The Portfolio will normally invest at least 80% of the value of its total as- sets in debt securities. In addition, under normal market conditions the Port- folio will invest at least 65% of its total assets in GNMAs. Securities ac- quired by the Portfolio will be rated in the highest rating category at the time of purchase (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 Portfolio's sub-adviser. If a security's rating is reduced below the minimum rating that is permitted for the Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security.

GNMAS AND OTHER MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolio will invest primarily in GNMAs, and may make significant investments in other 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 Portfolio may acquire several types of mortgage-related securities. GNMAs are typically mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages. The Portfolio may also acquire adjustable rate mortgage-related securities ("ARMs") as well as collateralized mortgage obligations ("CMOs"), which provide the holder with a specified inter- est 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 enti- ties known as real estate mortgage investment conduits ("REMICs"). CMOs are is- sued 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, pay- ments of principal are applied to the CMO classes in the order of their respec- tive stated maturities, so that no principal payments will be made on a CMO class until all other classes having 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 converted thereafter to interest-paying secu- rities. They may also include planned amortization classes ("PACs") which gen- erally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market vola- tility than other classes.

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 the Portfolio, the maturity of mortgage-related and other asset-backed securities held by the Portfolio will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, 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 mortgage-related and asset-backed securities less potential for growth in value than conventional 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 Portfolio will generally be at lower rates than the rates that were carried by the obli- gations that have been prepaid. Because of these and other reasons, a mortgage- related or asset-backed security's total return and maturity may be difficult to predict precisely. To the extent

8.

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 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 securities contain- ing loans or mortgages originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It is possible 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 Securities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with its invest- ment objective, the Portfolio 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.

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, the Portfolio may fail to fully re- coup 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 receives all or most of the interest are generally higher than prevailing mar- ket yields on other mortgage-related obligations because their cash flow pat- terns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

The 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, the Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under

9.

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 instrumentality. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumen- talities if it is not obligated to do so by law.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with its investment objective, the Portfolio may invest in debt obligations of domestic or foreign corporations and banks, and may acquire commercial obligations issued by Cana- dian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issu- er. Bank obligations may include certificates of deposit, notes, bankers' ac- ceptances 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 a specific obligation or by government regulation. The Portfolio may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

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.

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.

To the extent the Portfolio's assets are invested in Municipal Obligations pay- able 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 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

10.

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.

INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolio may enter into these transactions primarily to preserve a return or spread on a particu- lar investment or portion of its holdings, as a duration management technique or to protect against an increase in the price of securities the Portfolio an- ticipates purchasing at a later date. The Portfolio intends to use these trans- actions 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.

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. For the pay- ment 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. The Portfolio will not pur- chase 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 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 for hedging pur- poses or to maintain liquidity. The value of the Portfolio's contracts may equal or exceed 100% of its total assets, although the Portfolio will not pur- chase 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. 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 securi- ties 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.

11.

The 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.

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

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."

GUARANTEED INVESTMENT CONTRACTS. The Portfolio may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, a portfolio makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the portfolio, on a monthly basis, interest which is based on an index (such as the Salomon Brothers CD Index), but is guaranteed not to be less than a certain minimum rate. The 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. The Portfolio may seek additional income by lending secu- rities 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. The 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 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. 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 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 the Portfolio. The absence of an active secondary market with respect to particu- lar variable and

12.

REPURCHASE AGREEMENTS. The 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. 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 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 Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities ei- ther maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolio may use reverse repurchase agreements when it is anticipated that the interest in- come 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 re- purchase 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 the 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 re- purchase agreement is outstanding, the Portfolio will maintain a segregated ac- count with the Fund's custodian containing cash, U.S. Government or other ap- propriate liquid debt securities having a value at least equal to the repur- chase 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. In addition, the Portfolio may borrow up to an additional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. The 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, the 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 and other expenses that the Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. The Portfolio will not 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 agreements 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. The Portfolio may purchase securities which are not registered under the Secu- rities Act of 1933 (the "1933 Act") but which can be sold to "qualified insti- tutional buyers" in accordance with Rule 144A under the 1933 Act. These securi- ties will not be considered illiquid so long as it is determined by the Portfo- lio's sub-adviser that an adequate trading market exists for the securities. This investment practice could have the effect of increasing the level of illi- quidity in the Portfolio during any period that qualified institutional buyers become uninterested in purchasing these restricted securities.

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 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 portfo- lio to lock in a price or yield on a security that it owns or intends to pur- chase, 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

13.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, the 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 agree- ment by the Portfolio to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same in- terest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period between the sale and repurchase, the Portfolio will not be entitled to receive interest and principal payments on the securi- ties sold. Proceeds of the sale will be invested in additional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. 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 performance of the Portfolio compared with what the performance would have been without the use of dollar rolls. At the time 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. A 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 correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be success- fully employed.

SHORT SALES. The Portfolio 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 decline. The Portfolio may make short sales both as a form of hedging to off- set 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 acquire 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. Under normal market conditions, it is expected that the annual portfolio turnover rate for the Portfolio will not exceed 450%. The Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the 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 transac- tion costs to the 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 Portfolio 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 Portfolio is not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securities, and the average maturity of the Portfolio's assets will vary within the limits stated herein based upon its sub-adviser's assessment of economic and market conditions. Although the Portfolio's sub-adviser will normally attempt to structure the 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.

14.

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 a 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 U.S. Government securities) if more than 5% of its total assets will be invested in the securities of any one issuer, ex- cept that up to 25% of the Portfolio's total assets may be invested without regard to this 5% limitation; or

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

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

15.

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 Advisors, Inc.
                  BlackRock Advisors, Inc. (formerly PNC Asset Management
                  Group, Inc.) was organized in 1994 to perform advisory serv-
                  ices for investment companies, and has its principal offices
                  at 345 Park Avenue, New York, New York 10154. BlackRock Advi-
                  sors, Inc. is an indirect wholly-owned subsidiary of PNC Bank
                  Corp., a multi-bank holding company.

                  The sub-adviser to the Portfolio is BlackRock Financial
                  Management, Inc. ("BlackRock"), an affiliate of BlackRock
                  Advisors, Inc., with its primary offices at 345 Park Avenue,
                  New York, New York 10154. BlackRock is a registered
                  investment adviser, organized in 1988. Robert S. Kapito,
                  Scott Amero and Michael P. Lustig serve as portfolio managers
                  of the Portfolio. Mr. Kapito has been Vice Chairman of the
                  sub-adviser since 1988, Mr. Amero has been Managing Director
                  of the sub-adviser since 1990, and Mr. Lustig has been a
                  portfolio manager of the sub-adviser since 1995. As adviser,
                  BlackRock Advisors, Inc. is responsible for the overall
                  investment management of the Portfolio. As sub-adviser,
                  BlackRock Financial Management is responsible for the day-to-
                  day management of the Portfolio, and generally makes all
                  purchase and sale investment decisions for the Portfolio.
                  BlackRock Financial Management also provides research and
                  credit analysis.

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

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


                  . BlackRock International, Ltd.: International equity.

                  . BlackRock Institutional Management Corporation: Money
                   market.

                  For their investment advisory and sub-advisory services,
                  BlackRock Advisors, Inc. and the Portfolio's sub-adviser are
                  entitled to fees, computed daily and payable monthly, at the
                  maximum annual rates set forth below. As stated under "What
                  Are The Expenses Of The Portfolio?", BlackRock Advisors, 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 Advisors, Inc., and do not represent an ex-
                  tra charge to the Portfolio.

                                      16.

AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY
 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

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

ADMINISTRATORS
BlackRock Advisors, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock Advisors, 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 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 Advisors, 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 admin- istration fee, computed daily and payable monthly, at the ag- gregate 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 ex- cess of $1 billion and (ii) .115% of the first $500 million of the average daily net assets allocated to each class of In- vestor 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 Admin- istrators may waive some or all of their administration 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, whose principal offices are located
AGENT AND      at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN      its transfer agent and dividend disbursing agent.

DISTRIBUTION   Under the Fund's Distribution and Service Plan (the "Plan"),
AND SERVICE    Investor Shares of the Portfolios bear the expense of payments
PLAN           ("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

                                      17.

--------------------------------------------------------------------------------
                  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, financial
                  institutions and industry professionals ("Service Organiza-
                  tions") 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
                  Portfolio's outstanding Investor A Shares and .75%
                  (annualized) of the average daily net asset value of each
                  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 ex-
                  penses). The Plan also permits the Distributor, the
                  Administrators and other companies that receive fees from the
                  Fund to make payments relating to distribution and sales sup-
                  port activities out of their past profits or other sources
                  available to them. For further information, see "Investment
                  Advisory, Administration, Distribution and Servicing Arrange-
                  ments" 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 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.

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 BlackRock, Inc.
                  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 pro-

                                      18.

spectuses and statements of additional information and of printing and distributing prospectuses and statements of addi- tional information to existing shareholders, expenses relating to shareholder reports, shareholder meetings and proxy solici- tations, insurance premiums, the expense of independent pricing services, and other expenses which are not expressly assumed by BlackRock Advisors, 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 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.

19.

The GNMA Portfolio of BlackRock Funds offer different pricing options to investors in the form of different share classes. These options are described 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 family

A Shares may make sense for investors with a long-term in- vestment 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 family
Automatically convert to A Shares seven 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 family

C Shares may make sense for shorter term (relative to both A and B Shares) 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. Such investors may plan to make substantial redemptions within 6 years of purchase.

                          A SHARES       B SHARES              C SHARES
Maximum Front-End Sales
 Charge                    4.00%          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
                                   shares are redeemed) 12 months of purchase)

*The Portfolio does not expect to incur 12b-1 fees in excess of .005% with re- spect to Investor A Shares during the current fiscal year.

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?"

20.

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 max- imum sales charge from four to seven years after purchase. Thereafter, Investor B Shares and Investor C Shares would bear higher aggregate expenses. Investor B and Investor C shareholders, however, enjoy the benefit of permitting 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 Investor 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 seven 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 reinvestment of dividends or distributions are also converted at the earlier of these dates--seven years after the reinvestment date or the date of conversion of the most recently purchased Investor B Shares that were not acquired through rein- vestment. 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 purchase, and Investor C shareholders pay a contingent deferred sales charge if they re- deem during the first twelve months after purchase. Investors expecting to re- deem during these periods should consider the cost of the applicable contingent deferred sales charge in addition to the aggregate annual Investor B or In- vestor C distribution fees, as compared with the cost of the applicable 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.

21.

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 In- vestment 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 em- ployees 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 purchase orders that fail to specify a class will automatically be invested in Investor A Shares.

PURCHASES THROUGH BROKERS. Shares of the Portfolio may be purchased through brokers which have entered into dealer agreements with the Distributor. Pur- chase 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 avail- able to the Portfolio's custodian no later than 4:00 p.m. (Eastern time) on the third Business Day following receipt 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 sharehold- ers. 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 purchase 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 appear on the check or Federal Reserve Draft. Investors may also wire Federal funds in connection with the purchase of shares. The wire instructions must include the name of the Portfolio, specify the class of Investor Shares, and include 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 de- termined 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 Portfo- lio 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 reserves the right to reject any purchase order, to modify or waive the minimum initial or subsequent investment requirement and to suspend and resume the sale of any share class of the Portfolio at any time.

In the event that a shareholder acquiring Investor A Shares on or after May 1, 1998 at a future date meets the eligibility standards for purchasing Institu- tional Shares (other than due to fluctuations in market value), then the shareholder's Investor A Shares will, upon the direction of the Fund's dis- tributor, automatically be convert-ed to Institutional Shares of the Portfolio having the same aggregate net asset value as the shares converted.

22.

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, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C SHARES. If a re- deeming shareholder owns both Investor A Shares and Investor B or Investor C Shares, the Investor A Shares will be redeemed first unless the shareholder in- dicates otherwise. If a redeeming shareholder owns both Investor B Shares and Investor C Shares, the redemption order will be processed to minimize the amount of the contingent deferred sales charge that will be charged unless the shareholder indicates 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 institution. Eligible guarantor institutions generally include banks, broker/dealers, credit unions, national securities exchanges, registered securities associations, 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. Shareholders holding Investor A Share certificates must send their certificates with the redemption request. Additional documen- tary evidence of authority is required by PFPC in the event redemption is re- quested by a corporation, partnership, trust, fiduciary, executor or adminis- trator.

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. This privilege may not be used to redeem Investor A Shares in certificated form. 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 share- holder's bank. To change the name of the single designated bank account to re- ceive 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 loss, liability, cost or expense for acting upon telephone in- structions reasonably believed to be genuine in accordance with such proce- dures.

23.

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 falls below the required minimum initial investment as the result of a redemp- tion or an exchange request. A shareholder will be notified in writing that the value of the shareholder's account 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 de- termination 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 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.

24.

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 may be ex- changed for shares of the same class of other portfolios of the Fund which of- fer that class of shares, based on their respective net asset values. 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. Share- holders holding share certificates are not eligible to exchange Investor A Shares by phone because share certificates must accompany all exchange re- quests. To add this feature to an existing account that previously did not pro- vide for this option, 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 re- quest the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests 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.

25.

The Fund reserves the right to reject any telephone exchange request. Tele- phone 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 share- holders. The Fund, the Administrators and the Distributor will employ reason- able procedures to confirm that instructions communicated by telephone are genuine. The Fund, the Administrators and the Distributor will not be liable for any loss, liability, cost or expense for acting upon telephone instruc- tions 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, Wilmington, Delaware 19899-8907.

AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of the Portfolio may arrange for periodic investments through automatic deductions from a checking or savings account by completing the AIP Application Form which may be ob- tained 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 current value of $10,000 or more in a 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 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 Ap- plication 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 and may not hold share certificates. Shareholders may change or cancel the SWP at any time, upon written notice to PFPC. Purchases of additional Investor A Shares of the Fund concurrently with withdrawals may be disadvantageous to investors because of the sales charges involved and, therefore, are discouraged. No con- tingent 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 appli- cable CDSC.

26.

                                                           REALLOWANCE OR
                        SALES CHARGE AS SALES CHARGE AS    PLACEMENT FEES
AMOUNT OF TRANSACTION        % OF             % OF       TO DEALERS (AS % OF
  AT OFFERING PRICE     OFFERING PRICE* NET ASSET VALUE*  OFFERING PRICE)**
Less than $25,000            4.00%            4.17%             3.50%
$25,000 but less than
 $50,000                     3.75             3.90              3.25
$50,000 but less than
 $100,000                    3.50             3.63              3.00
$100,000 but less than
 $250,000                    3.00             3.09              2.50
$250,000 but less than
 $500,000                    2.00             2.04              1.50
$500,000 but less than
 $1,000,000                  1.00             1.01              0.75
$1-2 million                 0.00             0.00              0.75
$2-3 million                 0.00             0.00              0.72
$3-5 million                 0.00             0.00              0.63
$5-10 million                0.00             0.00              0.44
$10-15 million               0.00             0.00              0.38
$15-20 million               0.00             0.00              0.35
$20-40 million               0.00             0.00              0.30

*There is no initial sales charge on purchase of $1,000,000 or more of Investor 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 dealers. Dealers who receive 90% or more of the sales charge may be deemed to be "under- writers" 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 Advisors, 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 spon- sor various educational programs, sales contests and promotions in which par- ticipants may receive reimbursement of expenses, entertainment and prizes such as travel awards, merchandise and cash. For further information, see "Invest- ment Advisory, Administration, Distribution and Servicing Arrangements" 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-adviser or trans- fer 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 retirees (and their spouses and minor children); (c) registered representatives of bro- kers who have entered into selling agreements with the Distributor; (d) spouses or children of such persons; and (e) any trust, pension, profit-sharing 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 501(c)(3) of the Internal Revenue Code; (c) registered investment advisers, trust companies and bank trust departments exercising discretionary investment authority with respect to amounts to be invested in the Port-

27.

QUALIFIED PLANS. In general, the sales charge (as a percentage of 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 aggregating $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 aggregating less than $500,000 will be 2.50%. The above schedule will apply to purchases by such Qualified Plans of Investor A Shares aggregating $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 administra- tors have entered into arrangements with the Fund. For further information, see "Purchase and Redemption Information" in the Statement of Additional Information.

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 company, 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 expense. 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 organized group may include, for example, a trustee or other fiduciary pur- chasing for a single fiduciary account or other employee benefit plan pur- chases 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 that are subject to a front-end sales charge or the total amount of an investor's initial invest- ment in such shares, less redemptions (whichever is greater) may be combined with the amount of the investor's current purchase in determining the applica- ble sales charge. IN ORDER TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION, PRE- VIOUS 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 the purchase is made in order to eliminate a sales charge. An investor should consult a tax adviser concerning the tax consequences of use of the re- investment 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 signed at any time within 90 days after the first investment to be included in the Letter of Intent. The initial investment must meet the minimum initial investment requirement and represent at least 5% of the total intended investment. THE INVESTOR MUST INSTRUCT PFPC UPON MAKING SUBSEQUENT PURCHASES THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF INTENT. All dividends and capi- tal gains of the Portfolio that are invested in additional Investor A Shares of the Portfolio are applied to the Letter of Intent.

28.

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 the 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 Advisors, 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 Investor 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 Advisors, 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

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 as described above under "Who Manages the Fund?" Dealers may not receive a commission in connection with sales of In- vestor C Shares to certain retirement plans sponsored by the Fund, BlackRock Advisors, 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 Investor A Shares and Investor B Shares. See "What Is The Schedule Of Sales Charges And Exemptions--Investor A Shares" for information on additional sales incentives which the Distributor, BlackRock Advisors, Inc. and/or their affiliates may provide to dealers in connection with the sale of shares.

29.

EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge on Investor B Shares and Investor C Shares is not charged in con- nection 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) redemptions made with respect to cer- tain retirement plans sponsored by the Fund, BlackRock, Inc. or its affiliates;
(4) redemptions in connection with a shareholder's death or disability (as de- fined in the Internal Revenue Code) subsequent to the purchase of Investor B or Investor C Shares; (5) involuntary redemptions of Investor B or Investor C Shares in accounts with low balances as described in "How Are Shares Re- deemed?"; and (6) redemptions made pursuant to the Systematic Withdrawal Plan, subject to the limitations set forth above under "What Are the Shareholder Fea- tures of the Fund?--Systematic Withdrawal Plan." In addition, no contingent de- ferred sales charge is charged on Investor B 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 administrators have entered into arrangements with the Fund. For further information, see "Purchase and Redemption Information" in the Statement of Additional Information.

When an investor redeems Investor B 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 and Investor C Shares are redeemed first from those shares that are not subject to the deferred sales load (i.e., shares that were acquired through reinvestment of dividends or distributions) and after that from the shares that have been held the longest.

30.

The Portfolio will normally invest at least 80% of the value of its total as- sets in debt securities. In addition, under normal market conditions the Port- folio will invest at least 65% of its total assets in GNMAs. Securities ac- quired by the Portfolio will be rated in the highest rating category at the time of purchase (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 Portfolio's sub-adviser. If a security's rating is reduced below the minimum rating that is permitted for the Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security.

GNMAS AND OTHER MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolio will invest primarily in GNMAs, and may make significant investments in other 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 Portfolio may acquire several types of mortgage-related securities. GNMAs are typically mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages. The Portfolio may also acquire adjustable rate mortgage-related securities ("ARMs") as well as collateralized mortgage obligations ("CMOs"), which provide the holder with a specified inter- est 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 enti- ties known as real estate mortgage investment conduits ("REMICs"). CMOs are is- sued 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, pay- ments of principal are applied to the CMO classes in the order of their respec- tive stated maturities, so that no principal payments will be made on a CMO class until all other classes having 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 converted thereafter to interest-paying secu- rities. They may also include planned amortization classes ("PACs") which gen- erally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market vola- tility than other classes.

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 the Portfolio, the maturity of mortgage-related and other asset-backed securities held by the Portfolio will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, 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 mortgage-related and asset-backed securities less potential for growth in value than conventional 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 Portfolio will generally be at lower rates than the rates that were carried by the obli- gations that have been prepaid. Because of these and other reasons, a mortgage- related or asset-backed security's total return and maturity may be difficult to predict precisely. To the extent

7.

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 receivables are generally unsecured, and the debtors are entitled to the pro- tection 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 per- mit 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 receiv- ables. Therefore, there is a possibility that recoveries on repossessed col- lateral may not, in some cases, be able to support payments on these securi- ties.

The 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 securities con- taining loans or mortgages originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It is possible 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 hold- ers could have rights against PNC Mortgage Securities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with its in- vestment objective, the Portfolio 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, particularly SMBS, may exhibit greater price volatility than ordinary debt se- curities because of the manner in which their principal and interest are re- turned to investors.

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, the Portfolio may fail to fully re- coup its initial investment. The market value of SMBS can be extremely vola- tile in response to changes in interest rates. The yields on a class of SMBS that receives 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 in- vestment will not be fully recouped.

The 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, the Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under

8.

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 instrumentality. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumen- talities if it is not obligated to do so by law.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with its investment objective, the Portfolio may invest in debt obligations of domestic or foreign corporations and banks, and may acquire commercial obligations issued by Cana- dian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issu- er. Bank obligations may include certificates of deposit, notes, bankers' ac- ceptances 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 a specific obligation or by government regulation. The Portfolio may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

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.

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.

To the extent the Portfolio's assets are invested in Municipal Obligations pay- able 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 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

9.

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.

INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolio may enter into these transactions primarily to preserve a return or spread on a particu- lar investment or portion of its holdings, as a duration management technique or to protect against an increase in the price of securities the Portfolio an- ticipates purchasing at a later date. The Portfolio intends to use these trans- actions 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.

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. For the pay- ment 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. The Portfolio will not pur- chase 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 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 for hedging pur- poses or to maintain liquidity. The value of the Portfolio's contracts may equal or exceed 100% of its total assets, although the Portfolio will not pur- chase 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. 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 securi- ties 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.

10.

The 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.

To maintain greater flexibility, the 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 commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including volatility and illiquidity.

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."

GUARANTEED INVESTMENT CONTRACTS. The Portfolio may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, a portfolio makes cash contributions to a 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. The 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. 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.

VARIABLE AND FLOATING RATE INSTRUMENTS. The 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. 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 resets in the opposite direction from the market rate of inter- est 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 de- gree of leverage inherent in inverse floaters is associated with greater vola- tility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for the Portfo- lio. The absence of an active secondary market with respect to particular vari- able and

11.

REPURCHASE AGREEMENTS. The 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. 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 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 Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities ei- ther maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolio may use reverse repurchase agreements when it is anticipated that the interest in- come 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 re- purchase 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 the 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 re- purchase agreement is outstanding, the Portfolio will maintain a segregated ac- count with the Fund's custodian containing cash, U.S. Government or other ap- propriate liquid debt securities having a value at least equal to the repur- chase 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. In addition, the Portfolio may borrow up to an additional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. The 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, the 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 and other expenses that the Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. The Portfolio will not 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 agreements 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. The Portfolio may purchase securities which are not registered under the Secu- rities Act of 1933 (the "1933 Act") but which can be sold to "qualified insti- tutional buyers" in accordance with Rule 144A under the 1933 Act. These securi- ties will not be considered illiquid so long as it is determined by the Portfo- lio's sub-adviser that an adequate trading market exists for the securities. This investment practice could have the effect of increasing the level of illi- quidity in the Portfolio during any period that qualified institutional buyers become uninterested in purchasing these restricted securities.

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 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 portfo- lio to lock in a price or yield on a security that it owns or intends to pur- chase, 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

12.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, the 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 Portfolio 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 enti- tled to receive interest and principal payments on the securities sold. Pro- ceeds of the sale will be invested in additional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. 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 performance of the Portfolio compared with what the performance would have been without the use of dollar rolls. At the time 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 having 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 correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be success- fully employed.

SHORT SALES. The Portfolio 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 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 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. Under normal market conditions, it is expected that the annual portfolio turnover rate for the Portfolio will not exceed 450%. The 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 the Portfo- lio and may result in the realization of short-term capital gains that are tax- able to shareholders as ordinary income.

INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the Portfolio can be expected to vary inversely with changes in prevailing interest rates. Fixed income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and de- preciation than securities with shorter maturities. The Portfolio is not re- stricted to any maximum or minimum time to maturity in purchasing individual portfolio securities, and the average maturity of the Portfolio's assets will vary within the limits stated herein based upon its sub-adviser's assessment of economic and market conditions. Although the Portfolio's sub-adviser will nor- mally attempt to structure the 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.

13.

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 U.S. Government securities) if more than 5% of its total assets will be invested in the securities of any one issuer, ex- cept that up to 25% of the Portfolio's total assets may be invested without regard to this 5% limitation; or

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

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

14.

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 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 Advisors, Inc.
               BlackRock Advisors, Inc. (formerly PNC Asset Management Group,
               Inc.) was organized in 1994 to perform advisory services for
               investment companies, and has its principal offices at 345 Park
               Avenue, New York, New York 10154. BlackRock Advisors, Inc. is
               an indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
               bank holding company.

               The sub-adviser to the Portfolio is BlackRock Financial Manage-
               ment, Inc. ("BlackRock"), an affiliate of BlackRock Advisors,
               Inc., with its primary offices at 345 Park Avenue, New York,
               New York 10154. BlackRock is a registered investment adviser,
               organized in 1988. Robert S. Kapito, Scott Amero and Michael P.
               Lustig serve as portfolio managers of the Portfolio. Mr. Kapito
               has been Vice Chairman of the sub-adviser since 1988, Mr. Amero
               has been Managing Director of the sub-adviser since 1990, and
               Mr. Lustig has been a portfolio manager of the sub-adviser
               since 1995.

               As adviser, BlackRock Advisors, Inc. is responsible for the
               overall investment management of the Portfolio. As sub-adviser,
               BlackRock Financial Management is responsible for the day-to-
               day management of the Portfolio, and generally makes all pur-
               chase and sale investment decisions for the Portfolio. Black-
               Rock Financial Management also provides research and credit
               analysis.

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

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

               . BlackRock International, Ltd.: International equity.

               . BlackRock Institutional Management Corporation: Money market.

               For their investment advisory and sub-advisory services, Black-
               Rock Advisors, Inc. and the Portfolio's sub-adviser are enti-
               tled to fees, computed daily and payable monthly, at the maxi-
               mum annual rates set forth below. As stated under "What Are The
               Expenses Of The Portfolio?", BlackRock Advisors, 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 Black-
               Rock Advisors, Inc., and do not represent an extra charge to
               the Portfolio.

                     MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)

AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY
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

15.

ADMINISTRATORS
BlackRock Advisors, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock Advisors, 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 officers.

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 Advisors, 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 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, whose principal offices are lo-
CUSTODIAN         cated at 400 Bellevue Parkway, Wilmington, Delaware 19809,
                  serves as its transfer agent and dividend disbursing agent.

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 BlackRock Advi-
                  sors, Inc. and the Administrators, transfer agency and custo-
                  dian 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 secu-
                  rities laws, expenses of preparing prospectuses and state-
                  ments of additional information and of printing and distrib-
                  uting prospectuses and statements of additional information
                  to existing shareholders, expenses relating to shareholder
                  reports, 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 Advisors, 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 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.

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 (a) registered investment advisers with a minimum investment of $500,000 and (b) the trust departments of PNC Bank and its affiliates (collec- tively, "PNC") on behalf of clients for whom PNC (i) acts in a fiduciary capac- ity (excluding participant-directed employee benefit plans) or otherwise has investment discretion or (ii) acts as custodian with respect to at least $2,000,000 in assets, 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 or modify the minimum investment amount, may reject any order for Institutional Shares and may suspend and resume the sale of shares of any share class of the Portfolio at any time.

In the event that a shareholder acquiring Institutional Shares on or after May 1, 1998 ceases to meet the eligibility standards for purchasing Institutional Shares (other than due to fluctuations in market value), then the shareholder's Institutional Shares will, upon the direction of the Fund's distributor, auto- matically be converted to shares of another class of the Portfolio having the same aggregate net asset value as the shares converted. If, at the time of con- version, an institution offering Service Shares of the Portfolio is acting on the shareholder's behalf, then the shareholder's Institutional Shares will be converted to Service Shares of the Portfolio. If not, then the shareholder's Institutional Shares will be converted to Investor A Shares of the Portfolio. Service Shares are currently authorized to bear additional service and process- ing fees at the aggregate annual rate of .30% of average daily net assets, while Investor A Shares are currently authorized to bear additional service, processing and distribution fees at the aggregate annual rate of .50% of aver- age daily net assets.

17.

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 Advisors, Inc., an ear- lier payment could adversely affect the Portfolio. No charge for wiring redemp- tion 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 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.

18.

The Portfolio will normally invest at least 80% of the value of its total as- sets in debt securities. In addition, under normal market conditions the Port- folio will invest at least 65% of its total assets in GNMAs. Securities ac- quired by the Portfolio will be rated in the highest rating category at the time of purchase (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 Portfolio's sub-adviser. If a security's rating is reduced below the minimum rating that is permitted for the Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio should continue to hold the security.

GNMAS AND OTHER MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolio will invest primarily in GNMAs, and may make significant investments in other 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 Portfolio may acquire several types of mortgage-related securities. GNMAs are typically mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages. The Portfolio may also acquire adjustable rate mortgage-related securities ("ARMs") as well as collateralized mortgage obligations ("CMOs"), which provide the holder with a specified inter- est 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 enti- ties known as real estate mortgage investment conduits ("REMICs"). CMOs are is- sued 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, pay- ments of principal are applied to the CMO classes in the order of their respec- tive stated maturities, so that no principal payments will be made on a CMO class until all other classes having 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 converted thereafter to interest-paying secu- rities. They may also include planned amortization classes ("PACs") which gen- erally require, within certain limits, that specified amounts of principal be applied on each payment date, and generally exhibit less yield and market vola- tility than other classes.

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 the Portfolio, the maturity of mortgage-related and other asset-backed securities held by the Portfolio will be based on estimates of average life which take prepayments into account. The average life of a mortgage-related instrument, 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 mortgage-related and asset-backed securities less potential for growth in value than conventional 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 Portfolio will generally be at lower rates than the rates that were carried by the obli- gations that have been prepaid. Because of these and other reasons, a mortgage- related or asset-backed security's total return and maturity may be difficult to predict precisely. To the extent

8.

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 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 securities contain- ing loans or mortgages originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It is possible 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 Securities Corp. or its affiliates.

STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with its invest- ment objective, the Portfolio 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.

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, the Portfolio may fail to fully re- coup 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 receives all or most of the interest are generally higher than prevailing mar- ket yields on other mortgage-related obligations because their cash flow pat- terns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

The 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, the Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under

9.

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 instrumentality. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumen- talities if it is not obligated to do so by law.

CORPORATE AND BANK OBLIGATIONS. To the extent consistent with its investment objective, the Portfolio may invest in debt obligations of domestic or foreign corporations and banks, and may acquire commercial obligations issued by Cana- dian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issu- er. Bank obligations may include certificates of deposit, notes, bankers' ac- ceptances 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 a specific obligation or by government regulation. The Portfolio may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

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.

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.

To the extent the Portfolio's assets are invested in Municipal Obligations pay- able 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 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

10.

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.

INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolio may enter into these transactions primarily to preserve a return or spread on a particu- lar investment or portion of its holdings, as a duration management technique or to protect against an increase in the price of securities the Portfolio an- ticipates purchasing at a later date. The Portfolio intends to use these trans- actions 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.

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. For the pay- ment 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. The Portfolio will not pur- chase 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 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 for hedging pur- poses or to maintain liquidity. The value of the Portfolio's contracts may equal or exceed 100% of its total assets, although the Portfolio will not pur- chase 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. 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 securi- ties 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.

11.

The 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.

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

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."

GUARANTEED INVESTMENT CONTRACTS. The Portfolio may make limited investments in guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance companies. Under these contracts, a portfolio makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the portfolio, on a monthly basis, interest which is based on an index (such as the Salomon Brothers CD Index), but is guaranteed not to be less than a certain minimum rate. The 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. The Portfolio may seek additional income by lending secu- rities 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. The 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 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. 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 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 the Portfolio. The absence of an active secondary market with respect to particu- lar variable and

12.

REPURCHASE AGREEMENTS. The 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. 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 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 Portfolio may use the proceeds of reverse repurchase agreements to purchase other securities ei- ther maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. The Portfolio may use reverse repurchase agreements when it is anticipated that the interest in- come 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 re- purchase 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 the 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 re- purchase agreement is outstanding, the Portfolio will maintain a segregated ac- count with the Fund's custodian containing cash, U.S. Government or other ap- propriate liquid debt securities having a value at least equal to the repur- chase 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. In addition, the Portfolio may borrow up to an additional 5% of its total assets for temporary purposes.

INVESTMENT COMPANIES. The 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, the 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 and other expenses that the Portfolio bears directly in connection with its own operations.

ILLIQUID SECURITIES. The Portfolio will not 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 agreements 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. The Portfolio may purchase securities which are not registered under the Secu- rities Act of 1933 (the "1933 Act") but which can be sold to "qualified insti- tutional buyers" in accordance with Rule 144A under the 1933 Act. These securi- ties will not be considered illiquid so long as it is determined by the Portfo- lio's sub-adviser that an adequate trading market exists for the securities. This investment practice could have the effect of increasing the level of illi- quidity in the Portfolio during any period that qualified institutional buyers become uninterested in purchasing these restricted securities.

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 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 portfo- lio to lock in a price or yield on a security that it owns or intends to pur- chase, 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

13.

DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the mortgage market and to enhance current income, the 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 agree- ment by the Portfolio to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same in- terest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period between the sale and repurchase, the Portfolio will not be entitled to receive interest and principal payments on the securi- ties sold. Proceeds of the sale will be invested in additional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. 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 performance of the Portfolio compared with what the performance would have been without the use of dollar rolls. At the time 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 correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be success- fully employed.

SHORT SALES. The Portfolio 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 decline. The Portfolio may make short sales both as a form of hedging to off- set 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 acquire 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. Under normal market conditions, it is expected that the annual portfolio turnover rate for the Portfolio will not exceed 450%. The Portfolio's annual portfolio turnover rate will not be a factor preventing a sale or purchase when the 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 transac- tion costs to the 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 Portfolio 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 Portfolio is not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securities, and the average maturity of the Portfolio's assets will vary within the limits stated herein based upon its sub-adviser's assessment of economic and market conditions. Although the Portfolio's sub-adviser will normally attempt to structure the 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.

14.

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 a 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 U.S. Government securities) if more than 5% of its total assets will be invested in the securities of any one issuer, ex- cept that up to 25% of the Portfolio's total assets may be invested without regard to this 5% limitation; or

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

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

15.

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 & Asso-
                 ciates, Inc.

ADVISER AND
SUB-ADVISER      The Adviser to BlackRock Funds is BlackRock Advisors, Inc.
                 BlackRock Advisors, Inc. (formerly PNC Asset Management
                 Group, Inc.) was organized in 1994 to perform advisory serv-
                 ices for investment companies, and has its principal offices
                 at 345 Park Avenue, New York, New York 10154. BlackRock Ad-
                 visors, Inc. is an indirect wholly-owned subsidiary of PNC
                 Bank Corp., a multi-bank holding company.

                 The sub-adviser to the Portfolio is BlackRock Financial Man-
                 agement, Inc. ("BlackRock"), an affiliate of BlackRock Advi-
                 sors, Inc., with its primary offices at 345 Park Avenue, New
                 York, New York 10154. BlackRock is a registered investment
                 adviser, organized in 1988. Robert S. Kapito, Scott Amero
                 and Michael P. Lustig serve as portfolio managers of the
                 Portfolio. Mr. Kapito has been Vice Chairman of the sub-ad-
                 viser since 1988, Mr. Amero has been Managing Director of
                 the sub-adviser since 1990 and Mr. Lustig has been a portfo-
                 lio manager of the sub-adviser since 1995.

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

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

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

                 . BlackRock International, Ltd.: International equity.

                 . BlackRock Institutional Management Corporation: Money
                  market.

                 For their investment advisory and sub-advisory services,
                 BlackRock Advisors, Inc. and the Portfolio's sub-adviser are
                 entitled to fees, computed daily and payable monthly, at the
                 maximum annual rates set forth below. As stated under "What
                 Are The Expenses Of The Portfolio?", BlackRock Advisors,
                 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 Advisors, Inc., and do not represent
                 an extra charge to the Portfolio.

                                      16.

AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY
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

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

ADMINISTRATORS
BlackRock Advisors, Inc., PFPC Inc. ("PFPC") and BlackRock Dis- tributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock Advisors, 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 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 Advisors, 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 admin- istration fee, computed daily and payable monthly, at the ag- gregate 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 ex- cess 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 administration 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     lios' custodian and PFPC, whose principal offices are located
AGENT AND      at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN      its transfer agent and dividend disbursing agent.

SHAREHOLDER
SERVICING
The Fund intends to enter into service arrangements with insti- 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

17.

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.

INVESTMENT QUALITY. Securities acquired by the Portfolios will be rated invest- ment 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 re- duced below the minimum rating that is permitted for a Portfolio, the Portfo- lio's sub-adviser will consider whether the Portfolio should continue to hold the security.

INVESTMENT EMPHASIS. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Portfolios will invest, dur- ing normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and possessions 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 income tax and is not an item of tax preference for purposes of the Federal alternative minimum tax ("Municipal Obligations"). In addition, each of the Portfolios intends to in- vest at least 65% of its total assets in Municipal Obligations of issuers lo- cated in the particular state indicated by its name ("State-Specific Obliga- tions"). During temporary defensive periods each of the Portfolios may invest without limitation in securities that are not Municipal Obligations and may hold without limitation uninvested cash reserves.

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.

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 Portfolio may invest up to 20% of its total assets in private activity 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 Portfolio may invest 25% or more of its assets in Municipal Obligations the interest on which is paid solely from revenues of similar projects. To

10.

The Portfolios are classified as non-diversified portfolios 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 secu- rity may affect the overall value of a non-diversified portfolio more than it would a diversified portfolio.

Each Portfolio may acquire "stand-by commitments" with respect to Municipal Ob- ligations held by it. Under a stand-by commitment, a dealer agrees to purchase, at the Portfolio's option, specified Municipal Obligations at a specified price. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commitment relates. The Portfolios may also invest in tax-exempt derivative securities re- lating 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 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.

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." Stripped securities may exhibit greater price volatility than ordinary debt se- curities because of the manner in which their principal and interest are re- turned to investors.

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?"

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

11.

INTEREST RATE TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolios may en- ter into these transactions primarily to preserve a return or spread on a par- ticular investment or portion of their holdings, as a duration management tech- nique 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.

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. 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 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 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 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

12.

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 inter- est 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 de- gree of leverage inherent in inverse floaters is associated with greater vola- tility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Portfolio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

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.

13.

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. 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.

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.

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.

14.

PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that the annual portfolio turnover rate for each of the Portfolios will not exceed 150%. A Portfolio's annual portfolio turnover rate will not be a factor pre- venting a sale or purchase when the 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 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 for 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 Portfolios in State-Specific Obligations raises special investment considerations. In particular, changes in the economic con- dition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfolio's shares. Certain matters re- lating to the states in which the Portfolios invest are described below. For further information, see "Special Considerations Regarding State-Specific Obli- gations" in the Statement of Additional Information.

Delaware. Delaware's economy has expanded throughout most sectors during the 1990's and has diversified beyond its historical emphasis in chemical and auto- mobile manufacturing to include strong banking and service sectors. Delaware completed fiscal year 1997 with a cumulative cash balance of $392.8 million, of which $116.2 million was unencumbered. The State's general obligation debt out- standing as of December 31, 1997 was $626.7 million. Approximately 80% of this debt is scheduled to mature within ten years and approximately 90% of this debt is scheduled to mature within 15 years. While the State has constitutionally- imposed limits on tax and license fee increases and the imposition of new taxes or fees (requiring approval by a three-fifths vote of each house of the General Assembly), there are no constitutionally-imposed limits on debt incurrence. However, Delaware has instituted several measures designed to manage and reduce its indebtedness, including legislative debt limits, "pay-as-you-go" financing for capital projects, bond refundings and cash debt defeasance and deauthorizations.

Kentucky. Kentucky is a leader among the states in the production of coal and tobacco. The Coal Severance Tax is a significant revenue producer for the Com- monwealth and its political subdivisions, and any substantial decrease in the amount of coal or other minerals produced could result in revenue shortfalls. Additionally, any federal legislation or litigation adversely affecting the to- bacco and/or cigarette industries would have a negative impact on Kentucky's economy. There is significant diversification in Kentucky's manufacturing sec- tor, which includes, among other things, tobacco processing plants, distiller- ies and durable goods production. No single segment of the Commonwealth's econ- omy consists of as much as one-fourth of the overall state domestic product. The Commonwealth continues to experience a high unemployment rate in non-urban- ized areas. Although revenue obligations of the Commonwealth or its political subdivisions may be payable from a specific project, there can be no assurances that economic difficulties and the resulting impact on state and local govern- ment finances will not adversely affect the market value of Kentucky State-Spe- cific Obligations or the ability of the respective entities to pay debt serv- ice.

15.

Because of constitutional limitations, the Commonwealth cannot enter into a fi- nancial obligation of more than two years' duration, and no other municipal is- suer within the Commonwealth can enter into a financial obligation of more than one year's duration. As a consequence, the payment and security arrangements applicable to Kentucky State-Specific Obligations differ significantly from those generally applicable to municipal revenue obligations in other states.

16.

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 Advisors, Inc. Each
               of the Portfolios within the BlackRock Funds family is managed
               by a specialized portfolio manager who is a member of BlackRock
               Advisors, 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
    ---------------                   -----------------
Delaware 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 commencement of
                         Portfolio operations and Portfolio manager
                         of predecessor fund since 1995.
Kentucky Tax-Free Income Kevin Klingert (see above).

BlackRock Advisors, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 345 Park Avenue, New York, New York 10154. BlackRock Advisors, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi- bank holding company.

As adviser, BlackRock Advisors, Inc. is responsible for the overall investment management of the Portfolios. As sub-advis- er, 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.

17.

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

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

. BlackRock International, Ltd.: International equity.

. BlackRock Institutional Management Corporation: Money market.

For their investment advisory and sub-advisory services, BlackRock Advisors, 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?", BlackRock Advisors, 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 Ad- visors, Inc., and do not represent an extra charge to the Portfolios.

AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY
 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

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 execution.

ADMINISTRATORS
BlackRock Advisors, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock Advisors, 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 officers.

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 Advisors, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's aver- age 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 as- sets, .075% of the next $500 million of each Portfolio's av- erage daily net assets and .065% of the average daily net as- sets of each Portfolio in excess of $1 billion and (ii) .115% of the first $500 million of the average daily net assets al- located to each class of Investor Shares of each Portfolio, .105% of the next $500 million of such average daily net as- sets and .095% of the average daily net assets allocated 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 Portfolio.

For information about the operating expenses the Portfolios expect to incur in the current fiscal year, see "What Are the Expenses of the Portfolios?"

18.

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

DISTRIBUTION   Under the Fund's Distribution and Service Plan (the "Plan"),
AND SERVICE    Investor Shares of the Portfolios bear the expense of payments
PLAN           ("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 distribu-
               tion and sales support activities out of their past profits or
               other sources available to them. For further information, see
               "Investment Advisory, Administration, Distribution and Servic-
               ing 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.

19.

INVESTMENT QUALITY. Securities acquired by the Portfolios will be rated invest- ment 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.

INVESTMENT EMPHASIS. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Portfolios will invest, dur- ing normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and possessions 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 income tax and is not an item of tax preference for purposes of the Federal alternative minimum tax ("Municipal Obligations"). In addition, each of the Portfolios intends to in- vest at least 65% of its total assets in Municipal Obligations of issuers lo- cated in the particular state indicated by its name ("State-Specific Obliga- tions"). During temporary defensive periods each of the Portfolios may invest without limitation in securities that are not Municipal Obligations and may hold without limitation uninvested cash reserves.

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.

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 Portfolio may invest up to 20% of its total assets in private activity 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 Portfolio may invest 25% or more of its assets in Municipal Obligations the interest on which is paid solely from revenues of similar projects. To the extent a Portfo- lio's assets are invested in Municipal Obligations payable from the revenues of similar

9.

The Portfolios are classified as non-diversified portfolios 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 secu- rity may affect the overall value of a non-diversified portfolio more than it would a diversified portfolio.

Each Portfolio may acquire "stand-by commitments" with respect to Municipal Ob- ligations held by it. Under a stand-by commitment, a dealer agrees to purchase, at the Portfolio's option, specified Municipal Obligations at a specified price. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commitment relates. The Portfolios may also invest in tax-exempt derivative securities re- lating 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 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.

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." Stripped securities may exhibit greater price volatility than ordinary debt se- curities because of the manner in which their principal and interest are re- turned to investors.

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?"

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

10.

INTEREST RATE TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolios may en- ter into these transactions primarily to preserve a return or spread on a par- ticular investment or portion of their holdings, as a duration management tech- nique 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.

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. 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 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 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 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.

11.

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 inter- est 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 de- gree of leverage inherent in inverse floaters is associated with greater vola- tility in their market values. Issuers of unrated variable and floating rate instruments must satisfy the same criteria as set forth above for a Portfolio. The absence of an active secondary market with respect to particular variable and floating rate instruments, however, could make it difficult for a Portfolio to dispose of a variable or floating rate instrument if the issuer defaulted on its payment obligation or during periods when the Portfolio is not entitled to exercise its demand rights.

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

12.

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.

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. Under normal market conditions, it is expected that the annual portfolio turnover rate for each of the Portfolios will not exceed 150%. A Portfolio's annual portfolio turnover rate will not be a factor pre- venting a sale or purchase when the 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 a Portfolio and may result in the realization of short-term capital gains that are taxable to shareholders as ordinary income.

13.

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 Portfolios in State-Specific Obligations raises special investment considerations. In particular, changes in the economic con- dition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfolio's shares. Certain matters re- lating to the states in which the Portfolios invest are described below. For further information, see "Special Considerations Regarding State-Specific Obli- gations" in the Statement of Additional Information.

Delaware. Delaware's economy has expanded throughout most sectors during the 1990's and has diversified beyond its historical emphasis in chemical and auto- mobile manufacturing to include strong banking and service sectors. Delaware completed fiscal year 1997 with a cumulative cash balance of $392.8 million, of which $116.2 million was unencumbered. The State's general obligation debt out- standing as of December 31, 1997 was $626.7 million. Approximately 80% of this debt is scheduled to mature within ten years and approximately 90% of this debt is scheduled to mature within 15 years. While the State has constitutionally- imposed limits on tax and license fee increases and the imposition of new taxes or fees (requiring approval by a three-fifths vote of each house of the General Assembly), there are no constitutionally-imposed limits on debt incurrence. However, Delaware has instituted several measures designed to manage and reduce its indebtedness, including legislative debt limits, "pay-as-you-go" financing for capital projects, bond refundings and cash debt defeasance and deauthorizations.

Kentucky. Kentucky is a leader among the states in the production of coal and tobacco. The Coal Severance Tax is a significant revenue producer for the Com- monwealth and its political subdivisions, and any substantial decrease in the amount of coal or other minerals produced could result in revenue shortfalls. Additionally, any federal legislation or litigation adversely affecting the to- bacco and/or cigarette industries would have a negative impact on Kentucky's economy. There is significant diversification in Kentucky's manufacturing sec- tor, which includes, among other things, tobacco processing plants, distiller- ies and durable goods production. No single segment of the Commonwealth's econ- omy consists of as much as one-fourth of the overall state domestic product. The Commonwealth continues to experience a high unemployment rate in non-urban- ized areas. Although revenue obligations of the Commonwealth or its political subdivisions may be payable from a specific project, there can be no assurances that economic difficulties and the resulting impact on state and local govern- ment finances will not adversely affect the market value of Kentucky State-Spe- cific Obligations or the ability of the respective entities to pay debt serv- ice.

Because of constitutional limitations, the Commonwealth cannot enter into a fi- nancial obligation of more than two years' duration, and no other municipal is- suer within the Commonwealth can enter into a financial obligation of more than one year's duration. As a consequence, the payment and security arrangements applicable to Kentucky State-Specific Obligations differ significantly from those generally applicable to municipal revenue obligations in other states.

14.

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 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 Advisors, Inc.
               Each of the Portfolios within the BlackRock Funds family is
               managed by a specialized portfolio manager who is a member of
               BlackRock Advisors, 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
-------------------------                -----------------
Delaware 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 commencement of
                            Portfolio operations and Portfolio manager
                            of predecessor fund since 1995.
Kentucky Tax-Free Income    Kevin Klingert (see above).

BlackRock Advisors, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 345 Park Avenue, New York, New York 10154. BlackRock Advisors, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi- bank holding company.

As adviser, BlackRock Advisors, Inc. is responsible for the overall investment management of the Portfolios. As sub-advis- er, 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 ADVISORS, INC. ARE:

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

. BlackRock International, Ltd.: International equity.

. BlackRock Institutional Management Corporation: Money market.

15.

For their investment advisory and sub-advisory services, BlackRock Advisors, 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?", BlackRock Advisors, 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 Ad- visors, 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

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 execution.

                  BlackRock Advisors, Inc., PFPC Inc. ("PFPC") and BlackRock
                  Distributors, Inc. ("BDI") (the "Administrators") serve as
                  the Fund's co-administrators. BlackRock Advisors, 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 officers.

                  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 Advisors,
                  Inc. is entitled to receive a fee, computed daily and payable
                  monthly, at an annual rate of .03% of each Portfolio's aver-
                  age 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 as-
                  sets, .075% of the next $500 million of each Portfolio's av-
                  erage daily net assets and .065% of the average daily net as-
                  sets of each Portfolio in excess of $1 billion and (ii) .115%
                  of the first $500 million of the average daily net assets al-
                  located 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 Institu-
                  tional 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
                  expect to incur in the current fiscal year, see "What Are The
                  Expenses Of The Portfolios?"

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

                                      16.

INVESTMENT QUALITY. Securities acquired by the Portfolios will be rated invest- ment 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.

INVESTMENT EMPHASIS. Each Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Portfolios will invest, dur- ing normal market conditions, at least 80% of their net assets in obligations issued by or on behalf of states, territories and possessions 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 income tax and is not an item of tax preference for purposes of the Federal alternative minimum tax ("Municipal Obligations"). In addition, each of the Portfolios intends to in- vest at least 65% of its total assets in Municipal Obligations of issuers lo- cated in the particular state indicated by its name ("State-Specific Obliga- tions"). During temporary defensive periods each of the Portfolios may invest without limitation in securities that are not Municipal Obligations and may hold without limitation uninvested cash reserves.

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.

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.

10.

The Portfolios are classified as non-diversified portfolios 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 secu- rity may affect the overall value of a non-diversified portfolio more than it would a diversified portfolio.

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

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." Stripped securities may exhibit greater price volatility than ordinary debt se- curities because of the manner in which their principal and interest are re- turned to investors.

11.

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?"

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 instrumentality. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored agencies or instrumen- talities if it is not obligated to do so by law.

INTEREST RATE TRANSACTIONS. The Portfolios may enter into interest rate swaps and may purchase or sell interest rate caps and floors. The Portfolios 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 securities a Port- folio 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.

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. 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 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.

12.

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.

13.

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. 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.

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

14.

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. Under normal market conditions, it is expected that the annual portfolio turnover rate for each of the Portfolios will not exceed 150%. A Portfolio's annual portfolio turnover rate will not be a factor pre- venting a sale or purchase when the 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 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 depreci- tion 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 Portfolios in State-Specific Obligations raises special investment considerations. In particular, changes in the economic con- dition and governmental policies of a state and its political subdivisions could adversely affect the value of a Portfolio's shares. Certain matters re- lating to the states in which the Portfolios invest are described below. For further information, see "Special Considerations Regarding State-Specific Obli- gations" in the Statement of Additional Information.

Delaware. Delaware's economy has expanded throughout most sectors during the 1990's and has diversified beyond its historical emphasis in chemical and auto- mobile manufacturing to include strong banking and service sectors. Delaware completed fiscal year 1997 with a cumulative cash balance of $392.8 million, of which $116.2 million was unencumbered. The State's general obligation debt out- standing as of December 31, 1997 was $626.7 million. Approximately 80% of this debt is scheduled to mature within ten years and approximately 90% of this debt is scheduled to mature within 15 years. While the State has constitutionally- imposed limits on tax and license fee increases and the imposition of new taxes or fees (requiring approval by a three-fifths vote of each house of the General Assembly), there are no constitutionally-imposed limits on debt incurrence. However, Delaware has instituted several measures designed to manage and reduce its indebtedness, including legislative debt limits, "pay-as-you-go" financing for capital projects, bond refundings and cash debt defeasance and deauthorizations.

15.

Because of constitutional limitations, the Commonwealth cannot enter into a fi- nancial obligation of more than two years' duration, and no other municipal is- suer within the Commonwealth can enter into a financial obligation of more than one year's duration. As a consequence, the payment and security arrangements applicable to Kentucky State-Specific Obligations differ significantly from those generally applicable to municipal revenue obligations in other states.

16.

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 Advisors, Inc. Each
               of the Portfolios within the BlackRock Funds family is managed
               by a specialized portfolio manager who is a member of BlackRock
               Advisors, 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 PORTFOLIO                         PORTFOLIO MANAGER
-------------------                         -----------------
Delaware Tax-Free         Kevin Klingert; Portfolio manager at BlackRock since
 Income                   1991; prior to joining BlackRock, Assistant Vice
                          President, Merrill, Lynch, Pierce, Fenner & Smith;
                          Portfolio manager since commencement of Portfolio
                          operations and Portfolio manager of predecessor fund
                          since 1995.
Kentucky Tax-Free Income  Kevin Klingert (see above).

BlackRock Advisors, Inc. (formerly PNC Asset Management Group, Inc.) was organized in 1994 to perform advisory services for investment companies, and has its principal offices at 345 Park Avenue, New York, New York 10154. BlackRock Advisors, Inc. is an indirect wholly-owned subsidiary of PNC Bank Corp., a multi- bank holding company.

As adviser, BlackRock Advisors, Inc. is responsible for the overall investment management of the Portfolios. As sub-advis- er, 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.

17.

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

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

. BlackRock International, Ltd.: International equity.

. BlackRock Institutional Management Corporation: Money market.

For their investment advisory and sub-advisory services, BlackRock Advisors, 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?", BlackRock Advisors, 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 Advisors, Inc., and do not represent an extra charge to the Portfolios.

AVERAGE DAILY NET         INVESTMENT  SUB-ADVISORY
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

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 execution.

ADMINISTRATORS
BlackRock Advisors, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc. ("BDI") (the "Administrators") serve as the Fund's co-administrators. BlackRock Advisors, 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 officers.

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 Advisors, Inc. is entitled to receive a fee, computed daily and payable monthly, at an annual rate of .03% of each Portfolio's aver- age 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 as- sets, .075% of the next $500 million of each Portfolio's av- erage daily net assets and .065% of the average daily net as- sets of each Portfolio in excess of $1 billion and (ii) .115% of the first $500 million of the average daily net assets al- located 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 administra- tion fees from a Portfolio.

18.

               For information about the operating expenses the Portfolios ex-
               pect to incur in the current fiscal year, see "What Are the Ex-
               penses of the Portfolios?"

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

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 designations and addresses;
               and providing other similar shareholder liaison services. Cus-
               tomers 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 investment
               of fiduciary funds in Portfolio shares. Institutions, including
               banks regulated by the Comptroller of the Currency, Federal Re-
               serve Board and state banking commissions, and investment ad-
               visers and other money managers subject to the jurisdiction of
               the SEC, the Department of Labor or state securities commis-
               sions, 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 under-
               writing securities. It is intended that the services provided
               by Institutions under their service agreements will not be pro-
               hibited 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 Portfolio
               before dividends and distributions are paid. Expenses include,
               but are not limited to, fees paid to BlackRock Advisors, Inc.
               and the Administrators, transfer agency and custodian 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

                                      19.

under Federal and state securities laws, expenses of prepar- ing prospectuses and statements of additional information and of printing and distributing prospectuses and statements of additional information to existing shareholders, expenses relating to shareholder reports, shareholder meetings and proxy solicitations, insurance premiums, the expense of in- dependent pricing services, and other expenses which are not expressly assumed by BlackRock Advisors, 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 partic- ular investment portfolio will be allocated among all in- vestment portfolios by or under the direction of the Board of Trustees in a manner the Board determines to be fair and equitable.

20.

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 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, certain persons who were sharehold- ers of The Compass Capital Group at the time of its combination with The PNC(R) Fund during the first quarter of 1996, and investors that participate in the Capital Directions SM asset allocation program.

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 account at an Institution through procedures established in connec- tion 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 share class of the Portfolio at any time.

In the event that a shareholder acquiring Service Shares on or after May 1, 1998 (other than a former shareholder of The Compass Capital Group as described above) ceases to meet the eligibility standards for purchasing Service Shares, then the shareholder's Service Shares will, upon the direction of the Fund's distributor, automatically be converted to Investor A Shares of the Portfolio having the same aggregate net asset value as the shares converted. Investor A Shares are currently authorized to bear additional service and distribution

21.

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 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 Advisors, Inc., an ear- lier payment could adversely affect a Portfolio. No charge for wiring redemp- tion payments is imposed by the Fund, although Institutions may charge their customer accounts for redemption services. Information relating to such redemp- tion 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 shareholder's 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' 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.

22.