be liable for any loss, liabil- ity, cost or expense for acting upon telephone instructions reasonably believed to be genuine in accordance with such procedures. Exchange orders may also be sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming- ton, Delaware 19899-8907.

AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of the Portfolio may arrange for periodic investments in the Portfolio through automatic deductions from a checking or savings account by completing the AIP Application Form which may be obtained from PFPC. The minimum pre-authorized investment amount is $50.

RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi- vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of its affiliates acts as custodian. For further information as to applications and annual fees, contact the Distributor. To determine whether the benefits of an IRA are available and/or appropriate, a shareholder should consult with a tax adviser.

SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal Plan which may be used by investors who wish to receive regular distributions from their accounts. Upon commencement of the SWP, the account must have a cur- rent value of $10,000 or more in the Portfolio. Shareholders may elect to re- ceive automatic cash payments of $50 or more either monthly, every other month, quarterly, three times a year, semi-annually, or annually. Automatic withdraw- als are normally processed on the 25th day of the applicable month or, if such day is not a Business Day, on the next Business Day and are paid promptly thereafter. An investor may utilize the SWP by completing the SWP Application Form which may be obtained from PFPC.

Shareholders should realize that if withdrawals exceed income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to PFPC. Pur- chases of additional Investor A Shares of the Fund concurrently with withdraw- als may be disadvantageous to investors because of the sales charges involved and, therefore, are discouraged. No contingent deferred sales charge will be assessed on redemptions of Investor B or Investor C Shares made through the SWP that do not exceed 12% of an account's net asset value on an annualized basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor B or Investor C Shares will not be subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the redemption date. SWP redemptions of Investor B or Investor C Shares in excess of this limit are still subject to the applicable CDSC.

23.

                                                          REALLOWANCE OR
                                                          PLACEMENT FEES
                            SALES CHARGE   SALES CHARGE     TO DEALERS
  AMOUNT OF TRANSACTION        AS % OF      AS % OF NET      (AS % OF
    AT OFFERING PRICE      OFFERING PRICE* ASSET VALUE*  OFFERING PRICE)**
Less than $25,000               5.00%          5.26%           4.50%
$25,000 but less than
 $50,000                        4.75           4.99            4.25
$50,000 but less than
 $100,000                       4.50           4.71            4.00
$100,000 but less than
 $250,000                       4.00           4.17            3.50
$250,000 but less than
 $500,000                       3.00           3.09            2.50
$500,000 but less than
 $1,000,000                     2.00           2.04            1.50
$1,000,000 but less than
 $2,000,000                     0.00           0.00            1.00
$2,000,000 but less than
 $3,000,000                     0.00           0.00            0.95
$3,000,000 but less than
 $5,000,000                     0.00           0.00            0.87
$5,000,000 but less than
 $10,000,000                    0.00           0.00            0.69
$10,000,000 but less than
 $15,000,000                    0.00           0.00            0.62
$15,000,000 but less than
 $20,000,000                    0.00           0.00            0.53
$20,000,000 but less than
 $40,000,000                    0.00           0.00            0.39

* There is no initial sales charge on purchases of $1,000,000 or more of In- vestor A Shares; however, a contingent deferred sales charge of 1.00% will be imposed on the lesser of the offering price or the net asset value of the shares on the redemption date for shares redeemed within 18 months after purchase.

** The Distributor may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

During special promotions, the entire sales charge may be reallowed to deal- ers. Dealers who receive 90% or more of the sales charge may be deemed to be "underwriters" under the 1933 Act. The amount of the sales charge not reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp. who provide sales support services. The Distributor, BlackRock, Inc. and/or their affiliates may also pay additional compensation, out of their assets and not as an additional charge to the Portfolio, to dealers in connection with the sale and distribution of shares (such as additional payments based on new sales), and may, subject to applicable NASD regulations, contribute to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsor various educational programs, sales contests and promotions in which participants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For further information, see "Investment Advisory, Administration, Distribution and Servicing Arrange- ments" in the Statement of Additional Information.

SALES CHARGE WAIVERS--INVESTOR A SHARES. The following persons associated with the Fund, the Distributor, the Fund's investment adviser, sub-advisers or transfer agent and their affiliates may buy Investor A Shares without paying a sales charge to the extent permitted by these firms: (a) officers, directors and partners (and their spouses and minor children); (b) employees and retir- ees (and their spouses and minor children); (c) registered representatives of brokers who have entered into selling agreements with the Distributor; (d) spouses or children of such persons; and (e) any trust, pension, profit-shar- ing or other benefit plan for any of the persons set forth in (a) through (c). The following persons may also buy Investor A Shares without paying a sales charge: (a) persons investing through an authorized payroll deduction plan;
(b) persons investing through an authorized investment plan for organizations which operate under Section

24.

QUALIFIED PLANS. In general, the sales charge (as a percentage of the offering price) payable by qualified employee benefit plans ("Qualified Plans") having at least 20 employees eligible to participate in purchases of Investor A Shares of the Portfolio aggregating less than $500,000 will be 1.00%. No sales charge will apply to purchases by such Qualified Plans of Investor A Shares aggregat- ing $500,000 and above. The sales charge payable by Qualified Plans having less than 20 employees eligible to participate in purchases of Investor A Shares of the Portfolio aggregating less than $500,000 will be 2.50%. The above schedule will apply to purchases by such Qualified Plans of Investor A Shares aggregat- ing $500,000 and above.

The Fund has established different waiver arrangements with respect to the sales charge on Investor A Shares of the Portfolio for purchases through cer- tain Qualified Plans participating in programs whose sponsors or administrators have entered into arrangements with the Fund. For further information, see "Purchase and Redemption Information" in the Statement of Additional Informa- tion.

QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the sales charge price. Upon notice to the investor's broker or the transfer agent, pur- chases of Investor A Shares made at any one time by the following persons may be considered when calculating the sales charge: (a) an individual, his or her spouse, and their children under the age of 21; (b) a trustee or fiduciary of a single trust estate or single fiduciary account; or (c) any organized group which has been in existence for more than six months, if it is not organized for the purpose of buying redeemable securities of a registered investment com- pany, and if the purchase is made through a central administrator, or through a single dealer, or by other means which result in economy of sales effort or ex- pense. An organized group does not include a group of individuals whose sole organizational connection is participation as credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker/dealer or clients of an investment adviser. Purchases made by an orga- nized group may include, for example, a trustee or other fiduciary purchasing for a single fiduciary account or other employee benefit plan purchases made through a payroll deduction plan.

REDUCED SALES CHARGES--INVESTOR A SHARES

RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value of an investor's existing Investor A Shares in the Portfolio or the total amount of an investor's initial investment in such shares, less redemptions (whichever is greater) may be combined with the amount of the investor's current purchase in determining the applicable sales charge. In order to receive the cumulative quantity reduction, previous purchases of Investor A Shares must be called to the attention of PFPC by the investor at the time of the current purchase.

REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of the Portfolio (or Investor A Shares of another non-money market portfolio of the Fund), a shareholder has a one-time right, to be exercised within 60 days, to reinvest the redemption proceeds without any sales charges. PFPC must be notified of the reinvestment in writing by the purchaser, or by his or her broker, at the time purchase is made in order to eliminate a sales charge. An investor should con- sult a tax adviser concerning the tax consequences of use of the reinvestment privilege.

LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi- ately by signing a Letter of Intent stating the investor's intention to invest during the next 13 months a specified amount in Investor A Shares which, if made at one time, would qualify for a reduced sales charge. The Letter of In- tent may be

25.

During the term of a Letter of Intent, the Fund's transfer agent will hold In- vestor A Shares representing 5% of the indicated amount in escrow for payment of a higher sales load if the full amount indicated in the Letter of Intent is not purchased. The escrowed Investor A Shares will be released when the full amount indicated has been purchased. Any redemptions made during the 13-month period will be subtracted from the amount of purchases in determining whether the Letter of Intent has been completed.

If the full amount indicated is not purchased within the 13-month period, the investor will be required to pay an amount equal to the difference between the sales charge actually paid and the sales charge the investor would have had to pay on his or her aggregate purchases if the total of such purchases had been made at a single time. If remittance is not received within 20 days of the ex- piration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the terms of the Letter of Intent, will redeem an appropriate number of Investor A Shares held in escrow to realize the difference.

PURCHASES OF INVESTOR B SHARES. Investor B Shares are subject to a deferred sales charge at the rates set forth in the chart below if they are redeemed within six years of purchase. The deferred sales charge on Investor B Shares is based on the lesser of the offering price or the net asset value of the In- vestor B Shares on the redemption date. Dealers will generally receive commis- sions equal to 4.00% of Investor B Shares sold by them plus ongoing fees under the Fund's Distribution and Service Plan and described under "Who Manages the Fund?" Dealers may not receive a commission in connection with sales of In- vestor B Shares to certain retirement plans sponsored by the Fund, BlackRock, Inc. or its affiliates, but may receive fees under the Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of In- vestor A Shares and Investor C Shares. See "What Is The Schedule Of Sales Charges And Exemptions--Investor A Shares" for information on additional sales incentives which the Distributor, BlackRock, Inc. and/or their affiliates may provide to dealers in connection with the sale of shares.

The amount of any contingent deferred sales charge an investor must pay on In- vestor B Shares depends on the number of years that elapse between the purchase date and the date the Investor B Shares are redeemed as set forth in the fol- lowing chart:

                                          CONTINGENT DEFERRED
                                          SALES CHARGE (AS A
          NUMBER OF YEARS             PERCENTAGE OF DOLLAR AMOUNT
       ELAPSED SINCE PURCHASE           SUBJECT TO THE CHARGE)
Less than one                                    4.50%
More than one, but less than two                 4.00
More than two, but less than three               3.50
More than three, but less than four              3.00
More than four, but less than five               2.00
More than five, but less than six                1.00
More than six, but less than seven               0.00
More than seven, but less than eight             0.00

PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred sales charge of 1.00% based on the lesser of the offering price or the net as- set value of the Investor C Shares on the redemption date if redeemed within twelve months after purchase. Dealers will generally receive commissions equal to 1.00% of the Investor C Shares sold by them plus ongoing fees under the Fund's Distribution and Service Plan and

26.

described under "Who Manages the Fund?" Dealers may not receive a commission in connection with sales of Investor C Shares to certain retirement plans spon- sored by the Fund, BlackRock, Inc. or its affiliates, but may receive fees un- der the Distribution and Service Plan. These commissions and payments, may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of Investor A Shares and Investor B Shares. See "What Is The Schedule Of Sales Charges And Exemptions-- Investor A Shares" for infor- mation on additional sales incentives which the Distributor, BlackRock, Inc. and/or their affiliates may provide to dealers in connection with the sale of shares.

EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE--INVESTOR B AND INVESTOR C SHARES. The contingent deferred sales charge on Investor B Shares and Investor C Shares is not charged in connection with: (1) exchanges described in "What Are The Shareholder Features Of The Fund?--Exchange Privilege"; (2) redemptions made in connection with minimum required distributions from IRA, 403(b)(7) and Qualified Plan accounts due to the shareholder reaching age 70 1/2; (3) redemp- tions made with respect to certain retirement plans sponsored by the Fund, BlackRock, Inc. or its affiliates; (4) redemptions in connection with a share- holder's death or disability (as defined in the Internal Revenue Code) subse- quent to the purchase of Investor B Shares or Investor C Shares; (5) involun- tary redemptions of Investor B Shares or Investor C Shares in accounts with low balances as described in "How Are Shares Redeemed?"; and (6) redemptions made pursuant to the Systematic Withdrawal Plan, subject to the limitations set forth above under "What Are The Shareholder Features Of The Fund?--Systematic Withdrawal Plan." In addition, no contingent deferred sales charge is charged on Investor B Shares or Investor C Shares acquired through the reinvestment of dividends or distributions. The Fund also waives the contingent deferred sales charge on redemptions of Investor B Shares of the Portfolio purchased through certain Qualified Plans participating in programs whose sponsors or administra- tors have entered into arrangements with the Fund. For further information, see "Purchase and Redemption Information" in the Statement of Additional Informa- tion.

When an investor redeems Investor B Shares or Investor C Shares, the redemption order is processed to minimize the amount of the contingent deferred sales charge that will be charged. Investor B Shares and Investor C Shares are re- deemed first from those shares that are not subject to the deferred sales load (i.e., shares that were acquired through reinvestment of dividends or distribu- tions) and after that from the shares that have been held the longest.

27.

During normal market conditions, the Micro-Cap Equity Portfolio will invest at least 90% (and in any event at least 65%) of its total assets in equity securi- ties of micro cap issuers. The Portfolio defines micro cap issuers as those with $25 million to $300 million in market capitalization (the total market value of a company's outstanding equity securities) at the time of purchase. Equity securities include common stock and preferred stock (including convert- ible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depository receipts.

MICRO CAP ISSUERS. Micro cap issuers will normally have more limited product lines, markets and financial resources and will be dependent upon a more lim- ited management group than larger capitalized companies. In addition, many mi- cro cap companies are not well known to the investing public, do not have sig- nificant institutional ownership and are followed by relatively few securities analysts, with the result that there may be less publicly available information concerning such companies in comparison with the information relating to compa- nies with larger market capitalizations. Also, the securities of micro cap com- panies are often traded in the over-the-counter markets and may have fewer mar- ket makers and wider spreads between their quoted bid and asked prices, and concomitantly lower trading volumes. This may result in comparatively greater price volatility and less liquidity than the securities of larger, more estab- lished companies, particularly those traded on the New York or American Stock Exchanges.

There have been instances of fraud in the micro cap market, including the ma- nipulation of micro cap stocks by brokers, issuers and promoters to benefit themselves at the expense of investors. No assurance can be given that the Mi- cro-Cap Equity Portfolio will not suffer losses due to fraudulent activity in the market in which it invests.

ADRS, EDRS AND GDRS. The Portfolio may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence owner- ship of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence owner- ship of either foreign or domestic underlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an inter- national basis. Unsponsored ADR, EDR and GDR programs are organized indepen- dently and without the cooperation of the issuer of the underlying securities. As a result, available information concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment con- siderations as described below under "International Investing."

INTERNATIONAL INVESTING. Investing in foreign securities involves considera- tions not typically associated with investing in securities of companies orga- nized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a portfolio that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

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

6.

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

Political and economic structures in countries with emerging economies or secu- rities markets may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability char- acteristic of more developed countries. Some of these 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 de- scribed above, including the risks of nationalization or expropriation of as- sets, may be heightened. In addition, unanticipated political or social devel- opments may affect the value of investments in these countries and the avail- ability to the Portfolio of additional investments in emerging market coun- tries. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these coun- tries may make investments in the countries illiquid and more volatile than in- vestments in Japan or most Western European countries. There may be little fi- nancial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such issuers.

The Portfolio may (but is not required to) use forward foreign currency ex- change contracts to hedge against movements in the value of foreign currencies (including the European Currency Unit) relative to the U.S. dollar in connec- tion with specific portfolio transactions or with respect to portfolio posi- tions. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Portfo- lio to establish a rate of exchange for a future point in time.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, the Portfolio may write (i.e. sell) covered call options, buy put op- tions, buy call options and write secured put options for the purpose of hedg- ing or earning additional income, which may be deemed speculative or cross- hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securi- ties, securities indices, or the yield differential between two securities or foreign currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. The Portfolio will not purchase put and call options when the aggregate premiums on outstand- ing options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted op- tions are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, the Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or for other hedging purposes. The value of the Portfolio's contracts may equal or exceed 100% of its total assets, although the Portfolio will not purchase or sell a futures contract unless immediately afterwards the aggregate amount of margin deposits on its existing futures positions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate the Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. The Portfolio may sell a futures contract in order to

7.

The Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When the Portfolio purchases an op- tion on a futures contract, it has the right to assume a position as a pur- chaser or a seller of a futures contract at a specified exercise price during the option period. When the Portfolio sells an option on a futures contract, it becomes obligated to sell or buy a futures contract if the option is exer- cised. In connection with the Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC require- ments.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in- struments held by the Portfolio and the price of the futures contract or op- tion; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlim- ited; (d) the sub-adviser's inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional In- formation.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolio from registration as a "commodity pool operator."

LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de- termines that market conditions warrant, the Portfolio may invest without lim- itation in high quality money market instruments. The Portfolio may also in- vest in high quality money market instruments pending investment or to meet anticipated redemption requests.

High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign issuers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and ob- ligations of supranational organizations. Generally, such obligations will ma- ture within one year from the date of settlement, but may mature within two years from the date of settlement. Under a repurchase agreement, the Portfolio agrees to purchase securities from financial institutions subject to the sell- er's agreement to repurchase them at an agreed upon time and price. Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose the Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transactions involve a commitment by the Portfolio to purchase or sell particular securities with payment and delivery taking place at a future date (perhaps one or two months later), and permit the Portfolio to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securities delivery takes place. The Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets absent unusual market conditions.

REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from fi- nancial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose the Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

8.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Portfolio is authorized to borrow money. If the securities held by the Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made by the Portfolio through reverse repurchase agreements under which the Portfo- lio sells portfolio securities to financial institutions such as banks and bro- ker-dealers and agrees to repurchase them at a particular date and price. The Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agree- ment. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest ex- pense, that the market value of the securities sold by the Portfolio may de- cline below the price of the securities the Portfolio is obligated to repur- chase and that the securities may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, the Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid securities having a value at least equal to the re- purchase price. The Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. Whenever borrowings exceed 5% of the Portfolio's total as- sets, the Portfolio will not make any investments.

INVESTMENT COMPANIES. In connection with the management of their daily cash po- sitions, the Portfolio may invest in securities issued by other investment com- panies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. The Portfolio may also invest in securities issued by other investment companies with similar investment objectives. Secu- rities of other investment companies will be acquired within limits prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of an- other investment company, the Portfolio would bear, along with other sharehold- ers, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the expenses each bears directly in connection with its own operations.

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

ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value of its net assets in securities that are illiquid. Variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to these limits. The Port- folio may purchase securities which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buy- ers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the adviser or sub-ad- viser that an adequate trading market exists for the securities. This invest- ment practice could have the effect of increasing the level of illiquidity in the Portfolio during any period that qualified institutional buyers become un- interested in purchasing these restricted securities.

PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that the annual portfolio turnover rate for the Portfolio will not exceed 150%. The Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the adviser or sub-adviser believes investment considera- tions warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e. 100% or more) will generally result in higher transaction costs to the Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

9.

The Portfolio's investment objective and policies may be changed by the Fund's Board of Trustees without shareholder approval. However, shareholders will be given at least 30 days' notice before any change to the Portfolio's investment objective. No assurance can be provided that the Portfolio will achieve its in- vestment objective.

The Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of the Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolio's fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

The Portfolio may not:

(1) purchase securities (except obligations of the U.S. Government and its in- strumentalities and related repurchase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of the Portfolio's total assets may be invested without re- gard to this 5% limitation;

(2) subject to the foregoing 25% exception, purchase more than 10% of the out- standing voting securities of any issuer;

(3) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry; and

(4) borrow money in amounts over one-third of the value of its total assets at the time of such borrowing.

These investment limitations are applied at the time investment securities are purchased.

10.

TRUSTEES       The business and affairs of BlackRock Funds are managed under
               the direction of the Board of Trustees. The following persons
               currently serve as trustees of BlackRock Funds:

               William O. Albertini--Executive Vice President and Chief Finan-
               cial Officer of Bell Atlantic Global Wireless.

               Raymond J. Clark--Treasurer of Princeton University.

               Robert M. Hernandez--Vice Chairman and Chief Financial Officer
               of USX Corporation.

               Anthony M. Santomero--Professor of Finance and Director of the
               Financial Institutions Center, The Wharton School, University
               of Pennsylvania.

               David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
               ates, Inc.

               The Statement of Additional Information furnishes additional
               information about the trustees and officers of the Fund.

ADVISER AND
SUB-ADVISER    The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
               Inc. (formerly PNC Asset Management Group, Inc.) was organized
               in 1994 to perform advisory services for investment companies,
               and has its principal offices at 1600 Market Street, 29th
               Floor, Philadelphia, Pennsylvania 19103. BlackRock, Inc. is an
               indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
               bank holding company.

               The sub-adviser to the Portfolio is PNC Equity Advisors Company
               ("PEAC"), an affiliate of BlackRock, Inc., with primary offices
               at 1600 Market Street, 27th Floor, Philadelphia, Pennsylvania
               19103. PEAC is a registered investment adviser, formed by PNC
               Bank in 1994. William J. Wykle and Thomas Callan serve as port-
               folio managers of the Portfolio. Mr. Wykle has been an invest-
               ment manager at the sub-adviser since 1995. From 1986 to 1995,
               Mr. Wykle was an investment manager with PNC Bank. Mr. Callan
               has been an investment manager at the sub-adviser since 1996,
               prior to which he was an equity analyst with PNC Bank since
               1993. Prior to 1993, Mr. Callan was a Trust Department Trainee
               at PNC Bank.

               As adviser, BlackRock, Inc. is responsible for the overall in-
               vestment management of the Portfolio. The sub-adviser is re-
               sponsible for the day-to-day management of the Portfolio, and
               generally makes all purchase and sale investment decisions for
               the Portfolio. The sub-adviser also provides research and
               credit analysis.

               THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

               . BlackRock Financial Management, Inc.: Domestic and non-dollar
                fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

For their investment advisory and sub-advisory services, Black- Rock, Inc. and the sub-adviser are entitled to fees, computed daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are the Expenses of the Portfolio?" BlackRock, Inc. and the sub-adviser intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by BlackRock, Inc. and do not represent an extra charge to the Portfolio.

11.

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                     1.10%                       .950%
$1 billion -- $2 billion             1.05                        .900
$2 billion -- $3 billion             1.025                       .875
greater than $3 billion              1.00                        .850

PEAC strives to achieve best execution on all transactions. Infrequently, brokerage transactions for the Portfolio may be directed to registered broker/dealers who have entered into dealer agreements with the Fund's distributor.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu- tors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock, Inc. and PFPC are indirect wholly-owned subsidiaries of PNC Bank Corp. BDI is a wholly- owned subsidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its of- ficers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relat- ing to the maintenance of financial records and fund account- ing. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable month- ly, at an annual rate of .03% of the Portfolio's average daily net assets. PFPC and BDI are entitled to receive a com- bined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of the Portfolio's average daily net assets, .075% of the next $500 million of the Portfolio's average daily net assets and .065% of the average daily net assets of the Port- folio in excess of $1 billion and (ii) .115% of the first $500 million of the average daily net assets allocated to In- stitutional Shares of the Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the av- erage daily net assets allocated to Institutional Shares of the Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their administration fees from the Portfolio.

For information about the operating expenses the Portfolio expects to incur in the current fiscal year, see "What Are The Expenses Of The Portfolio?"

DIVIDEND          PNC Bank, whose principal offices are located at 1600 Market
DISBURSING        Street, Philadelphia, Pennsylvania 19103, serves as the Port-
AGENT AND         folio's custodian and PFPC serves as its transfer agent and
CUSTODIAN         dividend disbursing agent. PFPC has its principal offices at
                  400 Bellevue Parkway, Wilmington, Delaware 19809.

EXPENSES
                  Expenses are deducted from the total income of the Portfolio
                  before dividends and distributions are paid. Expenses in-
                  clude, but are not limited to, fees paid to the investment
                  adviser and the Administrators, transfer agency and custodian
                  fees, trustee fees, taxes, interest, professional fees, fees
                  and expenses in registering and qualifying the Portfolio and
                  its shares for distribution under Federal and state securi-
                  ties laws, expenses of preparing prospectuses and statements
                  of additional information and of printing and distributing
                  prospectuses and statements of additional information to ex-
                  isting shareholders, expenses relating to shareholder re-
                  ports, shareholder meetings and proxy solicitations, insur-
                  ance premiums, the expense of independent pricing services,
                  and other expenses which are not expressly assumed by Black-
                  Rock, Inc. or the Fund's service providers under their agree-
                  ments with the Fund. Any general expenses of the Fund that do
                  not belong to a particular investment portfolio will be allo-
                  cated among all investment portfolios by or under the direc-
                  tion of the Board of Trustees in a manner the Board deter-
                  mines to be fair and equitable.

12.

DISTRIBUTOR. Shares of the Portfolio are offered on a continuous basis by BDI as distributor (the "Distributor"). BDI maintains its principal offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Fund is not required or permitted under the Plan to make distribution payments with respect to Institutional Shares. However, the Plan permits BDI, the Administrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them which, subject to applicable NASD regulations, may include contributions to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsor- ship of various educational programs, sales contests and promotions in which participants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For further information, see "In- vestment Advisory, Administration, Distribution, and Servicing Arrangements" in the Statement of Additional Information.

PURCHASE OF SHARES. Institutional Shares are offered to institutional invest- ors, including registered investment advisers with a minimum investment of $500,000 and individuals with a minimum investment of $2,000,000.

Institutional Shares are sold at their net asset value per Share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East- ern Time) on a Business Day are priced the same day. A "Business Day" is any weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business.

Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders re- ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi- ness Day.

Payment for Institutional Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permis- sible investments for the Portfolio. For further information, see the Statement of Additional Information. The minimum initial investment for institutions is $5,000. There is no minimum subsequent investment requirement. The Fund does not accept third party checks for initial or subsequent investments.

The Fund may in its discretion waive the minimum investment amount and may re- ject any order for Institutional Shares, and may suspend and resume the sale of any share class of the Portfolio at any time.

REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the re- demption order. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption or- ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo- dian is closed is normally wired in Federal funds on the next Business Day fol- lowing redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days after receiv- ing a redemption order if, in the judgment of BlackRock, Inc., an earlier pay- ment could adversely affect the Portfolio. No charge for wiring redemption pay- ments is imposed by the Fund.

13.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund reserves the right to redeem Institutional Shares in any shareholder's account if the account balance drops below $5,000 as the result of redemption requests and the shareholder does not increase the balance to at least $5,000 on thirty days' written notice.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

Shares of the Portfolio may be purchased by customers of broker-dealers and agents which have established a servicing relationship with the Fund on behalf of their customers. These broker-dealers and agents may impose additional or different conditions on the purchase or redemption of Portfolio shares by their customers and may charge their customers transaction, account or other fees on the purchase and redemption of Portfolio shares. Each broker-dealer or agent is responsible for transmitting to its customers a schedule of any such fees and information regarding any additional or different conditions regarding pur- chases and redemptions. Shareholders who are customers of such broker-dealers or agents should consult them for information regarding these fees and condi- tions.

14.

During normal market conditions, the Micro-Cap Equity Portfolio will invest at least 90% (and in any event at least 65%) of its total assets in equity securi- ties of micro cap issuers. The Portfolio defines micro cap issuers as those with $25 million to $300 million in market capitalization (the total market value of a company's outstanding equity securities) at the time of purchase. Equity securities include common stock and preferred stock (including convert- ible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts and partnerships; and depository receipts.

MICRO CAP ISSUERS. Micro cap issuers will normally have more limited product lines, markets and financial resources and will be dependent upon a more lim- ited management group than larger capitalized companies. In addition, many mi- cro cap companies are not well known to the investing public, do not have sig- nificant institutional ownership and are followed by relatively few securities analysts, with the result that there may be less publicly available information concerning such companies in comparison with the information relating to compa- nies with larger market capitalizations. Also, the securities of micro cap com- panies are often traded in the over-the-counter markets and may have fewer mar- ket makers and wider spreads between their quoted bid and asked prices, and concomitantly lower trading volumes. This may result in comparatively greater price volatility and less liquidity than the securities of larger, more estab- lished companies, particularly those traded on the New York or American Stock Exchanges.

There have been instances of fraud in the micro cap market, including the ma- nipulation of micro cap stocks by brokers, issuers and promoters to benefit themselves at the expense of investors. No assurance can be given that the Mi- cro-Cap Equity Portfolio will not suffer losses due to fraudulent activity in the market in which it invests.

ADRS, EDRS AND GDRS. The Portfolio may invest in both sponsored and unsponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence owner- ship of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depository Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence owner- ship of either foreign or domestic underlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an inter- national basis. Unsponsored ADR, EDR and GDR programs are organized indepen- dently and without the cooperation of the issuer of the underlying securities. As a result, available information concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment con- siderations as described below under "International Investing."

INTERNATIONAL INVESTING. Investing in foreign securities involves considera- tions not typically associated with investing in securities of companies orga- nized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a portfolio that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

The Portfolio's investments in foreign securities may also be adversely af- fected by changes in foreign political or social conditions, diplomatic rela- tions, confiscatory taxation, expropriation, limitation on the removal of

6.

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

Political and economic structures in countries with emerging economies or secu- rities markets may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability char- acteristic of more developed countries. Some of these 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 de- scribed above, including the risks of nationalization or expropriation of as- sets, may be heightened. In addition, unanticipated political or social devel- opments may affect the value of investments in these countries and the avail- ability to the Portfolio of additional investments in emerging market coun- tries. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these coun- tries may make investments in the countries illiquid and more volatile than in- vestments in Japan or most Western European countries. There may be little fi- nancial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such issuers.

The Portfolio may (but is not required to) use forward foreign currency ex- change contracts to hedge against movements in the value of foreign currencies (including the European Currency Unit) relative to the U.S. dollar in connec- tion with specific portfolio transactions or with respect to portfolio posi- tions. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Portfo- lio to establish a rate of exchange for a future point in time.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, the Portfolio may write (i.e. sell) covered call options, buy put op- tions, buy call options and write secured put options for the purpose of hedg- ing or earning additional income, which may be deemed speculative or cross- hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securi- ties, securities indices, or the yield differential between two securities or foreign currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. The Portfolio will not purchase put and call options when the aggregate premiums on outstand- ing options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (measured at the time an option is written). Options trading is a highly specialized activity that entails greater than ordinary investment risks. In addition, unlisted op- tions are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, the Portfolio may also invest in futures contracts and options on futures contracts to commit funds awaiting investment in stocks or maintain cash liquidity or for other hedging purposes. The value of the Portfolio's contracts may equal or exceed 100% of its total assets,

7.

Futures contracts obligate the Portfolio, at maturity, to take or make deliv- ery of securities, the cash value of a securities index or a stated quantity of a foreign currency. The Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. The Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, the Portfolio may uti- lize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

The Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When the Portfolio purchases an op- tion on a futures contract, it has the right to assume a position as a pur- chaser or a seller of a futures contract at a specified exercise price during the option period. When the Portfolio sells an option on a futures contract, it becomes obligated to sell or buy a futures contract if the option is exer- cised. In connection with the Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC require- ments.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in- struments held by the Portfolio and the price of the futures contract or op- tion; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlim- ited; (d) the sub-adviser's inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional In- formation.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolio from registration as a "commodity pool operator."

LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de- termines that market conditions warrant, the Portfolio may invest without lim- itation in high quality money market instruments. The Portfolio may also in- vest in high quality money market instruments pending investment or to meet anticipated redemption requests.

High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign issuers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial paper, repurchase agreements and ob- ligations of supranational organizations. Generally, such obligations will ma- ture within one year from the date of settlement, but may mature within two years from the date of settlement. Under a repurchase agreement, the Portfolio agrees to purchase securities from financial institutions subject to the sell- er's agreement to repurchase them at an agreed upon time and price. Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose the Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transactions involve a commitment by the Portfolio to purchase or sell particular securities with payment and delivery taking place at a future date (perhaps one or two months later), and permit the Portfolio to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in interest rates or market

8.

REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from fi- nancial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose the Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Portfolio is authorized to borrow money. If the securities held by the Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made by the Portfolio through reverse repurchase agreements under which the Portfo- lio sells portfolio securities to financial institutions such as banks and bro- ker-dealers and agrees to repurchase them at a particular date and price. The Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agree- ment. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest ex- pense, that the market value of the securities sold by the Portfolio may de- cline below the price of the securities the Portfolio is obligated to repur- chase and that the securities may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, the Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid securities having a value at least equal to the re- purchase price. The Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. Whenever borrowings exceed 5% of the Portfolio's total as- sets, the Portfolio will not make any investments.

INVESTMENT COMPANIES. In connection with the management of their daily cash po- sitions, the Portfolio may invest in securities issued by other investment com- panies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. The Portfolio may also invest in securities issued by other investment companies with similar investment objectives. Secu- rities of other investment companies will be acquired within limits prescribed by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of an- other investment company, the Portfolio would bear, along with other sharehold- ers, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the expenses each bears directly in connection with its own operations.

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

ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value of its net assets in securities that are illiquid. Variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to these limits. The Port- folio may purchase securities which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buy- ers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the adviser or sub-ad- viser that an adequate trading market exists for the

9.

PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that the annual portfolio turnover rate for the Portfolio will not exceed 150%. The Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the adviser or sub-adviser believes investment considera- tions warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e. 100% or more) will generally result in higher transaction costs to the Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

10.

The Portfolio's investment objective and policies may be changed by the Fund's Board of Trustees without shareholder approval. However, shareholders will be given at least 30 days' notice before any change to the Portfolio's investment objective. No assurance can be provided that the Portfolio will achieve its in- vestment objective.

The Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of the Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolio's fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

The Portfolio may not:

(1) purchase securities (except obligations of the U.S. Government and its in- strumentalities and related repurchase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of the Portfolio's total assets may be invested without re- gard to this 5% limitation;

(2) subject to the foregoing 25% exception, purchase more than 10% of the out- standing voting securities of any issuer;

(3) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry; and

(4) borrow money in amounts over one-third of the value of its total assets at the time of such borrowing.

These investment limitations are applied at the time investment securities are purchased.

11.

TRUSTEES         The business and affairs of BlackRock Funds are managed un-
                 der the direction of the Board of Trustees. The following
                 persons currently serve as trustees of BlackRock Funds:

                 William O. Albertini--Executive Vice President and Chief Fi-
                 nancial Officer of Bell Atlantic Global Wireless.

                 Raymond J. Clark--Treasurer of Princeton University.

                 Robert M. Hernandez--Vice Chairman and Chief Financial
                 Officer of USX Corporation.

                 Anthony M. Santomero--Professor of Finance and Director of
                 the Financial Institutions Center, The Wharton School,
                 University of Pennsylvania.

                 David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Asso-
                 ciates, Inc.

                 The Statement of Additional Information furnishes additional
                 information about the trustees and officers of the Fund.

ADVISER AND
SUB-ADVISER      The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
                 Inc. (formerly PNC Asset Management Group, Inc.) was orga-
                 nized in 1994 to perform advisory services for investment
                 companies, and has its principal offices at 1600 Market
                 Street, 29th Floor, Philadelphia, Pennsylvania 19103.
                 BlackRock, Inc. is an indirect wholly-owned subsidiary of
                 PNC Bank Corp., a multi-bank holding company.

                 The sub-adviser to the Portfolio is PNC Equity Advisors Com-
                 pany ("PEAC"), an affiliate of BlackRock, Inc., with primary
                 offices at 1600 Market Street, 27th Floor, Philadelphia,
                 Pennsylvania 19103. PEAC is a registered investment adviser,
                 formed by PNC Bank in 1994. William J. Wykle and Thomas
                 Callan serve as portfolio managers of the Portfolio. Mr.
                 Wykle has been an investment manager at the sub-adviser
                 since 1995. From 1986 to 1995, Mr. Wykle was an investment
                 manager with PNC Bank. Mr. Callan has been an investment
                 manager at the sub-adviser since 1996, prior to which he was
                 an equity analyst with PNC Bank since 1993. Prior to 1993,
                 Mr. Callan was a Trust Department Trainee at PNC Bank.

                 As adviser, BlackRock, Inc. is responsible for the overall
                 investment management of the Portfolio. The sub-adviser is
                 responsible for the day-to-day management of the Portfolio,
                 and generally makes all purchase and sale investment deci-
                 sions for the Portfolio. The sub-adviser also provides re-
                 search and credit analysis.

                 THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

                 . BlackRock Financial Management, Inc.: Domestic and non-
                  dollar fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

12.

For their investment advisory and sub-advisory services, BlackRock, Inc. and the sub-adviser are entitled to fees, computed daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are the Expenses of the Portfolio?" BlackRock, Inc. and the sub-adviser intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by BlackRock, Inc. and do not represent an extra charge to the Portfolio.

                                   INVESTMENT                SUB-ADVISORY
AVERAGE DAILY NET ASSETS          ADVISORY FEE                   FEE
first $1 billion                     1.10%                       .950%
$1 billion -- $2 billion             1.05                        .900
$2 billion -- $3 billion             1.025                       .875
greater than $3 billion              1.00                        .850

PEAC strives to achieve best execution on all transactions. In- frequently, brokerage transactions for the Portfolio may be di- rected to registered broker/dealers who have entered into dealer agreements with the Fund's distributor.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad- ministrators. BlackRock, Inc. and PFPC are indirect wholly- owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub- sidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relating to the maintenance of financial records and fund accounting. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of the Portfolio's average daily net assets. PFPC and BDI are entitled to receive a combined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of the Portfolio's average daily net assets, .075% of the next $500 million of the Portfolio's average daily net assets and .065% of the average daily net assets of the Portfolio in excess of $1 billion and
(ii) .115% of the first $500 million of the average daily net assets allocated to Service Shares of the Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the average daily net assets allocated to Service Shares of the Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their adminis- tration fees from the Portfolio.

For information about the operating expenses the Portfolio ex- pects to incur in the current fiscal year, see "What Are The Expenses Of The Portfolio?"

AGENT,         PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND       Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING     lio's custodian and PFPC serves as its transfer agent and divi-
AGENT AND      dend disbursing agent. PFPC has its principal offices at 400
CUSTODIAN      Bellevue Parkway, Wilmington, Delaware 19809.

                                      13.

SERVICING        The Fund intends to enter into service arrangements with in-
                 stitutional investors ("Institutions") (including PNC Bank
                 and its affiliates) which provide that the Institutions will
                 render support services to their customers who are the bene-
                 ficial owners of Service Shares. These services are intended
                 to supplement the services provided by the Fund's Adminis-
                 trators and transfer agent to the Fund's shareholders of
                 record. In consideration for payment of a shareholder
                 processing fee of up to .15% (on an annualized basis) of the
                 average daily net asset value of Service Shares owned bene-
                 ficially by their customers, Institutions may provide one or
                 more of the follow- ing services: processing purchase and
                 redemption requests from customers and placing orders with
                 the Fund's transfer agent or the distributor; processing
                 dividend payments from the Fund on behalf of customers; pro-
                 viding sub-accounting with respect to Service Shares benefi-
                 cially owned by customers or the information necessary for
                 sub-accounting; and providing other similar services. In
                 consideration for payment of a separate shareholder servic-
                 ing fee of up to .15% (on an annualized basis) of the aver-
                 age daily net asset value of Service Shares owned benefi-
                 cially by their customers, Institutions may provide one or
                 more of these additional services to such customers: re-
                 sponding to customer inquiries relating to the services per-
                 formed by the Institution and to customer inquiries concern-
                 ing their investments in Service Shares; assisting customers
                 in designating and changing dividend options, account desig-
                 nations and addresses; and providing other similar share-
                 holder liaison services. Customers who are beneficial owners
                 of Service Shares should read this Prospectus in light of
                 the terms and fees governing their accounts with
                 Institutions.

                 Conflict-of-interest restrictions may apply to the receipt
                 of compensation paid by the Fund in connection with the in-
                 vestment of fiduciary funds in Portfolio shares. Institu-
                 tions, including banks regulated by the Comptroller of the
                 Currency, Federal Reserve Board and state banking commis-
                 sions, and investment advisers and other money managers sub-
                 ject to the jurisdiction of the SEC, the Department of Labor
                 or state securities commissions, are urged to consult their
                 legal counsel before entering into agreements with the Fund.

                 The Glass-Steagall Act and other applicable laws, among
                 other things, prohibit banks from engaging in the business
                 of underwriting securities. It is intended that the services
                 provided by Institutions under their service agreements will
                 not be prohibited under these laws. Under state securities
                 laws, banks and financial institutions that receive payments
                 from the Fund may be required to register as dealers.


EXPENSES         Expenses are deducted from the total income of the Portfolio
                 before dividends and distributions are paid. Expenses in-
                 clude, but are not limited to, fees paid to the investment
                 adviser and the Administrators, transfer agency and custo-
                 dian fees, trustee fees, taxes, interest, professional fees,
                 shareholder servicing and processing fees, fees and expenses
                 in registering and qualifying the Portfolio and its shares
                 for distribution under Federal and state securities laws,
                 expenses of preparing prospectuses and statements of addi-
                 tional information and of printing and distributing prospec-
                 tuses and statements of additional information to existing
                 shareholders, expenses relating to shareholder reports,
                 shareholder meetings and proxy solicitations, insurance pre-
                 miums, the expense of independent pricing services, and
                 other expenses which are not expressly assumed by BlackRock,
                 Inc. or the Fund's service providers under their agreements
                 with the Fund. Any general expenses of the Fund that do not
                 belong to a particular investment portfolio will be allo-
                 cated among all investment portfolios by or under the direc-
                 tion of the Board of Trustees in a manner the Board deter-
                 mines to be fair and equitable.

14.

DISTRIBUTOR. Shares of the Portfolio are offered on a continuous basis by BDI as distributor (the "Distributor"). BDI maintains its principal offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Fund is not required or permitted under the Plan to make distribution payments with respect to Service Shares. However, the Plan permits BDI, the Administrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them which, subject to ap- plicable NASD regulations, may include contributions to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsor- ship of various educational programs, sales contests and promotions in which participants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For further information, see "In- vestment Advisory, Administration, Distribution and Servicing Arrangements" in the Statement of Additional Information.

PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu- tions acting on behalf of their customers, as well as to certain persons who were shareholders of Compass Capital Group of Funds at the time of its combina- tion with The PNC(R) Fund during the first quarter of 1996. Service Shares will normally be held of record by Institutions or in the names of nominees of In- stitutions. Share purchases are normally effected through a customer's account at an Institution through procedures established in connection with the re- quirements of the account. In these cases, confirmations of share purchases and redemptions will be sent to the Institutions. Beneficial ownership of shares will be recorded by the Institutions and reflected in the account statements provided by such Institutions to their customers. Investors wishing to purchase shares should contact their Institutions.

Service Shares are sold at their net asset value per share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern Time) on a Business Day are priced the same day. A "Business Day" is any week- day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Business Day.

Payment for Service Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the Portfolio. For further information, see the Statement of Additional Information. The minimum initial investment is $5,000; however, In- stitutions may set a higher minimum for their customers. There is no minimum subsequent investment requirement. The Fund does not accept third party checks for initial or subsequent investments.

The Fund may in its discretion waive or modify the minimum investment amount, may reject any order for Service Shares and may suspend and resume the sale of any share class of the Portfolio at any time.

REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in accordance with the procedures applicable to their accounts with the Institu- tions. These procedures will vary according to the type of account and the In- stitution involved, and customers should consult their account managers in this regard. It is the responsibility of Institutions to transmit redemption orders to PFPC and credit their customers' accounts with redemption proceeds on a timely basis. In the case of shareholders holding share certificates, the cer- tificates must accompany the redemption request.

Institutions may place redemption orders by telephoning PFPC at (800) 441-7450. Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the redemption order. The Fund, the

15.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custodian is closed is normally wired in Federal funds on the next Business Day following redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days af- ter receiving a redemption order if, in the judgment of BlackRock, Inc., an earlier payment could adversely affect the Portfolio. No charge for wiring re- demption payments is imposed by the Fund, although Institutions may charge their customer accounts for redemption services. Information relating to such redemption services and charges, if any, should be obtained by customers from their Institutions.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.

The Fund reserves the right to redeem Service Shares in any shareholder's ac- count if the account balance drops below $5,000 as the result of redemption requests and the shareholder does not increase the balance to at least $5,000 upon thirty days' written notice. If a customer has agreed with an Institution to maintain a minimum balance in his or her account with the Institution, and the balance in the account falls below that minimum, the customer may be obli- gated to redeem all or part of his or her shares in the Portfolio to the ex- tent necessary to maintain the minimum balance required.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsi- bilities under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal Plan ("SWP") which may be used by investors who wish to receive regular dis- tributions from their accounts. Upon commencement of the SWP, the account must have a current value of $10,000 or more in the Portfolio. Shareholders may elect to receive automatic cash payments of $50 or more either monthly, every other month, quarterly, three times a year, semi-annually, or annually. Auto- matic withdrawals are normally processed on the 25th day of the applicable month or, if such day is not a Business Day, on the next Business Day and are paid promptly thereafter. An investor may utilize the SWP by completing the SWP Application Form which may be obtained from PFPC.

Shareholders should realize that if withdrawals exceed income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to PFPC.

16.

INVESTMENT QUALITY. Securities acquired by the Intermediate Government Bond Portfolio and Government Income Portfolio will be rated in the highest rating category at the time of purchase or, if unrated, of comparable quality as de- termined by the Portfolios' sub-adviser. Securities acquired by the other Portfolios except the Low Duration Bond Portfolio will be rated investment grade at the time of purchase (within the four highest rating categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable quality as determined by the Portfolios' sub-adviser. Securities rated "Baa" on "BBB" are generally considered to be investment grade although they have speculative characteristics. If a security's rating is reduced below the minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security. The Low Duration Bond Portfolio may invest up to 20% of its assets in non-investment grade fixed-income or convertible securities with a minimum rating of "B". See "High Yield Securities" below.

INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Intermediate Government Bond Portfolio and Government Income Portfolio (the "Government Portfolios") will invest at least 65% of their total assets in obligations issued or guar- anteed by the U.S. Government, its agencies or instrumentalities and related repurchase agreements during normal market conditions. Under normal market conditions, the International Bond Portfolio will invest at least 65% of its total assets in the debt obligations of foreign issuers located in at least three different foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to- gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo- lios") will invest, during normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and pos- sessions of the United States, the District of Columbia and their political sub-divisions, agencies, instrumentalities and authorities and related tax-ex- empt derivative securities the interest on which is exempt from regular Fed- eral income tax and is not an item of tax preference for purposes of the Fed- eral alternative minimum tax ("Municipal Obligations"). In addition, each State-Specific Tax-Free Portfolio intends to invest at least 65% of its net assets in Municipal Obligations of issuers located in the particular state in- dicated by its name ("State-Specific Obligations"). The Tax-Free Income Port- folio intends to invest no more than 25% of its net assets in Municipal Obli- gations of issuers located in the same state. During temporary defensive peri- ods each Tax-Free Portfolio may invest without limitation in securities that are not Municipal Obligations and may hold without limitation uninvested cash reserves.

FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in foreign securities and currencies. Each of the Managed Income and Core Bond Portfolios may invest up to 10% of its total assets and the Low Duration Bond Portfolio may invest up to 20% of its total assets in debt securities of for- eign issuers on either a currency hedged or unhedged basis, and may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Some of these instruments may have the characteristics of futures contracts. In addition, each Portfolio may engage in foreign currency exchange transactions to seek to protect against changes in the level of fu- ture exchange rates which would adversely affect the Portfolio's performance. These investments and transactions involving foreign securities, currencies, options (including options that relate to foreign currencies), futures, hedg- ing and cross-hedging are described below and under "Interest Rate and Cur- rency Transactions" and "Options and Futures Contracts." Investing in securi- ties of foreign issuers involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities will be affected favorably or unfavorably by changes in currency exchange rates.

24.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitations on the removal of funds or assets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Portfo- lio's foreign investments may be less liquid and their prices may be more vola- tile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities ex- changes, brokers and issuers in foreign countries than in the United States.

Foreign investments may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Commu- nity; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign curren- cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero- coupon securities.

Because the securities markets in these countries are highly developed, the In- ternational Bond Portfolio may invest more than 25% of its total assets in the securities of issuers located in Canada, France, Germany, Japan and the United Kingdom. Investments of 25% or more of the Portfolio's total assets in a par- ticular country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

To maintain greater flexibility, a Portfolio may invest in instruments which have the characteristics of futures contracts. These instruments may take a va- riety of forms, such as debt securities with interest or principal payments de- termined by reference to the value of a currency or commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including volatility and illiquidity.

The expense ratio of the International Bond Portfolio can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as higher investment research costs, higher foreign custody costs, higher commission costs and additional costs arising from delays in settlements of transactions involving foreign securities.

HIGH YIELD SECURITIES. The Low Duration Bond Portfolio may invest in non-in- vestment grade or "high yield" fixed income or convertible securities commonly known to investors as "junk bonds" when the Portfolio's sub-adviser believes that the investment characteristics of such securities make them desirable in light of the Portfolio's investment objective and current portfolio mix, so long as under normal market conditions, no more than 20% of its total assets are invested in non-investment grade debt securities, and such securities are rated "B" or higher at the time of purchase by at least one major rating agen- cy.

While generally providing greater income and opportunity for gain, non-invest- ment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated "Ba" or lower by Moody's or "BB" or lower by Standard & Poor's) or will

25.

be non-rated. High yield securities are considered to be speculative with re- spect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.

While the market values of high yield securities tend to react less to fluctua- tions in interest rates than do those of higher rated securities, the values of high yield securities often reflect individual corporate developments and have a high sensitivity to economic changes to a greater extent than do higher rated securities. Investors in high yield securities have a lower degree of protec- tion with respect to principal and interest payments then do investors in higher rated securities due to the reduced creditworthiness of high yield is- suers. During an economic downturn, a substantial period of rising interest rates or a recession, highly leveraged issuers of high yield securities may ex- perience financial distress possibly resulting in insufficient revenues to meet their principal and interest payment obligations, to meet projected business goals and to obtain additional financing. An economic downturn could also dis- rupt the market for lower-rated securities and adversely affect the value of outstanding securities, the Portfolio's net asset value and the ability of the issuers to repay principal and interest. If the issuer of a security held by a Portfolio defaulted, the Portfolio may not receive full interest and principal payments due to it and could incur additional expenses if it chose to seek re- covery of its investment.

The secondary markets for high yield securities are not as liquid as the sec- ondary markets for higher rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and partici- pants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, due to the market's relative youth and growth the trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. In addition, the high yield markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory devel- opments. These developments could adversely affect a Portfolio's net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and li- quidity of outstanding high yield securities, especially in a thinly traded market.

The Low Duration Bond Portfolio may invest in securities rated "B" and above or determined by the sub-adviser to be of comparable quality. Securities which are rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re- spect to capacity to pay interest and repay principal. Securities which are rated "B" generally lack characteristics of a desirable investment and assur- ance of interest and principal payments over any long period of time may be small. For a description of securities ratings, see Appendix A in the Statement of Additional Information. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and principal. In the event that a Portfolio investing in high yield securities experiences an unexpected level of net redemptions, the Portfolio could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Portfolio's rate of return is based. The costs attributable to investing in the high yield markets are usually higher for several reasons, such as higher investment research costs and higher commission costs. For more information regarding non-investment grade securities, see "Investment Poli- cies--Non-Investment Grade Securities" in the Statement of Additional Informa- tion.

MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga- tions are "general obligation" securities and "revenue" securities. General ob- ligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue se- curities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being fi- nanced. Revenue securities include private activity bonds which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit stand-

26.

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

Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac- tivity bonds the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax ("AMT Paper") when added together with any other taxable investments held by the Portfolio. In addition, each Tax-Free Portfolio may invest 25% or more of its assets in Municipal Obligations the in- terest on which is paid solely from revenues of similar projects. To the extent a Portfolio's assets are invested in Municipal Obligations payable from the revenues of similar projects or are invested in private activity bonds, the Portfolio will be subject to the particular risks presented by the laws and economic conditions relating to such projects and bonds to a greater extent than it would be if its assets were not so invested.

The Tax-Free Income Portfolio is classified as a diversified portfolio, and the State-Specific Tax-Free Portfolios are classified as non-diversified portfo- lios, under the 1940 Act. Investment returns on a non-diversified portfolio typically are dependent upon the performance of a smaller number of securities relative to the number held in a diversified portfolio. Consequently, the change in value of any one security may affect the overall value of a non-di- versified portfolio more than it would a diversified portfolio.

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

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. Accordingly, the ability of a Portfolio to buy and sell Municipal Obligations may, at any particular time and with re- spect to any particular securities, be limited. In addition, Municipal Obliga- tions purchased by the Portfolios include obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these institutions could cause loss to a Tax-Free Portfolio and affect its share price.

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

27.

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax- Free Portfolios) may make significant investments in residential and commercial mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers.

The Portfolios may acquire several types of mortgage-related securities, in- cluding guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage- related securities ("ARMs") and collateralized mortgage obligations ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other classes hav- ing an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known as "Z-Bonds"), which only accrue interest at a specified rate until other specified classes have been retired and are con- verted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and gener- ally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured, and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the ma- turity of mortgage-related and other asset-backed securities held by the Port- folio will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that a Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Portfolio's principal investment to the extent of premium paid.

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STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in- vestment objectives, the Portfolios may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obliga- tions. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, par- ticularly SMBS, may exhibit greater price volatility than ordinary debt securi- ties because of the manner in which their principal and interest are returned to investors. The International Bond Portfolio also may purchase "stripped" se- curities that evidence ownership in the future interest payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mort- gage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. How- ever, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that re- ceives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest pay- ments. Additionally, current federal tax law requires the holder of certain zero coupon bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated in- vestment company and avoid liability for federal income and excise taxes, a Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvanta- geous circumstances in order to generate cash to satisfy these distribution re- quirements. See "How Are Fund Distributions Taxed?"

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or foreign corporations and banks, and may acquire com- mercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer. Bank obligations may include certificates of deposit, notes, bankers' acceptances and fixed time deposits. These obliga- tions may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by gov- ernment regulation. The Portfolios may also make interest-bearing savings de- posits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest rates, maturities and times of issuance. Obligations of certain agencies and instrumentalities of the U.S. Government such as the

29.

INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfo- lios may enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration manage- ment technique or to protect against an increase in the price of securities a Portfolio anticipates purchasing at a later date. The Portfolios intend to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments 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 inter- est on a notional principal amount from the party selling such interest rate floor.

In addition, the International Bond Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future ex- change rates. The Portfolio may engage in foreign currency exchange transac- tions in connection with the purchase and sale of portfolio securities (trans- action hedging) and to protect the value of specific portfolio positions (posi- tion hedging). The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency, and may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts (futures contracts). The Portfolio may also purchase ex- change-listed and over-the-counter call and put options on futures contracts and on foreign currencies, and may write covered call options on up to 100% of the currencies in its portfolio. In order to protect against currency fluctua- tions, the International Bond Portfolio may enter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolio and another party to make or receive payments in specified currencies.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio may write (i.e., sell) covered call options, buy put options, buy call options and write secured put options for the purpose of hedging or earning additional income, which may be deemed speculative, or, with respect to the International Bond Portfolio, cross-hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securities, securities indices, or the yield differential between two securities or, in the case of the International Bond Portfolio, foreign currencies, and may or may not be listed on a securi- ties exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (mea- sured at the time an option is written). Options trading is a highly special- ized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts for hedging pur- poses or to maintain liquidity. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract

30.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of certain securities, the cash value of a securities index or a stated quan- tity of a foreign currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru- ments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the re- sulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the sub-adviser's inability to predict correctly the direction of securities pric- es, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

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

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

VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of

31.

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made through reverse repurchase agreements under which a Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Portfolios may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the trans- action. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obli- gated to repurchase and that the securities may not be returned to the Portfo- lio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid debt securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agree- ments, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an additional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a share- holder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that each Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 15% limit. Each Portfolio may purchase securities which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the Portfolios' sub- adviser that an adequate trading market exists for the securities. This invest- ment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified institutional buyers become uninter- ested in purchasing these restricted securities.

32.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, each Portfolio (except the Tax- Free Portfolios) may enter into dollar roll transactions. A dollar roll trans- action involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar secu- rity at a later date at an agreed-upon price. The securities that are repur- chased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepay- ment histories than those sold. During the period between the sale and repur- chase, a Portfolio will not be entitled to receive interest and principal pay- ments on the securities sold. Proceeds of the sale will be invested in addi- tional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the in- come, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the per- formance would have been without the use of dollar rolls. At the time a Portfo- lio enters into a dollar roll transaction, it will place in a segregated ac- count maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including ac- crued interest) and will subsequently monitor the account to ensure that its value is maintained. A Portfolio's dollar rolls, together with its reverse re- purchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties a Portfolio is required to purchase may decline below the agreed upon re- purchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio's right to purchase or repur- chase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully em- ployed.

SHORT SALES. The Portfolios may only make short sales of securities "against- the-box." A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will de- cline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to ac- quire the identical security at no additional cost. When selling short "against-the-box," a Portfolio forgoes an opportunity for capital appreciation in the security.

PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios are set forth above under "What Are the Portfolios' Financial Highlights?" A Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the sub-adviser believes investment considerations war- rant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e., 100% or more) will generally result in higher transaction costs to a Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing inter- est rates. Fixed income securities with longer maturities, which tend to pro- duce higher yields, are subject to potentially greater capital appreciation and depreciation

33.

STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen- tration of investments by the State-Specific Tax-Free Portfolios in State-Spe- cific Obligations raises special investment considerations. In particular, changes in the economic condition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfolio's shares. Certain matters relating to the states in which the State-Specific Tax- Free Portfolios invest are described below. For further information, see "Spe- cial Considerations Regarding State-Specific Obligations" in the Statement of Additional Information.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following five years. As of June 30, 1996, the General Fund had a surplus of $635.2 million. A relatively high proportion of persons 65 and older in the Commonwealth, court ordered increases in healthcare reimbursement rates and higher correctional program costs place increased pressures on the tax resources of the Common- wealth and its municipalities. The Commonwealth's debt burden remains moderate. Employment growth has shifted to the trade and service sectors, with losses in more high-paid manufacturing positions. A new governor took office in January 1995, but the Commonwealth has continued to show fiscal restraint.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumen- talities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary pe- riods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdi- visions and instrumentalities to meet their financial obligations. In addition, New Jersey maintains a balanced budget which restricts total appropriation in- creases to only 5% annually with respect to any municipality or county. This balanced budget plan may actually adversely affect a particular municipality's or county's ability to repay its obligations.

Ohio. While diversifying more into the service and other non-manufacturing areas, the economy of Ohio continues to rely in part on durable goods manufac- turing largely concentrated in motor vehicles and equipment, steel, rubber products and household appliances. As a result, general economic activity in Ohio, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an im- portant segment of the Ohio economy with over half the State's area devoted to farming and approximately 16% of total employment in agribusiness. In past years, the State's overall unemployment rate has been somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, for the last six years the State rates were below the national rates (4.9% versus 5.4% in 1996). The unem- ployment rate and its effects vary among particular geographic areas of the State. There can be no assurance that future national, regional or state-wide economic difficulties and the resulting impact on State or local government fi- nances generally will not adversely affect the market value of Ohio State-Spe- cific Obligations held in the Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those obligations.

34.

BOARD OF       The business and affairs of the Fund are managed under the di-
TRUSTEES       rection of its Board of Trustees. The following persons cur-
               rently serve on the Board:

               William O. Albertini--Executive Vice President and Chief Finan-
               cial Officer of Bell Atlantic Global Wireless.

               Raymond J. Clark--Treasurer of Princeton University.

               Robert M. Hernandez--Vice Chairman and Chief Financial Officer
               of USX Corporation.

               Anthony M. Santomero--Professor of Finance and Director of the
               Financial Institutions Center, The Wharton School, University
               of Pennsylvania.

               David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
               ates, Inc.

ADVISER AND
SUB-ADVISER    The Adviser to BlackRock Funds is BlackRock, Inc. Each of the
               Portfolios within the BlackRock Funds family is managed by
               a specialized portfolio manager who is a member of BlackRock,
               Inc.'s fixed income portfolio management affiliate, BlackRock
               Financial Management, Inc. ("BlackRock"). BlackRock has its
               primary offices at 345 Park Avenue, New York, New York 10154.

The Portfolios and their portfolio managers are as follows:

BLACKROCK FUNDS PORTFOLIO                    PORTFOLIO MANAGER
-------------------------                    -----------------
Low Duration Bond            Robert S. Kapito; Vice Chairman of BlackRock
                             since 1988; Portfolio co-manager since its
                             inception.
                             Scott Amero; Managing Director of BlackRock since
                             1990; Portfolio co-manager since its inception.
                             Jody Kochansky; Vice President of BlackRock since
                             1992; Portfolio co-manager since 1995.
Intermediate Government Bond Robert S. Kapito and Scott Amero (see above) and
                             Michael P. Lustig; Mr. Lustig has been Vice
                             President of BlackRock since 1989; Messrs.
                             Kapito, Lustig and Amero have been Portfolio co-
                             managers since 1995.
Intermediate Bond            Robert S. Kapito, Michael P. Lustig and Scott
                             Amero (see above); Messrs. Kapito, Lustig and
                             Amero have been Portfolio co-managers since 1995.
Core Bond                    Keith Anderson; Managing Director of BlackRock
                             since 1988; Portfolio co-manager since June 1997.
                             Robert Michele, CFA; Managing Director of
                             BlackRock since 1996; Director and head of U.S.
                             Fixed Income Investments at CS First Boston
                             Investment Management Corporation from 1993 to
                             1995; From 1985-1993, he served as Deputy Manager
                             and Senior Portfolio Manager at Brown Brothers
                             Harriman & Co.; Portfolio co-manager since June
                             1997.
Government Income            Robert S. Kapito, Michael P. Lustig and Scott
                             Amero (see above); Messrs. Kapito, Lustig and
                             Amero have been Portfolio co-managers since 1995.

35.

BLACKROCK FUNDS PORTFOLIO                    PORTFOLIO MANAGER
-------------------------                    -----------------
Managed Income               Keith Anderson (see above); Portfolio co-manager
                             since June 1997.
                             Robert Michele (see above); Portfolio co-manager
                             since June 1997.
International Bond           Andrew Gordon; Portfolio manager at BlackRock
                             since 1996; responsible for non-dollar research
                             at Barclay Investments from 1994 to 1996 and at
                             CS First Boston from 1986 to 1994; Portfolio
                             manager since January 1997.
Tax-Free Income              Kevin Klingert; Portfolio manager at BlackRock
                             since 1991; prior to joining BlackRock, Assistant
                             Vice President, Merrill Lynch, Pierce, Fenner &
                             Smith; Portfolio manager since 1995.
Pennsylvania Tax-Free Income Kevin Klingert (see above); Portfolio manager
                             since 1995.
New Jersey Tax-Free Income   Kevin Klingert (see above); Portfolio manager
                             since 1995.
Ohio Tax-Free Income         Kevin Klingert (see above); Portfolio manager
                             since 1995.

BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for in- vestment companies, and has its principal offices at 1600 Market Street, 29th Floor, Philadelphia, Pennsylvania 19103. BlackRock, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.

As adviser, BlackRock, Inc. is responsible for the overall investment management of the Portfolios. As sub-adviser, BlackRock Financial Management is responsible for the day- to-day management of the Portfolios, and generally makes all purchase and sale investment decisions for the Portfolios. BlackRock Financial Management also provides research and credit analysis.

THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

. BlackRock Financial Management, Inc.: Domestic and non- dollar fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

For their investment advisory and sub-advisory services, BlackRock, Inc. and the Portfolios' sub-adviser are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfo- lios?", with respect to certain Portfolios, BlackRock, Inc. and the sub-adviser intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by BlackRock, Inc., and do not represent an extra charge to the Portfolios.

                           EACH PORTFOLIO EXCEPT THE
                         INTERNATIONAL BOND PORTFOLIO            INTERNATIONAL BOND PORTFOLIO
                         ----------------------------------      ----------------------------------
AVERAGE DAILY NET          INVESTMENT         SUB-ADVISORY         INVESTMENT         SUB-ADVISORY
 ASSETS                   ADVISORY FEE            FEE             ADVISORY FEE            FEE
-----------------        --------------      --------------      --------------      --------------
first $1 billion               .500%               .350%                .550%              .400%
$1 billion--$2 billion         .450                .300                 .500               .350
$2 billion--$3 billion         .425                .275                 .475               .325
greater than $3 billion        .400                .250                 .450               .300

For the twelve months ended September 30, 1997, the Portfo- lios paid investment advisory fees at the following annual rates (expressed as a percentage of average daily net as- sets) after voluntary fee waivers: Intermediate Government Bond Portfo- lio, .30%; Intermediate Bond Portfolio, .30%; Government Income Portfolio, .00%; Man-aged Income Portfo- lio, .35%; Tax-Free Income Portfolio, .28%; Pennsylvania Tax-Free

36.

Income Portfolio, .29%; Ohio Tax-Free Income Portfolio, .09%; Low Duration Bond Portfolio, .27%; Core Bond Portfolio, .26%, New Jersey Tax-Free Income Portfolio, .29%; and the Interna- tional Bond Portfolio, .56%.

The Portfolios' sub-adviser strives to achieve best execution on all transactions. Infrequently, brokerage transactions for the Portfolios may be directed through registered broker/dealers who have entered into dealer agreements with the Fund's distributor, subject to the requirements of best execu- tion.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad- ministrators. BlackRock, Inc. and PFPC are indirect wholly- owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub- sidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relating to the maintenance of financial records and fund accounting. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's average daily net assets. PFPC and BDI are entitled to receive a combined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of each Portfolio's average daily net assets, .075% of the next $500 million of each Portfolio's average daily net assets and .065% of the av- erage daily net assets of each Portfolio in excess of $1 bil- lion and (ii) .115% of the first $500 million of the average daily net assets allocated to each class of Investor Shares of each Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the average daily net assets al- located to each class of Investor Shares of each Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their administration fees from a Portfo- lio.

For information about the operating expenses the Portfolios paid for the most recent fiscal period, see "What Are the Ex- penses of the Portfolios?"

AGENT,         PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND       Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING     lios' custodian and PFPC, whose principal offices are located
AGENT AND      at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN      their transfer agent and dividend disbursing agent.

DISTRIBUTION
AND SERVICE    Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN           Investor Shares of the Portfolios bear the expense of payments
               ("distribution fees") made to BDI, as the Fund's distributor
               (the "Distributor"), or affiliates of PNC Bank, for distribu-
               tion and sales support services. The distribution fees may be
               used to compensate the Distributor for distribution services
               and to compensate the Distributor and PNC Bank affiliates for
               sales support services provided in connection with the offering
               and sale of Investor Shares. The distribution fees may also be
               used to reimburse the Distributor and PNC Bank affiliates for
               related expenses, including payments to brokers, dealers, fi-
               nancial institutions and industry professionals ("Service Orga-
               nizations") for sales support services and related expenses.
               Distribution fees payable under the Plan will not exceed .10%
               (annualized) of the average daily net asset value of each
               Portfolio's outstanding Investor A Shares and .75% (annualized)
               of the average daily net asset value of each Portfolio's out-
               standing Investor B and Investor C Shares. Payments under the
               Plan are not tied directly to out-of-pocket expenses and there-
               fore may be used by the recipients as they choose (for example,
               to defray their overhead expenses). The Plan also permits the
               Distributor, the Administrators and other companies that re-
               ceive fees from the Fund to make payments relating to distri
                   -

                                      37.

bution and sales support activities out of their past profits or other sources available to them. For further information, see "Investment Advisory, Administration, Distribution and Servicing Arrangements" in the Statement of Additional Infor- mation.

Under the Plan, the Fund intends to enter into service ar- rangements with Service Organizations (including PNC Bank and its affiliates) with respect to each class of Investor Shares pursuant to which Service Organizations will render certain support services to their customers who are the beneficial owners of Investor Shares. In consideration for a shareholder servicing fee of up to .25% (annualized) of the average daily net asset value of Investor Shares owned by their customers, Service Organizations may provide one or more of the follow- ing services: responding to customer inquiries relating to the services performed by the Service Organization and to customer inquiries concerning their investments in Investor Shares; assisting customers in designating and changing divi- dend options, account designations and addresses; and provid- ing other similar shareholder liaison services. In considera- tion for a separate shareholder processing fee of up to .15% (annualized) of the average daily net asset value of Investor Shares owned by their customers, Service Organizations may provide one or more of these additional services to such cus- tomers: processing purchase and redemption requests from customers and placing orders with the Fund's transfer agent or the Distributor; processing dividend payments from the Fund on behalf of customers; providing sub-accounting with respect to Investor Shares beneficially owned by customers or the information necessary for sub-accounting; and providing other similar services.

Service Organizations may charge their clients additional fees for account services. Customers who are beneficial own- ers of Investor Shares should read this Prospectus in light of the terms and fees governing their accounts with Service Organizations.

The Glass-Steagall Act and other applicable laws, among other things, prohibit banks from engaging in the business of un- derwriting securities. It is intended that the services pro- vided by Service Organizations under their service agreements will not be prohibited under these laws. Under state securi- ties laws, banks and financial institutions that receive pay- ments from the Fund may be required to register as dealers.

INVESTMENT QUALITY. Securities acquired by the Intermediate Government Bond Portfolio will be rated in the highest rating category at the time of purchase or, if unrated, of comparable quality as determined by the Portfolio's sub-ad- viser. Securities acquired by the other Portfolios except the Low Duration Bond Portfolio will be rated investment grade at the time of purchase (within the four highest rating categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable quality as determined by the Portfolios' sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P are generally considered to be investment grade although they have speculative characteristics. If a security's rating is reduced below the minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security. The Low Duration Bond Portfolio may invest up to 20% of its assets in non-investment grade fixed-income or convertible securities with a minimum rating of "B". See "High Yield Securities" below.

INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Intermediate Government Bond Portfolio will invest at least 65% of its total assets in obligations is- sued or guaranteed by the U.S. Government, its agencies or instrumentalities and related repurchase agreements during normal market conditions. Under normal market conditions, the International Bond Portfolio will invest at least 65% of its total assets in the debt obligations of foreign issuers located in at least three different foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to- gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo- lios") will invest, during normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and posses- sions of the United States, the District of Columbia and their political sub- divisions, agencies, instrumentalities and authorities and related tax-exempt derivative securities the interest on which is exempt from regular Federal in- come tax and is not an item of tax preference for purposes of the Federal al- ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe- cific Tax-Free Portfolio intends to invest at least 65% of its net assets in Municipal Obligations of issuers located in the particular state indicated by its name ("State-Specific Obligations"). The Tax-Free Income Portfolio intends to invest no more than 25% of its net assets in Municipal Obligations of is- suers located in the same state. During temporary defensive periods each Tax- Free Portfolio may invest without limitation in securities that are not Munici- pal Obligations and may hold without limitation uninvested cash reserves.

FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in foreign securities and currencies. Each of the Managed Income and Core Bond Portfolios may invest up to 10% of its total assets and the Low Duration Bond Portfolio may invest up to 20% of its total assets in debt securities of foreign issuers on either a currency hedged or unhedged basis, and may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Some of these instruments may have the characteristics of futures contracts. In addition, each Portfolio may engage in foreign currency exchange transactions to seek to protect against changes in the level of future exchange rates which would adversely affect the Portfolio's performance. These investments and transactions involving foreign securities, currencies, options (including options that relate to foreign currencies), futures, hedging and cross-hedging are described below and under "Interest Rate and Currency Transactions" and "Options and Futures Contracts." Investing in securities of foreign issuers involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Portfolio that invests in foreign securities will be affected favorably or unfavorably by changes in currency exchange rates.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitations on the removal of

19.

Foreign investments may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Commu- nity; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign curren- cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero- coupon securities.

Because the securities markets in these countries are highly developed, the In- ternational Bond Portfolio may invest more that 25% of its total assets in the securities of issuers located in Canada, France, Germany, Japan and the United Kingdom. Investments of 25% or more of the Portfolio's total assets in a par- ticular country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

To maintain greater flexibility, a Portfolio may invest in instruments which have the characteristics of futures contracts. These instruments may take a va- riety of forms, such as debt securities with interest or principal payments de- termined by reference to the value of a currency or commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including volatility and illiquidity.

The expense ratio of the International Bond Portfolio can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as higher investment research costs, higher foreign custody costs, higher commission costs and additional costs arising from delays in settlements of transactions involving foreign securities.

HIGH YIELD SECURITIES. The Low Duration Bond Portfolio may invest in non-in- vestment grade or "high yield" fixed income or convertible securities commonly known to investors as "junk bonds" when the Portfolio's sub-adviser believes that the investment characteristics of such securities make them desirable in light of the Portfolio's investment objective and current portfolio mix, so long as under normal market conditions, no more than 20% of its total assets are invested in non-investment grade debt securities, and such securities are rated "B" or higher at the time of purchase by at least one major rating agen- cy.

While generally providing greater income and opportunity for gain, non-invest- ment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated "Ba" or lower by Moody's or "BB" or lower by Standard & Poor's) or will be non-rated. High yield securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.

20.

While the market values of high yield securities tend to react less to fluctua- tions in interest rates than do those of higher rated securities, the values of high yield securities often reflect individual corporate developments and have a high sensitivity to economic changes to a greater extent than do higher rated securities. Investors in high yield securities have a lower degree of protec- tion with respect to principal and interest payments then do investors in higher rated securities due to the reduced creditworthiness of high yield is- suers. During an economic downturn, a substantial period of rising interest rates or a recession, highly leveraged issuers of high yield securities may ex- perience financial distress possibly resulting in insufficient revenues to meet their principal and interest payment obligations, to meet projected business goals and to obtain additional financing. An economic downturn could also dis- rupt the market for lower-rated securities and adversely affect the value of outstanding securities, the Portfolio's net asset value and the ability of the issuers to repay principal and interest. If the issuer of a security held by a Portfolio defaulted, the Portfolio may not receive full interest and principal payments due to it and could incur additional expenses if it chose to seek re- covery of its investment.

The secondary markets for high yield securities are not as liquid as the sec- ondary markets for higher rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and partici- pants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, due to the market's relative youth and growth the trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. In addition, the high yield markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory devel- opments. These developments could adversely affect a Portfolio's net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and li- quidity of outstanding high yield securities, especially in a thinly traded market.

The Low Duration Bond Portfolio may invest in securities rated "B" and above or determined by the sub-adviser to be of comparable quality. Securities which are rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re- spect to capacity to pay interest and repay principal. Securities which are rated "B" generally lack characteristics of a desirable investment and assur- ance of interest and principal payments over any long period of time may be small. For a description of securities ratings, see Appendix A in the Statement of Additional Information. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and principal. In the event that a Portfolio investing in high yield securities experiences an unexpected level of net redemptions, the Portfolio could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Portfolio's rate of return is based. The costs attributable to investing in the high yield markets are usually higher for several reasons, such as higher investment research costs and higher commission costs. For more information regarding non-investment grade securities, see "Investment Poli- cies--Non-Investment Grade Securities" in the Statement of Additional Information.

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

21.

Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac- tivity bonds the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax ("AMT Paper") when added together with any other taxable investments held by the Portfolio. In addition, each Tax-Free Portfolio may invest 25% or more of its assets in Municipal Obligations the in- terest on which is paid solely from revenues of similar projects. To the extent a Portfolio's assets are invested in Municipal Obligations payable from the revenues of similar projects or are invested in private activity bonds, the Portfolio will be subject to the particular risks presented by the laws and economic conditions relating to such projects and bonds to a greater extent than it would be if its assets were not so invested.

The Tax-Free Income Portfolio is classified as a diversified portfolio, and the State-Specific Tax-Free Portfolios are classified as non-diversified portfo- lios, under the 1940 Act. Investment returns on a non-diversified portfolio typically are dependent upon the performance of a smaller number of securities relative to the number held in a diversified portfolio. Consequently, the change in value of any one security may affect the overall value of a non-di- versified portfolio more than it would a diversified portfolio.

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

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. Accordingly, the ability of a Portfolio to buy and sell Municipal Obligations may, at any particular time and with re- spect to any particular securities, be limited. In addition, Municipal Obliga- tions purchased by the Portfolios include obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these institutions could cause loss to a Tax-Free Portfolio and affect its share price.

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

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax- Free Portfolios) may make significant investments in residential and commercial mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers.

22.

The Portfolios may acquire several types of mortgage-related securities, in- cluding guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage- related securities ("ARMs") and collateralized mortgage obligations ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other classes hav- ing an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known as "Z-Bonds"), which only accrue interest at a specified rate until other specified classes have been retired and are con- verted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and gener- ally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured, and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws many of which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the pur- chaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. There- fore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the ma- turity of mortgage-related and other asset-backed securities held by the Port- folio will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that a Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Portfolio's principal investment to the extent of premium paid.

The Portfolios may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securities contain- ing loans or mortgages originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It is possible

23.

that under some circumstances, PNC Mortgage Securities Corp. or its affiliates could have interests that are in conflict with the holders of these mortgage- backed securities, and such holders could have rights against PNC Mortgage Se- curities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in- vestment objectives, the Portfolios may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obliga- tions. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, par- ticularly SMBS, may exhibit greater price volatility than ordinary debt securi- ties because of the manner in which their principal and interest are returned to investors. The International Bond Portfolio also may purchase "stripped" se- curities that evidence ownership in the future interest payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mort- gage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. How- ever, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that re- ceives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest pay- ments. Additionally, current federal tax law requires the holder of certain zero coupon bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated in- vestment company and avoid liability for federal income and excise taxes, a Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvanta- geous circumstances in order to generate cash to satisfy these distribution re- quirements. See "How Are Fund Distributions Taxed?"

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or foreign corporations and banks, and may acquire com- mercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer. Bank obligations may include certificates of deposit, notes, bankers' acceptances and fixed time deposits. These obliga- tions may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by gov- ernment regulation. The Portfolios may also make interest-bearing savings de- posits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest rates, maturities and times of issuance. Obligations of certain agencies and instrumentalities of the U.S. Government such as the Government National Mort- gage Association are supported by the United States' full faith and credit; others such as those of the Federal National Mortgage Association and the Stu- dent Loan Marketing Association are supported by the right of the issuer to borrow from the Treasury; others such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation are supported only by the credit of the instru-

24.

INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfo- lios may enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration manage- ment technique or to protect against an increase in the price of securities a Portfolio anticipates purchasing at a later date. The Portfolios intend to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments 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 inter- est on a notional principal amount from the party selling such interest rate floor.

In addition, the International Bond Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future ex- change rates. The Portfolio may engage in foreign currency exchange transac- tions in connection with the purchase and sale of portfolio securities (trans- action hedging) and to protect the value of specific portfolio positions (posi- tion hedging). The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency, and may also enter into contracts to purchase or sell foreign currencies at a fu- ture date ("forward contracts") and purchase and sell foreign currency futures contracts (futures contracts). The Portfolio may also purchase exchange-listed and over-the-counter call and put options on futures contracts and on foreign currencies, and may write covered call options on up to 100% of the currencies in its portfolio. In order to protect against currency fluctuations, the Inter- national Bond Portfolio may enter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolio and another party to make or re- ceive payments in specified currencies.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio may write (i.e., sell) covered call options, buy put options, buy call options and write secured put options for the purpose of hedging or earning additional income, which may be deemed speculative, or, with respect to the International Bond Portfolio, cross-hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securities, securities indices or the yield differential between two securities, or, in the case of the International Bond Portfolio, foreign currencies, and may or may not be listed on a securi- ties exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (mea- sured at the time an option is written). Options trading is a highly special- ized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts for hedging pur- poses or to maintain liquidity. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately afterwards the aggregate amount of margin deposits on its existing futures positions plus the amount of premiums paid for related futures options entered in to for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of certain securities, the cash value of a securities index or a stated quan- tity of a foreign currency. A Portfolio may sell a futures contract in

25.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in- struments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the sub-adviser's inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

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

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

VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of in- terest to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that ex- ceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Port- folio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

26.

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities. Borrowings may be made through reverse repurchase agreements under which a Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Portfolios may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the trans- action. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obli- gated to repurchase and that the securities may not be returned to the Portfo- lio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liquid securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agreements, to- gether with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an additional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a share- holder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that each Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 15% limit. Each Portfolio may purchase securities which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the Portfolios' sub- adviser that an adequate trading market exists for the securities. This invest- ment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified institutional buyers become uninter- ested in purchasing these restricted securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transactions involve a commitment by a Port- folio to purchase or sell particular securities with payment and delivery tak- ing place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security that it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securities delivery takes place. Each Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets absent unusual market conditions.

27.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, each Portfolio (except the Tax- Free Portfolios) may enter into dollar roll transactions. A dollar roll trans- action involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar secu- rity at a later date at an agreed-upon price. The securities that are repur- chased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepay- ment histories than those sold. During the period between the sale and repur- chase, a Portfolio will not be entitled to receive interest and principal pay- ments on the securities sold. Proceeds of the sale will be invested in addi- tional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the in- come, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the per- formance would have been without the use of dollar rolls. At the time a Portfo- lio enters into a dollar roll transaction, it will place in a segregated ac- count maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including ac- crued interest) and will subsequently monitor the account to ensure that its value is maintained. A Portfolio's dollar rolls, together with its reverse re- purchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties a Portfolio is required to purchase may decline below the agreed upon re- purchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio's right to purchase or repur- chase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully em- ployed.

SHORT SALES. The Portfolios may only make short sales of securities "against- the-box." A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will de- cline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to ac- quire the identical security at no additional cost. When selling short "against-the-box," a Portfolio forgoes an opportunity for capital appreciation in the security.

PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios are set forth above under "What Are the Portfolios' Financial Highlights?" A Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the sub-adviser believes investment considerations war- rant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e., 100% or more) will generally result in higher transaction costs to a Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing inter- est rates. Fixed income securities with longer maturities, which tend to pro- duce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Portfolios are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securities, and the average maturity of a Portfolio's assets will vary within the limits stated above under "What Are the Differences Among the Portfolios?" based upon its sub-adviser's assessment of economic and market conditions. Although the Portfolios' sub-adviser will normally attempt to structure each Portfolio to have a comparable duration to its benchmark as stated in that section, there can be no assurance that it will be able to do so at all times.

STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen- tration of investments by the State-Specific Tax-Free Portfolios in State-Spe- cific Obligations raises special investment considerations. In particular, changes in the economic condition and governmental policies of a state and its political subdivi-

28.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following five years. As of June 30, 1996, the General Fund had a surplus of $635.2 million. A relatively high proportion of persons 65 and older in the Commonwealth, court ordered increases in healthcare reimbursement rates and higher correctional program costs place increased pressures on the tax resources of the Common- wealth and its municipalities. The Commonwealth's debt burden remains moderate. Employment growth has shifted to the trade and service sectors, with losses in more high-paid manufacturing positions. A new governor took office in January 1995, but the Commonwealth has continued to show fiscal restraint.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumen- talities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary pe- riods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdi- visions and instrumentalities to meet their financial obligations. In addition, New Jersey maintains a balanced budget which restricts total appropriation in- creases to only 5% annually with respect to any municipality or county. This balanced budget plan may actually adversely affect a particular municipality's or county's ability to repay its obligations.

Ohio. While diversifying more into the service and other non-manufacturing areas, the economy of Ohio continues to rely in part on durable goods manufac- turing largely concentrated in motor vehicles and equipment, steel, rubber products and household appliances. As a result, general economic activity in Ohio, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an im- portant segment of the Ohio economy with over half the State's area devoted to farming and approximately 16% of total employment in agribusiness. In past years, the State's overall unemployment rate has been somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, for the last six years the State rates were below the national rates (4.9% versus 5.4% in 1996). The unem- ployment rate and its effects vary among particular geographic areas of the State. There can be no assurance that future national, regional or state-wide economic difficulties and the resulting impact on State or local government fi- nances generally will not adversely affect the market value of Ohio State-Spe- cific Obligations held in the Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those obligations.

29.

BOARD OF          The business and affairs of the Fund are managed under the
TRUSTEES          direction of its Board of Trustees. The following persons
                  currently serve on the Board:

                 William O. Albertini--Executive Vice President and Chief Fi-
                 nancial Officer of Bell Atlantic Global Wireless.

                 Raymond J. Clark--Treasurer of Princeton University.

                 Robert M. Hernandez--Vice Chairman and Chief Financial
                 Officer of USX Corporation.

                 Anthony M. Santomero--Professor of Finance and Director of
                 the Financial Institutional Center, The Wharton School,
                 University of Pennsylvania.

                 David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
                 ates, Inc.

ADVISER AND
SUB-ADVISER       The Adviser to the BlackRock Funds is BlackRock, Inc. Each of
                  the Portfolios within the BlackRock Funds family is managed
                  by a specialized portfolio manager who is a member of Black-
                  Rock, Inc.'s fixed income portfolio management affiliate,
                  BlackRock Financial Management, Inc. ("BlackRock"). BlackRock
                  has its primary offices at 345 Park Avenue, New York, New
                  York 10154.

The Portfolios and their portfolio managers are as follows:

 BLACKROCK FUNDS PORTFOLIO                 PORTFOLIO MANAGER
 -------------------------                 -----------------
Low Duration Bond             Robert S. Kapito; Vice Chairman of
                              BlackRock since 1988; Portfolio co-manager
                              since its inception.
                              Scott Amero; Managing Director of BlackRock
                              since 1990; Portfolio co-manager since its
                              inception.
                              Jody Kochansky; Vice President of BlackRock
                              since 1992; Portfolio co-manager since
                              1995.
Intermediate Government Bond  Robert S. Kapito and Scott Amero (see
                              above) and Michael P. Lustig; Mr. Lustig
                              has been Vice President of BlackRock since
                              1989; Messrs. Kapito, Lustig and Amero have
                              been Portfolio co-managers since 1995.
Intermediate Bond             Robert S. Kapito, Michael P. Lustig and
                              Scott Amero (see above); Messrs. Kapito,
                              Lustig and Amero have been Portfolio co-
                              managers since 1995.
Core Bond                     Keith Anderson; Managing Director of
                              BlackRock since 1988; Portfolio co-manager
                              since June 1997.
                              Robert Michele, CFA; Managing Director of
                              BlackRock since 1996; Director and head of
                              U.S. Fixed Income Investments at CS First
                              Boston Investment Management Corporation
                              from 1993 to 1995; From 1985-1993, he
                              served as Deputy Manager and Senior
                              Portfolio Manager at Brown Brothers
                              Harriman & Co.; Portfolio co-manager since
                              June 1997.

30.

 BLACKROCK FUNDS PORTFOLIO                 PORTFOLIO MANAGER
 -------------------------                 -----------------
Managed Income                Keith Anderson (see above); Portfolio co-
                              manager since June 1997.
                              Robert Michele (see above); Portfolio co-
                              manager since June 1997.
International Bond            Andrew Gordon; Portfolio manager at
                              BlackRock since 1996; responsible for non-
                              dollar research at Barclay Investments from
                              1994 to 1996 and at CS First Boston from
                              1986 to 1994; Portfolio manager since
                              January 1997.
Tax-Free Income               Kevin Klingert; Portfolio manager at
                              BlackRock since 1991; prior to joining
                              BlackRock, Assistant Vice President,
                              Merrill, Lynch, Pierce, Fenner & Smith;
                              Portfolio manager since 1995.
Pennsylvania Tax-Free Income  Kevin Klingert (see above); Portfolio
                              manager since 1995.
New Jersey Tax-Free Income    Kevin Klingert (see above); Portfolio
                              manager since 1995.
Ohio Tax-Free Income          Kevin Klingert (see above); Portfolio
                              manager since 1995.

31.

BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for in- vestment companies, and has its principal offices at 1600 Market Street, 29th Floor, Philadelphia, Pennsylvania 19103. BlackRock, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.

As adviser, BlackRock, Inc. is responsible for the overall investment management of the Portfolios. As sub-adviser, BlackRock Financial Management is responsible for the day- to-day management of the Portfolios, and generally makes all purchase and sale investment decisions for the Portfolios. BlackRock Financial Management also provides research and credit analysis.

THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

. BlackRock Financial Management, Inc.: Domestic and non- dollar fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

For their investment advisory and sub-advisory services, BlackRock, Inc. and the Portfolios' sub-adviser are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfo- lios?", with respect to certain Portfolios, BlackRock, Inc. and the sub-adviser intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by BlackRock, Inc., and do not represent an extra charge to the Portfolios.

                              EACH PORTFOLIO
                         EXCEPT THE INTERNATIONAL
                              BOND PORTFOLIO       INTERNATIONAL BOND PORTFOLIO
                         ------------------------- ----------------------------------
   AVERAGE DAILY NET      INVESTMENT  SUB-ADVISORY   INVESTMENT         SUB-ADVISORY
        ASSETS           ADVISORY FEE     FEE       ADVISORY FEE            FEE
first $1 billion             .500%        .350%       .550%               .400%
$1 billion--$2 billion       .450         .300        .500                .350
$2 billion--$3 billion       .425         .275        .475                .325
greater than $3 billion      .400         .250        .450                .300

For the twelve months ended September 30, 1997, the Portfo- lios paid investment advisory fees at the following annual rates (expressed as a percentage of average daily net as- sets) after voluntary fee waivers: Intermediate Government Bond Portfolio, .30%; Intermediate Bond Portfolio, .30%; Managed Income Portfolio, .35%; Tax-Free Income Portfolio, .28%; Pennsylvania Tax-Free Income Portfolio, .29%; Ohio Tax-Free Income Portfolio, .09%; Low Duration Bond Portfo- lio, .27%; Core Bond Portfolio, .26%; New Jersey Tax-Free Income Portfolio, .29%; and the International Bond Portfo- lio, .56%.

The Portfolios' sub-adviser strives to achieve best execu- tion on all transactions. Infrequently, brokerage transac- tions for the Portfolios may be directed through registered broker/dealers who have entered into dealer agreements with the Fund's distributor, subject to the requirements of best execution.

32.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad- ministrators. BlackRock, Inc. and PFPC are indirect wholly- owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub- sidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relating to the maintenance of financial records and fund accounting. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's average daily net assets. PFPC and BDI are entitled to receive a combined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of each Portfolio's average daily net assets, .075% of the next $500 million of each Portfolio's average daily net assets and .065% of the av- erage daily net assets of each Portfolio in excess of $1 bil- lion and (ii) .115% of the first $500 million of the average daily net assets allocated to Institutional Shares of each Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the average daily net assets allocated to Institutional Shares of each Portfolio in excess of $1 bil- lion. From time to time the Administrators may waive some or all of their administration fees from a Portfolio.

For information about the operating expenses the Portfolios paid for the most recent fiscal period, see "What Are The Ex- penses Of The Portfolios?"

AGENT,         PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND       Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING     lios' custodian and PFPC, whose principal offices are located
AGENT AND      at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN      their transfer agent and dividend disbursing agent.

EXPENSES
               Expenses are deducted from the total income of each Portfolio
               before dividends and distributions are paid. Expenses include,
               but are not limited to, fees paid to BlackRock, Inc. and the
               Administrators, transfer agency and custodian fees, trustee
               fees, taxes, interest, professional fees, fees and expenses in
               registering and qualifying the Portfolios and their shares for
               distribution under Federal and state securities laws, expenses
               of preparing prospectuses and statements of additional informa-
               tion and of printing and distributing prospectuses and state-
               ments of additional information to existing shareholders, ex-
               penses relating to shareholder reports, shareholder meetings
               and proxy solicitations, insurance premiums, the expense of in-
               dependent pricing services, and other expenses which are not
               expressly assumed by BlackRock, Inc. or the Fund's service
               providers under their agreements with the Fund. Any general ex-
               penses of the Fund that do not belong to a particular invest-
               ment portfolio will be allocated among all investment portfo-
               lios by or under the direction of the Board of Trustees in a
               manner the Board determines to be fair and equitable.

33.

DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI as distributor (the "Distributor"). BDI maintains its principal offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Fund is not required or permitted under the Plan to make distribution payments with respect to Institutional Shares. However, the Plan permits BDI, the Administrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support ac- tivities out of their past profits or other sources available to them which, subject to applicable NASD regulations, may include contributions to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsorship of various educational programs, sales contests and promo- tions in which participants may receive reimbursement of expenses, entertain- ment and prizes such as travel awards, merchandise and cash. For further in- formation, see "Investment Advisory, Administration, Distribution and Servic- ing Arrangements" in the Statement of Additional Information.

PURCHASE OF SHARES. Institutional Shares are offered to institutional invest- ors, including registered investment advisers with a minimum investment of $500,000 and individuals with a minimum investment of $2,000,000.

Institutional Shares are sold at their net asset value per share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern Time) on a Business Day are priced the same day. A "Business Day" is any weekday that the New York Stock Exchange (the "NYSE") and the Federal Re- serve Bank of Philadelphia (the "FRB") are open for business.

Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Business Day.

Payment for Institutional Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are per- missible investments for the respective Portfolios. For further information, see the Statement of Additional Information. The minimum initial investment for institutions is $5,000. There is no minimum subsequent investment require- ment. The Fund does not accept third party checks for initial or subsequent investments.

The Fund may in its discretion waive or modify the minimum investment amount, may reject any order for Institutional Shares and may suspend and resume the sale of shares of any Portfolio at any time.

REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the redemption order. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custodian is closed is normally wired in Federal funds on the next Business Day following redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days af- ter receiving a redemp-

34.

tion order if, in the judgment of BlackRock, Inc., an earlier payment could ad- versely affect a Portfolio. No charge for wiring redemption payments is imposed by the Fund.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.

The Fund may redeem Institutional Shares in any Portfolio account if the ac- count balance drops below $5,000 as the result of redemption requests and the shareholder does not increase the balance to at least $5,000 on thirty days' written notice.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

Shares of the Portfolios may be purchased by customers of broker-dealers and agents which have established a servicing relationship with the Fund on behalf of their customers. These broker-dealers and agents may impose additional or different conditions on the purchase or redemption of Portfolio shares by their customers and may charge their customers transaction, account or other fees on the purchase and redemption of Portfolio shares. Each broker-dealer or agent is responsible for transmitting to its customers a schedule of any such fees and information regarding any additional or different conditions regarding pur- chases and redemptions. Shareholders who are customers of such broker-dealers or agents should consult them for information regarding these fees and condi- tions.

35.

INVESTMENT QUALITY. Securities acquired by the Intermediate Government Bond Portfolio will be rated in the highest rating category at the time of purchase or, if unrated, of comparable quality as determined by the Portfolio's sub-ad- viser. Securities acquired by the other Portfolios except the Low Duration Bond Portfolio will be rated investment grade at the time of purchase (within the four highest rating categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if unrated, of comparable quality as determined by the Portfolios' sub-adviser. Securities rated "Baa" by Moody's or "BBB" by S&P are generally considered to be investment grade although they have speculative characteristics. If a security's rating is reduced below the minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security. The Low Duration Bond Portfolio may invest up to 20% of its assets in non-investment grade fixed-income or convertible securities with a minimum rating of "B". See "High Yield Securities" below.

INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Intermediate Government Bond Portfolio will invest at least 65% of its total assets in obligations is- sued or guaranteed by the U.S. Government, its agencies or instrumentalities and related repurchase agreements during normal market conditions. Under normal market conditions, the International Bond Portfolio will invest at least 65% of its total assets in the debt obligations of foreign issuers located in at least three different foreign countries. The Pennsylvania Tax-Free Income Portfolio, New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the "State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to- gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo- lios") will invest, during normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and posses- sions of the United States, the District of Columbia and their political sub- divisions, agencies, instrumentalities and authorities and related tax-exempt derivative securities the interest on which is exempt from regular Federal in- come tax and is not an item of tax preference for purposes of the Federal al- ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe- cific Tax-Free Portfolio intends to invest at least 65% of its net assets in Municipal Obligations of issuers located in the particular state indicated by its name ("State-Specific Obligations"). The Tax-Free Income Portfolio intends to invest no more than 25% of its net assets in Municipal Obligations of is- suers located in the same state. During temporary defensive periods each Tax- Free Portfolio may invest without limitation in securities that are not Munici- pal Obligations and may hold without limitation uninvested cash reserves.

FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in foreign securities and currencies. Each of the Managed Income and Core Bond Portfolios may invest up to 10% of its total assets and the Low Duration Bond Portfolio may invest up to 20% of its total assets in debt securities of for- eign issuers on either a currency hedged or unhedged basis, and may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Some of these instruments may have the characteristics of futures contracts. In addition, each Portfolio may engage in foreign currency exchange transactions to seek to protect against changes in the level of future exchange rates which would adversely affect the Portfolio's performance. These invest- ments and transactions involving foreign securities, currencies, options (in- cluding options that relate to foreign currencies), futures, hedging and cross- hedging are described below and under "Interest Rate and Currency Transactions" and "Options and Futures Contracts." Investing in securities of foreign issuers involves considerations not typically associated with investing in securities of companies organized and operated in the United States. Because foreign secu- rities generally are denominated and pay dividends or interest in foreign cur- rencies, the value of a Portfolio that invests in foreign securities will be affected favorably or unfavorably by changes in currency exchange rates.

19.

A Portfolio's investments in foreign securities may also be adversely affected by changes in foreign political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitations on the removal of funds or assets, or imposition of (or change in) exchange control regulations. In addi- tion, changes in govern
ment administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio's operations. In general, less infor- mation is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to is- suers in the United States. While the volume of transactions effected on for- eign stock exchanges has increased in recent years, it remains appreciably be- low that of the New York Stock Exchange. Accordingly, a Portfolio's foreign in- vestments may be less liquid and their prices may be more volatile than compa- rable investments in securities in U.S. companies. In addition, there is gener- ally less government supervision and regulation of securities exchanges, bro- kers and issuers in foreign countries than in the United States.

Foreign investments may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Commu- nity; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign curren- cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero- coupon securities.

Because the securities markets in these countries are highly developed, the In- ternational Bond Portfolio may invest more than 25% of its total assets in the securities of issuers located in Canada, France, Germany, Japan and the United Kingdom. Investments of 25% or more of the Portfolio's total assets in a par- ticular country will make the Portfolio's performance more dependent upon the political and economic circumstances of a particular country than a mutual fund that is more widely diversified among issuers in different countries.

To maintain greater flexibility, a Portfolio may invest in instruments which have the characteristics of futures contracts. These instruments may take a va- riety of forms, such as debt securities with interest or principal payments de- termined by reference to the value of a currency or commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including volatility and illiquidity.

The expense ratio of the International Bond Portfolio can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as higher investment research costs, higher foreign custody costs, higher commission costs and additional costs arising from delays in settlements of transactions involving foreign securities.

HIGH YIELD SECURITIES. The Low Duration Bond Portfolio may invest in non-in- vestment grade or "high yield" fixed income or convertible securities commonly known to investors as "junk bonds" when the Portfolio's sub-adviser believes that the investment characteristics of such securities make them desirable in light of the Portfolio's investment objective and current portfolio mix, so long as under normal market conditions, no more than 20% of its total assets are invested in non-investment grade debt securities, and such securities are rated "B" or higher at the time of purchase by at least one major rating agen- cy.

While generally providing greater income and opportunity for gain, non-invest- ment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated "Ba" or lower by Moody's or "BB" or lower by Standard & Poor's) or will be non-rated. High yield securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.

20.

While the market values of high yield securities tend to react less to fluctua- tions in interest rates than do those of higher rated securities, the values of high yield securities often reflect individual corporate develop-ments and have a high sensitivity to economic changes to a greater extent than do higher rated securities. Investors in high yield securities have a lower degree of protec- tion with respect to principal and interest payments then do investors in higher rated securities due to the reduced creditworthiness of high yield is- suers. During an economic downturn, a substantial period of rising interest rates or a recession, highly leveraged issuers of high yield securities may ex- perience financial distress possibly resulting in insufficient revenues to meet their principal and interest payment obligations, to meet projected business goals and to obtain additional financing. An economic downturn could also dis- rupt the market for lower-rated securities and adversely affect the value of outstanding securities, the Portfolio's net asset value and the ability of the issuers to repay principal and interest. If the issuer of a security held by a Portfolio defaulted, the Portfolio may not receive full interest and principal payments due to it and could incur additional expenses if it chose to seek re- covery of its investment.

The secondary markets for high yield securities are not as liquid as the sec- ondary markets for higher rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and partici- pants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, due to the market's relative youth and growth the trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. In addition, the high yield markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory devel- opments. These developments could adversely affect a Portfolio's net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and li- quidity of outstanding high yield securities, especially in a thinly traded market.

The Low Duration Bond Portfolio may invest in securities rated "B" and above or determined by the sub-adviser to be of comparable quality. Securities which are rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re- spect to capacity to pay interest and repay principal. Securities which are rated "B" generally lack characteristics of a desirable investment and assur- ance of interest and principal payments over any long period of time may be small. For a description of securities ratings, see Appendix A in the Statement of Additional Information. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and principal. In the event that a Portfolio investing in high yield securities experiences an unexpected level of net redemptions, the Portfolio could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Portfolio's rate of return is based. The costs attributable to investing in the high yield markets are usually higher for several reasons, such as higher investment research costs and higher commission costs. For more information regarding non-investment grade securities, see "Investment Poli- cies--Non-Investment Grade Securities" in the Statement of Additional Informa- tion.

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

21.

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

Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac- tivity bonds the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax ("AMT Paper") when added together with any other taxable investments held by the Portfolio. In addition, each Tax-Free Portfolio may invest 25% or more of its assets in Municipal Obligations the in- terest on which is paid solely from revenues of similar projects. To the extent a Portfolio's assets are invested in Municipal Obligations payable from the revenues of similar projects or are invested in private activity bonds, the Portfolio will be subject to the particular risks presented by the laws and economic conditions relating to such projects and bonds to a greater extent than it would be if its assets were not so invested.

The Tax-Free Income Portfolio is classified as a diversified portfolio, and the State-Specific Tax-Free Portfolios are classified as non-diversified portfo- lios, under the 1940 Act. Investment returns on a non-diversified portfolio typically are dependent upon the performance of a smaller number of securities relative to the number held in a diversified portfolio. Consequently, the change in value of any one security may affect the overall value of a non-di- versified portfolio more than it would a diversified portfolio.

Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu- nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase, at the Portfolio's option, specified Municipal Obligations at a spec- ified price. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commit- ment relates. The Tax-Free Portfolios may invest in tax-exempt derivative secu- rities relating to Municipal Obligations, including tender option bonds, par- ticipations, beneficial interests in trusts and partnership interests.

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. Accordingly, the ability of a Portfolio to buy and sell Municipal Obligations may, at any particular time and with re- spect to any particular securities, be limited. In addition, Municipal Obliga- tions purchased by the Portfolios include obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these institutions could cause loss to a Tax-Free Portfolio and affect its share price.

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

MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax- Free Portfolios) may make significant investments in residential and commercial mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers.

22.

The Portfolios may acquire several types of mortgage-related securities, in- cluding guaranteed mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages, adjustable rate mortgage- related securities ("ARMs") and collateralized mortgage obligations ("CMOs"), which provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. In most cases, however, payments of principal are applied to the CMO classes in the order of their respective stated maturities, so that no principal payments will be made on a CMO class until all other classes hav- ing an earlier stated maturity date are paid in full. The classes may include accrual certificates (also known as "Z-Bonds"), which only accrue interest at a specified rate until other specified classes have been retired and are con- verted thereafter to interest-paying securities. They may also include planned amortization classes ("PACs") which generally require, within certain limits, that specified amounts of principal be applied on each payment date, and gener- ally exhibit less yield and market volatility than other classes.

Non-mortgage asset-backed securities involve risks that are not presented by mortgage-related securities. Primarily, these securities do not have the bene- fit of the same security interest in the underlying collateral. Credit card re- ceivables are generally unsecured and the debtors are entitled to the protec- tion of a number of state and Federal consumer credit laws many of which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the pur- chaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. There- fore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities.

The yield and maturity characteristics of mortgage-related and other asset- backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. In calculating the average weighted maturity of a Portfolio, the ma- turity of mortgage-related and other asset-backed securities held by the Port- folio will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of scheduled principal payments and mortgage prepayments. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments.

The relationship between prepayments and interest rates may give some high- yielding asset-backed securities less potential for growth in value than con- ventional bonds with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, an asset-backed security's total return and maturity may be difficult to predict precisely. To the extent that a Portfolio purchases asset-backed securities at a premium, prepayments (which may be made without penalty) may result in loss of the Portfolio's principal investment to the extent of premium paid.

The Portfolios may from time to time purchase in the secondary market certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-related securities contain- ing loans or mortgages originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It is possible

23.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in- vestment objectives, the Portfolios may purchase Treasury receipts and other "stripped" securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obliga- tions. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their "face value," and may include stripped mortgage-backed securities ("SMBS"). Stripped securities, par- ticularly SMBS, may exhibit greater price volatility than ordinary debt securi- ties because of the manner in which their principal and interest are returned to investors. The International Bond Portfolio also may purchase "stripped" se- curities that evidence ownership in the future interest payments or principal payments on obligations of foreign governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mort- gage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. How- ever, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that re- ceives all or most of the interest are generally higher than prevailing market yields on other mortgage- related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest pay- ments. Additionally, current federal tax law requires the holder of certain zero coupon bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated in- vestment company and avoid liability for federal income and excise taxes, a Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvanta- geous circumstances in order to generate cash to satisfy these distribution re- quirements. See "How Are Fund Distributions Taxed?"

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or foreign corporations and banks, and may acquire com- mercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer. Bank obligations may include certificates of deposit, notes, bankers' acceptances and fixed time deposits. These obliga- tions may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by gov- ernment regulation. The Portfolios may also make interest-bearing savings de- posits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest rates, maturities and times of issuance. Obligations of certain agencies and instrumentalities of the U.S. Government such as the Government National Mort- gage Association are supported by the United States' full faith and credit; others such as those of the Federal National Mortgage Association and the Stu- dent Loan Marketing Association are supported by the right of the issuer to borrow from the Treasury; others such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation are supported only by the credit of the instru-

24.

INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfo- lios may to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to protect against an increase in the price of securi- ties a Portfolio anticipates purchasing at a later date. The Portfolios intend to use these transactions as a hedge and not as a speculative investment.

Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments 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 inter- est on a notional principal amount from the party selling such interest rate floor.

In addition, the International Bond Portfolio may engage in foreign currency exchange transactions to protect against uncertainty in the level of future ex- change rates. The Portfolio may engage in foreign currency exchange transac- tions in connection with the purchase and sale of portfolio securities (trans- action hedging) and to protect the value of specific portfolio positions (posi- tion hedging). The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency, and may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts (futures contracts). The Portfolio may also purchase ex- change-listed and over-the-counter call and put options on futures contracts and on foreign currencies, and may write covered call options on up to 100% of the currencies in its portfolio. In order to protect against currency fluctua- tions, the International Bond Portfolio may enter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolio and another party to make or receive payments in specified currencies.

OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob- jective, each Portfolio may write (i.e., sell) covered call options, buy put options, buy call options and write secured put options for the purpose of hedging or earning additional income, which may be deemed speculative, or, with respect to the International Bond Portfolio, cross-hedging. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securities, securities indices, or the yield differential between two securities or, in the case of the International Bond Portfolio, foreign currencies, and may or may not be listed on a securi- ties exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its net assets at the time of purchase, and will not write options on more than 25% of the value of its net assets (mea- sured at the time an option is written). Options trading is a highly special- ized activity that entails greater than ordinary investment risks. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

To the extent consistent with its investment objective, each Portfolio may also invest in futures contracts and options on futures contracts for hedging pur- poses or to maintain liquidity. The value of a Portfolio's contracts may equal or exceed 100% of its total assets, although a Portfolio will not purchase or sell a futures contract unless immediately afterwards the aggregate amount of margin deposits on its existing futures positions plus the amount of premiums paid for related futures options entered into for other than bona fide hedging purposes is 5% or less of its net assets.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of certain securities, the cash value of a securities index or a stated quan- tity of a foreign currency. A Portfolio may sell a futures contract in

25.

A Portfolio may purchase and sell call and put options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes ob- ligated to sell or buy a futures contract if the option is exercised. In con- nection with a Portfolio's position in a futures contract or related option, the Fund will create a segregated account of liquid assets or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in- struments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the sub-adviser's inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations. For further discussion of risks involved with domestic and foreign futures and options, see the Statement of Additional Information.

The Fund intends to comply with the regulations of the Commodity Futures Trad- ing Commission exempting the Portfolios from registration as a "commodity pool operator."

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

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

VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate of an inverse floater resets in the opposite direction from the market rate of in- terest to which it is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that ex- ceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Port- folio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

26.

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities from financial institutions subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho- rized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio's outstanding shares will decline in value by proportionately more than the de- cline in value suffered by the Portfolio's securities.

Borrowings may be made through reverse repurchase agreements under which a Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. The Portfolios may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse re- purchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. This use of reverse repurchase agree- ments may be regarded as leveraging and, therefore, speculative. Reverse repur- chase agreements involve the risks that the interest income earned in the in- vestment of the proceeds will be less than the interest expense, that the mar- ket value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securities may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, a Portfolio will maintain a segregated account with the Fund's custodian containing cash, U.S. Government or other appropriate liq- uid debt securities having a value at least equal to the repurchase price. A Portfolio's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an ad- ditional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a share- holder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that each Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 15% limit. Each Portfolio may purchase securities which are not registered under the Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the Portfolios' sub- adviser that an adequate trading market exists for the securities. This invest- ment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified institutional buyers become uninter- ested in purchasing these restricted securities.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se- curities on a "when-issued" basis and may purchase or sell securities on a "forward commitment" basis. These transactions involve a commitment by a Port- folio to purchase or sell particular securities with payment and delivery tak- ing place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security that it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securities delivery takes place. Each Portfolio's when-issued purchases and forward commitments are not expected to exceed 25% of the value of its total assets absent unusual market conditions.

27.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, each Portfolio (except the Tax- Free Portfolios) may enter into dollar roll transactions. A dollar roll trans- action involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar secu- rity at a later date at an agreed-upon price. The securities that are repur- chased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepay- ment histories than those sold. During the period between the sale and repur- chase, a Portfolio will not be entitled to receive interest and principal pay- ments on the securities sold. Proceeds of the sale will be invested in addi- tional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the in- come, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the per- formance would have been without the use of dollar rolls. At the time a Port- folio enters into a dollar roll transaction, it will place in a segregated ac- count maintained with its custodian cash, U.S. Government securities or other liquid securities having a value equal to the repurchase price (including ac- crued interest) and will subsequently monitor the account to ensure that its value is maintained. A Portfolio's dollar rolls, together with its reverse re- purchase agreements and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securi- ties a Portfolio is required to purchase may decline below the agreed upon re- purchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio's right to purchase or repur- chase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser's ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully em- ployed.

SHORT SALES. The Portfolios may only make short sales of securities "against- the-box." A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will de- cline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale "against-the-box," at the time of sale, the Portfolio owns or has the immediate and unconditional right to ac- quire the identical security at no additional cost. When selling short "against-the-box," a Portfolio forgoes an opportunity for capital appreciation in the security.

PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios are set forth above under "What Are the Portfolios' Financial Highlights?" A Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the sub-adviser believes investment considerations war- rant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover rates (i.e., 100% or more) will generally result in higher transaction costs to a Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

INTEREST RATE AND EXTENSION RISKS. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing inter- est rates. Fixed income securities with longer maturities, which tend to pro- duce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Portfolios are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securities, and the average maturity of a Portfolio's assets will vary within the limits stated above under "What Are the Differences Among the Portfolios?" based upon its sub-adviser's assessment of economic and market conditions. Although the Portfolios' sub-adviser will normally attempt to structure each Portfolio to have a comparable duration to its benchmark as stated in that section, there can be no assurance that it will be able to do so at all times.

STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen- tration of investments by the State-Specific Tax-Free Portfolios in State-Spe- cific Obligations raises special investment considerations.

28.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following five years. As of June 30, 1996, the General Fund had a surplus of $635.2 million. A relatively high proportion of persons 65 and older in the Commonwealth, court ordered increases in healthcare reimbursement rates and higher correctional program costs place increased pressures on the tax resources of the Common- wealth and its municipalities. The Commonwealth's debt burden remains moderate. Employment growth has shifted to the trade and service sectors, with losses in more high-paid manufacturing positions. A new governor took office in January 1995, but the Commonwealth has continued to show fiscal restraint.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumen- talities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary pe- riods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdi- visions and instrumentalities to meet their financial obligations. In addition, New Jersey maintains a balanced budget which restricts total appropriation in- creases to only 5% annually with respect to any municipality or county. This balanced budget plan may actually adversely affect a particular municipality's or county's ability to repay its obligations.

Ohio. While diversifying more into the service and other non-manufacturing areas, the economy of Ohio continues to rely in part on durable goods manufac- turing largely concentrated in motor vehicles and equipment, steel, rubber products and household appliances. As a result, general economic activity in Ohio, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an im- portant segment of the Ohio economy with over half the State's area devoted to farming and approximately 16% of total employment in agribusiness. In past years, the State's overall unemployment rate has been somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, for the last six years the State rates were below the national rates (4.9% versus 5.4% in 1996). The unem- ployment rate and its effects vary among particular geographic areas of the State. There can be no assurance that future national, regional or state-wide economic difficulties and the resulting impact on State or local government fi- nances generally will not adversely affect the market value of Ohio State-Spe- cific Obligations held in the Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those obligations.

29.

BOARD OF          The business and affairs of the Fund are managed under the
TRUSTEES          direction of its Board of Trustees. The following persons
                  currently serve on the Board:

                  William O. Albertini--Executive Vice President and Chief Fi-
                  nancial Officer of Bell Atlantic Global Wireless.

                  Raymond J. Clark--Treasurer of Princeton University.

                  Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
                  cer of USX Corporation.

                  Anthony M. Santomero--Professor of Finance and Director of
                  the Financial Institutions Center, The Wharton School, Uni-
                  versity of Pennsylvania.

                  David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
                  ates, Inc.

ADVISER AND
SUB-ADVISER       The Adviser to BlackRock Funds is BlackRock, Inc. Each of the
                  Portfolios within the BlackRock Funds family is managed by a
                  specialized portfolio manager who is a member of BlackRock,
                  Inc.'s fixed income portfolio management affiliate, BlackRock
                  Financial Management, Inc. ("BlackRock"). BlackRock has its
                  primary offices at 345 Park Avenue, New York, New York 10154.

The Portfolios and their portfolio managers are as follows:

 BLACKROCK FUNDS
 PORTFOLIO                                 PORTFOLIO MANAGER
 ---------------                           -----------------
Low Duration Bond        Robert S. Kapito; Vice Chairman of BlackRock since
                         1988; Portfolio co-manager since its inception.
                         Scott Amero; Managing Director of BlackRock since
                         1990; Portfolio co-manager since its inception.
                         Jody Kochansky; Vice President of BlackRock since
                         1992; Portfolio co-manager since 1995.
Intermediate Government  Robert S. Kapito and Scott Amero (see above) and
 Bond                    Michael P. Lustig; Mr. Lustig has been Vice
                         President of BlackRock since 1989; Messrs. Kapito,
                         Lustig and Amero have been Portfolio co-managers
                         since 1995.
Intermediate Bond        Robert S. Kapito, Michael P. Lustig and Scott Amero
                         (see above); Messrs. Kapito, Lustig and Amero have
                         been Portfolio co-managers since 1995.
Core Bond                Keith Anderson; Managing Director of BlackRock since
                         1988; Portfolio co-manager since June 1997.
                         Robert Michele, CFA; Managing Director of BlackRock
                         since 1996; Director and head of U.S. Fixed Income
                         Investments at CS First Boston Investment Management
                         Corporation from 1993 to 1995; From 1985-1993, he
                         served as Deputy Manager and Senior Portfolio
                         Manager at Brown Brothers Harriman & Co.; Portfolio
                         co-manager since June 1997.
Managed Income           Keith Anderson (see above); Portfolio co-manager
                         since June 1997.

30.

 BLACKROCK PORTFOLIO                       PORTFOLIO MANAGER
 -------------------                       -----------------
                         Robert Michele (See above); Portfolio co-manager
                         since June 1997.
International Bond       Andrew Gordon; Portfolio manager at BlackRock since
                         1996; responsible for non-dollar research at Barclay
                         Investments from 1994 to 1996 and at CS First Boston
                         from 1986 to 1994; Portfolio manager since January
                         1997.
Tax-Free Income          Kevin Klingert; Portfolio manager at BlackRock since
                         1991; prior to joining BlackRock, Assistant Vice
                         President, Merrill, Lynch, Pierce, Fenner & Smith;
                         Portfolio manager since 1995.
Pennsylvania Tax-Free    Kevin Klingert (see above); Portfolio manager since
 Income                  1995.
New Jersey Tax-Free In-  Kevin Klingert (see above); Portfolio manager since
 come                    1995.
Ohio Tax-Free Income     Kevin Klingert (see above); Portfolio manager since
                         1995.

BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 1600 Market Street, 29th Floor, Philadelphia, Pennsylvania 19103. BlackRock, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.

As adviser, BlackRock, Inc. is responsible for the overall in- vestment management of the Portfolios. As sub-adviser, Black- Rock Financial Management is responsible for the day-to-day management of the Portfolios, and generally makes all purchase and sale investment decisions for the Portfolios. BlackRock Fi- nancial Management also provides research and credit analysis.

THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

. BlackRock Financial Management, Inc.: Domestic and non-dollar fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

For their investment advisory and sub-advisory services, BlackRock, Inc. and the Portfolios' sub-adviser are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfolios?", with respect to certain Portfolios, BlackRock, Inc. and the sub-adviser intend to waive a portion of their fees during the current fiscal year. All sub-advisory fees are paid by BlackRock, Inc., and do not represent an extra charge to the Portfolios.

                           EACH PORTFOLIO EXCEPT THE
                         INTERNATIONAL BOND  PORTFOLIO           INTERNATIONAL BOND PORTFOLIO
                         ----------------------------------      ----------------------------------
AVERAGE DAILY NET          INVESTMENT         SUB-ADVISORY         INVESTMENT         SUB-ADVISORY
ASSETS                    ADVISORY FEE            FEE             ADVISORY FEE            FEE
-----------------        --------------      --------------      --------------      --------------
first $1 billion             .500%               .350%               .550%               .400%
$1 billion--$2 billion       .450                .300                .500                .350
$2 billion--$3 billion       .425                .275                .475                .325
greater than $3 billion      .400                .250                .450                .300

31.

For the twelve months ended September 30, 1997, the Portfo- lios paid investment advisory fees at the following annual rates (expressed as a percentage of average daily net as- sets) after voluntary fee waivers: Intermediate Government Bond Portfolio, .30%; Intermediate Bond Portfolio, .30%; Managed Income Portfolio, .35%; Tax-Free Income Portfolio, .28%; Pennsylvania Tax-Free Income Portfolio, .29%; Ohio Tax-Free Income Portfolio, .09%; Low Duration Bond Portfo- lio, .27%; Core Bond Portfolio, .26%; New Jersey Tax-Free Income Portfolio, .29%; and International Bond Portfolio, .56%.

The Portfolios' sub-adviser strives to achieve best execu- tion on all transactions. Infrequently, brokerage transac- tions for the Portfolios may be directed through registered broker/dealers who have entered into dealer agreements with the Fund's distributor, subject to the requirements of best execution.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu- tors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock, Inc. and PFPC are indi- rect wholly-owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned subsidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters re- lating to the maintenance of financial records and fund ac- counting. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and pay- able monthly, at an annual rate of .03% of each Portfolio's average daily net assets. PFPC and BDI are entitled to re- ceive a combined administration fee, computed daily and pay- able monthly, at the aggregate annual rate of (i) .085% of the first $500 million of each Portfolio's average daily net assets, .075% of the next $500 million of each Portfolio's average daily net assets and .065% of the average daily net assets of each Portfolio in excess of $1 billion and (ii) .115% of the first $500 million of the average daily net as- sets allocated to Service Shares of each Portfolio, .105% of the next $500 million of such average daily net assets and .095% of the average daily net assets allocated to Service Shares of each Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their administration fees from a Portfolio.

For information about the operating expenses the Portfolios paid for the most recent fiscal period, see "What Are the Expenses of the Portfolios?"

AGENT,           PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND         Street, Philadelphia, Pennsylvania 19103, serves as the
DISBURSING       Portfolios' custodian and PFPC, whose principal offices are
AGENT AND        located at 400 Bellevue Parkway, Wilmington, Delaware 19809,
CUSTODIAN        serves as their transfer agent and dividend disbursing
                 agent.

SHAREHOLDER      The Fund intends to enter into service arrangements with in-
SERVICING        stitutional investors ("Institutions") (including PNC Bank
                 and its affiliates) which provide that the Institutions will
                 render support services to their customers who are the bene-
                 ficial owners of Service Shares. These services are intended
                 to supplement the services provided by the Fund's Adminis-
                 trators and transfer agent to the Fund's shareholders of
                 record. In consideration for payment of a shareholder
                 processing fee of up to .15% (on an annualized basis) of the
                 average daily net asset value of Service Shares owned bene-
                 ficially by their customers, Institutions may provide one or
                 more of the follow-

                                      32.

 COMPASS CAPITAL PORTFOLIO                   PORTFOLIO MANAGER
 -------------------------                   -----------------
Managed Income             Keith Anderson; Managing Director of BlackRock since
                           1988; Portfolio co-manager since June 1997.
                           Robert Michele (See above); Portfolio co-manager
                           since June 1997.
High Yield                           ,             and Robert S. Kapito (see
                           above); Portfolio co-managers since inception.
International Bond         Andrew Gordon; portfolio manager at BlackRock since
                           1996; responsible for non-dollar research at Barclay
                           Investments from 1994 to 1996 and at CS First Boston
                           from 1986 to 1994; Portfolio manager since January
                           1997.
Tax-Free Income            Kevin Klingert; portfolio manager at BlackRock since
                           1991; prior to joining BlackRock, Assistant Vice
                           President, Merrill, Lynch, Pierce, Fenner & Smith;
                           Portfolio manager since 1995.
Pennsylvania Tax-Free      Kevin Klingert (see above); Portfolio manager since
 Income                    1995.
New Jersey Tax-Free In-    Kevin Klingert (see above); Portfolio manager since
 come                      1995.
Ohio Tax-Free Income       Kevin Klingert (see above); Portfolio manager since
                           1995.

PAMG was organized in 1994 to perform advisory services for in- vestment companies, and has its principal offices at 1600 Mar- ket Street, 29th Floor, Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-bank holding company.

For their investment advisory and sub-advisory services, PAMG and the Portfolios' sub-adviser are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the maximum annual rates set forth below. As stated under "What Are The Expenses Of The Portfolios?" PAMG and the sub-adviser intend to waive a portion of their fees during the current fis- cal year. All sub-advisory fees are paid by PAMG, and do not represent an extra charge to the Portfolios.

                                EACH PORTFOLIO
                         EXCEPT THE INTERNATIONAL BOND                  HIGH YIELD AND
                           AND HIGH YIELD PORTFOLIOS             INTERNATIONAL BOND PORTFOLIOS
                         ----------------------------------      ----------------------------------
AVERAGE DAILY NET          INVESTMENT         SUB-ADVISORY         INVESTMENT         SUB-ADVISORY
ASSETS                    ADVISORY FEE            FEE             ADVISORY FEE            FEE
-----------------        --------------      --------------      --------------      --------------
first $1 billion                .500%               .350%               .550%               .400%
$1 billion--$2 billion          .450                .300                .500                .350
$2 billion--$3 billion          .425                .275                .475                .325
greater than $3 billion         .400                .250                .450                .300

33.

DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI as distributor (the "Distributor"). BDI maintains its principal offices at Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.

The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. The Fund is not required or permitted under the Plan to make distribution payments with respect to Service Shares. However, the Plan permits BDI, the Administrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them, which, subject to applicable NASD regulations, may include contributions to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsorship of various educational programs, sales contests and promotions in which participants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For further information, see "Investment Advisory, Administration, Distribution and Servicing Arrange- ments" in the Statement of Additional Information.

PURCHASE OF SHARES. Service Shares are offered without a sales load to Insti- tutions acting on behalf of their customers, as well as certain persons who were shareholders of Compass Capital Group of Funds at the time of its combi- nation with the PNC(R) Fund during the first quarter of 1996. Service Shares will normally be held of record by Institutions or in the names of nominees of Institutions. Share purchases are normally effected through a customer's ac- count at an Institution through procedures established in connection with the requirements of the account. In these cases, confirmations of share purchases and redemptions will be sent to the Institutions. Beneficial ownership of shares will be recorded by the Institutions and reflected in the account statements provided by such Institutions to their customers. Investors wishing to purchase shares should contact their Institutions.

Service Shares are sold at their net asset value per share next computed after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern Time) on a Business Day are priced the same day. A "Business Day" is any week- day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Business Day.

Payment for Service Shares must normally be made in Federal funds or other funds immediately available to the Fund's custodian. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the respective Portfolios. For further information, see the Statement of Additional Information. The minimum initial investment is $5,000; however, Institutions may set a higher minimum for their customers. There is no minimum subsequent investment requirement. The Fund does not accept third party checks for initial or subsequent investments.

The Fund may in its discretion waive or modify the minimum investment amount, may reject any order for Service Shares and may suspend and resume the sale of shares of any Portfolio at any time.

REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in accordance with the procedures applicable to their accounts with the Institu- tions. These procedures will vary according to the type of account and the In- stitution involved, and customers should consult their account managers in this regard. It is the responsibility of Institutions to transmit redemption orders to PFPC and credit their customers' accounts with redemption proceeds on a timely basis. In the case of shareholders holding share certificates, the certificates must accompany the redemption request.

34.

Institutions may place redemption orders by telephoning PFPC at (800) 441-7450. Shares are redeemed at their net asset value per share next determined after PFPC's receipt of the redemption order. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions com- municated by telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal funds wired to the redeeming Institution on the next Business Day, provided that the Fund's custodian is also open for business. Payment for redemption or- ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo- dian is closed is normally wired in Federal funds on the next Business Day fol- lowing redemption on which the Fund's custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven days after receiv- ing a redemption order if, in the judgment of BlackRock, Inc., an earlier pay- ment could adversely affect a Portfolio. No charge for wiring redemption pay- ments is imposed by the Fund, although Institutions may charge their customer accounts for redemption services. Information relating to such redemption serv- ices and charges, if any, should be obtained by customers from their Institu- tions.

During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Redemption requests may also be mailed to PFPC at 400 Bellevue Parkway, Wilmington, DE 19809.

The Fund may redeem Service Shares in any Portfolio account if the account bal- ance drops below $5,000 as the result of redemption requests and the share- holder does not increase the balance to at least $5,000 upon thirty days' writ- ten notice. If a customer has agreed with an Institution to maintain a minimum balance in his or her account with the Institution, and the balance in the ac- count falls below that minimum, the customer may be obligated to redeem all or part of his or her shares in the Portfolios to the extent necessary to maintain the minimum balance required.

The Fund may also suspend the right of redemption or postpone the date of pay- ment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund's responsibili- ties under the 1940 Act. See "Purchase and Redemption Information" in the Statement of Additional Information for examples of when such redemption might be appropriate.

35.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment objectives, the Portfolios may invest in debt obligations of domestic or foreign corporations and banks, and may acquire commercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer. Bank obligations may include certificates of deposit, notes, bankers' acceptances and fixed time deposits. These obligations may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of the specific obligation or by government regulation. The Money Market Portfolio may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of its total assets. The obligations of foreign issuers may involve certain risks in addition to those of domestic issuers, including higher transaction costs, less complete financial information, less stringent regulatory requirements and less market liquidity.

Commercial paper issues include securities issued by corporations without reg- istration under the Securities Act of 1933 (the "1933 Act") in reliance on the exemption in Section 3(a)(3), and commercial paper issued in reliance on the so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities laws in that any resale must similarly be made in an exempt transaction. Sec- tion 4(2) paper is normally resold to other institutional investors through or with the assistance of investment dealers which make a market in Section 4(2) paper, thus providing liquidity.

U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob- jectives, the Portfolios may also purchase obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities. Obligations of cer- tain agencies and instrumentalities of the U.S. Government are backed by the full faith and credit of the United States. Others are backed by the right of the issuer to borrow from the U.S. Treasury or are backed only by the credit of the agency or instrumentality issuing the obligation.

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

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

15.

Each Municipal Portfolio may acquire "stand-by commitments" with respect to Municipal Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase at the Portfolio's option specific Municipal Obligations at a specified price. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligation to which such commitment relates.

The amount of information regarding the financial condition of issuers of Mu- nicipal Obligations may be less extensive than the information for public cor- porations, and the secondary market for Municipal Obligations may be less liq- uid than that for taxable obligations. Accordingly, the ability of a Portfolio to buy and sell Municipal Obligations may, at any particular time and with re- spect to any particular securities, be limited. In addition, Municipal Obliga- tions purchased by the Portfolios include obligations backed by letters of credit and other forms of credit enhancement issued by domestic and foreign banks, as well as other financial institutions. Changes in the credit quality of these institutions could cause loss to a Municipal Portfolio and affect its share price.

The Municipal Portfolios may invest in tax-exempt derivative securities relat- ing to Municipal Obligations, including tender option bonds, participations, beneficial interests in trusts and partnership interests.

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

MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do not expect to do so, each Portfolio may invest in mortgage-related securities issued by the U.S. Government or its agencies or instrumentalities or issued by private companies. Mortgage-related securities may include collateralized mortgage obligations ("CMOs") issued by the Federal National Mortgage Associa- tion, the Federal Home Loan Mortgage Corporation or other U.S. Government agencies or instrumentalities or issued by private companies. In periods of falling interest rates, the rate of mortgage prepayments tends to increase. During these periods, the reinvestment of prepayment proceeds by the particu- lar Portfolio will generally be at lower rates than the rates on the prepaid obligations.

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

REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from broker-dealers and financial institutions subject to the seller's agreement to repurchase them at an agreed-upon time and price ("repurchase agreements"). The securities held subject to a repurchase agreement may have stated maturi- ties exceeding 13 months, so long as the repurchase agreement itself matures in less than 13 months. Default by or bankruptcy of the seller would expose the Portfolio to possible loss because of adverse market action or delays in connection with the disposition of the underlying obligations.

GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, the Portfolio makes cash con- tributions to a deposit fund of the insurance company's general account. The insurance company then credits interest to the Portfolio on a monthly basis, which is based on an index (such

16.

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

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

REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase agreements for temporary purposes (such as to obtain cash to meet redemption requests when the liquidation of portfolio securities is deemed disadvantageous or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio of securities that it holds concurrently with an agreement by the Portfolio to repurchase the same securities at an agreed-upon price and date. Reverse repur- chase agreements involve the risk that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase.

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

UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves pending investment during temporary defensive periods or if, in the opinion of the Portfolios' sub-adviser, suitable obligations are unavailable. During nor- mal market periods, no more than 20% of a Portfolio's assets will be held uninvested. Uninvested cash reserves will not earn income.

ILLIQUID SECURITIES. No Portfolio will invest more than 10% of the value of its net assets in securities that are illiquid. Variable and floating rate instru- ments that cannot be disposed of within seven days, GICs, and repurchase agree- ments and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to this 10% limit. Each Portfolio may purchase securities which are not registered under the 1933 Act but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as the sub-adviser determines that an adequate trading market exists for the securities. This investment practice could have the effect of increas- ing the level of illiquidity in a Portfolio during any period that qualified institutional buyers become uninterested in purchasing these restricted securi- ties.

17.

New Jersey. The State of New Jersey generally has a diversified economic base consisting of, among others, commerce and service industries, selective commer- cial agriculture, insurance, tourism, petroleum refining and manufacturing, al- though New Jersey's manufacturing industry has experienced a downward trend in the last few years. New Jersey is a major recipient of Federal assistance and, of all the states, is among the highest in the amount of Federal aid received. Therefore, a decrease in Federal financial assistance may adversely affect the financial condition of New Jersey and its political subdivisions and instrumen- talities. While New Jersey's economic base has become more diversified over time and thus its economy appears to be less vulnerable during recessionary pe- riods, a recurrence of high levels of unemployment could adversely affect New Jersey's overall economy and the ability of New Jersey and its political subdi- visions and instrumentalities to meet their financial obligations. In addition, New Jersey maintains a balanced budget which restricts total appropriation in- creases to only 5% annually with respect to any municipality or county. This balanced budget plan may actually adversely affect a particular municipality's or county's ability to repay its obligations.

Ohio. While diversifying more into the service and other non-manufacturing areas, the economy of Ohio continues to rely in part on durable goods manufac- turing largely concentrated in motor vehicles and equipment, steel, rubber products and household appliances. As a result, general economic activity in Ohio, as in many other industrially developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an im- portant segment of the Ohio economy with over half the State's area devoted to farming and approximately 16% of total employment in agribusiness. In past years, the State's overall unemployment rate has been somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, for the last six years the State rates were below the national rates (4.9% versus 5.4% in 1996). The unem- ployment rate and its effects vary among particular geographic areas of the State. There can be no assurance that future national, regional or state-wide economic difficulties and the resulting impact on State or local government fi- nances generally will not adversely affect the market value of Ohio State-Spe- cific Obligations held in the Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those obligations.

Pennsylvania. Although the General Fund of the Commonwealth (the principal op- erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases resulted in surpluses the following five years. As of June 30, 1996, the General Fund has a surplus of $635.2 million. A relatively high proportion of persons 65 and older in the Commonwealth, court ordered increases in healthcare reimbursement rates and higher correctional program costs place increased pressures on the tax resources of the Common- wealth and its municipalities. The Commonwealth's debt burden remains moderate. Employment growth has shifted to the trade and service sectors, with losses in more high-paid manufacturing positions. A new governor took office in January 1995, but the Commonwealth has continued to show fiscal restraint.

18.

A Portfolio's investment objective and policies may be changed by the Fund's Board of Trustees without shareholder approval. However, shareholders will be given at least 30 days' notice before any change to a Portfolio's investment objective. No assurance can be provided that a Portfolio will achieve its in- vestment objective.

Each Portfolio has also adopted certain fundamental investment limitations that may be changed only with the approval of a "majority of the outstanding shares of a Portfolio" (as defined in the Statement of Additional Information). Sev- eral of the Portfolios' fundamental investment policies, which are set forth in full in the Statement of Additional Information, are summarized below.

No Portfolio may:

(1) purchase securities (except U.S. Government securities and related repur- chase agreements) if more than 5% of its total assets will be invested in the securities of any one issuer, except that up to 25% of a Portfolio's total assets may be invested without regard to this 5% limitation;

(2) invest 25% or more of its total assets in one or more issuers conducting their principal business activities in the same industry, except that the Money Market Portfolio will invest at least 25% of its total assets in ob- ligations of issuers in the banking industry or instruments secured by such obligations except during temporary defensive periods;

(3) borrow money except for temporary purposes in amounts up to one-third of the value of its total assets at the time of such borrowing. Whenever borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not make any additional investments; and

(4) in the case of the Municipal Money Market Portfolio, invest less than 80% of its net assets in instruments the interest on which is exempt from regu- lar Federal income tax and not subject to the Federal alternative minimum tax ("AMT"), except during defensive periods or during periods of unusual market conditions; and

(5) in the case of each State-Specific Municipal Portfolio, invest less than 80% of its net assets in instruments the interest on which is exempt from regular Federal income tax (including instruments which are subject to AMT), except during defensive periods or during periods of unusual market conditions.

Restriction 1 does not apply to the State-Specific Municipal Portfolios. In- stead, as a non-fundamental investment restriction, each State-Specific Munici- pal Portfolio will not hold any securities (except U.S. Government securities and related repurchase agreements) that would cause, at the end of any tax quarter, more than 5% of its total assets to be invested in securities of any one issuer, except that up to 50% of a Portfolio's total assets may be invested without regard to this limitation so long as no more than 25% of the Portfo- lio's total assets are invested in any one issuer (except U.S. Government secu- rities and related repurchase agreements).

In accordance with current SEC regulations, the Money Market Portfolio intends, as a non-fundamental policy, to limit its investments in the securities of any single issuer (other than U.S. Government securities and related repurchase agreements) to not more than 5% of the value of its total assets at the time of purchase, except that 25% of the value of its total assets may be invested in any one issuer for a period of up to three business days. The Money Market Portfolio will also limit its investments in Eligible Securities that are not in the highest rating category as determined by two NRSROs (or one NRSRO if the security is rated by only one NRSRO) or, if unrated, are not of comparable quality, to 5% of its total assets, with investments in any one such issuer be- ing limited to no more than 1% of its total assets or $1 million, whichever is greater, measured at the time of purchase.

The investment limitations stated above are applied at the time investment se- curities are purchased.

19.

BOARD OF          The business and affairs of the Fund are managed under the
TRUSTEES          direction of the Fund's Board of Trustees. The following per-
                  sons currently serve on the Board:

                 William O. Albertini--Executive Vice President and Chief Fi-
                 nancial Officer of Bell Atlantic Global Wireless.

                 Raymond J. Clark--Treasurer of Princeton University.

                 Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
                 cer of USX Corporation.

                 Anthony M. Santomero--Professor of Finance and Director of
                 the Financial Institutions Center, The Wharton School, Uni-
                 versity of Pennsylvania.

                 David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
                 ates, Inc.

INVESTMENT
ADVISER AND       The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
SUB-ADVISER       Inc. (formerly PNC Asset Management Group, Inc.) was orga-
                  nized in 1994 to perform advisory services for investment
                  companies, and has its principal offices at 1600 Market
                  Street, 29th Floor, Philadelphia, Pennsylvania 19103. Black-
                  Rock, Inc. is an indirect wholly-owned subsidiary of PNC Bank
                  Corp., a multi-bank holding company. PNC Institutional Man-
                  agement Corporation ("PIMC"), an affiliate of BlackRock,
                  Inc., serves as each Portfolio's sub-adviser. PIMC's princi-
                  pal business address is 400 Bellevue Parkway, Wilmington,
                  Delaware 19809.

                  As adviser, BlackRock, Inc. is responsible for the overall
                  investment management of the Portfolios. As sub-adviser, PIMC
                  is responsible for the day-to-day management of the Portfo-
                  lios, and generally makes all purchase and sale investment
                  decisions for the Portfolios. PIMC also provides research and
                  credit analysis. Portfolio transactions for a Portfolio may
                  be directed through broker/dealers who sell Fund shares, sub-
                  ject to the requirements of best execution.

                  THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:

                  . BlackRock Financial Management, Inc.: Domestic and non-
                   dollar fixed income.

. PNC Equity Advisors: Growth equity.

. Provident Capital Management: Value equity.

. CastleInternational Asset Management: International equity.

. PIMC: Money market.

For their investment advisory and sub-advisory services, BlackRock, Inc. and PIMC are entitled to fees, computed daily on a Portfolio-by-Portfolio basis and payable monthly, at the annual rates set forth below. All sub-advisory fees payable to PIMC are paid by BlackRock, Inc., and do not represent an extra charge to the Portfolios.

AVERAGE DAILY NET                 INVESTMENT                  SUB-ADVISORY
ASSETS                           ADVISORY FEE                     FEE
first $1 billion                     .450%                        .400%
$1 billion--$2 billion               .400                         .350
$2 billion--$3 billion               .375                         .325
greater than $3 billion              .350                         .300

20.

For the twelve months ended September 30, 1997, the Portfolios paid investment advisory fees at the following annual rates (expressed as a percentage of average daily net assets) after voluntary fee waivers: Money Market Portfolio, .09%; U.S. Trea- sury Money Market Portfolio, .08%; Municipal Money Market Port- folio, .06%; Ohio Municipal Money Market Portfolio, .06%; Penn- sylvania Municipal Money Market Portfolio, .07%; North Carolina Municipal Money Market Portfolio, .06%; Virginia Municipal Money Market Portfolio, .00%; New Jersey Municipal Money Market Portfolio, .06%.

ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC"), and BlackRock Distribu- tors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock, Inc. and PFPC are indirect whol- ly-owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned subsidiary of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of PDI is owned by its officers.

The Administrators generally assist the Fund in all aspects of its administration and operation, including matters relating to the maintenance of financial records and fund accounting. As compensation for these services, BlackRock, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's average daily net assets. PFPC and BDI are entitled to receive a combined administration fee, computed daily and payable monthly, at the aggregate annual rate of (i) .085% of the first $500 million of each Portfolio's average daily net assets, .075% of the next $500 million of each Portfolio's average daily net assets and .065% of the av- erage daily net assets of each Portfolio in excess of $1 bil- lion and (ii) .065% of the first $500 million of the average daily net assets allocated to each class of Investor Shares of each Portfolio, .055% of the next $500 million of such average daily net assets and .045% of the average daily net assets al- located to each class of Investor Shares of each Portfolio in excess of $1 billion. From time to time the Administrators may waive some or all of their administration fees from a Portfo- lio.

For information about the operating expenses the Portfolios paid for the most recent fiscal year, see "What Are The Ex- penses Of The Portfolios?"

AGENT,         PNC Bank, National Association ("PNC Bank"), whose principal
DIVIDEND       offices are located at 1600 Market Street, Philadelphia, Penn-
DISBURSING     sylvania 19103, serves as the Portfolios' custodian and PFPC,
AGENT AND      whose principal offices are located at 400 Bellevue Parkway,
CUSTODIAN      Wilmington, Delaware 19809, serves as their transfer agent and
               dividend disbursing agent.

DISTRIBUTION
AND SERVICE    Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN           Investor Shares of the Portfolios bear the expense of payments
               ("distribution fees") made to BDI, as the Fund's distributor
               (the "Distributor"), or affiliates of PNC Bank for distribution
               and sales support services. The distribution fees may be used
               to compensate the Distributor for distribution services and to
               compensate the Distributor and PNC Bank affiliates for sales
               support services provided in connection with the offering and
               sale of Investor Shares. The distribution fees may also be used
               to reimburse the Distributor and PNC Bank affiliates for re-
               lated expenses, including payments to brokers, dealers, finan-
               cial institutions and industry professionals ("Service Organi-
               zations") for sales support services and related expenses. Dis-
               tribution fees payable under the Plan will not exceed .10%
               (annualized) of the average daily net asset value of each Port-
               folio's outstanding Investor A Shares and .75% (annualized) of
               the average daily net asset value of each Portfolio's outstand-
               ing Investor B and Investor C Shares. Payments under the Plan
               are not tied directly to out-of-pocket expenses and therefore
               may be used by the recipients as they choose (for example, to
               defray their overhead

                                      21.

expenses). The Plan also permits the Distributor, the Admin- istrators and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them which, subject to applicable NASD regulations, may include contributions to various non-cash and cash incentive arrangements to promote the sale of shares, as well as sponsorship of various educational pro- grams, sales contests and promotions in which participants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For fur- ther information, see "Investment Advisory, Administration, Distribution and Servicing Arrangements" in the Statement of Additional Information.

Under the Plan, the Fund intends to enter into service ar- rangements with Service Organizations (including PNC Bank and its affiliates) with respect to each class of Investor Shares pursuant to which Service Organizations will render certain support services to their customers who are the ben- eficial owners of Investor Shares. In consideration for a shareholder servicing fee of up to .25% (annualized) of the average daily net asset value of Investor Shares owned by their customers, Service Organizations may provide one or more of the following services: responding to customer in- quiries relating to the services performed by the Service Organization and to customer inquiries concerning their in- vestments in Investor Shares; assisting customers in desig- nating and changing dividend options, account designations and addresses; and providing other similar shareholder liai- son services. In consideration for a separate shareholder processing fee of up to .15% (annualized) of the average daily net asset value of Investor Shares owned by their cus- tomers, Service Organizations may provide one or more of these additional services to such customers: processing pur- chase and redemption requests from customers and placing or- ders with the Fund's transfer agent or the Distributor; processing dividend payments from the Fund on behalf of cus- tomers; providing sub-accounting with respect to Investor Shares beneficially owned by customers or the information necessary for sub-accounting; and providing other similar services.

Service Organizations may charge their clients additional fees for account services. Customers who are beneficial own- ers of Investor Shares should read this Prospectus in light of the terms and fees governing their accounts with Service Organizations.

The Glass-Steagall Act and other applicable laws, among other things, prohibit banks from engaging in the business of underwriting securities. It is intended that the services provided by Service Organizations under their service agree- ments will not be prohibited under these laws. Under state securities laws, banks and financial institutions that re- ceive payments from the Fund may be required to register as dealers.