POS AMI

            AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
   
                                 MARCH 30, 1998
    

                           1940 ACT FILE NO. 811-5078


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM N-2

                             REGISTRATION STATEMENT
                  UNDER THE INVESTMENT COMPANY ACT OF 1940    |X|

   
                                 Amendment No. 12             |X|
    


                       MFS GOVERNMENT MARKETS INCOME TRUST
               (Exact Name of Registrant as Specified in Charter)

                500 Boylston Street, Boston, Massachusetts 02116
              (Address of Principal Executive Offices) (Zip Code)

        Registrant's Telephone Number, including Area Code: 617-954-5000


                                Stephen E. Cavan
                               Secretary and Clerk
                       MFS Government Markets Income Trust
                  c/o Massachusetts Financial Services Company
                               500 Boylston Street
                           Boston, Massachusetts 02116
                     (Name and Address of Agent for Service)




                                        -2-

                       MFS GOVERNMENT MARKETS INCOME TRUST

                                     PART A.

                      INFORMATION REQUIRED IN A PROSPECTUS



Items 1 and 2: Omitted pursuant to General Instruction G.3 to Form N-2.

Item 3.1  Fee Table:  Inapplicable - 1940 Act filing only.

Items 3.2, 4, 5, 6 and 7: Omitted  pursuant to General  Instruction  G.3 to Form
N-2.

Item 8.  General Description of Registrant:

         8.1.   General:   The  Registrant  is  a  closed-end,   non-diversified
management  investment company which was organized as a business trust under the
laws of The Commonwealth of Massachusetts on March 27, 1987.

         8.2, 8.3, and 8.4.  Investment  Objectives  and Policies,  Risk Factors
and Other Policies:

                        INVESTMENT OBJECTIVE AND POLICIES

   
         The  Registrant's  investment  objective  is to provide a high level of
current  income.  The investment  objective and policies of the Registrant  may,
unless otherwise  specifically  stated,  be changed by the Trustees of the Trust
without a vote of the shareholders.  A change in the Registrant's  objective may
result in the  Registrant  having an  investment  objective  different  from the
objective which the shareholder considered appropriate at the time of investment
in the  Registrant.  The  Registrant  attempts  to  achieve  this  objective  by
investing at least 65% of its assets in obligations  issued or guaranteed by the
U.S.  Government,   its  agencies,   authorities  or  instrumentalities   ("U.S.
Government Securities").  The Registrant does not intend to invest a significant
portion of its assets in any particular type of U.S. Government  Securities.  In
addition,  the Registrant may engage in transactions  involving related options.
The  Registrant  may also  invest up to 35% of its total  assets in  obligations
issued  or  guaranteed  by  a  foreign   government  or  any  of  its  political
subdivisions,  authorities,  agencies or instrumentalities  ("Foreign Government
Securities") when the Registrant's  investment adviser,  Massachusetts Financial
Services Company ("MFS" or the "Investment Adviser"),  believes that differences
in yield are  sufficient  to justify the risks of investing in such  securities.
See "Special  Considerations" below. In pursuing this objective,  the Registrant
will  consider the  preservation  of capital by balancing  the yields of various
fixed  income  securities  against  their  attendant  risks.  In  addition,  the
Registrant  intends  to sell  futures  contracts  to hedge  against  the loss of
capital.  However,  the Registrant will not purchase securities with the goal of
seeking capital appreciation. There can be no assurance that the Registrant will
achieve its investment objective.
    

                                        -3-

         U.S. Government Securities. The U.S. Government Securities in which the
Registrant intends to invest include (i) U.S. Treasury obligations, which differ
only in their interest rates,  maturities and times of issuance:  U.S.  Treasury
bills (maturity of one year or less),  U.S. Treasury notes (maturities of one to
10 years),  and U.S.  Treasury  bonds  (generally  maturities of greater than 10
years),  all of which are  backed by the full  faith  and  credit of the  United
States;  (ii) obligations issued or guaranteed by U.S. Government  agencies,  or
instrumentalities,  some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association  ("GNMA");  some of which are supported by the right of the
issuer to borrow from the U.S.  Government,  e.g.,  obligations  of Federal Home
Loan  Banks;  and some of which are  backed  only by the  credit  of the  issuer
itself, e.g., obligations of the Student Loan Marketing  Association;  and (iii)
interests in trusts or other entities representing interests in obligations that
are issued or guaranteed  by the U.S.  Government or that are backed by the full
faith and credit of the U.S.  Government (such government  securities may not be
included in the assets that satisfy the test that 65% of the Registrant's assets
must be invested in government  securities).  For a description  of  obligations
issued or  guaranteed  by U.S.  Government  agencies or  instrumentalities,  see
"Description of Obligations Issued or Guaranteed by U.S.  Government Agencies or
Instrumentalities" below.

   
         Some U.S.  Government  Securities do not  generally  involve the credit
risks associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields  available from other interest  bearing  securities.  Like other
interest bearing securities,  however, the values of U.S. Government  Securities
change as interest rates  fluctuate.  Shorter-term  U.S. and Foreign  Government
Securities generally are more stable and less susceptible to principal loss than
longer-term securities.
    

         Foreign Government  Securities.  The Registrant may invest up to 35% of
its total assets in Foreign  Government  Securities of issuers considered stable
by the  Investment  Adviser.  The  Investment  Adviser does not believe that the
credit risk inherent in the  obligations of such stable  foreign  governments is
significantly greater than that of U.S. Government Securities. For a description
of the risk considerations  involved,  see "Special  Considerations"  below. The
percentage of the Registrant's assets invested in Foreign Government  Securities
will vary depending on the relative yields of such securities,  the economies of
the countries in which the investments  are made and such  countries'  financial
markets,  the interest rate climate of such  countries and the  relationship  of
such countries' currencies to the U.S. dollar. Investments in Foreign Government
Securities  and currency  are  evaluated  on the basis of  fundamental  economic
criteria (e.g.,  relative  inflation  levels and trends,  growth rate forecasts,
balance of payments  status,  and economic  policies)  as well as technical  and
political  data. In addition to the  foregoing,  interest rates are evaluated on
the  basis of  differentials  or  anomalies  that may  exist  between  different
countries.  To the extent  that the  Registrant  invests  in Foreign  Government
Securities,  the Registrant's portfolio,  under normal conditions,  will include
securities of a number of foreign countries.  As a "non-diversified"  investment
company,  the  Registrant  will be able to invest  more than 5% of its assets in
obligations of one or more foreign  governments,  to the extent

                                        -4-

consistent   with   federal   income  tax   diversification   requirements   for
qualification as a regulated  investment  company.  The Registrant may also hold
foreign currency for hedging purposes.

         As a result of its investments in Foreign  Government  Securities,  the
Registrant  may  receive  interest  payments,  or the  proceeds  of the  sale or
redemption  of such  securities,  in  foreign  currencies.  In that  event,  the
Registrant may promptly convert such currencies into dollars at the then current
exchange rate.  Alternatively,  under certain  circumstances,  such as where the
Investment  Adviser  anticipates  that  the  exchange  rate  will  improve,  the
Registrant may hold such currencies for an indefinite period of time.

         In addition,  the Registrant may be required to receive delivery of the
foreign currencies underlying options on foreign currencies or Forward Contracts
it has entered into. This could occur, for example,  if an option written by the
Registrant  is  exercised  or the  Registrant  is  unable to close out a Forward
Contract it has entered into.  The Registrant may also elect to take delivery of
the currencies  underlying  options or Forward  Contracts if, in the judgment of
the Investment  Adviser,  it is in the best interest of the Registrant to do so.
The  Registrant  may also hold foreign  currency in  anticipation  of purchasing
Foreign Government Securities.  The holding of currencies exposes the Registrant
to risk of loss if currency  exchange  rates move in a direction  adverse to the
Registrant's  position.  Such losses  could  reduce any profits or increase  any
losses  sustained by the  Registrant  from the sale or redemption of securities,
and could reduce the dollar value of interest or dividend payments received.  In
addition,  the holding of currencies  could  adversely  affect the  Registrant's
profit or loss on currency options or Forward Contracts.

   
         Brady  Bonds.  The  Registrant  may  invest in Brady  Bonds,  which are
securities  created  through the exchange of existing  commercial  bank loans to
public  and  private  entities  in  certain  emerging  markets  for new bonds in
connection with debt  restructurings  under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury,  Nicholas F. Brady (the "Brady Plan").
Brady  Plan debt  restructurings  have been  implemented  to date in  Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, the Dominican Republic,  Ecuador, Jordan,
Mexico,  Morocco,  Nigeria,  Panama, Peru, the Phillippines,  Poland,  Slovenia,
Uruguay and Venezuela.  Brady Bonds have been issued only recently, and for that
reason do not have a long payment history.  Brady Bonds may be collateralized or
uncollateralized,  are  issued in various  currencies  (but  primarily  the U.S.
dollar) and are actively  traded in  over-the-counter  secondary  markets.  U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate  bonds,  are generally  collateralized  in full as to principal by
U.S.  Treasury  zero coupon bonds having the same  maturity as the bonds.  Brady
Bonds  are  often  viewed  as having  three or four  valuation  components;  the
collateralized  repayment  of principal at final  maturity;  the  collateralized
interest   payments;   the   uncollateralized   interest   payments;   and   any
uncollateralized  repayment  of principal  at maturity  (these  uncollateralized
amounts  constituting  the  "residual  risk").  In light of the residual risk of
Brady Bonds and the history of defaults of  countries  issuing  Brady Bonds with
respect to commercial bank loans by public and private entities,  investments in
Brady Bonds may be viewed as speculative.

         Emerging Market Securities.  The Registrant may invest up to 20% of its
net assets in emerging market securities.  Emerging market countries include any
country  determined by the 
    

                                        -5-
   

Adviser to have an emerging  market  economy,  taking  into  account a number of
factors,  including  whether  the country  has a low- to  middle-income  economy
according to the  International  Bank for  Reconstruction  and Development,  the
country's foreign currency debt rating, its political and economic stability and
the  development of its financial and capital  markets.  The Adviser  determines
whether an issuer's  principal  activities  are  located in an  emerging  market
country  by  considering  such  factors  as its  country  of  organization,  the
principal  trading  market for its securities and the source of its revenues and
location of its assets. The issuer's principal  activities  generally are deemed
to be  located  in a  particular  country  if:  (a) the  security  is  issued or
guaranteed by the government of that country or any of its agencies, authorities
or  instrumentalities;  (b) the  issuer  is  organized  under  the laws of,  and
maintains a principal office in, that country;  (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
    

         Other Investments.  When the Investment Adviser believes that investing
for defensive purposes is appropriate,  such as during periods of unusual market
conditions,  or when relative yields are deemed  attractive,  part or all of the
Registrant's assets may be invested in cash (including foreign currency) or cash
equivalent short-term obligations including, but not limited to, certificates of
deposit, commercial paper, notes, U.S. Government Securities, Foreign Government
Securities and repurchase agreements.
   

         The investment  objective and policies  described  above may be changed
without shareholder approval, except that, as a fundamental policy, at least 65%
of the Registrant's  assets under normal  circumstances will be invested in U.S.
Government  Securities.  This fundamental  policy may not be changed without the
approval  of the holders of a majority  of the  Registrant's  shares (as defined
below under "Investment Restrictions").

         Lower Rated Fixed Income Securities:  Up to 10% of the Registrant's net
assets may be invested in  non-convertible  fixed-income  securities rated BB or
lower by Standard & Poor's Rating Services ("S&P"),  Fitch IBCA, Inc.  ("Fitch")
or Duff & Phelps  Credit  Rating  Co.("Duff & Phelps") or Ba or lower by Moody's
Investors  Services,  Inc.  ("Moody's")  or,  if  unrated,  determined  to be of
equivalent  quality by the Adviser  (commonly  referred to as "junk bonds").  No
minimum  rating  standard is required by the  Registrant.  These  securities are
considered  speculative  and,  while  generally  providing  greater  income than
investments in higher rated  securities,  will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater  volatility of price (especially during
periods of economic  uncertainty or change) than securities in the higher rating
categories.
    


                              INVESTMENT PRACTICES

         The following investment  practices apply to the portfolio  investments
of the Registrant. These practices may be changed without shareholder approval.

                                        -6-

         Options on U.S.  and  Foreign  Government  Securities.  In an effort to
increase  current  income and to reduce  fluctuations  in net asset  value,  the
Registrant  intends to write  covered put and call  options and purchase put and
call options on U.S. and Foreign Government Securities that are traded on United
States and foreign securities exchanges and over-the-counter.  This practice may
result in the loss of principal under certain market  conditions.  For a further
discussion  of the use,  risks and costs of options  trading,  see  "Options and
Futures" below.

   
         Futures Contracts and Options on Futures Contracts.  The Registrant may
enter into  contracts  for the future  delivery of fixed  income  securities  or
foreign currencies, or contracts based on Eurodollar deposits, financial indices
including  any  index  of  U.S.  or  Foreign  Government   Securities  ("Futures
Contracts") and may purchase and write options to buy or sell Futures  Contracts
("Options  on Futures  Contracts").  Futures  Contracts  and  Options on Futures
Contracts to be written or purchased by the Registrant will be traded on U.S. or
foreign  exchanges.  These  investment  techniques  may be used to hedge against
anticipated  future changes in interest or exchange rates which  otherwise might
either adversely affect the value of the  Registrant's  portfolio  securities or
adversely  affect  the  prices of  securities  which the  Registrant  intends to
purchase  at a  later  date.  Should  interest  or  exchange  rates  move  in an
unexpected  manner,  the Registrant may not achieve the anticipated  benefits of
Futures  Contracts or Options on Futures  Contracts  or may realize a loss.  For
further  discussion of the use, risks and costs of Futures Contracts and Options
on Futures Contracts, see "Options and Futures" below.
    

         The Trustees have adopted the  requirement  that Futures  Contracts and
Options on Futures Contracts only be used as a hedge and not for speculation. In
addition  to this  requirement,  the  Board of  Trustees  has also  adopted  the
restriction  that the Registrant  will not enter into any Futures  Contracts and
Options on Futures  Contracts if  immediately  thereafter  the amount of initial
margin deposits on all the Futures Contracts of the Registrant and premiums paid
on Options on Futures Contracts would exceed 5% of the market value of the total
assets  of  the  Registrant.  This  restriction  will  not  be  changed  by  the
Registrant's  Board of Trustee without  considering the policies and concerns of
the various federal and state regulatory agencies.

         Options on Foreign  Currencies.  The  Registrant may purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines  in the  dollar  value of  foreign  portfolio  securities  and  against
increases in the dollar cost of foreign  securities  to be  acquired.  As in the
case of other  kinds of  options,  however,  the writing of an option on foreign
currency will  constitute  only a partial hedge, up to the amount of the premium
received,  and the  Registrant  could be required  to  purchase or sell  foreign
currencies at  disadvantageous  exchange rates,  thereby incurring  losses.  The
purchase of an option on foreign  currency may  constitute  an  effective  hedge
against fluctuations in exchange rates although,  in the event of rate movements
adverse to the  Registrant's  position,  it may forfeit the entire amount of the
premium plus related  transaction  costs.  Options on foreign  currencies  to be
written  or  purchased  by the  Registrant  will be  traded on U.S.  or  foreign
exchanges or  over-the-counter.  For further  discussion  of the use,  risks and
costs of options on foreign currencies, see "Options and Futures" below.

                                        -7-

         Forward Foreign Currency Exchange  Contracts.  The Registrant may enter
into forward foreign currency  exchange  contracts for the purchase or sale of a
specific currency at a future date at a price set at the time of the contract (a
"Forward  Contract").  The  Registrant  will enter into  Forward  Contracts  for
hedging  purposes as well as for non-hedging  purposes.  The Registrant may also
enter into a Forward  Contract on one currency in order to hedge against risk of
loss arising from fluctuations in the value of a second currency (referred to as
a "cross  hedge") if, in the judgment of the  Investment  Adviser,  a reasonable
degree of correlation can be expected between movements in the values of the two
currencies. In addition, where the Registrant enters into Forward Contracts as a
"cross hedge", the Registrant incurs the risk of imperfect  correlation  between
changes  in the  values of the two  currencies,  which  could  result in losses.
Transactions in Forward Contracts entered into for hedging purposes will include
forward  purchases or sales of foreign  currencies for the purpose of protecting
the dollar value of securities  denominated in a foreign  currency or protecting
the dollar equivalent of interest or dividends to be paid on such securities. By
entering into such  transactions,  however,  the  Registrant  may be required to
forego the benefits of advantageous  changes in exchange  rates.  The Registrant
may also enter into  transactions  in Forward  Contracts  for other than hedging
purposes.  For example,  if the Investment  Adviser  expects that the value of a
particular  foreign currency will increase or decrease  relative to the value of
the  U.S.   dollar,   the   Registrant  may  purchase  or  sell  such  currency,
respectively,  through a Forward Contract.  If the expected changes in the value
of the currency  occur,  the Registrant will realize profits which will increase
its gross income.  Where  exchange  rates do not move in the direction or to the
extent anticipated, however, the Registrant may sustain losses which will reduce
its gross income. Such transactions could involve significant risk of loss.

   
         The  Registrant  has  established  procedures  which require the use of
segregated assets or "cover" in connection with the purchase and sale of Forward
Contracts. In those instances in which the Registrant satisfies this requirement
through  segregation of assets,  it will segregate liquid assets,  which will be
marked  to  market  on a daily  basis,  in an  amount  equal to the value of its
commitments  under Forward  Contracts.  While these  contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate Forward Contracts. In such event, the
Registrant's  ability to utilize Forward Contracts in the manner set forth above
may be restricted.

         Swaps and Related Transactions.  As one way of managing its exposure to
different  types of  investments,  the  Registrant  may enter into interest rate
swaps,  currency  swaps and other types of available  swap  agreements,  such as
caps,  collars and floors.  Swaps  involve the exchange by the  Registrant  with
another  party of cash  payments  based upon  different  interest  rate indexes,
currencies,  and other prices or rates such as the value of mortgage  prepayment
rates.  For example,  in the typical  interest rate swap, the  Registrant  might
exchange a sequence  of cash  payments  based on a floating  rate index for cash
payments  based  on a  fixed  rate.  Payments  made by  both  parties  to a swap
transaction are based on a notional principal amount determined by the parties.
    

         The Registrant may also purchase and sell caps, floors and collars.  In
a typical cap or floor  agreement,  one party agrees to make payments only under
specified  circumstances,  usually  

                                        -8-

in return for payment of a fee by the counterparty. For example, the purchase of
an interest  rate cap entitles the buyer,  to the extent that a specified  index
exceeds a  predetermined  interest  rate,  to receive  payments of interest on a
contractually-based principal amount from the counterparty selling such interest
rate cap.  The sale of an  interest  rate  floor  obligates  the  seller to make
payments to the extent that a specified interest rate falls below an agreed-upon
level.  A collar  arrangement  combines  elements  of buying a cap and selling a
floor.

   
         Swap  agreements  could be used to shift a fund's  investment  exposure
from one type of investment to another. For example, if the Registrant agreed to
exchange  payments in dollars for  payments  in foreign  currency,  in each case
based on a fixed rate,  the swap  agreement  would tend to  decrease  the fund's
exposure to U.S.  interest  rates and increase its exposure to foreign  currency
and interest rates.  Caps and floors have an effect similar to buying or writing
options.  Depending  on how they are  used,  swap  agreements  may  increase  or
decrease the overall  volatility of the  Registrant's  investments and its share
price and yield.

         Swap agreements are  sophisticated  hedging  instruments that typically
involve a small  investment of cash relative to the magnitude of risks  assumed,
or no investment of cash. As a result, swaps can be highly volatile and may have
a  considerable  impact on the  Registrant's  performance.  Swap  agreements are
subject to risks  related to the  counterparty's  ability  to  perform,  and may
decline  in  value  if the  counterparty's  creditworthiness  deteriorates.  The
Registrant may also suffer losses if it is unable to terminate  outstanding swap
agreements or reduce its exposure through offsetting transactions.
    

         Swaps, caps, floors and collars are highly specialized activities which
involve  certain  risks.  Swap  agreements  may be  individually  negotiated and
structured to include exposure to a variety of different types of investments or
market factors.  Depending on their  structure,  swap agreements may increase or
decrease the Registrant's  exposure to long or short-term interest rates (in the
U.S.  or  abroad),  foreign  currency  values,  mortgage  securities,  corporate
borrowing rates, or other factors such as securities  prices or inflation rates.
Swap  agreements  can take many  different  forms and are known by a variety  of
names.  The Registrant is not limited to any particular  form or variety of swap
agreements  if the  Investment  Adviser  determines  it is  consistent  with the
Registrant's investment objective and policies.

   
         The  Registrant  will maintain  liquid  assets  sufficient to cover its
current  obligations  under swap  transactions.  If the Registrant enters into a
swap  agreement  on a net basis (i.e.,  the two payment  streams are netted out,
with the Registrant receiving or paying, as the case may be, only the net amount
of the two payments),  the Registrant will maintain cash or liquid assets with a
daily value at least equal to the excess,  if any, of the  Registrant's  accrued
obligations  under the swap  agreement over the accrued amount the Registrant is
entitled to receive under the agreement.  If the  Registrant  enters into a swap
agreement on other than a net basis, it will maintain liquid assets with a value
equal to the full  amount  of the  Registrant's  accrued  obligations  under the
agreement.
    

         The most significant  factor in the performance of swaps,  caps, floors
and  collars is the change in the  specific  interest  rate,  currency  or other
factor that determines the amount of 

                                        -9-

payments  to be  made  under  the  arrangement.  If the  Investment  Adviser  is
incorrect in its forecasts of such factors,  the  investment  performance of the
Registrant  would be less  than  what it  would  have  been if these  investment
techniques  had not been used.  If a swap  agreement  calls for  payments by the
Registrant,  the Registrant  must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declines, the value of the swap
agreement would be likely to decline,  potentially  resulting in losses.  If the
counterparty  defaults, the Registrant's risk of loss consists of the net amount
of payments  that the  Registrant  is  contractually  entitled  to receive.  The
Registrant  anticipates that it will be able to eliminate or reduce its exposure
under these  arrangements by assignment or other disposition or by entering into
an offsetting agreement with the same or another counterparty.

   
         Indexed Securities. The Registrant may purchase securities whose prices
are indexed to the prices of other securities,  securities indices,  currencies,
precious metals or other  commodities,  or other financial  indicators.  Indexed
securities  typically,  but not always,  are debt  securities or deposits  whose
value at maturity  (i.e.,  principal  value) or interest  rate is  determined by
reference to a specific  instrument or  statistic,  the value of which may vary.
Gold-indexed  securities,  for example,  typically  provide for a maturity value
that depends on the price of gold,  resulting in a security whose price tends to
rise and fall together with gold prices.  Currency-indexed  securities typically
are short-term to  intermediate-term  debt  securities  whose maturity values or
interest  rates  are  determined  by  reference  to the  values  of one or  more
specified   foreign   currencies,   and  may  offer  higher   yields  than  U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be  positively  or  negatively  indexed;  that is, their  maturity  value or
interest  rates  may  increase  when the  specified  currency  value  increases,
resulting  in a  security  that  performs  similarly  to  a  foreign-denominated
instrument,  or  their  maturity  value  may  decline  when  foreign  currencies
increase,  resulting in a security whose price  characteristics are similar to a
put on the underlying currency and could involve the loss of all or a portion of
the  principal  amount  of  or  interest  on  the  instrument.  Currency-indexed
securities  may also  have  prices  that  depend  on the  values  of a number of
different foreign currencies  relative to each other.  Indexed securities may be
more volatile than the underlying  instrument  itself and could involve the loss
of all or a portion of the principal amount or interest of the instrument.

         The performance of indexed  securities depends to a great extent on the
performance  of the security,  currency,  or other  instrument to which they are
indexed,  and may also be  influenced  by interest  rate changes in the U.S. and
abroad.  At the same time,  indexed  securities  are subject to the credit risks
associated  with the  issuer of the  security,  and  their  values  may  decline
substantially if the issuer's credit worthiness deteriorates.  Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.

         Inverse  Floating  Rate  Obligations.  The  Registrant  may  invest  in
so-called  "inverse floating rate  obligations" or "residual  interest" bonds or
other  obligations or certificates  relating thereto  structured to have similar
features.  Such obligations  generally have floating or variable  interest rates
that move in the opposite  direction of short-term  interest rates and generally
increase or decrease  in value in  response  to changes in  short-term  interest
rates at a rate which is a multiple  of the rate at which  fixed-rate  long-term
tax-exempt  securities  increase or decrease in 
    

                                        -10-

   

response  to such  changes.  As a result,  such  obligations  have the effect of
providing investment leverage and may be more volatile than long-term fixed-rate
tax-exempt obligations.

         Restricted Securities. The Registrant may also purchase securities that
are not registered  under the  Securities Act of 1933 ("1933 Act")  ("restricted
securities"),  including  those  that  can be  offered  and  sold to  "qualified
institutional   buyers"   under  Rule  144A  under  the  1933  Act  ("Rule  144A
securities").  A  determination  is made based upon a  continuing  review of the
trading  markets for a specific  Rule 144A  security,  whether such  security is
liquid and thus not subject to the Registrant's limitation on investing not more
than 10% of its net assets in illiquid  investments.  The Board of Trustees  has
adopted  guidelines and delegated to MFS the daily  function of determining  and
monitoring the liquidity of Rule 144A securities.  The Board,  however,  retains
oversight  of  the  liquidity  determinations,   focusing  on  factors  such  as
valuation,  liquidity and  availability of  information.  Investing in Rule 144A
securities  could have the effect of  decreasing  the level of  liquidity in the
Registrant to the extent that qualified  institutional  buyers become for a time
uninterested  in  purchasing  Rule  144A  securities  held  in the  Registrant's
portfolio. Subject to the Registrant's 10% limitation on investments in illiquid
investments,  and subject to the  diversification  requirements  of the Internal
Revenue Code of 1986, as amended,  the  Registrant may also invest in restricted
securities that may not be sold under Rule 144A,  which presents  certain risks.
As a result,  the Registrant might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value.  In
addition, market quotations are less readily available.  Therefore, judgment may
at times play a greater  role in valuing  these  securities  than in the case of
unrestricted securities.

         Lending of Portfolio  Securities.  The  Registrant may seek to increase
its income by lending portfolio securities to the extent consistent with present
regulatory  policies,  including  those of the Board of Governors of the Federal
Reserve System and the SEC. Such loans will usually be made only to member firms
of a national securities exchange (the "Exchange") (or subsidiaries thereof) and
member banks of the Federal Reserve System,  and would be required to be secured
continuously by collateral, in cash U.S. Government Securities or an irrevocable
letter of credit  maintained  on a current  basis at an amount at least equal to
the market value of the securities  loaned.  The Registrant would have the right
to call a loan  and  obtain  the  securities  loaned  at any  time on  customary
industry  settlement  notice (which will usually not exceed five days).  For the
duration of a loan, the  Registrant  would continue to receive the equivalent of
the  interest or  dividends  paid by the issuer on the  securities  loaned.  The
Registrant  would  receive  a fee from the  borrower  or  compensation  from the
investment of the collateral, less a fee paid to the borrower, if the collateral
is in the form of cash . The Registrant  would not,  however,  have the right to
vote any  securities  having voting rights during the existence of the loan, but
the Registrant  would call the loan in  anticipation  of an important vote to be
taken among holders of the  securities or of the giving or  withholding of their
consent on a material matter affecting the investment.  As with other extensions
of credit,  there are risks of delay in  recovery  or even loss of rights in the
collateral should the borrower of the securities fail financially.  However, the
loans would be made only to firms deemed by the Investment Adviser to be of good
standing, and when, in the judgment of the Investment Adviser, the consideration
which can be earned  currently from securities  loans of this type justified the
attendant risk. If the Investment  Adviser  
    

                                        -11-
   

determines  to make  securities  loans,  it is  intended  that the  value of the
securities  loaned would not exceed 30% of the value of the  Registrant's  total
assets.

         "When-Issued"   Securities.   Securities   may   be   purchased   on  a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will usually be delivered to the  Registrant  at a future date beyond  customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Registrant
is not limited to the amount of securities for which it may have  commitments to
purchase on such basis,  it is expected  that under  normal  circumstances,  the
Registrant  will not commit more than 30% of its total assets to such purchases.
The Registrant  does not pay for the securities  until received or start earning
interest on the securities until the contractual settlement date. While awaiting
delivery of securities  purchased on such basis,  the Registrant  will segregate
liquid assets sufficient to cover its commitments.  Although the Registrant does
not intend to make such purchases for  speculative  purposes,  purchases on such
bases may involve more risk than other types of purchases.

         When the Registrant  commits to purchase a security on a  "when-issued"
or "forward  delivery"  basis, it will segregate  liquid assets  concerning such
purchases.  However,  although  the  Registrant  does not  intend  to make  such
purchases for  speculative  purposes and intends to adhere to the  provisions of
the SEC policy, purchases of securities on such basis may involve more risk than
other types of  purchases.  For  example,  if the  Registrant  determines  it is
necessary to sell the  "when-issued"  or "forward  delivery"  securities  before
delivery, it may incur a gain or a loss because of market fluctuations since the
time the commitment to purchase such securities was made.  Purchasing securities
on a when-issued  basis involves a risk that the yields  available in the market
when delivery takes place may be higher than yields on the securities purchased.

         Repurchase  Agreements.   The  Registrant  may  enter  into  repurchase
agreements in order to earn income on available cash or as a temporary defensive
measure.  Under a  repurchase  agreement,  the  Registrant  acquires  securities
subject to the seller's agreement to repurchase at a specific time and price. If
the seller  becomes  subject to a proceeding  under the  bankruptcy  laws or its
assets  are  otherwise  subject  to a stay  order,  the  Registrant's  right  to
liquidate the securities  may be restricted  (during which time the value of the
securities could decline).

         The Registrant may enter into  repurchase  agreements  with sellers who
are member  firms (or a  subsidiary  thereof)  of the  Exchange,  members of the
Federal Reserve System, or recognized primary U.S. Government securities dealers
or institutions  which the Investment Adviser has determined to be of comparable
creditworthiness. The securities that the Registrant purchases and holds through
its agent are U.S.  Government  Securities,  the values of which are equal to or
greater  than  the  repurchase  price  agreed  to be  paid  by the  seller.  The
repurchase  price may be higher than the purchase  price,  the difference  being
income to the Registrant, or the purchase and repurchase prices may be the same,
with  interest  at a  standard  rate  due to the  Registrant  together  with the
repurchase price on repurchase.  In either case, the income to the Registrant is
unrelated to the interest rate on the U.S. Government Securities.
    

                                        -12-
   

         The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon  delivery date or upon demand,  as
the case may be, the Registrant will have the right to liquidate the securities.
If at the time the Registrant is contractually entitled to exercise its right to
liquidate  the  securities,  the  seller is subject  to a  proceeding  under the
bankruptcy  laws or its  assets  are  otherwise  subject  to a stay  order,  the
Registrant's  exercise of its right to liquidate the  securities  may be delayed
and result in certain  losses and costs to the  Registrant.  The  Registrant has
adopted  and follows  procedures  which are  intended  to minimize  the risks of
repurchase  agreements.  For example, the Registrant only enters into repurchase
agreements  after the  Investment  Adviser  has  determined  that the  seller is
creditworthy, and the Investment Adviser monitors that seller's creditworthiness
on an  ongoing  basis.  Moreover,  under  such  agreements,  the  value  of  the
securities  (which are marked to market  every  business  day) is required to be
greater than the  repurchase  price,  and the  Registrant  has the right to make
margin calls at any time if the value of the  securities  falls below the agreed
upon collateral.
    

         Securities Purchased at a Discount. When and if available, fixed income
securities may be purchased at a market discount from face value.  However,  the
Registrant  does not intend to hold such  securities to maturity for the purpose
of achieving  potential capital gains, unless current yields on these securities
remain attractive.

         "Reset" Options.  In certain  instances,  the Registrant may enter into
options on Treasury  securities  which  provide for periodic  adjustment  of the
premium during the term of each such option. Like other types of options,  these
transactions, which may be referred to as "reset" options or "adjustable strike"
options,  grant the purchaser the right to purchase (in the case of a "call") or
sell (in the case of a "put"),  a  specified  type and  series of U.S.  Treasury
security at any time up to a stated  expiration date (or, in certain  instances,
on such date).  In contrast  to other  types of options,  however,  the price at
which the underlying security may be purchased or sold under a "reset" option is
determined at various  intervals  during the term of the option,  and such price
fluctuates from interval to interval based on changes in the market value of the
underlying  security.  As a result, the strike price of a "reset" option, at the
time of exercise,  may be less advantageous to the Registrant than if the strike
price had been fixed at the initiation of the option.  In addition,  the premium
paid for the purchase of the option may be determined at the termination, rather
than the initiation,  of the option. If the premium is paid at termination,  the
Registrant  assumes  the risk that (i) the  premium may be less than the premium
which would otherwise have been received at the initiation of the option because
of such factors as the volatility in yield of the underlying  Treasury  security
over the term of the option  and  adjustments  made to the  strike  price of the
option,  and (ii) the option  purchaser may default on its obligation to pay the
premium at the termination of the option.

         Mortgage Pass-Through Securities. The Registrant may invest in mortgage
pass-through   securities.   Mortgage  pass-through  securities  are  securities
representing  interests  in "pools"  of  mortgage  loans.  Monthly  payments  of
interest and  principal  by the  individual  borrowers  on mortgages  are passed
through  to the  holders  of the  securities  (net of fees paid to the issuer or
guarantor of the  securities) as the mortgages in the underlying  mortgage pools
are paid off. The average  lives of mortgage  pass-throughs  are  variable  when
issued because their average lives depend on prepayment  rates. The average life
of these  securities  is likely to be  substantially 

                                        -13-

shorter than their stated final  maturity as a result of  unscheduled  principal
prepayment.  Prepayments on underlying mortgages result in a loss of anticipated
interest,  and all or a part of a premium if any has been  paid,  and the actual
yield (or total return) to the Registrant may be different than the quoted yield
on the securities. Mortgage prepayments generally increase with falling interest
rates  and  decrease  with  rising  interest  rates.  Like  other  fixed  income
securities,  when  interest  rates rise the value of the  mortgage  pass-through
security generally will decline; however, when interest rates are declining, the
value of mortgage  pass-through  securities  with  prepayment  features  may not
increase as much as that of other fixed income securities.

         Payment  of  principal  and  interest  on  some  mortgage  pass-through
securities  (but not the  market  value  of the  securities  themselves)  may be
guaranteed by the full faith and credit of the U.S.  Government  (in the case of
securities  guaranteed by GNMA); or guaranteed by agencies or  instrumentalities
of the  U.S.  Government  (such as the  Federal  National  Mortgage  Association
("FNMA") or the Federal  Home Loan  Mortgage  Corporation  ("FHLMC"),  which are
supported only by the discretionary  authority of the U.S Government to purchase
the agency's obligations).  Mortgage pass-through  securities may also be issued
by  non-governmental  issuers  (such  as  commercial  banks,  savings  and  loan
institutions,  private mortgage insurance companies,  mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may be
supported by various forms of insurance or guarantees.

         Interests  in pools of  mortgage-related  securities  differ from other
forms of debt  securities,  which  normally  provide  for  periodic  payment  of
interest in fixed amounts with principal  payments at maturity or specified call
dates.  Instead,  these  securities  provide a monthly payment which consists of
both  interest  and  principal  payments.   In  effect,  these  payments  are  a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage  loans,  net of any  fees  paid  to the  issuer  or  guarantor  of such
securities. Additional payments are caused by prepayments of principal resulting
from the sale,  refinancing or foreclosure  of the underlying  property,  net of
fees or costs which may be incurred. Some mortgage pass-through securities (such
as  securities  issued by the GNMA) are  described as  "modified  pass-through."
These  securities  entitle the holder to receive  all  interests  and  principal
payments owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled  payment dates regardless of whether the mortgagor  actually makes the
payment.

         The principal government guarantor of mortgage pass-through  securities
is the GNMA.  GNMA is a  wholly-owned  U.S.  Government  corporation  within the
Department  of Housing and Urban  Development.  GNMA is authorized to guarantee,
with the full faith and  credit of the U.S.  Government,  the timely  payment of
principal and interest on  securities  issued by  institutions  approved by GNMA
(such as savings and loan  institutions,  commercial banks and mortgage bankers)
and backed by pools of FHA-insured or VA-guaranteed mortgages. These guarantees,
however,  do not apply to the  market  value or yield of  mortgage  pass-through
securities.  GNMA  securities are often purchased at a premium over the maturity
value of the  underlying  mortgages.  This premium is not guaranteed and will be
lost if prepayment occurs.

         Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S.  Government)  include FNMA and FHLMC. FNMA
is a government-

                                        -14-

sponsored corporation owned entirely by private  stockholders.  It is subject to
general  regulation  by the  Secretary  of Housing and Urban  Development.  FNMA
purchases  conventional  residential  mortgages (i.e.,  mortgages not insured or
guaranteed by any governmental agency) from a list of approved sellers/servicers
which  include  state and  federally-chartered  savings  and loan  associations,
mutual  savings banks,  commercial  banks,  credit unions and mortgage  bankers.
Pass-through  securities  issued by FNMA are  guaranteed as to timely payment by
FNMA of principal and interest.

         FHLMC was created by Congress in 1970 as a corporate instrumentality of
the U.S.  Government for the purpose of increasing the  availability of mortgage
credit for residential housing. FHLMC issues Participation  Certificates ("PCs")
which represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) from FHLMC's national portfolio.  FHLMC guarantees timely payment
of interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.

         Commercial  banks,  savings  and loan  institutions,  private  mortgage
insurance  companies,  mortgage  bankers and other secondary market issuers also
create  pass-through  pools of  mortgage  loans.  Such  issuers  may also be the
originators  and/or  servicers of the  underlying  mortgage-related  securities.
Pools created by such non-governmental  issuers generally offer a higher rate of
interest  than  government  and  government-related  pools  because there are no
direct or indirect  government  or agency  guarantees  of payments in the former
pools.  However,  timely  payment of interest and principal of mortgage loans in
these  pools may be  supported  by various  forms of  insurance  or  guarantees,
including  individual  loan,  title,  pool and hazard  insurance  and letters of
credit. The insurance and guarantees are issued by government entities,  private
insurers and the mortgage  poolers.  There can be no assurance  that the private
insurers or guarantors can meet their obligations  under the insurance  policies
or  guarantee  arrangements.   The  Registrant  may  also  buy  mortgage-related
securities without insurance or guarantees.

   
         Mortgage  "Dollar Roll"  Transactions.  The  Registrant  may enter into
mortgage  "dollar  roll"  transactions  with selected  banks and  broker-dealers
pursuant to which the Registrant sells  mortgage-backed  securities for delivery
in the  future  (generally  within  30 days)  and  simultaneously  contracts  to
repurchase  substantially similar (same type, coupon and maturity) securities on
a specified future date. The Registrant  records these  transactions as sale and
purchase transactions rather than as borrowing transactions. The Registrant will
only enter into covered  rolls.  A "covered  roll" is a specific type of "dollar
roll"  for which  there is an  offsetting  cash  position  or a cash  equivalent
security position which matures on or before the forward  settlement date of the
"dollar  roll"  transaction.  During the roll period,  the  Registrant  foregoes
principal and interest paid on the mortgage-backed securities. The Registrant is
compensated  for the lost interest by the  difference  between the current sales
price and the lower  price for the future  purchase  (often  referred  to as the
"drop") as well as by the  interest  earned on the cash  proceeds of the initial
sale. The Registrant may also be compensated by receipt of a commitment fee.

         Zero Coupon Bonds.  Securities in which the  Registrant may invest also
include  zero coupon  bonds.  Zero coupon bonds are debt  obligations  which are
issued at a significant discount 

    

                                        -15-

from face value.  The  discount  approximates  the total  amount of interest the
bonds will  accrue and  compound  over the period  until  maturity  or the first
interest  payment date at a rate of interest  reflecting  the market rate of the
security at the time of issuance.  Zero coupon bonds do not require the periodic
payment of interest.  Such investments benefit the issuer by mitigating its need
for cash to meet  debt  service,  but also  require  a higher  rate of return to
attract  investors  who  are  willing  to  defer  receipt  of  such  cash.  Such
investments  may  experience  greater  volatility  in  market  value  than  debt
obligations which make regular payments of interest.  The Registrant will accrue
income on such  investments,  which is distributable to shareholders for tax and
accounting  purposes prior to the receipt of cash  payments.  The Registrant may
have to dispose of portfolio securities under disadvantageous circumstances,  or
may  have to  leverage  itself,  to  raise  cash to  satisfy  such  distribution
requirement.

         Yield Curve Options.  The Registrant may also enter into options on the
yield  "spread",  or  differential,  between  two  U.S.  or  Foreign  Government
Securities, in transactions referred to as "yield curve" options. In contrast to
other types of options,  a yield curve option is based on the difference between
the yields of designated U.S. or Foreign Government Securities,  rather than the
prices  of the  individual  securities,  and is  usually  settled  through  cash
payments.  Accordingly, a yield curve option is profitable to the holder if this
differential  widens (in the case of a call) or narrows  (in the case of a put),
regardless  of  whether  the yields of the  underlying  securities  increase  or
decrease.

   
         Yield curve  options may be used for the same purposes as other options
on securities.  Specifically,  the Registrant may purchase or write such options
for hedging purposes.  For example, the Registrant may purchase a call option on
the  spread  between  two  securities  if it  owns  one  of the  securities  and
anticipates  purchasing the other security and wants to hedge against an adverse
change in the yield spread between the two  securities.  The Registrant may also
purchase or write yield curve options for other than hedging  purposes (i.e., in
an effort to increase its current  income) if, in the judgment of the Investment
Adviser,  the  Registrant  will be able to profit from  movements  in the spread
between the yields of the underlying U.S. or Foreign Government Securities.  The
trading of yield curve  options is subject to all of the risks  associated  with
the  trading of other types of  options.  In  addition,  however,  such  options
present  risk of loss even when the  yield of one of the  underlying  securities
remains constant, if the yield spread moves in a direction or to an extent which
was not  anticipated.  Yield curve  options  written by the  Registrant  will be
covered.  A call (or put) option is covered if the Registrant holds another call
(or put)  option  on the  yield  spread  between  the same  two  securities  and
segregates  liquid  assets  sufficient to cover the  Registrant's  net liability
under the two options.  Therefore, the Registrant's maximum liability for such a
covered  option  is the  difference  between  the  amount  of  the  Registrant's
liability  under the  option  written  by the  Registrant  less the value of the
option held by the  Registrant.  Yield curve  options may also be covered in any
other manner as may be in accordance with the  requirements of the  counterparty
with which the option is traded and applicable laws and regulations. Yield curve
options are traded  over-the-counter  and,  because they have been only recently
introduced,  established  trading  markets  for  these  securities  have not yet
developed.  Because these  securities are traded  over-the-counter,  the SEC has
taken the position  that yield curve options are  illiquid,  and the  Registrant
therefore  includes them for 
    

                                        -16-

   

purposes of calculating the 10% limitation  with respect to illiquid  securities
contained in its investment restrictions.
    

         Loan Participations and Other Direct  Indebtedness.  The Registrant may
invest a portion of its assets in "loan  participations."  By  purchasing a loan
participation,  the Registrant acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate borrower. Many such loans are
secured,  and  most  impose  restrictive  covenants  which  must  be  met by the
borrower.  These loans are made generally to finance internal  growth,  mergers,
acquisitions,   stock  repurchases,   leveraged  buy-outs  and  other  corporate
activities. Such loans may be in default at the time of purchase. The Registrant
may also  purchase  trade or other claims  against  companies,  which  generally
represent  money owed by the company to a supplier of goods and services.  These
claims may also be purchases  at a time when the company is in default.  Certain
of the loan  participations  acquired by the  Registrant  may involve  revolving
credit  facilities or other standby  financing  commitments  which  obligate the
Registrant to pay additional cash on a certain date or on demand.

         The  highly  leveraged  nature of many such  loans may make such  loans
especially vulnerable to adverse changes in economic or market conditions.  Loan
participations and other direct investments may not be in the form of securities
or may be subject to  restrictions on transfer,  and only limited  opportunities
may exist to resell such instruments.  As a result, the Registrant may be unable
to sell such investments at an opportune time or may have to resell them at less
than the fair market value.

         Collateralized   Mortgage   Obligations  and  Multiclass   Pass-Through
Certificates.   The   Registrant   may   invest  a  portion  of  its  assets  in
collateralized  mortgage  obligations  or  "CMOs,"  which  are debt  obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are  collateralized  by certificates  issued by the GNMA, FNMA or FHLMC but
also may be  collateralized  by whole  loans or  private  mortgage  pass-through
securities (such collateral  collectively  hereinafter  referred to as "Mortgage
Assets"). Such obligations also include investments in trusts and other entities
representing interests in U.S. or Foreign Government Securities, or holding U.S.
or Foreign Government Securities in amounts sufficient to cover all payments due
from such  entities.  The  Registrant may also invest a portion of its assets in
multiclass  pass-through  securities  which  are  equity  interests  in a  trust
composed  of  Mortgage  Assets.  Unless the  context  indicates  otherwise,  all
reference herein to CMOs include multiclass pass-through securities. Payments of
principal of and interest on the Mortgage Assets,  and any  reinvestment  income
thereon,  provide  the funds to pay debt  service on the CMOs or make  scheduled
distributions on the multiclass pass-through  securities.  CMOs may be issued by
agencies or  instrumentalities of the U.S. or a foreign government or by private
originators  of, or investors in,  mortgage  loans,  including  savings and loan
associations,  mortgage banks,  commercial  banks,  investment banks and special
purpose subsidiaries of the foregoing.  The issuer of a series of CMOs may elect
to be treated as a Real Estate Mortgage Investment Conduit (a "REMIC").

         In a CMO,  a series  of bonds or  certificates  are  usually  issued in
multiple  classes.  Each class of CMOs,  often  referred to as a  "tranche,"  is
issued at a specific fixed or floating  coupon 

                                        -17-

rate and has a stated maturity or final distribution date. Principal prepayments
on the Mortgage  Assets may cause the CMOs to be retired  substantially  earlier
than their stated maturities or final distribution dates, resulting in a loss of
all or part of the premium if any has been paid.  Interest is paid or accrued on
all  classes  of the CMOs on a  monthly,  quarterly  or  semiannual  basis.  The
principal  of and interest on the  Mortgage  Assets may be  allocated  among the
several classes of a series of a CMO in innumerable ways. In a common structure,
payments of  principal,  including any  principal  prepayments,  on the Mortgage
Assets are  applied to the  classes of the series of a CMO in the order of their
respective stated maturities or final distribution  dates, so that no payment of
principal  will be made on any class of CMOs until all other  classes  having an
earlier  stated  maturity  or final  distribution  date  have been paid in full.
Certain CMOs may be stripped  (securities  which  provide only the  principal or
interest  factor of the  underlying  security).  See  "Stripped  Mortgage-Backed
Securities"  below for a description of the risks of investing in these stripped
securities and of investing in classes consisting primarily of interest payments
or principal payments.

         The  Registrant  may also  invest  in  parallel  pay  CMOs and  Planned
Amortization  Class CMOs ("PAC  Bonds").  Parallel  pay CMOs are  structured  to
provide payments of principal on each payment date to more than one class. These
simultaneous  payments are taken into account in calculating the stated maturity
date or  final  distribution  date of  each  class,  which,  as with  other  CMO
structures,  must be retired by its stated  maturity date or final  distribution
date but may be retired  earlier.  PAC Bonds  generally  require  payments  of a
specified  amount of  principal  on each  payment  date.  PAC  Bonds are  always
parallel pay CMOs with the required  principal payment on such securities having
the highest priority after interest has been paid to all classes.

         Stripped  Mortgage-Backed  Securities.  In addition, the Registrant may
invest a portion of its assets in stripped mortgage-backed  securities ("SMBS"),
which are  derivative  multiclass  mortgage  securities  issued by  agencies  or
instrumentalities  of the U.S. or a foreign government or by private originators
of, or investors in, mortgage loans,  including  savings and loan  associations,
mortgage banks, commercial banks and investment banks.

         SMBS are usually  structured  with two classes that  receive  different
proportions of the interest and principal  distributions from a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage  assets,  while the other class will
receive  most of the interest and the  remainder of the  principal.  In the most
extreme  case,  one class will receive all of the interest (the interest only or
"IO"  class)  while the other  class  will  receive  all of the  principal  (the
principal  only or "PO"  class).  The yield to  maturity  on an IO is  extremely
sensitive  to the rate of  principal  payments  (including  prepayments)  on the
related  underlying  Mortgage Assets, and a rapid rate of principal payments may
have a material  adverse  effect on such  security's  yield to maturity.  If the
underlying  mortgage assets experience  greater than anticipated  prepayments of
principal,  the  Registrant  may fail to fully recoup its initial  investment in
these securities. The market value of the class consisting primarily or entirely
of principal  payments generally is unusually volatile in response to changes in
interest rates.


                                        -18-


                               OPTIONS AND FUTURES

   
         Options on U.S.  and  Foreign  Government  Securities.  The  Registrant
intends  to  write  covered  put and  call  options  and  purchase  put and call
options on U.S.  and  Foreign  Government  Securities  that are traded on United
States and foreign securities exchanges and over-the-counter.

         Call options written by the Registrant give the holder the right to buy
the underlying  securities from the Registrant at a stated  exercise price;  put
options  written  by the  Registrant  give  the  holder  the  right  to sell the
underlying  security to the Registrant at a stated exercise price. A call option
written by the  Registrant  is  "covered"  if the  Registrant  owns the security
underlying  the call or has an  absolute  and  immediate  right to acquire  that
security without additional cash consideration (or for additional liquid assets)
upon conversion or exchange of other  securities  held in its portfolio.  A call
option is also covered if the  Registrant  holds a call on the same security and
in the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b)  greater  than the  exercise  price of the call  written  if  liquid  assets
representing  the  difference  are  segregated by the  Registrant.  A put option
written by the  Registrant  is "covered"  if the  Registrant  segregates  liquid
assets with a value equal to the exercise  price or else holds a put on the same
security and in the same principal  amount as the put written where the exercise
price of the put held is (a) equal to or greater than the exercise  price of the
put  written or (b) less than the  exercise  price of the put  written if liquid
assets  representing  the difference are segregated by the  Registrant.  Put and
call options  written by the Registrant may also be covered in such other manner
as may be in accordance  with the  requirements of the exchange on which, or the
counterparty  with  which,  the  option is traded  and the  applicable  laws and
regulations.  The premium paid by the purchaser of an option will reflect, among
other things,  the  relationship  of the exercise  price to the market price and
volatility of the underlying security,  the remaining term of the option, supply
and demand and interest  rates.  Put and call options may also be covered in any
other manner as may be in accordance  with the  requirements  of the exchange on
which, or the counterparty with which, the option is traded and applicable rules
and regulations.
    

         The writer of an option may have no  control  over when the  underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put  option,  since  with  regard to  certain  options,  the  writer may be
assigned  an  exercise  notice  at any  time  prior  to the  termination  of the
obligation. Whether or not an option expires unexercised, the writer retains the
amount of the  premium.  This amount,  of course,  may, in the case of a covered
call  option,  be offset  by a decline  in the  market  value of the  underlying
security  during the option  period.  If a call option is exercised,  the writer
experiences a profit or loss from the sale of the underlying security.  If a put
option is  exercised,  the writer must  fulfill the  obligation  to purchase the
underlying  security at the exercise  price,  which will usually exceed the then
current market value of the underlying security. Even if an option is exercised,
the writer retains the amount of the premium.

         The writer of an option that wishes to  terminate  its  obligation  may
effect a  "closing  purchase  transaction."  This is  accomplished  by buying an
option of the same series as the option  previously  written.  The effect of the
purchase  is that  the  writer's  position  will  be  canceled  by the  clearing
corporation.  However,  a writer may not effect a closing  purchase  transaction
after being 


                                        -19-

notified of the exercise of an option.  Likewise,  an investor who is the holder
of  an  option  may   liquidate  its  position  by  effecting  a  "closing  sale
transaction."  This is  accomplished  by selling an option of the same series as
the option  previously  purchased.  There is no guarantee  that either a closing
purchase or a closing sale transaction can be effected. The writer, however, has
the right to repurchase an option it has written in certain situations.

         Effecting a closing  transaction  in the case of a written  call option
will  permit the  Registrant  to write  another  call  option on the  underlying
security with either a different  exercise price or expiration  date or both, or
in the case of a written put option will permit the  Registrant to write another
put option to the extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent  sale of any securities  subject to the
option to be used for other Registrant investments. If the Registrant desires to
sell a  particular  security  from its  portfolio on which it has written a call
option,  it will effect a closing  transaction  prior to or concurrent  with the
sale of the security.

         The Registrant will realize a profit from a closing  transaction if the
price of the  transaction  is less than the premium  received  from  writing the
option or is more than the premium paid to purchase the option;  the  Registrant
will realize a loss from a closing  transaction if the price of the  transaction
is more than the premium  received  from  writing the option or is less than the
premium paid to purchase the option.  Because increases in the market price of a
call  option  will  generally  reflect  increases  in the  market  price  of the
underlying security,  any loss resulting from the repurchase of a call option is
likely  to be  offset  in whole  or in part by  appreciation  of the  underlying
security owned by the Registrant.

         An  option  position  may be  closed  out  only  where  there  exists a
secondary  market for an option of the same series.  If a secondary  market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the  Registrant  would have to exercise the options
in order to realize any profit.  If the Registrant is unable to effect a closing
purchase  transaction  in a  secondary  market,  it will not be able to sell the
underlying  security  until the option  expires or it  delivers  the  underlying
security upon  exercise.  Reasons for the absence of a liquid  secondary  market
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an Exchange on opening transactions
or closing  transactions  or both;  (iii) trading  halts,  suspensions  or other
restrictions  may be imposed  with  respect to  particular  classes or series of
options or underlying securities;  (iv) unusual or unforeseen  circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the  Options  Clearing  Corporation  may not at all times be  adequate to handle
current trading  volume;  or (vi) one or more Exchanges  could,  for economic or
other  reasons,  decide or be compelled at some future date to  discontinue  the
trading of options (or a particular class or series of options),  in which event
the  secondary  market on that  Exchange (or in that class or series of options)
would cease to exist,  although  outstanding  options on that  Exchange that had
been issued by the Options  Clearing  Corporation  as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.

                                        -20-

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

         The writing of covered  put options is similar in terms of  risk/return
characteristics  to  buy-and-write  transactions.  If the  market  price  of the
underlying  security  rises or otherwise is above the  exercise  price,  the put
option will expire  worthless and the  Registrant's  gain will be limited to the
premium  received.  If the market price of the underlying  security  declines or
otherwise is below the exercise  price,  the  Registrant  may elect to close the
position  or  take  delivery  of the  security  at the  exercise  price  and the
Registrant's  return will be the premium  received from the put option minus the
amount by which the market price of the  security is below the  exercise  price.
Out-of-the-money,  at-the-money, and in-the-money put options may be used by the
Registrant  in the  same  market  environments  that  call  options  are used in
equivalent buy-and-write transactions.

         The  Registrant  may purchase put options to hedge against a decline in
the value of its  portfolio.  By using put options in this way,  the  Registrant
will  reduce any  profit it might  otherwise  have  realized  in the  underlying
security by the amount of the premium paid for the put option and by transaction
costs.

         The  Registrant  may purchase call options to hedge against an increase
in the  price of U.S.  or  Foreign  Government  Securities  that the  Registrant
anticipates  purchasing in the future. The premium paid for the call option plus
any  transaction  costs  will  reduce  the  benefit,  if  any,  realized  by the
Registrant  upon exercise of the option,  and unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Registrant.

   
         Futures  Contracts.  The  Registrant  may enter into  contracts for the
future  delivery of fixed income  securities or foreign  currencies or contracts
based on bond or other financial indices and commodities, including any index of
U.S.  or Foreign  Government  Securities  ("Futures  Contracts").  A "sale" of a
Futures  Contract  means a contractual  obligation to deliver the  

    

                                        -21-

   
securities or foreign currencies called for by the contract at a specified price
in a fixed delivery  month or, in the case of a Futures  Contract on an index, a
contractual  obligation to make or receive a cash settlement.  A "purchase" of a
Futures  Contract  means a contractual  obligation to acquire the  securities or
foreign  currencies  called for by the contract at a specified  price in a fixed
delivery month or, in the case of a Futures  Contract on an index, a contractual
obligation to make or receive a cash  settlement.  U.S.  Futures  Contracts have
been designed by exchanges which have been designated  "contract markets" by the
CFTC, and must be executed through a futures commission  merchant,  or brokerage
firm,  which is a member of the  relevant  contract  market.  Existing  contract
markets include the Chicago Board of Trade and the International Monetary Market
of the Chicago  Mercantile  Exchange.  Futures Contracts trade on these markets,
and, through their clearing corporations, the exchanges guarantee performance of
the contracts as between the clearing  members of the exchange.  The  Registrant
will enter into Futures  Contracts  which are based on debt  securities that are
backed by the full faith and credit of the U.S.  Government,  such as  long-term
U.S. Treasury Bonds,  Treasury Notes,  Government National Mortgage  Association
modified pass-through  mortgage-backed  securities and three-month U.S. Treasury
Bills.  The Registrant may also enter into Futures  Contracts which are based on
Eurodollar deposits and non-U.S.  Government bonds, and foreign currency Futures
Contracts  which  currently are traded on the British  pound,  Canadian  dollar,
Japanese yen, Swiss franc and German mark.
    

         At the  same  time  a  Futures  Contract  is  purchased  or  sold,  the
Registrant  must  allocate cash or  securities  as a deposit  payment  ("initial
deposit").  The  initial  deposit  varies,  but may be as low as 5% or less of a
contract's face value.  Daily  thereafter,  the Futures  Contract is valued on a
marked-to-market  basis and the  Registrant  may be  required  to pay or receive
"variation  margin,"  which  reflects any decline or increase in the  contract's
value.

         At the time of  delivery  of  securities  pursuant  to such a Contract,
adjustments are made to recognize differences in value arising from the delivery
of  securities  with a  different  interest  rate  from  that  specified  in the
contract.  In some  (but not many)  cases,  securities  called  for by a Futures
Contract may not have been issued when the contract was written.

         Although Futures  Contracts by their terms call for the actual delivery
or  acquisition  of  securities,  in most cases the  contractual  obligation  is
fulfilled  before  the  date  of the  contract  without  having  to make or take
delivery of the  securities.  The  offsetting  of a  contractual  obligation  is
accomplished  by  buying  (or  selling,  as the  case  may be) on a  commodities
exchange an identical  Futures  Contract calling for delivery in the same month.
Such a transaction,  which is effected through a member of an exchange,  cancels
the  obligation  to  make  or  take  delivery  of  the  securities.   Since  all
transactions  in the  futures  market are made,  offset or  fulfilled  through a
clearinghouse  associated  with the exchange on which the  contracts are traded,
the  Registrant  will incur  brokerage  fees when it purchases or sells  Futures
Contracts.

   
         One purpose of the  acquisition or sale of a Futures  Contract,  in the
case of a  portfolio,  such as the  portfolio of the  Registrant,  which hold or
intends to acquire long-term fixed income  securities,  is to attempt to protect
the Registrant from  fluctuations in interest or foreign  exchange rates without
actually  buying  or  selling  long-term  fixed  income  securities  or  foreign
currency.  
    

                                        -22-

For example,  if the Registrant  owns long-term  bonds,  and interest rates were
expected to increase,  the Registrant might enter into Futures Contracts for the
sale of debt securities.  Such a sale would have much the same effect as selling
an equivalent value of the long-term bonds owned by the Registrant.  If interest
rates did increase,  the value of the debt  securities  in the  portfolio  would
decline, but the value of the Futures Contracts to the Registrant would increase
at  approximately  the same rate,  thereby  keeping  the net asset  value of the
Registrant  from  declining as much as it otherwise  would have.  The Registrant
could  accomplish  similar  results by selling  bonds with long  maturities  and
investing in bonds with short  maturities  when  interest  rates are expected to
increase. However, since the futures market is more liquid than the cash market,
the use of Futures Contracts as an investment technique allows the Registrant to
maintain a defensive position without having to sell its portfolio securities.

   

         Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated  purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts  should be similar to that of long-term  bonds,  the Registrant  could
take advantage of the  anticipated  rise in the value of long-term bonds without
actually buying them until the market had stabilized.  At that time, the Futures
Contracts could be liquidated and the Registrant  could then buy long-term bonds
on the cash market.  To the extent the Registrant  enters into Futures Contracts
for this  purpose  the  Registrant  will  segregate  liquid  assets to cover its
obligations  with  respect to such  Futures  Contracts in an amount equal to the
difference  between the fluctuating  market value of such Futures  Contracts and
the  aggregate  value of the initial and variation  margin  payments made by the
Registrant with respect to such Futures Contracts.
    

         The ordinary  spreads  between prices in the cash and futures  markets,
due to differences in the natures of those markets,  are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin  requirements.  Rather than meeting additional variation margin
requirements,   investors  may  close  Futures  Contracts   through   offsetting
transactions  which could distort the normal  relationship  between the cash and
futures  markets.  Second,  the  liquidity  of the  futures  market  depends  on
participants entering into offsetting  transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery,  liquidity
in the futures market could be reduced, thus producing  distortion.  Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less  onerous  than margin  requirements  in the  securities  market.
Therefore,  increased  participation  by  speculators  in the futures market may
cause  temporary  price  distortions.  Due to the  possibility of distortion,  a
correct forecast of general  interest rate trends by the Investment  Adviser may
still not result in a successful transaction.

         In addition,  Futures  Contracts entail risks.  Although the Registrant
believes  that  use of  such  Contracts  will  benefit  the  Registrant,  if the
Investment  Adviser's  investment judgment about the direction of interest rates
is incorrect,  the Registrant's  overall  performance would be poorer than if it
had not entered into any such  contract.  For  example,  if the  Registrant  had
hedged  against the  possibility  of an  increase in interest  rates which would
adversely  affect the price of bonds held in its  portfolio  and interest  rates
decrease  instead,  the  Registrant  will lose part or all of the benefit of the
increased value of its bonds which it has hedged because it will have 

                                        -23-

offsetting losses in its futures positions. In addition, in such situations,  if
the  Registrant  has  insufficient  cash,  it may  have to sell  bonds  from its
portfolio to meet daily variation margin  requirements.  Such sales of bonds may
be, but will not  necessarily  be, at increased  prices which reflect the rising
market.  The  Registrant  may have to sell  securities  at a time when it may be
disadvantageous to do so.

         Options on Futures  Contracts.  The Registrant  intends to purchase and
write Options on Futures Contracts for hedging purposes.  The purchase of a call
option on a Futures  Contract is similar in some  respects to the  purchase of a
call option on an  individual  security.  Depending on the pricing of the option
compared to either the price of the Futures  Contract  upon which it is based or
the price of the  underlying  debt  securities,  it may or may not be less risky
than ownership of the Futures  Contract or underlying debt  securities.  As with
the purchase of Futures Contracts,  when the Registrant is not fully invested it
may purchase a call option on a Futures  Contract to hedge a market  advance due
to declining interest rates.

         The  writing  of a call  option on a  Futures  Contract  constitutes  a
partial hedge against declining prices of the security or foreign currency which
is deliverable  upon exercise of the Futures  Contract.  If the futures price at
expiration of the option is below the exercise price, the Registrant will retain
the full amount of the option premium which provides a partial hedge against any
decline  that may have  occurred in the  Registrant's  portfolio  holdings.  The
writing  of a put  option  on a Futures  Contract  constitutes  a partial  hedge
against  increasing  prices  of  the  security  or  foreign  currency  which  is
deliverable  upon  exercise of the  Futures  Contract.  If the futures  price at
expiration of the option is higher than the exercise price,  the Registrant will
retain the full  amount of the option  premium  which  provides a partial  hedge
against any increase in the price of securities which the Registrant  intends to
purchase.  If a put or call option the Registrant has written is exercised,  the
Registrant  will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio  securities and changes in the value of its futures  positions,
the  Registrant's  losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.

   
         The  Registrant  may cover  the  writing  of call  options  on  Futures
Contracts (a) through purchases of the underlying Futures Contract,  (b) through
ownership of the instrument,  or instruments  included in the index,  underlying
the Futures  Contract,  or (c) through the holding of a call on the same Futures
Contract and in the same principal amount as the call written where the exercise
price of the call  held (i) is equal to or less than the  exercise  price of the
call written or (ii) is greater  than the exercise  price of the call written if
liquid assets representing the difference are segregated by the Registrant.  The
Registrant may cover the writing of put options on Futures Contracts (a) through
sales of the  underlying  Futures  Contract,  (b) through  segregation of liquid
assets in an amount equal to the value of the security or index  underlying  the
Futures  Contracts,  or (c)  through  the  holding of a put on the same  Futures
Contract and in the same principal  amount as the put written where the exercise
price of the put held is equal to or greater than the exercise  price of the put
written or where the  exercise  price of the put held is less than the  exercise
price of the put  written  if liquid  assets  representing  the  difference  are
segregated by the Registrant. Put and call options on Futures Contracts may also
be covered in 
    

                                        -24-

such other  manner as may be in  accordance  with the rules of the  exchange  on
which they are traded and applicable laws and regulations.

         The  purchase of a put option on a Futures  Contract is similar in some
respects to the purchase of protective put options on portfolio securities.  For
example, the Registrant may purchase a put option on a Futures Contract to hedge
the Registrant's portfolio against the risk of rising interest rates.

         The amount of risk the  Registrant  assumes when it purchases an Option
on a  Futures  Contract  is  the  premium  paid  for  the  option  plus  related
transaction  costs. In addition to the correlation  risks discussed  above,  the
purchase  of an option also  entails  the risk that  changes in the value of the
underlying  Futures  Contract  will not be fully  reflected  in the value of the
option purchased.

         The  Registrant's   ability  to  engage  in  the  options  and  futures
strategies  described above will depend on the availability of liquid markets in
such  instruments.  It is impossible  to predict the amount of trading  interest
that may exist in various  types of options on futures.  Therefore  no assurance
can be given  that the  Registrant  will be able to  utilize  these  instruments
effectively  for the  purposes set forth above.  Furthermore,  the  Registrant's
ability  to engage in options  and  futures  transactions  may be limited by tax
considerations.

         Forward  Contracts on Foreign  Currency.  The Registrant may enter into
forward  foreign  currency  exchange  contracts  for the  purchase  or sale of a
specific currency at a future date at a price set at the time of the contract (a
"Forward  Contract").  The  Registrant  will enter into  Forward  Contracts  for
hedging  purposes as well as for non-hedging  purposes.  Transactions in Forward
Contracts  entered into for hedging  purposes will include forward  purchases or
sales of foreign  currencies  for the purpose of protecting  the dollar value of
securities denominated in a foreign currency or protecting the dollar equivalent
of interest or dividends to be paid on such  securities.  By entering  into such
transactions,  however, the Registrant may be required to forego the benefits of
advantageous  changes in  exchange  rates.  The  Registrant  may also enter into
transactions in Forward Contracts for other than hedging purposes.  For example,
if the  Investment  Adviser  believes  that the  value of a  particular  foreign
currency will increase or decrease relative to the value of the U.S. dollar, the
Registrant may purchase or sell such currency,  respectively,  through a Forward
Contract.  If the  expected  changes  in the value of the  currency  occur,  the
Registrant  will realize  profits which will  increase its gross  income.  Where
exchange  rates  do not  move in the  direction  or to the  extent  anticipated,
however, the Registrant may sustain losses which will reduce its gross income.

   
         The Registrant has established  procedures which require the Registrant
to segregate assets  sufficient to cover any commitments under Forward Contracts
to purchase or sell  foreign  currencies  or to limit any  potential  risk.  The
assets will be marked to market on a daily basis.  While these contracts are not
presently  regulated by the CFTC, the CFTC may in the future assert authority to
regulate Forward  Contracts.  In such event the Registrant's  ability to utilize
Forward  Contracts  in the manner  set forth  above may be  restricted.  Forward
Contracts may limit  potential gain from a positive  change in the  relationship
between  the U.S.  dollar  and  foreign  currencies.
    

                                        -25-

Unanticipated   changes  in  currency   prices  may  result  in  poorer  overall
performance for the Registrant than if it had not engaged in such transactions.

         Options on Foreign  Currencies.  The  Registrant may purchase and write
options on foreign  currencies for hedging  purposes in a manner similar to that
in which Futures  Contracts on foreign  currencies or Forward  Contracts will be
utilized.  For example,  a decline in the dollar value of a foreign  currency in
which portfolio  securities are denominated will reduce the dollar value of such
securities,  even if their value in the foreign  currency remains  constant.  In
order to protect against such diminutions in the value of portfolio  securities,
the Registrant may purchase put options on the foreign currency. If the value of
the  currency  does  decline,  the  Registrant  will have the right to sell such
currency for a fixed amount in dollars and will thereby  offset,  in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.

         Conversely,  where a rise in the dollar  value of a  currency  in which
securities to be acquired are denominated is projected,  thereby  increasing the
cost of such securities,  the Registrant may purchase call options thereon.  The
purchase of such options could offset,  at least  partially,  the effects of the
adverse  movements in exchange  rates. As in the case of other types of options,
however,  the  benefit to the  Registrant  deriving  from  purchases  of foreign
currency  options  will be  reduced  by the amount of the  premium  and  related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent  anticipated,  the Registrant could sustain losses on
transactions  in foreign  currency  options  which would  require it to forego a
portion or all of the benefits of advantageous changes in such rates.

         The  Registrant  may write options on foreign  currencies  for the same
types of hedging  purposes.  For example,  where the  Registrant  anticipates  a
decline in the dollar  value of  foreign-denominated  securities  due to adverse
fluctuations  in exchange  rates it could,  instead of  purchasing a put option,
write a call option on the relevant  currency.  If the expected  decline occurs,
the option will most likely not be  exercised,  and the  diminution  in value of
portfolio securities will be offset by the amount of the premium received.

         Similarly,  instead of  purchasing  a call  option to hedge  against an
anticipated  increase  in the dollar  cost of  securities  to be  acquired,  the
Registrant  could write a put option on the relevant  currency  which,  if rates
move in the manner projected,  will expire  unexercised and allow the Registrant
to hedge such increased cost up to the amount of the premium.  As in the case of
other types of options,  however,  the writing of a foreign currency option will
constitute  only a partial  hedge up to the amount of the  premium,  and only if
rates move in the expected direction.  If this does not occur, the option may be
exercised  and the  Registrant  would  be  required  to  purchase  or  sell  the
underlying  currency  at a loss  which may not be  offset  by the  amount of the
premium.  Through the writing of options on foreign  currencies,  the Registrant
also may be  required  to forego all or a portion of the  benefits  which  might
otherwise have been obtained from favorable movements in exchange rates.

         All call options written on foreign  currencies will be covered. A call
option  written on foreign  currencies  by the  Registrant  is  "covered" if the
Registrant owns the underlying  foreign  currency  covered by the call or has an
absolute and immediate right to acquire that foreign 

                                        -26-
   

currency  without   additional  cash   consideration  (or  for  additional  cash
consideration) segregated by the Registrant upon conversion or exchange of other
foreign  currency  held in its  portfolio.  A call option is also covered if the
Registrant  has  purchased a call on the same  foreign  currency and in the same
principal  amount as the call written where the exercise  price of the call held
is (a)  equal to or less  than the  exercise  price of the call  written  or (b)
greater  than  the  exercise   price  of  the  call  written  if  liquid  assets
representing  the  difference is segregated by the  Registrant.  A put option on
foreign  currencies  written by the  Registrant  is "covered" if the  Registrant
segregated  liquid  assets  in an  amount  equal  to the  exercise  price or has
purchased a put on the same foreign currency and in the same principal amount as
the call  written  where the  exercise  price of the put held is (a) equal to or
greater than the exercise price of the put written or (b) less than the exercise
price of the put  written  if  liquid  assets  representing  the  difference  is
segregated by the  Registrant.  Call and put options on foreign  currencies  may
also  be  covered  in  any  other  manner  as  may  be in  accordance  with  the
requirements of the exchange on which, or the counterparty  with which, they are
traded and applicable rules and regulations.
    

         Call and put options and Options on Futures Contracts may be covered in
any other manner as may be in accordance  with the  requirements of the exchange
on which, or the counterparty  with which,  they are traded and applicable rules
and regulations.

         Additional Risks of Options on U.S. and Foreign Government  Securities,
Futures Contracts,  Options on Futures Contracts,  Forward Contracts and Options
on Foreign  Currencies.  Unlike  transactions  entered into by the Registrant in
Futures  Contracts,  options on foreign currencies and Forward Contracts are not
traded on  contract  markets  regulated  by the CFTC or (with the  exception  of
certain foreign currency options) by the SEC. To the contrary,  such instruments
are traded through  financial  institutions  acting as  market-makers,  although
foreign  currency  options  are  also  traded  on  certain  national  securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange,  subject to SEC  regulation.  Similarly,  options on securities may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections  afforded  to  exchange  participants  will  not be  available.  For
example,  there  are no daily  price  fluctuation  limits,  and  adverse  market
movements could therefore continue to an unlimited extent over a period of time.
Although  the  purchaser  of an option  cannot  lose more than the amount of the
premium  plus  related  transaction  costs,  this entire  amount  could be lost.
Moreover,  the option writer and trader of Forward  Contracts could lose amounts
substantially  in excess of their  initial  investments,  due to the  margin and
collateral requirements associated with such positions.

   
         In order to  assure  that the  Registrant  will not be  deemed  to be a
"commodity pool" for purposes of the Commodity Exchange Act,  regulations of the
CFTC require that the Registrant enter into  transactions in Futures  Contracts,
Options on  Futures  Contracts  and  Options  on  Foreign  Currencies  traded on
CFTC-regulated  exchanges only (i) for bona fide hedging purposes (as defined in
CFTC regulations),  or (ii) for non-bonafide hedging purposes, provided that the
aggregate  initial  margin and premiums to establish  such non-bona fide hedging
positions  does not  exceed  5% of the  liquidation  value  of the  Registrant's
assets,  after taking into account  unrealized  profits and unrealized losses on
any such contract the Registrant  has entered into, and 
    

                                        -27-
   

excluding,  in  computing  such 5%, the  in-the-money  amount with respect to an
option that is in-the-money at the time of purchase.

         The  staff  of  the  SEC  has  taken  the   position   that   purchased
over-the-counter  options  and  assets  used to cover  written  over-the-counter
options are illiquid;  therefore,  together with other illiquid securities, such
options  and assets  cannot  exceed  10% of the  Registrant's  assets  under its
investment  restrictions.  Although the Investment  Adviser  disagrees with this
position,  the investment  Adviser intends to limit the Registrant's  writing of
over-the-counter  options in accordance with the following procedure.  Except as
provided below, the Registrant  intends to write  over-the-counter  options only
with  primary  U.S.  Government  Securities  dealers  recognized  by the Federal
Reserve Bank of New York.  Also, the contracts which the Registrant has in place
with primary  dealers will provide that the Registrant has the absolute right to
repurchase an option it writes at any time at a price which  represents the fair
market  value,  as  determined  in good faith  through  negotiation  between the
parties,  but which in no event will  exceed a price  determined  pursuant  to a
formula  in the  contract.  Although  the  specific  formula  may  vary  between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium  received  by the  Registrant  for writing the option,
plus the amount, if any, of the option's  intrinsic value (i.e., the amount that
the option is  in-the-money).  The formula may also  include a factor to account
for the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money.  The Registrant will treat all
or a part of the formula  price as illiquid for purposes of the SEC  illiquidity
ceiling. The Registrant may also write over-the-counter options with non-primary
dealers,  including  foreign  dealers,  and will treat the assets  used to cover
these options as illiquid for purposes of such SEC illiquidity ceiling.
    

         Options  on foreign  currencies  traded on an  Exchange  are within the
jurisdiction of the SEC, as are other securities traded on such Exchanges.  As a
result, many of the protections  provided to traders on organized exchanges will
be  available  with respect to such  transactions.  In  particular,  all foreign
currency option positions entered into on an Exchange are cleared and guaranteed
by the  Options  Clearing  Corporation  ("OCC"),  thereby  reducing  the risk of
counterparty default.  Further, a liquid secondary market in options traded on a
national  securities  exchange  may  be  more  readily  available  than  in  the
over-the-counter market, potentially permitting the Registrant to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.

         The  purchase and sale of  exchange-traded  foreign  currency  options,
however,  is  subject  to the risks of the  availability  of a liquid  secondary
market described above, as well as the risks regarding adverse market movements,
margining  of  options  written,  the  nature of the  foreign  currency  market,
possible  intervention  by  governmental  authorities  and the  effects of other
political  economic  events.  In  addition,  exchange-traded  options on foreign
currencies  involve certain risks not presented by the over-the  counter market.
For example,  exercise and  settlement of such options must be made  exclusively
through the OCC,  which has  established  banking  relationships  in  applicable
foreign countries for this purpose.  As a result,  the OCC may, if it determines
that  foreign  governmental  restrictions  or taxes  would  prevent  the orderly
settlement  of  foreign  currency  option  exercises,  or would  result in undue
burdens on the OCC or its clearing 

                                        -28-

member, impose special procedures on exercise and settlement,  such as technical
changes  in the  mechanics  of  delivery  of  currency,  or the fixing of dollar
settlement prices or prohibitions on exercise.

         In addition, options on U.S. and Foreign Government Securities, Futures
Contracts,  Options on  Futures  Contracts,  Forward  Contracts  and  options on
foreign  currencies may be traded on foreign  exchanges.  Such  transactions are
subject to the risk of governmental  actions  affecting trading in or the prices
of foreign  currencies or securities.  The value of such positions also could be
adversely  affected by (i) other complex foreign political and economic factors,
(ii)  lesser  availability  than in the  United  States of data on which to make
trading decisions, (iii) delays in the Registrant's ability to act upon economic
events  occurring in foreign  markets  during  non-business  hours in the United
States,  (iv) the  imposition  of different  exercise and  settlement  terms and
procedures and margin  requirements  than in the Untied  States,  and (v) lesser
trading volume.

         Future  Developments.  The  Registrant  proposes to take  advantage  of
opportunities  in the area of  options  and  Futures  Contracts  and  Options on
Futures Contracts which are not presently contemplated for use by the Registrant
or which are not currently  available but which may be developed,  to the extent
such  opportunities  are  both  consistent  with  the  Registrant's   investment
objective and legally  permissible for the Registrant.  Such  opportunities,  if
they arise,  may involve  risks which exceed  those  involved in the options and
futures activities described above.

                              PORTFOLIO MANAGEMENT

         The  Registrant's   portfolio  management  may  include  the  following
strategies:

         (1) changing  from  one U.S.  Government  Security  to an  essentially
similar U.S.  Government Security when their respective yields are distorted due
to market factors;

         (2) changing  from U.S.  Government  Securities  to Foreign  Government
Securities or from Foreign Government  Securities to U.S. Government  Securities
when disparities arise in their relative yields;

         (3) selling one kind of U.S. Government Security (e.g., Treasury bonds)
and  buying  another  (e.g.,  GNMA  direct   pass-through   certificates)   when
disparities arise in the relative values of each;

         (4) shortening the average maturity of its portfolio in anticipation of
a rise in interest rates so as to minimize depreciation of principal; and

         (5) lengthening  the average  maturity of its portfolio in anticipation
of a decline in interest rates so as to maximize appreciation of principal.

         The  Registrant  may  also  use  the  techniques   described  above  in
"Investment Practices" to manage its portfolio.

                                        -29-

         While  these  strategies  are  designed to  increase  the  Registrant's
current  income  available  for  distribution  to  its   shareholders,   if  the
Registrant's  expectations of changes in interest rates or its evaluation of the
normal yield  relationship  between two securities or  obligations  proves to be
incorrect, the Registrant's income and net asset value may be reduced.

                             SPECIAL CONSIDERATIONS

         The value of shares of the Registrant  will vary as the aggregate value
of the Registrant's  portfolio securities increases or decreases.  The net asset
value of the  Registrant  may change as the  general  levels of  interest  rates
fluctuate.  When interest  rates decline,  the value of a portfolio  invested at
higher yields can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested at lower yields can be expected to decline. If the
Registrant's  expectations of changes in interest rates or its evaluation of the
normal yield  relationship  between two securities  proves to be incorrect,  the
Registrant's income, net asset value and potential capital gain may be decreased
or its potential capital loss may be increased.

         Although changes in the value of the Registrant's  portfolio securities
subsequent to their  acquisition  are reflected in the net asset value of shares
of the  Registrant,  such  changes  will not affect the income  received  by the
Registrant  from such  securities.  The dividends  paid by the  Registrant  will
increase or decrease in relation to the income  received by the Registrant  from
its investments,  which will in any case be reduced by the Registrant's expenses
before being distributed to the Registrant's shareholders.

         The  Registrant's  use  of  options,  Futures  Contracts,   Options  on
Futures  Contracts,  Forward  Contracts  and options on foreign  currencies  may
result in the loss of principal  under certain market  conditions.  See "Options
and Futures" above.

         Investing in Foreign Government Securities involves  considerations and
possible  risks not  typically  associated  with  investing  in U.S.  Government
Securities.  The value of  Foreign  Government  Securities  investments  will be
affected  by  changes  in  currency  rates  or  exchange  control   regulations,
application  of  foreign  tax laws,  including  withholding  taxes,  changes  in
governmental  administration  or economic or monetary policy (in this country or
abroad) or changed  circumstances  in  dealings  between  nations.  Costs may be
incurred in connection  with  conversions  between various  currencies.  Foreign
brokerage  commissions  are  generally  higher  than in the United  States,  and
foreign securities markets may be less liquid, more volatile and less subject to
governmental  supervision  than in the  United  States.  Investments  in foreign
countries  could be affected by other factors not present in the United  States,
including  expropriation,  confiscatory  taxation and potential  difficulties in
enforcing  contractual  obligations and could be subject to extended  settlement
periods.

   
         The risks of investing in foreign  securities may be intensified in the
case of investments in emerging markets.  Securities of many issuers in emerging
markets may be less  liquid and more  volatile  than  securities  of  comparable
domestic issuers.  Emerging markets also have different clearance and settlement
procedures,  and in certain markets there have been times when  
    

                                        -30-
   

settlements  have  been  unable  to keep  pace  with the  volume  of  securities
transactions,  making it  difficult  to  conduct  such  transactions.  Delays in
settlement could result in temporary periods when a portion of the assets of the
Registrant is uninvested and no return is earned  thereon.  The inability of the
Registrant to make intended security purchases due to settlement  problems could
cause the Registrant to miss attractive investment  opportunities.  Inability to
dispose of  portfolio  securities  due to  settlement  problems  could result in
losses to the  Registrant  due to subsequent  declines in value of the portfolio
security,  a decrease in the level of liquidity in the  Registrant's  portfolio,
or, if the  Registrant  has  entered  into a contract to sell the  security,  in
possible  liability to the purchaser.  Certain  markets may require  payment for
securities  before  delivery,  and in such markets the Registrants bear the risk
that the  securities  will not be delivered and that the  Registrant's  payments
will not be returned. Securities prices in emerging markets can be significantly
more volatile than in the more  developed  nations of the world,  reflecting the
greater uncertainties of investing in less established markets and economies. In
particular,  countries  with  emerging  markets  may  have  relatively  unstable
governments, present the risk of nationalization of businesses,  restrictions on
foreign ownership,  or prohibitions of repatriation of assets, and may have less
protection of property  rights than more developed  countries.  The economies of
countries  of  emerging  markets  may  be  predominantly  based  on  only  a few
industries,  may be  highly  vulnerable  to  changes  in local or  global  trade
conditions  and may suffer from extreme and  volatile  debt burdens or inflation
rates.  Local securities  markets may trade a small number of securities and may
be unable to respond  effectively  to  increases in trading  volume  potentially
making prompt  liquidation  of substantial  holdings  difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited  marketability  and may be  subject  to more  abrupt  or  erratic  price
movements.

         Certain  emerging  markets may require  governmental  approval  for the
repatriation of investment income, capital or the proceeds of sale of securities
of foreign  investors.  In addition,  if a  deterioration  occurs in an emerging
market's  balance  of  payments  or for other  reasons a  country  could  impose
temporary  restrictions on foreign capital remittances.  The Registrant could be
adversely   affected  by  delays  in,  or  a  refusal  to  grant,  any  required
governmental approval for repatriation of capital, as well as by the application
to the Registrant of any restrictions on investments.

         Investment in certain foreign  emerging market debt  obligations may be
restricted or controlled to varying degrees.  These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of the Registrant.

         The  lower-rated  high  yielding  fixed income  securities in which the
Registrant may invest  generally tend to reflect  economic  changes,  short-term
corporate  and  industry  developments  to a greater  extent than  higher  rated
securities,  which react  primarily  to  fluctuations  in the  general  level of
interest rates  (although  these  lower-rated  fixed income  securities are also
affected by changes in interest rates,  the market's  perception of their credit
quality,  and the outlook for economic growth).  In the past, economic downturns
or an increase in interest  rates have,  under certain  circumstances,  caused a
higher  incidence of default by the issuers of these securities and may do so in
the future,  especially in the case of highly leveraged issuers.  During certain
periods,  the higher yields on the Registrant's  lower-rated high yielding fixed
income  securities
    

                                        -31-
   

are paid  primarily  because  of the  increased  risk of loss of  principal  and
income,  arising from such factors as the  heightened  possibility of default or
bankruptcy of the issuers of such  securities.  Due to the fixed income payments
of these  securities,  the  Registrant  may  continue  to earn the same level of
interest  income while its net asset value  declines  due to  portfolio  losses,
which could result in an increase in the  Registrant's  yield despite the actual
loss of principal.  The market for these lower-rated fixed income securities may
be less liquid than the market for investment grade fixed income securities, and
judgment may at time play a greater role in valuing these securities than in the
case of  investment  grade  fixed  income  securities.  Changes  in the value of
securities  subsequent to their acquisition will not affect cash income or yield
to the  Registrant but will be reflected in the net asset value of shares of the
Registrant.

         While the Adviser  may refer to ratings  issued by  established  credit
rating  agencies,  it is not the  Registrant's  policy  to rely  exclusively  on
ratings issued by these rating  agencies,  but rather to supplement such ratings
with the Adviser's own  independent  and ongoing review of credit  quality.  The
Registrant's  achievement of its  investment  objective may be more dependent on
the  Adviser's own credit  analysis  than in the case of an  investment  company
primarily investing in higher quality fixed income securities. For a description
of these and other rating categories, see "Description of Bond Ratings" below.
    

         The Registrant has registered as a "non-diversified" investment company
so that it will be able to invest more than 5% of its assets in the  obligations
of  one  or  more  issuers,  subject  to  the  diversification  requirements  of
Subchapter M of the Code  (hereinafter  defined)  applicable to the  Registrant.
Since the  Registrant may invest a relatively  high  percentage of its assets in
the  obligations  of a limited  number of issuers,  the  Registrant  may be more
susceptible to any single economic, political or regulatory occurrence.

         For these reasons, an investment in shares of the Registrant should not
constitute  a  complete  investment  program  and  may  not be  appropriate  for
investors who cannot assume the greater risk of capital depreciation inherent in
seeking higher income.

                                 INVESTMENT RESTRICTIONS

   
         The  Registrant  has adopted the  following  policies  which  cannot be
changed  without the approval of the holders of a majority of its shares  (which
means  the  lesser  of  (i)  more  than  50% of the  outstanding  shares  of the
Registrant,  or (ii) 67% or more of the  outstanding  shares  of the  Registrant
present at a meeting at which holders of more than 50% of its outstanding shares
are  represented  in person or by proxy).  Except with respect to borrowings and
investing in illiquid  securities,  all percentage  limitations  set forth below
apply  immediately  after a purchase or initial  investment  and any  subsequent
change in any applicable  percentage resulting from market fluctuations does not
require elimination of any security from the portfolio.  The Registrant may not:
    

                  (1)  borrow   money,   except  as  a  temporary   measure  for
         extraordinary  or emergency  purposes or for a repurchase of its shares
         and in no event in excess of 33 1/3% of its assets;

                                        -32-

                  (2)  purchase any security or evidence of interest  therein on
         margin, except that the Registrant may obtain such short-term credit as
         may be necessary for the clearance of purchases and sales of securities
         and  except  that  the  Registrant  may  make  deposits  on  margin  in
         connection with Futures Contracts and options;

                  (3)  underwrite  securities  issued  by other  persons  except
         insofar as the  Registrant  may  technically  be deemed an  underwriter
         under the Securities Act of 1933 in selling a portfolio security;

                  (4)  invest in illiquid investments, including securities 
         which are subject to legal or contractual restrictions on resale or for
         which there is no readily available market (e.g.,  trading in the 
         security is suspended or, in the case of unlisted securities,  market 
         makers do not exist or will not  entertain  bids or offers),  if more 
         than 10% of the Registrant's  assets  (taken at market value) would be 
         invested in such securities;

                  (5)  purchase   or  sell  real  estate   (including   limited
         partnership  interests but excluding  securities secured by real estate
         or  interests  therein),  interests  in  oil,  gas or  mineral  leases,
         commodities  or  commodity  contracts  (except   currencies,   currency
         futures,  Forward Contracts or contracts for the future  acquisition or
         delivery  of  fixed  income  securities  and  related  options)  in the
         ordinary  course of the  business  of the  Registrant  (the  Registrant
         reserves the freedom of action to hold and to sell real estate acquired
         as a result of the ownership of securities);

                  (6)  purchase securities of any issuer if such purchase at the
         time thereof would cause more than 10% of the voting securities of such
         issuer to be held by the Registrant;

                  (7)  issue any senior security (as that term is defined in the
         1940 Act), if such issuance is specifically  prohibited by the 1940 Act
         or the rules and regulations promulgated thereunder (for the purpose of
         this  restriction,  collateral  arrangements  with  respect to options,
         Futures  Contracts  and  Options on Futures  Contracts  and  collateral
         arrangements  with  respect to  initial  and  variation  margin are not
         deemed to be the issuance of a senior security);

                  (8)  make loans to other persons except through the lending of
         its  portfolio  securities  not in excess  of 30% of its  total  assets
         (taken  at market  value)  and  except  through  the use of  repurchase
         agreements,  the purchase of commercial paper or the purchase of all or
         a  portion  of an  issue  of debt  securities  in  accordance  with its
         investment objective, policies and restrictions; or

                  (9)  make  short  sales  of  securities  or  maintain  a short
         position,  unless at all times when a short position is open it owns an
         equal  amount of such  securities  or  securities  convertible  into or
         exchangeable  for,  without  payment  of  any  further   consideration,
         securities of the same issue as, and equal in amount to, the securities
         sold short ("short  sales  against the box"),  and unless not more than
         10% of the  Registrant's

                                        -33-

         net assets (taken at market value) is held as collateral for such sales
         at any one  time  (it is the  Registrant's present  intention to make 
         such sales only for the purpose of deferring realization of gain or 
         loss for Federal income tax purposes; such sales would not be made of 
         securities subject to outstanding options).

   
         Except for investment  restriction number (1) and (4), the Registrant's
investment limitations, policies and rating standards are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances  will
not be considered to result in a violation of policy.
    

               DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
                 U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES

   
         Federal Farm Credit  Banks  Consolidated  Systemwide  Notes and Bonds -
are bonds issued and guaranteed by a cooperatively  owned  nationwide  system of
banks  and  associations  supervised  by  the  Farm  Credit  Administration,  an
independent  agency of the U.S.  Government.  These bonds are not  guaranteed by
the U.S. Government.

         Maritime  Administration  Bonds - are bonds issued by the Department of
Transportation of the U.S. Government and are guaranteed by the United States.

         FHA debentures- are bonds issued by the Federal Housing  Administration
of the U.S. Government and are guaranteed by the United States.
    

         GNMA Certificates - are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government,  which represent
partial  ownership  interests in a pool of mortgage loans issued by lenders such
as mortgage bankers,  commercial banks and savings and loan  associations.  Each
mortgage  loan included in the pool is also insured or guaranteed by the Federal
Housing  Administration,   the  Veterans  Administration  or  the  Farmers  Home
Administration.

         FHLMC  Bonds - are bonds  issued and  guaranteed  by the  Federal  Home
Loan Mortgage Corporation and are not guaranteed by the U.S. Government.

         FNMA Bonds - are bonds issued and  guaranteed  by the Federal  National
Mortgage Association and are not guaranteed by the U.S. Government.

         Federal  Home Loan Bank Notes and Bonds - are notes and bonds issued by
the Federal Home Loan Bank System, and are not guaranteed by the U.S.
Government.

         Although this list includes a description  of the primary types of U.S.
Government agency or instrumentality obligations in which the Registrant intends
to invest, the Registrant may invest in obligations of U.S.  Government agencies
or instrumentalities other than those listed above.


                                        -34-


   

                           DESCRIPTION OF BOND RATINGS


         The ratings of Moody's,  S&P and Fitch  represent  their opinions as to
the quality of various bonds. It should be emphasized, however, that ratings are
not absolute standards of quality.  Consequently,  bonds with the same maturity,
coupon and rating may have different yields while bonds of the same maturity and
coupon with different ratings may have the same yield.


                         MOODY'S INVESTORS SERVICE, INC.

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

         Aa:  Bonds  which are rated Aa are judged to be of high  quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds.  They are rated lower than the best bonds  because  margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements  may be of greater  amplitude  or there may be other  elements  present
which make the long-term risks appear somewhat larger than in Aaa securities.

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

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

         Ba: Bonds which are rated Ba are judged to have  speculative  elements;
their future  cannot be  considered  as  well-assured.  Often the  protection of
interest  and  principal  payments  may be very  moderate  and  thereby not well
safeguarded  during  both good and bad times  over the  future.  Uncertainty  of
position characterizes bonds in this class.

         B:  Bonds  which  are rated B  generally  lack  characteristics  of the
desirable  investment.  Assurance  of  interest  and  principal  payments  or of
maintenance  of other terms of the contract  over any long period of time may be
small.
    

                                        -35-
   

         Caa:  Bonds  which  are  rated Caa are of poor  standing.  Such  issues
may be in default or there may be present  elements  of danger  with  respect to
principal or interest.

         Ca:  Bonds  which  are  rated  Ca  represent   obligations   which  are
speculative  in a high  degree.  Such  issues are often in default or have other
marked shortcomings.

         C: Bonds  which are rated C are the lowest  rated  class of bonds,  and
issues so rated can be  regarded  as having  extremely  poor  prospects  of ever
attaining any real investment standing.

                   STANDARD & POOR'S RATINGS SERVICES, INC.*

                             Long-Term Issue Credit Ratings

         Issue credit ratings are based,  in varying  degrees,  on the following
considerations:
         1.  Likelihood of  payment-capacity  and  willingness of the obligor to
meet its financial  commitment on an obligation in accordance  with the terms of
the obligation;
         2.  Nature of and provisions of the obligation;
         3. Protection  afforded by, and relative position of, the obligation in
the event of bankruptcy,  reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.

         The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior  obligations of an entity.  Junior  obligations are
typically rated lower than senior obligations,  to reflect the lower priority in
bankruptcy,  as noted above.  (Such  differentiation  applies when an entity has
both senior and subordinated obligations,  secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly,  in the case of
junior debt, the rating may not conform exactly with the category definition.

         AAA: An obligation  rated AAA has the highest  rating  assigned by S&P.
 The obligor's  capacity to meet its financial  commitment on the  obligation is
EXTREMELY STRONG.

         AA: An  obligation  rated AA differs from the highest rated issues only
in small degree.  The obligator's  capacity to meet its financial  commitment on
the obligation is VERY STRONG.

         A: An obligation  rated A is somewhat more  susceptible  to the adverse
effects of changes in circumstances and economic  conditions than obligations in
higher-rated  categories.  However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.

         BBB: An obligation rated BBB exhibits ADEQUATE  protection  parameters.
However,  adverse economic conditions or changing  circumstances are more likely
to lead to a weakened  capacity of the obligor to meet its financial  commitment
on the obligation.

- -----------------------
*Rates all  governmental  bodies  having  $1,000,000  or more debt  outstanding,
unless adequate information is not available.
    



                                        -36-



   
         Obligations  rated BB, B, CCC and C are regarded as having  significant
speculative characteristics.  BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics,  these  may be  outweighed  by  large  uncertainties  or  major
exposures to adverse conditions.

         BB: An obligation  rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse  business,  financial,  or economic  conditions  which could lead to the
obligor's   inadequate  capacity  to  meet  its  financial   commitment  on  the
obligation.

         B:  An  obligation  rated  B is  MORE  VULNERABLE  to  nonpayment  than
obligations  rated BB, but the obligor  currently  has the  capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's  capacity or willingness to meet its
financial commitment on the obligation.

         CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its  financial  commitment  on the  obligation.  In the event of
adverse business,  financial, or economic conditions,  the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
         CC:  An  obligation  rated  CC  is  CURRENTLY   HIGHLY   VULNERABLE  to
nonpayment.

         C: The C rating  may be used to cover a  situation  where a  bankruptcy
petition has been filed or similar  action has been taken,  but payments on this
obligation are being continued.

         D: An obligation rated D is in payment  default.  The D rating
category  is used when  payments on an  obligation  are not made on the date due
even if the  applicable  grace period has not expired,  unless S&P believes that
such payments  will be made during such grace period.  The D rating also will be
used upon the filing of a bankruptcy  petition or the taking of a similar action
payments are on obligations jeopardized.

         Plus (+) or Minus (-):  The  ratings  from AA to CCC may be modified by
the addition of a plus or minus sign to show relative  standing within the major
rating categories.

         r:  This  symbol  is  attached  to  the  ratings  of  instruments  with
significant  noncredit  risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations  linked  or  indexed  to  equities,   currencies,   or  commodities;
obligations   exposed  to  severe  prepayment   risk-such  as  interest-only  or
principal-only  mortgage  securities;   and  obligations  with  unusually  risky
interest terms, such as inverse floaters.
    



                                        -37-

   
                                FITCH IBCA, INC.

                     International Long-Term Credit Ratings

         AAA:
         Highest credit  quality.  AAA ratings denote the lowest  expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments.  This capacity is highly unlikely to be
adversely affected by foreseeable events.

         AA:
         Very high credit  quality.  AA ratings denote a very low expectation of
credit risk.  They indicate very strong capacity for timely payment of financial
commitments.  This  capacity  is not  significantly  vulnerable  to  foreseeable
events.

         A:
         High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial  commitments is considered  strong.
This capacity may, nevertheless,  be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.

         BBB:
         Good credit quality. BBB ratings indicate that there is currently a low
expectation  of credit  risk.  The  capacity  for timely  payment  of  financial
commitments is considered adequate,  but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.  This is the lowest
investment-grade category.

         BB:
         Speculative.  BB rating  indicate that there is a possibility of credit
risk  developing,  particularly  as the result of adverse  economic  change over
time;  however,  business or  financial  alternatives  may be available to allow
financial  commitments  to be met.  Securities  rated in this  category  are not
investment grade.

         B:
         Highly speculative.  B ratings indicate that significant credit risk is
present,  but a limited  margin of safety  remains.  Financial  commitments  are
currently being met; however,  capacity for continued payment is contingent upon
sustained, favorable business and economic environment.

         CCC, CC, C:
         High default risk. Default is a real possibility.  Capacity for meeting
financial  commitments is solely reliant upon sustained,  favorable  business or
economic  developments.  A CC rating indicates that default of some kind appears
probably. C ratings signal imminent default.
    



                                        -38-
   
         DDD, DD and D:
         Default.  Securities  are  not  meeting  current  obligations  and  are
extremely  speculative.  DDD  designates  the highest  potential for recovery of
amounts  outstanding  on any  securities  involved.  For  U.S.  corporates,  for
example,  DD indicates expected recovery of 50%-90% of such outstandings,  and D
the lowest recovery potential, i.e., below 50%.


                             DUFF & PHELPS CREDIT RATING CO.


                      Long-Term Debt & Preferred Stock Rating Scale


         AAA:  Highest credit quality.  The risk factors are  negligible,  being
only slightly more than for risk-free U.S. Treasury debt.

         AA+,AA,AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.

         A+,A,A-:  Protection  factors are average but adequate.  However,  risk
factors are more variable and greater in periods of economic stress.

         BBB+,BBB,  BBB-:  Below-average protection factors but still considered
sufficient  for  prudent  investment.  Considerable  variability  in risk during
economic cycles.

         BB+,BB,BB-:   Below   investment   grade  but  deemed  likely  to  meet
obligations  when due.  Present  or  prospective  financial  protection  factors
fluctuate according to industry conditions or company fortunes.  Overall quality
may move up or down frequently with this category.

         CCC: Well below investment-grade  securities.  Considerable uncertainty
exists as to timely  payment of  principal,  interest  or  preferred  dividends.
Protection  factors  are narrow  and risk can be  substantial  with  unfavorable
economic/industry conditions, and/or with unfavorable company developments.

         DD:  Defaulted  debt  obligations.  Issuers  failed  to meet  scheduled
principal and/or interest payments.

         DP:  Preferred stock with dividend arrearages.

         8.5.     Share Price Data:  Inapplicable.

         8.6      Business Development Companies.  Inapplicable.
    



                                        -39-

Item 9. Management:

         9.1.a.  General - Board of  Trustees:  Management  of the  Registrant's
business  and  affairs is the  responsibility  of the Board of  Trustees  of the
Registrant.

   
         9.1.b.  General  -  Investment   Advisers:   MFS  is  the  Registrant's
Investment  Adviser.  MFS and its  predecessor  organizations  have a history of
money management  dating from 1924, thus making MFS America's oldest mutual fund
organization.  MFS is a  subsidiary  of Sun Life  off  Canada  (U.S.)  Financial
Services  Holding,  Inc.  ("Sun  Life of  Canada  (U.S.)")  which  in turn is an
indirect wholly owned  subsidiary of Sun Life Assurance  Company of Canada ("Sun
Life").  Sun  Life,  a mutual  life  insurance  company,  is one of the  largest
international  life  insurance  companies  and has been  operating in the United
States since 1895.  The executive  officers of MFS report to the Chairman of Sun
Life.  The principal  business  address of MFS is 500 Boylston  Street,  Boston,
Massachusetts 02116.

         MFS also serves as investment  adviser to each of the Trusts in the MFS
Family of Funds (the "MFS Funds"),  MFS Municipal Income Trust, MFS Intermediate
Income Trust,  MFS  Multimarket  Income  Trust,  MFS Charter  Income Trust,  MFS
Special Value Trust,  MFS  Institutional  Trust,  MFS Variable  Insurance Trust,
MFS/Sun  Life  Series  Trust and  seven  variable  accounts,  each of which is a
registered  investment  company  established  by Sun Life  Assurance  Company of
Canada (U.S.),  a subsidiary of Sun Life in connection  with the sale of various
fixed/variable  annuity  contracts.  MFS and its  wholly-owned  subsidiary,  MFS
Institutional  Advisors,  Inc., provide investment advice to substantial private
clients.   Net  assets  under  the  management  of  the  MFS  organization  were
approximately  $77.6 billion on behalf of approximately 2.9 million investors as
of  February  28,  1998.  As  of  such  date,  the  MFS   organization   managed
approximately $20.4 billion of securities in fixed income portfolios,  including
approximately $6.6 billion in U.S.  Government  Securities and approximately $40
billion in  securities  of  foreign  issuers  and  non-U.S.  dollar  denominated
securities of U.S. issuers.  The Directors of MFS are Jeffrey L. Shames,  Arnold
D. Scott,  John W. Ballen,  John D. McNeil and Donald A. Stewart.  Mr. Shames is
the Chairman and  President,  Mr. Ballen is the Executive Vice President and Mr.
Scott is the Secretary and a Senior  Executive  Vice  President of MFS.  Messrs.
McNeil and Stewart are the Chairman and  President,  respectively,  of Sun Life.
Sun Life, a mutual life insurance company,  is one of the largest  international
life insurance companies and has been operating in the United States since 1895,
establishing a headquarters  office here in 1973. The executive  officers of MFS
report to the Chairman of Sun Life.


                          INVESTMENT ADVISORY AGREEMENT

         General.   The  Investment  Advisory  Agreement  between  MFS  and  the
Registrant (the "Advisory Agreement") provides that, subject to the direction of
the Board of  Trustees  of the  Registrant,  MFS is  responsible  for the actual
management  of  the  Registrant's  portfolio.   The  responsibility  for  making
decisions to buy, sell or hold a particular  security  rests with the Investment
Adviser, subject to review by the Board of Trustees.
    

                                        -40-

         The Investment Adviser is not dependent on any other party in providing
the investment  advisory  services required in the management of the Registrant.
The Investment  Adviser may,  however,  consider  analyses from various sources,
including broker-dealers with which the Registrant does business.

   
         The  Investment  Adviser  pays  the  compensation  of the  Registrant's
officers and of the Trustees who are affiliated with the Investment Adviser. The
Investment   Adviser  also  provides  certain  financial,   legal,   compliance,
shareholder  communications  and other  administrative  services  pursuant  to a
Master Administrative Services Agreement, dated March 1, 1997, as amended.
    

         The Advisory Agreement also provides that neither MFS nor its personnel
shall be liable  for any error of  judgment  or  mistake  of law or for any loss
arising out of any  investment  or for any act or omission in the  execution and
management of the Registrant, except for willful misfeasance, bad faith or gross
negligence  in the  performance  of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.

   
         Advisory  Fee.  For the  services  provided  by MFS under the  Advisory
Agreement, the Registrant pays MFS an annual fee computed and paid monthly in an
amount  equal  to the  sum of  .32%  of the  average  daily  net  assets  of the
Registrant  and 5.33% of the daily gross income  (i.e.,  income other than gains
from the sale of securities or gains received from options and Futures Contracts
of the Registrant for the Registrant's  then-current fiscal year). This advisory
fee is greater than that paid by most funds.
    

         Payment of Expenses.  MFS has voluntarily agreed to reduce its right to
the fee set forth in the  Advisory  Agreement to a maximum of 0.85% in the event
that such fees exceed 0.85% of the average  daily net assets of the  Registrant,
on an annual basis for the then-current fiscal year. This temporary advisory fee
reduction may be rescinded at any time.

   
         The  Registrant  pays  the  compensation  of the  Trustees  who are not
officers of MFS and all the Registrant's expenses,  including governmental fees,
interest  charges,  taxes,  membership dues in the Investment  Company Institute
allocable to the Registrant, fees and expenses of independent auditors, of legal
counsel,  and of any transfer agent,  registrar or dividend  disbursing agent of
the Registrant, expenses of repurchasing shares, expenses of preparing, printing
and mailing share certificates,  shareholder reports,  notices, proxy statements
and  reports to  governmental  officers  and  commissions;  brokerage  and other
expenses  connected  with the  execution,  recording and settlement of portfolio
security transactions; insurance premiums, fees and expenses of the Registrant's
Custodian for all services to the Registrant, including safekeeping of funds and
securities and maintaining required books and accounts;  expenses of calculating
the  net  asset  value  of the  Registrant's  shares,  expenses  of  shareholder
meetings,  expenses  in  connection  with  the  Dividend  Reinvestment  and Cash
Purchase Plan and SEC registration fees.
    

         Use of Name.  The  Advisory  Agreement  provides  that if MFS ceases to
serve as the Investment  Adviser to the  Registrant,  the Registrant will change
its name so as to delete the 

                                        -41-

initials  "MFS" and that MFS may render  services  to others and may permit fund
clients in addition to the Registrant to use the initials "MFS" in their names.

   
         The Advisory  Agreement will remain in effect until August 1, 1998, and
will continue in effect  thereafter  only if such  continuance  is  specifically
approved at least  annually by the Board of Trustees or by vote of a majority of
the  Registrant's  outstanding  voting  securities  and,  in either  case,  by a
majority  of the  Trustees  who are not  parties to the  Advisory  Agreement  or
interested  persons  of  any  such  party.  The  Advisory  Agreement  terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Registrant's  outstanding voting securities or by either party
on not more than 60 days' nor less than 30 days' written notice.

         9.1.c.  General -  Portfolio  Management:  Steven E.  Nothern and Steve
Bryant are portfolio  managers of the  Registrant.  Mr.  Nothern,  a Senior Vice
President  of MFS,  joined  MFS in 1986.  He became a  portfolio  manager of the
Registrant  in 1992.  Mr.  Bryant,  a Senior  Vice  President  of MFS,  became a
portfolio  manager at MFS in 1987. He a portfolio  manager of the  Registrant in
1992.

         9.1.d.  General -  Administrators:  MFS  provides the  Registrant  with
certain  financial,  legal,  compliance,  shareholder  communications  and other
administrative  services pursuant to a Master Administrative  Services Agreement
dated March 1, 1997, as amended.  Under this Agreement,  the Registrant pays MFS
an administrative  fee up to 0.015% per annum of the Registrant's  average daily
net  assets.  This fee  reimburses  MFS for a  portion  of the cost it incurs to
provide  such  services.  For the period  March 1, 1997  through the fiscal year
ended November 30, 1997, MFS received $59,654 under the Agreement.

         9.1.e.  Custodians:  State Street Bank and Trust Company,  225 Franklin
Street,  Boston,  Massachusetts  02110 is the custodian and dividend  disbursing
agent for the Registrant. MFS Service Center, Inc., 500 Boylston Street, Boston,
Massachusetts  02116,  a wholly  owned  subsidiary  of MFS,  is the  shareholder
servicing agent.

         9.1.f.   General:   Payment  of  Expenses.   The  Registrant  pays  the
compensation  of the  Trustees  who  are  not  affiliated  with  MFS and all the
Registrant's expenses including, but not limited to, advisory and administrative
services,  governmental fees,  interest charges,  taxes,  membership dues in the
Investment Company Institute  allocable to the Registrant,  fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,  registrar or
dividend disbursing agent of the Registrant, expenses of repurchasing shares and
servicing  shareholder  accounts,  expenses of  preparing,  printing and mailing
share certificates,  shareholder reports,  notices, proxy statements and reports
to governmental officers and commissions, brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions,
insurance  premiums,  fees and expenses of the Registrant's  Custodian,  for all
services to the  Registrant,  including  safekeeping of funds and securities and
maintaining  required books and accounts,  expenses of calculating the net asset
value of the Registrant's shares, expenses of shareholder meetings,  expenses in
connection with the Dividend Reinvestment and Cash Purchases Plan and SEC fees.
    

                                        -42-

         9.1.g. General - Affiliated Brokerage:  Inapplicable.

         9.2.   Non-resident Managers:  While the Registrant is a  Massachusetts
business  trust,  Sir J. David Gibbons,  a trustee of the  Registrant,  is not a
resident  of the  United  States,  and  substantially  all of his  assets may be
located  outside  the  United  States.  As a  result,  it may be  difficult  for
investors  to effect  service of process upon him within the United  States,  to
enforce in United  States  courts,  or to  realize  outside  the United  States,
judgments of courts in the United States predicated upon civil  liabilities,  if
any,  of his  under  the  Federal  securities  laws of the  United  States.  The
Registrant  has  been  advised  that  there  is  substantial  doubt  as  to  the
enforceability  in  Bermuda,  where he  resides,  of such civil  remedies as are
afforded by the Federal securities laws of the United States.

         9.3.   Control Persons:  Inapplicable.

Item 10. Capital Stock, Long-Term Debt, and Other Securities:

         10.1.  Capital Stock:

         a. and f. Description of Shares. The Registrant's  Declaration of Trust
permits the Trustees to issue an unlimited number of full and fractional  Shares
of Beneficial Interest, without par value. Shareholders are entitled to one vote
for each share held and to vote in the election of Trustees and on other matters
submitted to meetings of shareholders.  No material amendment may be made to the
Registrant's  Declaration of Trust without the affirmative vote of a majority of
its  shares.  Under  certain  circumstances,  shareholders  have  the  right  to
communicate  with other  shareholders  and to remove  Trustees.  Shares  have no
pre-emptive  or  conversion  rights.  Shares  when  issued  are  fully  paid and
non-assessable,  except as set forth  below  under  "Certain  Provisions  of the
Declaration of Trust."

         The Registrant's Declaration of Trust permits the Trustees to divide or
combine the shares  into a greater or lesser  number of shares  without  thereby
changing the proportionate  beneficial  interests in the Registrant.  Each share
represents an equal  proportionate  interest in the  Registrant  with each other
share. The Registrant has no present  intention of offering  additional  shares,
except that  additional  shares may be issued  under the  Registrant's  Dividend
Reinvestment  and Cash Purchase Plan.  Other  offerings of its shares,  if made,
will require  approval of the  Registrant's  Board of Trustees.  Any  additional
offering will be subject to the requirements of the 1940 Act that shares may not
be sold at a  price  below  the  then-current  net  asset  value,  exclusive  of
underwriting   discounts  and  commissions,   except,  among  other  things,  in
connection with an offering to existing  shareholders or with the consent of the
holders of a majority of the Registrant's outstanding voting securities.

         The  Registrant  may be terminated (i) upon the sale of its assets to a
diversified  open-end management  investment company, if approved by the vote of
the holders of two-thirds of its outstanding shares, except that if the Trustees
recommend  such sale of assets,  the  approval  by the vote of the  holders of a
majority of its outstanding shares will be sufficient,  or (ii) upon 

                                        -43-

liquidation  and  distribution  of its  assets,  if  approved by the vote of the
holders of two-thirds  of its  outstanding  shares,  or (iii) by the Trustees by
written  notice to the  Registrant's  shareholders.  If not so  terminated,  the
Registrant will continue indefinitely.  Upon liquidation of the Registrant,  the
Registrant's shareholders are entitled to share pro rata in the Registrant's net
assets available for distribution to its shareholders.

   
         Repurchase  of  Shares.  The  Registrant  is  a  closed-end  management
investment  company and as such its  shareholders do not, and will not, have the
right to redeem their shares of the  Registrant.  The Registrant,  however,  may
repurchase  its shares from time to time in the open market or  otherwise as and
when it is deemed advisable by the Trustees.  Such repurchases will be made only
when the  Registrant's  shares are trading at a discount of 10% or more from the
net asset value of the shares. Shares repurchased by the Registrant will be held
in  treasury.  The  Registrant  may  incur  debt  to  finance  share  repurchase
transactions. See the section "Investment Restrictions" in the response to Items
8.2, 8.3 and 8.4.
    

         The shares of the  Registrant  will trade in the open market at a price
which will be a function of several factors, including their net asset value and
yield. The shares of closed-end  investment  companies  generally sell at market
prices varying from their net asset values. When the Registrant  repurchases its
shares for a price  below  their net asset  value,  the net asset value of those
shares that remain  outstanding will be enhanced,  but this does not necessarily
mean that the market price of those  outstanding  shares will be affected either
positively  or  negatively.  Further,  interest on  borrowings  to finance share
repurchase transactions will reduce the Registrant's net income.

         Certain  Provisions of the  Declaration of Trust.  The Registrant is an
entity of the type commonly  known as a  "Massachusetts  business  trust." Under
Massachusetts   law,   shareholders   of  such  a  trust  may,   under   certain
circumstances,  be held  personally  liable  as  partners  for its  obligations.
However,  the Declaration of Trust contains an express disclaimer of shareholder
liability  for  acts  or   obligations   of  the  Registrant  and  provides  for
indemnification and reimbursement of expenses out of the Registrant property for
any shareholder  held  personally  liable for the obligations of the Registrant.
The  Declaration  of Trust also  provides  that the  Registrant  shall  maintain
appropriate  insurance (for example,  fidelity  bonding and errors and omissions
insurance) for the protection of the  Registrant,  its  shareholders,  Trustees,
officers,  employees and agents  covering  possible tort and other  liabilities.
Thus,  the  risk  of a  shareholder  incurring  financial  loss  on  account  of
shareholder  liability  is limited  to  circumstances  in which both  inadequate
insurance exists and the Registrant itself is unable to meet its obligations.

         The  Declaration  of Trust  further  provides that  obligations  of the
Registrant  are not binding  upon the  Trustees  individually  but only upon the
property of the  Registrant  and that the Trustees will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the  Declaration of Trust
protects a Trustee  against any liability to which he would otherwise be subject
by reason of willful  misfeasance,  bad faith,  gross  negligence,  or  reckless
disregard of the duties involved in the conduct of his office.


                                        -44-

         Anti-Takeover   Provisions.   The  Registrant   presently  has  certain
anti-takeover provisions in its Declaration of Trust which could have the effect
of limiting the ability of other  entities or persons to acquire  control of the
Registrant,  to cause it to  engage in  certain  transactions  or to modify  its
structure.  The Board of Trustees is divided into three  classes,  each having a
term of three years.  Each year the term of one class  expires.  This  provision
could  delay for up to two years the  replacement  of a majority of the Board of
Trustees. In addition, the affirmative vote or consent of the holders of 66 2/3%
of the shares of the  Registrant  (a greater vote than that required by the 1940
Act and, in some cases,  greater than the required  vote  applicable to business
corporations  under state law) is required to authorize  the  conversion  of the
Registrant from a closed-end to an open-end  investment company, or generally to
authorize any of the following transactions:

         (i)      merger or  consolidation  of the  Registrant  with or into any
                  other corporation;

         (ii)     issuance of any  securities  of the  Registrant  to any person
                  or entity for cash;

         (iii)    sale,  lease or exchange of all or any substantial part of the
                  assets of the  Registrant  to any  entity  or  person  (except
                  assets  having an  aggregate  fair  market  value of less than
                  $1,000,000); or

         (iv)     sale,  lease or exchange to the  Registrant,  in exchange  for
                  securities of the  Registrant,  of any assets of any entity or
                  person (except assets having an aggregate fair market value of
                  less than $1,000,000)

if such  corporation,  person or  entity  is  directly,  or  indirectly  through
affiliates,  the beneficial owner of 5% or more of the outstanding shares of the
Registrant.  However,  such vote or consent will not be required with respect to
the foregoing  transactions where the Board of Trustees under certain conditions
approves the  transaction.  Reference is made to the Declaration of Trust of the
Registrant, on file with the SEC, for the full text of these provisions.

         The  foregoing  provisions  will  make more  difficult  a change in the
Registrant's  management,  or consummation of the foregoing transactions without
the Trustees' approval,  and could have the effect of depriving  shareholders of
an opportunity to sell their shares at a premium over  prevailing  market prices
by  discouraging  a third party from seeking to obtain control of the Registrant
in a tender  offer or similar  transaction.  However,  the Board of Trustees has
considered  these  anti-takeover  provisions  and believes  that they are in the
shareholders' best interests and benefit shareholders by providing the advantage
of potentially  requiring persons seeking control of the Registrant to negotiate
with  its  management  regarding  the  price  to be paid  and  facilitating  the
continuity of the Registrant's management.

         b.       Inapplicable.

         c.       Inapplicable.

         d.       Inapplicable.

                                        -45-

         e. Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan. The Registrant intends to distribute monthly to shareholders substantially
all of its net  investment  income in  accordance  with the timing  requirements
imposed by the Code,  and thereby to be relieved  of any  federal  income  taxes
thereon.  Premiums from options and short-term  capital gains may be distributed
monthly.  Shareholders  will  be  informed  of  the  tax  consequences  of  such
distributions,  including  whether any portion  represents  a return of capital,
after the end of each calendar year.  Long-term  capital  gains,  if any, net of
capital losses, will be distributed at least annually. See Item 10.4.

         Shareholders  may  elect to have all  distributions  of  dividends  and
capital  gains  automatically  reinvested by State Street Bank and Trust Company
("State Street").  Pursuant to the Registrant's  Dividend  Reinvestment and Cash
Purchase  Plan (the  "Plan"),  the  provisions  of which  are set  forth  below,
shareholders not making such election will receive all such amounts in cash paid
by check mailed directly to the shareholder by State Street.

         If the  Trustees of the  Registrant  declare a dividend or determine to
make a capital gain distribution,  the  nonparticipants in the Plan will receive
such dividend or distribution in cash and  participants in the Plan will receive
the  equivalent  in shares of the  Registrant.  Whenever the market price of the
shares on the  payment  date for the  dividend  or  distribution  is equal to or
exceeds  their  net  asset  value,  participants  will be  issued  shares of the
Registrant  at the higher of net asset  value or 95% of the market  price.  This
discount  reflects  savings in underwriting and other costs which the Registrant
would otherwise be required to incur to raise additional  capital.  If net asset
value  exceeds  the  market  price of  Registrant  shares at such time or if the
Registrant should declare a dividend or other distribution payable only in cash,
State Street will, as agents for the participants,  buy Registrant shares in the
open market, on the New York Stock Exchange or elsewhere,  for the participants'
accounts. If, before State Street has completed its purchases,  the market price
exceeds the net asset value of the  Registrant's  shares,  the average per share
purchase  price  paid by State  Street  may  exceed  the net asset  value of the
Registrant's  shares,  resulting in the  acquisition of fewer shares than if the
dividend or distribution had been paid in shares issued by the Registrant.

         Participants in the Plan may withdraw from the Plan upon written notice
to State Street. When a participant  withdraws from the Plan or upon termination
of the Plan as provided  below,  certificates  for whole shares  credited to his
account  under the Plan will be issued and a cash  payment  will be made for any
fraction of a share credited to such account.

         Participants  in the Plan have the  option of  making  additional  cash
payments to State Street,  semi-annually,  for  investment  in the  Registrant's
shares.  Such payments may be made in any amount from $100 to $500. State Street
will use all monies  received  from  participants  (as well as any  dividend and
distributions received in cash) to purchase Registrant shares in the open market
semi-annually. Interest will not be paid on any uninvested cash payments.

         State  Street  maintains  all  shareholder  accounts  in the  Plan  and
furnishes  monthly  written  confirmations  of all  transactions in the account,
including  information  needed by  shareholders  

                                        -46-

for  personal and tax  records.  Shares in the account of each Plan  participant
will  be  held by  State  Street  in  non-certificated  form in the  name of the
participant,  and each  shareholder's  proxy will include those shares purchased
pursuant  to the Plan.  While the  Registrant  has no plans to issue  additional
shares other than  pursuant to the Plan, if  participants  in the Plan desire to
exercise any rights which may be issued or granted with respect to shares,  they
should  request  that  certificates  for whole  shares  be issued to them.  Each
participant  nevertheless has the right to receive certificates for whole shares
owned by him.

         The  Registrant  will  distribute  proxy material to nominee and record
shareholders in accordance with SEC rules and regulations.

         There  is no  charge  to  participants  for  reinvesting  dividends  or
distributions,  except for certain  brokerage  commissions,  as described below.
State  Street's  fees for the  handling of the  reinvestment  of  dividends  and
distributions will be paid by the Registrant.  A service fee of $0.75 is charged
for each cash purchase as well as a pro rata share of the brokerage commissions,
if any.  There  will be no  brokerage  charges  with  respect  to shares  issued
directly by the  Registrant  as a result of dividends or  distributions  payable
either in stock or in cash. However,  each participant will pay a pro rata share
of brokerage  commissions  incurred  with respect to State  Street's open market
purchases in connection with the  reinvestment of dividends or  distributions as
well as from voluntary cash payments.

         With respect to purchases from  voluntary  cash payments,  State Street
will charge a pro rata share of the brokerage commissions. Brokerage charges for
purchasing  small amounts of stock for individual  accounts through the Plan are
expected to be less than the usual brokerage charges for such  transactions,  as
State  Street  will be  purchasing  shares  for all  participants  in blocks and
pro-rating the lower commission thus attainable.

         The  automatic  reinvestment  of dividends and  distributions  will not
relieve participants of any income tax which may be payable on such dividends or
distributions.

         Experience  under the Plan may  indicate  that  changes are  desirable.
Accordingly,  the trust  reserves  the right to amend or  terminate  the Plan as
applied to any voluntary  cash  payments  made and any dividend or  distribution
paid subsequent to written notice of the change sent to the  participants in the
Plan at least 90 days before the record date for such dividend or  distribution.
The Plan also may be amended or  terminated by State Street on at least 90 days'
written notice to  participants in the Plan. All  correspondence  concerning the
Plan  should  be  directed  to State  Street  at 225  Franklin  Street,  Boston,
Massachusetts 02110.

         10.2. Long-term debt:  Inapplicable.

         10.3. General:  Inapplicable.

         10.4.  Taxes:  The  Registrant  has elected and intends to qualify each
year as a  "regulated  investment  company"  under  Subchapter M of the Internal
Revenue  Code of 1986,  as  amended  (the  "Code"),  by meeting  all  applicable
requirements  of Subchapter M,  including  requirements  as 

                                        -47-
   

to the  nature of the  Registrant's  gross  income,  the  amount  of  Registrant
distributions, and the composition of the Registrant's portfolio assets. Because
the Registrant  intends to distribute  all of its net investment  income and net
realized  capital  gains to the  shareholders  in  accordance  with  the  timing
requirements imposed by the Code, it is not expected that the Registrant will be
required to pay any federal  income or excise taxes,  although the  Registrant's
foreign-source  income  may be  subject to  foreign  withholding  taxes.  If the
Registrant  should fail to qualify as a  "regulated  investment  company" in any
year, the Registrant would incur a regular corporate federal income tax upon its
taxable income and distributions received from the Registrant would generally be
taxable as ordinary income to shareholders.

                  Shareholders  of the  Registrant  normally  will  have  to pay
federal income taxes, and any state or local taxes, on the dividends and capital
gain  distributions  they receive from the  Registrant.  Dividends from ordinary
income and any  distributions  from net short-term  capital gains are taxable to
shareholders  as ordinary  income for federal  income tax purposes.  Because the
Registrant  expects to earn primarily  interest  income,  it is expected that no
Registrant  dividends will qualify for the dividends deduction for corporations.
Distributions  of net capital gains (i.e.,  the excess of net long-term  capital
gains  over net  short-term  capital  losses)  are  taxable to  shareholders  as
long-term  capital gains for Federal  income tax purposes  without regard to the
length of time the shareholders have held their shares.  Such capital gains will
generally  be  taxable  to  shareholders  as if the  shareholders  had  directly
realized  gains  from the same  sources  from which  they were  realized  by the
Registrant. Any dividend that is declared by the Registrant in October, November
or December of any calendar year,  that is payable to  shareholders of record in
such  month  and that is paid  the  following  January,  will be  treated  as if
received by the shareholders on December 31 of the year in which the dividend is
declared.  The  Registrant  will notify  shareholders  regarding the federal tax
status of its distributions after the end of each calendar year.

         Distributions  will be taxable as described above,  whether received in
cash or in shares under the Registrant's Dividend Reinvestment and Cash Purchase
Plan (the "Plan"). With respect to distributions  received in cash or reinvested
in shares  purchased on the open market,  the amount of the distribution for tax
purposes is the amount of cash  distributed  or  allocated  to the  shareholder.
However,  with respect to distributions  made in shares issued by the Registrant
pursuant to the Plan,  the amount of the  distribution  for tax  purposes is the
fair market value of the issued shares on the payment date and a portion of such
distribution  may be  treated  as a return  of  capital.  In the case of  shares
purchased on the open market,  a participating  shareholder's  tax basis in each
share received is its cost. In the case of shares issued by the Registrant,  the
shareholder's  tax basis in each share  received is its fair market value on the
payment date.

         Distributions by the Registrant  generally result in a reduction in the
fair market value of the Registrant's  shares.  Should a distribution reduce the
fair  market  value  below  a  shareholder's   cost  basis,   such  distribution
nevertheless  would be taxable  to the  shareholder  as  described  above,  even
though,  from an investment  standpoint,  it may  constitute a partial return of
capital.  In  particular,  since the price of shares  purchased  just prior to a
distribution  includes  the amount of 
    

                                        -48-
   

the forthcoming distribution, investors purchasing shares at that time should be
aware that the  distribution  may be taxable to them even though it represents a
return of their investment.

         In general,  any gain or loss  realized upon a taxable  disposition  of
shares of the  Registrant by a  shareholder  that holds such shares as a capital
asset will be treated as a  long-term  capital  gain or loss if the shares  have
been held for more than twelve months and otherwise as a short-term capital gain
or loss; a long-term capital gain realized by an individual, estate or trust may
be eligible for reduced tax rates if the shares were held for more than eighteen
months.  However,  any  loss  realized  upon  a  disposition  of  shares  in the
Registrant  held for six months or less will be treated as a  long-term  capital
loss to the extent of any distributions of net capital gain made with respect to
those  shares.  Any loss  realized  upon a  disposition  of  shares  may also be
disallowed under rules relating to wash sales.

         The Registrant's  current dividend and accounting  policies will affect
the amount,  timing,  and character of distributions  to shareholders,  and may,
under  certain  circumstances,  make an  economic  return of capital  taxable to
shareholders.  Any investment in zero coupon bonds,  certain stripped securities
and certain securities  purchased at a market discount will cause the Registrant
to recognize  income prior to the receipt of cash payments with respect to those
securities.  In  order  to  distribute  this  income  and  avoid  a tax  on  the
Registrant,  the  Registrant may be required to liquidate  portfolio  securities
that it might  otherwise  have  continued  to  hold,  potentially  resulting  in
additional  taxable gain or loss to the  Registrant.  An  investment in residual
interests  of a CMO that has  elected to be treated  as a real  estate  mortgage
investment conduit,  or "REMIC," can create complex tax problems,  especially if
the Registrant has state or local governments or other tax-exempt  organizations
as shareholders.

         The Registrant's  transactions in options,  Futures Contracts,  Forward
Contracts, short sales "against the box" and swaps and related transactions will
be subject  to  special  tax rules  that may  affect  the  amount,  timing,  and
character of Registrant income and  distributions to shareholders.  For example,
certain  positions  held by the  Registrant  on the  last  business  day of each
taxable year will bee marked to market (i.e.,  treated as if closed out) on that
day, and any gain or loss  associated  with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by the
Registrant  that  substantially  diminish its risk of loss with respect to other
positions in its portfolio  may  constitute  "straddles,"  and may be subject to
special tax rules that would cause deferral of Registrant losses, adjustments in
the holding periods of Registrant securities,  and conversion of short-term into
long-term  capital  losses.  Certain tax elections exist for straddles which may
alter the effects of these rules.  The  Registrant  will limit its activities in
options, Futures Contracts, Forward Contracts, short sales "against the box" and
swaps and related  transactions to the extent necessary to meet the requirements
of Subchapter M of the Code.
    

         Special tax considerations apply with respect to foreign investments of
the  Registrant.  Foreign  exchange gains and losses  realized by the Registrant
will generally be treated as ordinary income and loss. Use of foreign currencies
for  non-hedging  purposes  may  be  limited  in  order  to  avoid  a tax on the
Registrant.

                                        -49-

   
         Investment  income received by the Registrant  from foreign  securities
may be subject to foreign  income taxes  withheld at the source;  the Registrant
does not expect to be able to pass through to  shareholders  foreign tax credits
with  respect to such  foreign  taxes.  The United  States has entered  into tax
treaties  with many  foreign  countries  that may  entitle the  Registrant  to a
reduced rate of tax or an  exemption  from tax on such  income;  the  Registrant
intends to qualify for treaty reduced rates where available. It is not possible,
however, to determine the Registrant's  effective rate of foreign tax in advance
since the amount of the Registrant's  assets to be invested in various countries
is not known.

         Dividends and certain other payments to persons who are not citizens or
residents  of the  United  States  or U.S.  entities  ("Non-U.S.  Persons")  are
generally  subject to U.S. tax  withholding  at the rate of 30%. The  Registrant
intends to withhold U.S.  federal income tax payments at the rate of 30% (or any
lower rate permitted under an applicable  treaty) on taxable dividends and other
payments to Non-U.S.  Persons that are subject to such withholding.  Any amounts
overwithheld  may be recovered by such persons by filing a claim for refund with
the U.S.  Internal  Revenue  Service within the time period  appropriate to such
claims.  Distributions received from the Registrant by Non-U.S. Persons may also
be subject to tax under the laws of their own  jurisdictions.  The Registrant is
also required in certain  circumstances to apply backup  withholding at the rate
of 31% on taxable  dividends and  redemption  proceeds  paid to any  shareholder
(including  a Non-U.S.  Person) who does not furnish to the  Registrant  certain
information  and   certifications   or  who  is  otherwise   subject  to  backup
withholding.  Backup withholding will not, however,  be applied to payments that
have been subject to 30% withholding.

         As long as it qualifies  as a regulated  investment  company  under the
Code, the Registrant will not be required to pay Massachusetts  income or excise
taxes.

         Distributions  of the  Registrant  that are  derived  from  interest on
obligations   of  the  U.S.   Government   and  certain  of  its   agencies  and
instrumentalities  (but  generally  not from  capital  gains  realized  upon the
disposition of such  obligations)  may be exempt from state and local taxes. The
Registrant  intends to advise  shareholders of the extent,  if any, to which its
distributions consist of such interest.  Shareholders are urged to consult their
tax advisers regarding the possible exclusion of such portion of their dividends
for  state  and  local  income  tax  purposes  as  well  as  regarding  the  tax
consequences of an investment in the Registrant.
    


                                        -50-


   
         10.5.    Outstanding   Securities:   The   following   information   is
furnished as of March 1, 1998:
    
- --------------------------------------------------------------------------------
(1)                      (2)              (3)                 (4)
                                                              Amount
                                                              Outstanding
                                          Amount Held by      Exclusive
                         Amount           Registrant or for   of Amount Shown
Title of Class           Authorized       its Account         Under (3)

- --------------------------------------------------------------------------------
   
Shares of                Unlimited        27,743,400*         97,911,555 shares
Beneficial Interest,
without par value

    
*Treasury Shares

         10.6. Securities Ratings:  Inapplicable.

Item 11. Defaults and Arrears on Senior Securities:  None.

Item 12. Legal Proceedings: None.

Item  13.   Table  of  Contents  of   Statement   of   Additional   Information:
Inapplicable.



                                     PART B

         INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION

Item 14. Cover Page: Inapplicable.

Item 15. Table of Contents:  Inapplicable.

Item 16. General Information and History:  Inapplicable.

Item 17. Investment Objective and Policies:

         17.1, 17.2 and 17.3: None that are not described in the Prospectus.

   
         17.4. For fiscal year 1997, the  Registrant's  portfolio  turnover rate
was 248%. For fiscal year 1996,  the  Registrant's  portfolio  turnover rate was
249%.
    

         A high  turnover  rate  necessarily  involves  greater  expenses to the
Registrant and could involve  realization of capital gains that would be taxable
to the  shareholders.  The  Registrant  will engage in  portfolio  trading if it
believes  that a  transaction,  net of costs  (including  custodian  transaction
charges), will help in achieving its investment objective.

                                        -51-

Item 18. Management:

   
         18.1. The Investment Advisers, Officers and Advisory Board Members: The
Trustees and officers of the Registrant and their  principal  occupations for at
least the last five years are set forth  below.  (Their  titles may have  varied
during that period.)  Unless  otherwise  noted,  the address of each Trustee and
officer is 500  Boylston  Street,  Boston,  Massachusetts  02116.  Trustees  and
officers  who are  "interested  persons"  of the  Registrant,  as defined in the
Investment  Company Act of 1940,  are denoted by an asterisk  (*).  The Board of
Trustees is divided into three classes,  each class having a term of three years
ending with the annual meeting of shareholders (or any adjournment thereof) held
in the year of expiration,  or until the election of a successor.  Each year the
term of office of one  class  expires:  Messrs.  Cohan,  Gibbons,  Smith and Ms.
O'Neill will continue in office until 1998, Messrs. Cohn, Robb and Sherratt will
continue in office until 1999 and Messrs. Bailey, Scott and Shames will continue
in office until 2000.

Name and Address            Position(s) Held with      Principal Occupation(s) 
                            Registrant                 During Past 5 years

Richard B. Bailey(born      Trustee                    Private Investor;
9/14/26)                                               Massachusetts Financial 
                                                       Services Company, former 
                                                       Chairman (prior to 
                                                       September 30, 1991); 
                                                       Cambridge Bancorp, 
                                                       Director, Cambridge Trust
                                                       Company, Director

Marshall N. Cohan (born     Trustee                    Private Investor
11/14/26)
2524 Bedford Mews Drive
Wellington, Florida

Lawrence H. Cohn, M.D.      Trustee                    Brigham and Women's 
(born 3/11/37)                                         Hospital, Chief of
75 Francis Street                                      Cardiac Surgery; Harvard
Boston, Massachusetts                                  Medical School, Professor
                                                       of Surgery

The Hon. Sir J. David       Trustee                    Edmund Gibbons Limited,
Gibbons, KBE (born                                     Chief Executive Officer;
6/15/27)                                               Colonial Insurance 
21 Reid Street                                         Company Ltd.; Chairman;
Hamilton, Bermuda HM                                   The Bank of N.T.
                                                       Butterfield & Son
                                                       Limited, Chairman (prior 
                                                       to November 1997) 

Abby M. O'Neill (born       Trustee                    Private Investor;
4/27/28)                                               Rockefeller Financial
30 Rockefeller Plaza,                                  Services, Inc.
Room 5600                                              (investment advisers),
New York, New York                                      Director
    



                                        -52-



Name and Address            Position(s) Held with      Principal Occupation(s) 
                            Registrant                 During Past 5 years
   

Walter E. Robb, III         Trustee                    Benchmark Advisors, Inc.
(born 8/18/26)                                         (corporate financial     
110 Broad Street                                       consultants), President
Boston, Massachusetts                                  and Treasurer; Benchmark
                                                       Consulting Group, Inc. 
                                                       (offices services), 
                                                       President; Landmark Funds
                                                       (mutual fund), Trustee

Arnold D. Scott* (born      Trustee                    Massachusetts Financial
12/16/42)                                              Services Company, 
                                                       Director, Senior 
                                                       Executive Vice President
                                                       and Secretary

Jeffrey L. Shames*(born     Trustee                    Massachusetts Financial 
6/2/55)                                                Services Company, 
                                                       Chairman

J. Dale Sherratt (born      Trustee                    Insight Resources, Inc. 
9/23/38)                                               (acquisition planning
One Liberty Square                                     specialists), President
Boston, Massachusetts

Ward Smith (born            Trustee                    NACCO Industries (holding
9/13/20)                                               company), Chairman (prior
36080 Shaker Blvd.                                     to June 1994); Sundstrand
Hunting Valley, Ohio                                   Corporation (diversified
                                                       mechanical manufacturer),
                                                       Director

Leslie J. Nanberg*(born     Vice President             Massachusetts Financial
11/14/45)                                              Services Company, Senior
                                                       Vice President and 
                                                       Director of Fixed Income
                                                       Portfolio Management

W. Thomas London* (born     Treasurer                  Massachusetts Financial
3/1/44)                                                Services Company, Senior 
                                                       Vice President

Ellen M. Moynihan* (born    Assistant Treasurer        Massachusetts Financial
11/13/57)                                              Services Company, Vice 
                                                       President (since 
                                                       September 1996); Deloitte
                                                       & Touche LLP, Senior
                                                       Manager (until September
                                                       1996)

James O. Yost* (born        Treasurer                  Massachusetts Financial
6/12/60)                                               Services Company, Vice 
                                                       President
    


                                        -53-

Name and Address            Position(s) Held with      Principal Occupation(s) 
                            Registrant                 During Past 5 years
   

Mark E. Bradley* (born      Assistant Treasurer        Massachusetts Financial
11/23/59)                                              Services Company, Vice
                                                       President (since March
                                                       1997); Putnam 
                                                       Investments, Vice 
                                                       President (from September
                                                       1994 until March 1997);
                                                       Ernst & Young, Senior Tax
                                                       Manager (until September
                                                       1994) 

Stephen E. Cavan*(born      Secretary and Clerk        Massachusetts Financial
11/6/53)                                               Services Company, Senior
                                                       Vice President, General 
                                                       Counsel and Assistant 
                                                       Secretary 

James R. Bordewick, Jr.*    Assistant Secretary        Massachusetts Financial
(born 3/6/59)                                          Services Company,  Senior
                                                       Vice President and 
                                                       Associate General Counsel
    

         Each Trustee and officer holds  comparable  positions  with certain MFS
affiliates  or with certain  other funds of which MFS or a subsidiary  of MFS is
the investment adviser or distributor.
   

         18.2. Each Trustee is also a Trustee of MFS Government Limited Maturity
Fund,  MFS Series  Trust I, MFS Series Trust II, MFS Series Trust VI, MFS Series
Trust VIII,  MFS Municipal  Series Trust,  MFS  Intermediate  Income Trust,  MFS
Charter  Income Trust and MFS Special  Value Trust.  Messrs.  Bailey,  Scott and
Shames are  Trustees of each of the MFS Funds and MFS  Multimarket  Income Trust
and MFS Municipal Income Trust.
    

         18.3. Sir J. David Gibbons has no authorized agent in the United States
to receive notice.



                                        -54-

18.4.a. The following table lists all Trustees of the Registrant and each of the
three highest paid executive officers or any affiliated person of the Registrant
with aggregate  compensation from the Registrant for the most recently completed
fiscal year in excess of $60,000 ("Compensated Persons").

      (1)             (2)           (3)               (4)             (5)
Name of            Aggregate     Pension or       Estimated        Total 
Person, Position   Compensation  Retirement       Annual Benefits  Compensation
(Estimated         From Fund(1)  Benefits         Upon             From Fund and
Credited Years                   Accrued As Part  Retirement(2)    Fund Complex
of                               of Fund                           Paid to
Service(2)(5))                   Expenses(1)                       Trustees(3)

   
Richard B.          $13,392         $4,083             (4)           $283,647
Bailey, Trustee 

Marshall N.         $14,392         $7,639             (4)           $148,067
Cohan, Trustee
(14)

Lawrence H.         $12,892         $2,856             (4)           $123,917
Cohn, M.D.,
Trustee (18)

The Hon. Sir J.     $13,392         $6,350             (4)           $129,842
David Gibbons, 
KBE, Trustee
(13)

Abby M.             $13,392         $3,403             (4)           $129,842
O'Neill, Trustee
(10)

Walter E. Robb,     $14,392         $7,639             (4)           $148,067
III, Trustee (15)

Arnold D.           None             None              None            None
Scott, Trustee

Jeffrey L.          None             None              None            None
Shames, Trustee

J. Dale Sherratt,   $16,892         $3,056             (4)           $184,067
Trustee (20)

Ward Smith,         $16,892         $3,819             (4)           $184,067
Trustee (13)


         (1)      For Fiscal year ended November 30, 1997.
         (2)      Based on normal retirement age of 75.
         (3)      Information  provided is provided for calendar year 1997.  All
                  Trustees  served as Trustees  of 42 funds  within the MFS Fund
                  complex (having  aggregate net assets 
    

                                        -55-


                  at December 31, 1997, of approximately  $18,869,750,275)
                  except Mr. Bailey, who served as Trustee of 69 funds within 
                  the MFS fund  complex  (having aggregate net assets at 
                  December 31, 1997,  of  approximately $47,848,672,538).
         (4)      See table set forth below  under Item  18.4.b.  for  estimated
                  annual benefits payable upon retirement by the Registrant to a
                  Trustee based on his or her credited years of service.
         (5)      Estimated credited years of service include the total years of
                  service plus the expected years until retirement.

   
         The  Registrant  pays each  Trustee  not an officer  of the  Investment
Adviser a fee of $7,350 per year plus $500 per  meeting  and  committee  meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance  at  meetings.  For  attendance  at  meetings  and other  services as
Trustees,  the Trustees of the Registrant as a group received  $115,636 from the
Registrant for the fiscal year ended November 30, 1997.
    

         18.4.(b).   The   Registrant   has  adopted  a   retirement   plan  for
non-interested  Trustees.  Under this plan, a Trustee will retire upon  reaching
age 75 and if the Trustee has completed at least 5 years of service, he would be
entitled to annual  payments  during his lifetime of up to 50% of such Trustee's
average annual  compensation  (based on the three years prior to his retirement)
depending  on his length of service.  A Trustee may also retire prior to the age
of 75 and  receive  reduced  payments  if he has  completed  at least 5 years of
service.  Under the plan,  a Trustee (or his  beneficiaries)  will also  receive
benefits  for a period of time in the event the  Trustee  is  disabled  or dies.
These benefits will also be based on the Trustee's  average annual  compensation
and length of service.  There is no retirement  plan provided by the  Registrant
for the interested  Trustees.  However, Mr. Bailey retired as Chairman of MFS as
of  September  30,  1991 and will  eventually  become  eligible  for  retirement
benefits.  The Registrant will accrue  compensation  expenses each year to cover
current year's service and amortize past service cost.

         The following table sets forth the estimated annual benefits payable by
the Registrant to the non-interested Trustees and Mr. Bailey upon retirement.

         Estimated Annual Benefits Payable by Registrant upon Retirement (1)

                    Average        Years of Service
                  Trustee Fees        3        5      7    10 or more
   
                  $11,602          $1,740   $2,901  $4,061   $5,801
                  $12,998          $1,950   $3,250  $4,549   $6,499
                  $14,394          $2,159   $3,598  $5,038   $7,197
                  $15,789          $2,368   $3,947  $5,526   $7,895
                  $17,185          $2,578   $4,296  $6,015   $8,593
                  $18,581          $2,787   $4,645  $6,503   $9,290
    

         (1)      Other funds in the MFS fund complex provide similar retirement
                  benefits to the Trustees.

                                        -56-

Item 19. Control Persons and Principal Holders of Securities:

   
         As of March 1, 1998, Cede & Co., c/o The Depository Trust Company, P.O.
Box 20,  Bowling Green Station,  New York,  New York 10004,  (as nominee for the
Depository Trust Company, 7 Hanover Square,  New York, New York 10004),  owns of
record approximately 59.37% of the outstanding shares of the Registrant.

         As of March 1, 1998,  all Trustees and officers of the  Registrant as a
group own of record less than 1% of the outstanding shares of the Registrant.

Item 20. Investment Advisory and Other Services:

         Items 20.1.a.  through 20.5. See Item 9.1.b.  For the fiscal year ended
November 30, 1997, MFS received fees under the Registrant's  Investment Advisory
Agreement  of  $3,802,065.  For the fiscal year ended  November  30,  1996,  MFS
received fees under the Investment  Advisory  Agreement of  $4,188,509.  For the
fiscal year ended  November 30, 1995,  MFS received fees under the  Registrant's
Investment Advisory Agreement of $4,459,164.
    


         20.6. The  Registrant's  securities and cash are held under a Custodian
Agreement  by State  Street Bank and Trust  Company,  whose  principal  business
address is 225 Franklin Street,  Boston,  Massachusetts 02110. State Street Bank
and Trust  Company also serves as dividend  disbursing  agent and as agent under
the Plan and as transfer agent and registrar for the Registrant's shares.


         20.7.  Deloitte & Touche LLP are the  Registrant's  independent  public
accountants and certify financial statements of the Registrant as required to be
certified  by any  law or  regulation  and  provide  certain  other  tax-related
services for the Registrant  (such as tax return  preparation and assistance and
consultation  with  respect to the  preparation  of filings  with the SEC).  The
principal  business  address of  Deloitte  & Touche  LLP is 125  Summer  Street,
Boston, Massachusetts 02110.

         20.8. Pursuant to the Registrar,  Transfer Agency and Service Agreement
between the Registrant and MFS Service Center,  Inc., MFS Service  Center,  Inc.
("MFSC")  acts  as  the  registrar  and  transfer  agent  for  the  Registrant's
authorized  and  issued  shares  of  beneficial  interest,  as well as  dividend
disbursing  agent for the Registrant,  and agent in connection with the Dividend
Reinvestment and Cash Purchase Plan of the Registrant.  For account maintenance,
the  Registrant  currently pays MFSC a fee based on the total number of accounts
for all  closed-end  funds  advised by MFS for which MFSC acts as registrar  and
transfer agent. If the total number of accounts is less than 75,000,  the annual
account fee is $9.00.  If the total  number of  accounts is 75,000 or more,  the
annual  account fee is $8.00.  For dividend  services,  MFSC  charges  $0.75 per
dividend  reinvestment and $0.75 per cash infusion.  If the total amount of fees
related to dividend  services  is less than $1,000 per month for all  closed-end
funds  advised by MFS for which MFSC acts as registrar and 

                                        -57-

transfer  agent,  the minimum fee for the  Registrant for these services will be
$167 per month. The Registrant will reimburse MFSC for reasonable  out-of-pocket
expenses and advances  incurred by MFSC and for any other  expenses  incurred by
MFSC at the request, or with the consent, of the Registrant.

   

Item 21. Brokerage Allocation and Other Practices:

         Specific  decisions to purchase or sell  securities  for the Registrant
are made by employees of the Investment Adviser who are appointed and supervised
by its senior officers. Such employees may serve other clients of the Investment
Adviser and any subsidiary in a similar  capacity.  Changes in the  Registrant's
investments are reviewed by the Board of Trustees.

         The  primary   consideration  in  portfolio  security  transactions  is
execution at the most favorable  prices and in the most effective  manner ("best
execution").  The Investment  Adviser has complete  freedom as to the markets in
and the  broker-dealers  through  which it seeks this  result.  U.S.  Government
Securities and, in the United States and in certain other countries,  other debt
securities are traded principally in the over-the-counter  market on a net basis
through  dealers  acting  for their own  account  and not as  brokers.  In other
countries,  securities may be traded on exchanges at fixed commission rates. The
cost  of  securities  purchased  from  underwriters  includes  an  underwriter's
commission or concession,  and the prices at which securities are purchased from
and sold to dealers  include a dealer's  mark-up or  mark-down.  The  Investment
Adviser normally seeks to deal directly with the primary market maker, unless in
its  opinion,  better  execution is available  elsewhere.  Securities  firms may
receive  brokerage  commissions  on  transactions  involving  options,   Futures
Contracts  and  Options  on  Futures  Contracts  and the  purchase  and  sale of
underlying  securities  upon  exercise of  options.  The  brokerage  commissions
associated  with buying and selling options may be  proportionately  higher than
those  associated  with  general   securities   transactions.   Subject  to  the
requirement  of seeking best  execution  securities  may, as  authorized  by the
Advisory  Agreement,  be  bought  from or sold to  dealers  who  have  furnished
statistical,  research  and other  information  or  services  to the  Investment
Adviser or who have sold shares of funds for which MFS or any subsidiary  serves
as  investment  adviser.  At present no  arrangements  to  recapture  commission
payments are in effect.  For the fiscal years ended November 30, 1997,  1996 and
1995, the Registrant did not pay any brokerage commissions.

         The Trustees of the Registrant (together with the Trustees of the other
MFS Funds) have directed the  Investment  Adviser to allocate a total of $54,160
of commission business from the MFS Funds to the Pershing Division of Donaldson,
Lufkin  &  Jenrette  as   consideration   for  the  annual  renewal  of  certain
publications  provided  by  Lipper  Analytical  Securities   corporation  (which
provides  information  useful to the  Trustees  in  reviewing  the  relationship
between the Registrant and the Investment Adviser).

         In certain  instances,  there may be securities  which are suitable for
the  Registrant's  portfolio  as well as for that of one or more of the advisory
clients of the Investment  Adviser or any subsidiary.  Investment  decisions for
the  Registrant and for the advisory  clients of the  

    

                                        -58-
   

Investment  Adviser or any  subsidiary  are made with a view to achieving  their
respective investment  objectives.  It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients.  Likewise,  a particular security may be bought for one
or more clients when one or more other  clients are selling that same  security.
Some  simultaneous  transactions  are inevitable  when several  clients  receive
investment advice from the same investment  adviser,  particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more  clients are  simultaneously  engaged in the purchase or sale of the
same security,  the securities are allocated  among clients in a manner believed
by the Investment Adviser to be equitable to each on a case by case basis. It is
recognized that in some cases this system could have a detrimental effect on the
price or volume of the security as far as the Registrant is concerned.  In other
cases, however, it is believed that the ability of the Registrant to participate
in volume transactions will produce better executions for the Registrant.

    

Item 22. Tax Status:  None.

   

Item  23.  Financial  Statements:  The  following  are  incorporated  herein  by
reference to the Registrant's Annual Report to its shareholders,  for its fiscal
year ended November 30, 1997, copies of which have been filed with the SEC:

          Portfolio of  Investments  at November 30, 1997
          Statement of Assets and Liabilities at November 30, 1997
          Statement of Operations for the year ended November 30, 1997
          Statement of Changes in Net Assets for the years ended November 30,
             1997 and 1996
          Financial Highlights for each of the years in the ten-year period 
             ended November 30, 1997.
          Notes to Financial Statements
          Independent Auditors' Report
    


                                        -59-



                                         PART C

                                    OTHER INFORMATION

         Item 24. Financial Statements and Exhibits:

         1.       Financial Statements:

                        The following have been incorporated by reference in 
                        Item 23:

   
                        Portfolio of Investments at November 30, 1997
                        Statement of Assets and Liabilities at November 30, 1997
                        Statement of Operations for year ended November 30, 1997
                        Statement of Changes in Net Assets for the years ended 
                           November 30, 1997 and 1996
                        Per Share and Other Data each of the years in the ten-
                           year period ended November 30, 1997.
    
                        Notes to Financial Statements
                        Independent Auditors' Report

         2.       Exhibits:

   
                  (a)(1)   --      Declaration of Trust, dated March 27, 1987
                                   (previously filed as Exhibit 2(a)(1) to
                                   Amendment  No.  11 to the Registration  
                                   Statement  on Form N-2,  filed  with the SEC 
                                   on January  26,  1998 ("Amendment No. 11"));
                                   incorporated herein by reference.

                  (b)(1)   --      Amended and Restated By-Laws dated December 
                                   14, 1994 (previously filed as Exhibit (b)(2) 
                                   to Amendment No. 10 to the Registrant's
                                   Registration  Statement on Form N-2 on March 
                                   30, 1995  ("Amendment No. 10")); incorporated
                                   herein by reference.

                  (c)      --      Inapplicable.

                  (d)      --      Specimen certificate for Shares of Beneficial
                                   Interest, without par value (previously filed
                                   as Exhibit  2(d) to Amendment No. 11);
                                   incorporated herein by reference.

                  (e)      --      The section "Dividend Reinvestment and Cash
                                   Purchase Plan" on page 4 of the Registrant's
                                   Annual Report to its Shareholders, for its
                                   fiscal year ended November 30, 1997;  
                                   incorporated herein by reference.
    

                                        -60-
   

                  (f)      --      Inapplicable.

                  (g)(1)   --      Investment Advisory Agreement, dated May 5,
                                   1987(previously filed as Exhibit 2(g)(1) to 
                                   Amendment No. 11); incorporated herein by 
                                   reference

                  (g)(2)   --      Administrative Services Agreement, dated 
                                   March 1, 1997,  between Massachusetts
                                   Financial Services Company and the
                                   Registrant (previously filed as Exhibit
                                   2(g)(2) to Amendment  No. 11); incorporated
                                   herein by reference.

                  (h)      --      Omitted pursuant to General Instruction G.3.
                                   to Form N-2.

                  (i)      --      Retirement Plan for Non-Interested Person 
                                   Trustees, dated January 1, 1991 (previously
                                   filed as Exhibit 2(i) to Amendment No. 11);
                                   incorporated herein by reference.

                  (j)(1)   --      Custodian Agreement between the Registrant
                                   and State Street Bank and Trust Company, 
                                   dated May 20, 1987(previously filed as 
                                   Exhibit 2(j)(1) to Amendment No. 11); 
                                   incorporated herein by reference

                  (j)(2)   --      Amendment to Custodian Agreement dated May 
                                   20, 1987; (previously filed as Exhibit 2(j)
                                   (2) to Amendment No. 11); incorporated herein
                                   by reference.

                  (j)(3)   --      Amendment to Custodian Agreement dated 
                                   October 9, (previously filed as Exhibit 2(j)
                                   (3) to Amendment No. 11); incorporated herein
                                   by reference

                  (j)(4)   --      Amendment to Custodian Agreement dated 
                                   February 29, 1988(previously filed as Exhibit
                                   2(j)(4) to Amendment No. 11); incorporated 
                                   herein by reference.

                  (j)(5)   --      Amendment to the Custodian contract, dated 
                                   October 1, 1989(previously filed as Exhibit 
                                   2(j)(5) to Amendment No. 11); incorporated 
                                   herein by reference.

                  (k)(1)   --      Registrar, Transfer Agency and Service 
                                   Agreement between Registrant and MFS Service 
                                   Center,  Inc., dated August 15, 1994 
                                   (previously filed as Exhibit (e)(2) to 
                                   Amendment No. 10);  incorporated herein by 
                                   reference.

                  (k)(2)   --      Loan Agreement by and among the Banks named 
                                   therein, the MFS Funds named therein, and The
                                   First National Bank of Boston,  dated as of
                                   February 21, 1995,  previously  filed as 
                                   Exhibit  (k)(3) to Amendment No. 10; 
                                   incorporated herein by reference.
    

                                        -61-
   

                  (l)      --      Omitted pursuant to General Instruction G.3 
                                   to Form N-2.

                  (m)      --      None.

                  (n)      --      Omitted pursuant to General Instruction G.3 
                                   to Form N-2.

                  (o)      --      Omitted pursuant to General Instructions G.3 
                                   to Form N-2.

                  (p)      --      Form of Purchase Agreement; filed herewith.

                  (q)      --      Inapplicable.

                  (r)      --      Financial Data Schedule; filed herewith.
    


Item 25.  Marketing Arrangements:  Inapplicable.

Item 26.  Other Expenses of Issuance and Distribution:  Inapplicable.

Item 27.  Persons  Controlled  by or  Under  Common  Control  with  Registrant:
Inapplicable.

Item 28.  Number of Holders of Securities:

          ---------------------------------------------------------------------
                   (1)                                (2)
                Title of Class               Number of Record  Holders
          ---------------------------------------------------------------------

   
            Shares of Beneficial Interest             10,905
               (without par value)          (as at March 1, 1998)
          ---------------------------------------------------------------------
    

Item 29. Indemnification:

         Article V of the  Registrant's  Declaration  of Trust provides that the
Registrant  will  indemnify its Trustees and officers  against  liabilities  and
expenses  incurred in connection  with  litigation in which they may be involved
because of their offices with the  Registrant,  unless as to  liabilities to the
Registrant or its shareholders,  it is finally  adjudicated that they engaged in
willful  misfeasance,  bad faith,  gross negligence or reckless disregard of the
duties  involved in their  offices,  or with respect to any matter  unless it is
adjudicated  that they did not act in good faith in the  reasonable  belief that
their  actions  were in the best  interest of the  Registrant.  In the case of a
settlement,  such  indemnification  will  not be  provided  unless  it has  been
determined in  

                                        -62-

accordance with the Declaration of Trust that such officers or Trustees have not
engaged in misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices.

         The Trustees and officers of the  Registrant  and the  personnel of the
Registrant's  investment  adviser  are  insured  under an errors  and  omissions
liability  insurance  policy.  The  Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment  Company Act
of 1940.

Item 30. Business and Other Connections of Investment Adviser:

   

         MFS serves as investment  adviser to the following open-end Funds 
comprising  the MFS Family of Funds (except the Vertex Funds  mentioned  below):
Massachusetts  Investors Trust,  Massachusetts  Investors Growth Stock Fund, MFS
Growth  Opportunities  Fund,  MFS  Government  Securities  Fund,  MFS Government
Limited  Maturity  Fund,  MFS Series  Trust I (which has  thirteen  series:  MFS
Managed  Sectors Fund, MFS Cash Reserve Fund, MFS World Asset  Allocation  Fund,
MFS Strategic  Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special  Opportunities  Fund, MFS  Convertible
Securities  Fund,  MFS Blue Chip Fund,  MFS New Discovery  Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series:  MFS Emerging  Growth Fund,  MFS Large Cap Growth Fund and MFS
Intermediate  Income Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund),  MFS Series Trust IV (which has
four series:  MFS Money  Market  Fund,  MFS  Government  Money Market Fund,  MFS
Municipal Bond Fund and MFS Mid Cap Growth Fund),  MFS Series Trust V (which has
six  series:  MFS Total  Return  Fund,  MFS  Research  Fund,  MFS  International
Opportunities  Fund, MFS International  Strategic Growth Fund, MFS International
Value Fund and MFS Asia  Pacific  Fund),  MFS  Series  Trust VI (which has three
series:  MFS World Total Return Fund,  MFS  Utilities  Fund and MFS World Equity
Fund),  MFS Series Trust VII (which has two series:  MFS World  Governments Fund
and MFS Value Fund), MFS Series Trust VIII (which has two series:  MFS Strategic
Income Fund and MFS World  Growth  Fund),  MFS Series  Trust IX (which has three
series:  MFS Bond Fund,  MFS Limited  Maturity  Fund and MFS  Municipal  Limited
Maturity  Fund),  MFS Series  Trust X (which has eight  series:  MFS  Government
Mortgage  Fund,  MFS/Foreign  &  Colonial  Emerging  Markets  Equity  Fund,  MFS
International  Growth Fund, MFS  International  Growth and Income Fund, MFS Real
Estate  Investment  Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series:  MFS
Union Standard Equity Fund,  Vertex All Cap Fund,  Vertex Research All Cap Fund,
Vertex Growth Fund,  Vertex Discovery Fund and Vertex  Contrarian Fund), and MFS
Municipal  Series Trust (which has 16 series:  MFS Alabama  Municipal Bond Fund,
MFS Arkansas  Municipal  Bond Fund,  MFS  California  Municipal  Bond Fund,  MFS
Florida  Municipal  Bond Fund,  MFS Georgia  Municipal  Bond Fund,  MFS Maryland
Municipal Bond Fund,  MFS  Massachusetts  Municipal  Bond Fund, MFS  Mississippi
Municipal  Bond  Fund,  MFS New York  Municipal  Bond Fund,  MFS North  Carolina
Municipal  Bond Fund, MFS  Pennsylvania  Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee  Municipal Bond Fund, MFS Virginia  Municipal
Bond Fund, MFS West Virginia  Municipal Bond Fund and MFS Municipal Income

    

                                        -63-

   

Fund) (the "MFS Funds"). The principal business address of each of the MFS Funds
is 500 Boylston Street, Boston, Massachusetts 02116.

         MFS also serves as investment  adviser of the following open-end Funds:
MFS  Institutional  Trust  ("MFSIT")  (which has seven  series) and MFS Variable
Insurance  Trust  ("MVI")  (which has twelve  series).  The  principal  business
address of each of the  aforementioned  funds is 500  Boylston  Street,  Boston,
Massachusetts 02116.

         In  addition,  MFS  serves  as  investment  adviser  to  the  following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket  Income Trust, MFS
Government  Markets Income Trust,  MFS  Intermediate  Income Trust,  MFS Charter
Income  Trust and MFS Special  Value  Trust (the "MFS  Closed-End  Funds").  The
principal  business  address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.

         Lastly,  MFS serves as investment  adviser to MFS/Sun Life Series Trust
("MFS/SL")  (which has 26 series),  Money Market  Variable  Account,  High Yield
Variable Account,  Capital Appreciation Variable Account,  Government Securities
Variable  Account,  World Governments  Variable  Account,  Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal   business  address  of  MFS/SL  is  500  Boylston   Street,   Boston,
Massachusetts   02116.   The   principal   business   address  of  each  of  the
aforementioned  Accounts  is One  Sun  Life  Executive  Park,  Wellesley  Hills,
Massachusetts 02181.

         Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned  subsidiary  of MFS,  whose  principal  business  address is 500  Boylston
Street, Boston, Massachusetts 02116 ("Vertex"),  serves as investment adviser to
Vertex All Cap Fund,  Vertex Research All Cap Fund,  Vertex Growth Fund,  Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The  principal  business  address of the  aforementioned  Funds is 500  Boylston
Street, Boston, Massachusetts 02116.

         MFS International  Ltd. ("MIL"),  a limited liability company organized
under the laws of Bermuda and a  subsidiary  of MFS,  whose  principal  business
address is Cedar  House,  41 Cedar  Avenue,  Hamilton  HM12  Bermuda,  serves as
investment  adviser to and  distributor  for MFS  American  Funds (which has six
portfolios:  MFS  American  Funds-U.S.  Equity  Fund,  MFS  American  Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American  Funds-U.S.  Research  Fund)  (the  "MIL  Funds").  The MIL  Funds  are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable  securities  (UCITS).  The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.

         MIL also  serves  as  investment  adviser  to and  distributor  for MFS
Meridian  U.S.  Government  Bond Fund,  MFS Meridian  Charter  Income Fund,  MFS
Meridian Global  Governments  Fund, MFS Meridian U.S.  Emerging Growth Fund, MFS
Meridian  Global Equity Fund, MFS Meridian  Limited  Maturity Fund, MFS Meridian
World Growth  Fund,  MFS 

    


                                        -64-
   

Meridian  Money Market Fund,  MFS Meridian World Total Return Fund, MFS Meridian
U.S. Equity Fund, MFS Meridian  Research Fund, MFS Meridian U.S. High Yield Fund
and MFS Meridian  Emerging  Markets Debt Fund  (collectively  the "MFS  Meridian
Funds").  Each of the MFS Meridian Funds is organized as an exempt company under
the laws of the Cayman Islands.  The principal  business  address of each of the
MFS Meridian Funds is P.O. Box 309, Grand Cayman,  Cayman Islands,  British West
Indies.

         MFS  International  (U.K.) Ltd.  ("MIL-UK"),  a private limited company
registered  with the  Registrar of Companies for England and Wales whose current
address is 4 John  Carpenter  Street,  London,  England  ED4Y 0NH,  is  involved
primarily  in  marketing  and  investment  research  activities  with respect to
private clients and the MIL Funds and the MFS Meridian Funds.

         MFS  Institutional  Advisors  (Australia)  Ltd.  ("MFSI-Australia"),  a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor  Phillip Tower, One Farrer
Place,  Sydney,   N5W2000,   Australia,  is  involved  primarily  in  investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.

         MFS Holdings Australia Pty Ltd. ("MFS Holdings  Australia"),  a private
limited company  organized  pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor  Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia,  and whose function is to serve primarily as a
holding company.

         MFS Fund  Distributors,  Inc.  ("MFD"),  a wholly owned  subsidiary  of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.

         MFS Service Center,  Inc.  ("MFSC"),  a wholly owned subsidiary of MFS,
serves as  shareholder  servicing  agent to the MFS  Funds,  the MFS  Closed-End
Funds, MFSIT and MVI.

         MFS Institutional  Advisors,  Inc. ("MFSI"),  a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.

         MFS Retirement  Services,  Inc.  ("RSI"),  a wholly owned subsidiary of
MFS,  markets MFS products to retirement plans and provides  administrative  and
record keeping services for retirement plans.

         MFS

         The  Directors of MFS are Jeffrey L. Shames,  Arnold D. Scott,  John W.
Ballen,  Donald A.  Stewart  and John D.  McNeil.  Mr.  Shames is the  Chairman,
Chief  Executive  Officer and  President,  Mr. Scott is a Senior  Executive Vice
President and  Secretary,  William W. Scott,  Jr.,  Patricia A. Zlotin,  John W.
Ballen,  Thomas J.  Cashman,  Jr.,  Joseph W. Dello Russo and Kevin R. Parke are
Executive  Vice  Presidents,  Stephen  E.  Cavan  is a  Senior  Vice  President,

    

                                        -65-
   

General  Counsel and an  Assistant  Secretary,  Robert T. Burns is a Senior Vice
President,  Associate  General  Counsel and an  Assistant  Secretary of MFS, and
Thomas B. Hastings is a Vice President and Treasurer of MFS.

         Massachusetts Investors Trust
         Massachusetts Investors Growth Stock Fund
         MFS Growth Opportunities Fund
         MFS Government Securities Fund
         MFS Series Trust I
         MFS Series Trust V
         MFS Series Trust VI
         MFS Series Trust X
         MFS Government Limited Maturity Fund

         Stephen E. Cavan is the  Secretary,  W. Thomas London is the Treasurer,
James O. Yost,  Ellen M. Moynihan and Mark E. Bradley,  Vice  Presidents of MFS,
are the Assistant  Treasurers,  James R.  Bordewick,  Jr., Senior Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.

         MFS Series Trust II

         Leslie J. Nanberg,  Senior Vice President of MFS, is a Vice  President,
Stephen E. Cavan is the Secretary,  W. Thomas London is the Treasurer,  James O.
Yost,  Ellen M. Moynihan and Mark E. Bradley are the Assistant  Treasurers,  and
James R. Bordewick, Jr. is the Assistant Secretary.

         MFS Government Markets Income Trust
         MFS Intermediate Income Trust

         Leslie J. Nanberg,  Senior Vice President of MFS, is a Vice  President,
Stephen E. Cavan is the Secretary,  W. Thomas London is the Treasurer,  James O.
Yost,  Ellen M. Moynihan and Mark E. Bradley are the Assistant  Treasurers,  and
James R. Bordewick, Jr. is the Assistant Secretary.

         MFS Series Trust III

         James T.  Swanson,  Robert J.  Manning and Joan S.  Batchelder,  Senior
Vice  Presidents  of MFS,  and Bernard  Scozzafava,  Vice  President of MFS, are
Vice  Presidents,  Sheila  Burns-Magnan,  Assistant  Vice  President of MFS, and
Daniel E.  McManus,  Vice  President  of MFS,  are  Assistant  Vice  Presidents,
Stephen E. Cavan is the Secretary,  W. Thomas London is the Treasurer,  James O.
Yost,  Ellen M. Moynihan and Mark E. Bradley are the Assistant  Treasurers,  and
James R. Bordewick, Jr. is the Assistant Secretary.
    




                                        -66-


   
         MFS Series Trust IV
         MFS Series Trust IX

         Robert A. Dennis and Geoffrey L.  Kurinsky,  Senior Vice  Presidents of
MFS, are Vice  Presidents,  Stephen E. Cavan is the Secretary,  W. Thomas London
is the Treasurer,  James O. Yost,  Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.

         MFS Series Trust VII

         Leslie J.  Nanberg and Stephen C.  Bryant,  Senior Vice  Presidents  of
MFS, are Vice  Presidents,  Stephen E. Cavan is the Secretary,  W. Thomas London
is the Treasurer,  James O. Yost,  Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.

         MFS Series Trust VIII

         Jeffrey L.  Shames,  Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer,  Jr., a Senior Vice President of MFS, are Vice  Presidents,  Stephen
E. Cavan is the  Secretary,  W. Thomas London is the  Treasurer,  James O. Yost,
Ellen M.  Moynihan and Mark E. Bradley are the  Assistant  Treasurers  and James
R. Bordewick, Jr. is the Assistant Secretary.

         MFS Municipal Series Trust

         Robert A.  Dennis is Vice  President,  David B. Smith and  Geoffrey  L.
Schechter,  Vice  Presidents  of MFS, are Vice  Presidents,  Daniel E.  McManus,
Vice President of MFS, is an Assistant Vice  President,  Stephen E. Cavan is the
Secretary,  W. Thomas London is the Treasurer,  James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant  Treasurers  and James R.  Bordewick,  Jr.
is the Assistant Secretary.

         MFS Variable Insurance Trust
         MFS Series Trust XI
         MFS Institutional Trust

         Stephen E. Cavan is the  Secretary,  W. Thomas London is the Treasurer,
James  O.  Yost,  Ellen  M.  Moynihan  and  Mark E.  Bradley  are the  Assistant
Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.

         MFS Municipal Income Trust

         Robert  J.  Manning  is  Vice  President,   Stephen  E.  Cavan  is  the
Secretary,  W. Thomas London is the Treasurer,  James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant  Treasurers  and James R.  Bordewick,  Jr.
is the Assistant Secretary.
    




                                        -67-
     
   
         MFS Multimarket Income Trust
         MFS Charter Income Trust

         Leslie J.  Nanberg and James T.  Swanson are Vice  Presidents,  Stephen
E. Cavan is the  Secretary,  W. Thomas London is the  Treasurer,  James O. Yost,
Ellen M.  Moynihan and Mark E. Bradley are the  Assistant  Treasurers  and James
R. Bordewick, Jr. is the Assistant Secretary.

         MFS Special Value Trust

         Robert  J.  Manning  is  Vice  President,   Stephen  E.  Cavan  is  the
Secretary,  W. Thomas London is the Treasurer,  James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant  Treasurers  and James R.  Bordewick,  Jr.
is the Assistant Secretary.

         MFS/Sun Life Series Trust

         John D. McNeil,  Chairman and  Director of Sun Life  Assurance  Company
of  Canada,  is the  Chairman,  Stephen  E. Cavan is the  Secretary,  W.  Thomas
London is the  Treasurer,  James O. Yost,  Ellen M. Moynihan and Mark E. Bradley
are the  Assistant  Treasurers  and James R.  Bordewick,  Jr.  is the  Assistant
Secretary.

         Money Market Variable Account
         High Yield Variable Account
         Capital Appreciation Variable Account
         Government Securities Variable Account
         Total Return Variable Account
         World Governments Variable Account
         Managed Sectors Variable Account

         John D.  McNeil is the  Chairman,  Stephen E.  Cavan is the  Secretary,
and James R. Bordewick, Jr. is the Assistant Secretary.

         Vertex

         Jeffrey L.  Shames and  Arnold D. Scott are the  Directors,  Jeffrey L.
Shames is the  President,  Kevin R. Parke and John W. Ballen are Executive  Vice
Presidents,  John F.  Brennan,  Jr.,  and John D.  Laupheimer  are  Senior  Vice
Presidents,  Brian E. Stack is a Vice  President,  Joseph W. Dello  Russo is the
Treasurer,  Thomas B. Hastings is the Assistant  Treasurer,  Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.

         MIL

         Arnold D.  Scott,  Jeffrey L.  Shames and  Thomas J.  Cashman,  Jr. are
Directors,  Stephen  E.  Cavan is a  Director,  Senior  Vice  President  and the
Clerk, Robert T. Burns is an Assistant Clerk,  Joseph W. Dello Russo,  Executive
Vice President and Chief  Financial  Officer of MFS, is the Treasurer and Thomas
B. Hastings is the Assistant Treasurer.

    

                                        -68
   

         MIL-UK

         Thomas J.  Cashman,  Jr. is President  and a Director,  Arnold D. Scott
and  Jeffrey L.  Shames are  Directors,  Stephen E. Cavan is a Director  and the
Secretary,  Joseph W. Dello Russo is the  Treasurer,  Thomas B.  Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.

         MFSI - Australia

         Thomas J. Cashman,  Jr. is President and a Director,  Graham E. Lenzer,
John  A.  Gee and  David  Adiseshan  are  Directors,  Stephen  E.  Cavan  is the
Secretary,  Joseph W. Dello Russo is the  Treasurer,  Thomas B.  Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.

         MFS Holdings - Australia

         Jeffrey L. Shames is the  President  and a  Director,  Arnold D. Scott,
Thomas J.  Cashman,  Jr., and Graham E. Lenzer are  Directors,  Stephen E. Cavan
is the  Secretary,  Joseph W. Dello Russo is the  Treasurer,  Thomas B. Hastings
is the Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.

         MIL Funds

         Richard B.  Bailey,  John A.  Brindle,  Richard W. S. Baker,  Arnold D.
Scott,  Jeffrey L. Shames and William F. Waters are Directors,  Stephen E. Cavan
is the  Secretary,  W. Thomas London is the Treasurer,  James O. Yost,  Ellen M.
Moynihan  and  Mark E.  Bradley  are  the  Assistant  Treasurers  and  James  R.
Bordewick, Jr. is the Assistant Secretary.

         MFS Meridian Funds

         Richard B.  Bailey,  John A.  Brindle,  Richard W. S. Baker,  Arnold D.
Scott,  Jeffrey L. Shames and William F. Waters are Directors,  Stephen E. Cavan
is the Secretary,  W. Thomas London is the Treasurer,  James R.  Bordewick,  Jr.
is the  Assistant  Secretary  and James O. Yost,  Ellen M.  Moynihan and Mark E.
Bradley are the Assistant Treasurers.

         MFD

         Arnold D.  Scott and  Jeffrey  L.  Shames  are  Directors,  William  W.
Scott,  Jr., an Executive Vice  President of MFS, is the  President,  Stephen E.
Cavan is the Secretary,  Robert T. Burns is the Assistant  Secretary,  Joseph W.
Dello  Russo  is  the  Treasurer,  and  Thomas  B.  Hastings  is  the  Assistant
Treasurer.
    




                                        -69-

   

         MFSC

         Arnold  D.  Scott  and  Jeffrey  L.  Shames  are  Directors,  Joseph A.
Recomendes,  a Senior Vice  President and Chief  Information  Officer of MFS, is
Vice  Chairman and a Director,  Janet A.  Clifford is the  President,  Joseph W.
Dello Russo is the  Treasurer,  Thomas B. Hastings is the  Assistant  Treasurer,
Stephen  E.  Cavan is the  Secretary,  and  Robert  T.  Burns  is the  Assistant
Secretary.

         MFSI

         Jeffrey  L.  Shames,  and  Arnold  D.  Scott are  Directors,  Thomas J.
Cashman,  Jr., is the  President  and a Director,  Leslie J. Nanberg is a Senior
Vice  President,  a  Managing  Director  and a  Director,  Kevin R. Parke is the
Executive Vice President and a Managing Director,  George F. Bennett,  Jr., John
A. Gee,  Brianne  Grady,  Joseph A.  Kosciuszek and Joseph J. Trainor are Senior
Vice  Presidents  and  Managing   Directors,   Joseph  W.  Dello  Russo  is  the
Treasurer,  Thomas B.  Hastings is the  Assistant  Treasurer and Robert T. Burns
is the Secretary.

         RSI

         Arnold D. Scott is the Chairman and a Director,  Martin E.  Beaulieu is
the  President,  William W. Scott,  Jr. is a Director,  Joseph W. Dello Russo is
the Treasurer,  Thomas B. Hastings is the Assistant Treasurer,  Stephen E. Cavan
is the Secretary and Robert T. Burns is the Assistant Secretary.

         In addition, the following persons,  Directors or officers of MFS, have
the affiliations indicated:

         Donald A. Stewart         President and a Director, Sun Life
                                   Assurance  Company  of  Canada,  Sun Life  
                                   Centre,  150 King Street West, Toronto, 
                                   Ontario,  Canada (Mr. Stewart is also
                                   an  officer  and/or  Director  of various  
                                   subsidiaries  and affiliates of Sun Life)

         John D. McNeil            Chairman, Sun Life Assurance  Company of
                                   Canada,  Sun Life  Centre,  150 King Street  
                                   West,  Toronto,  Ontario,  Canada  (Mr.  
                                   McNeil  is  also an  officer  and/or
                                   Director of various subsidiaries and 
                                   affiliates of Sun Life)
    


                                        -70


Item 31. Location of Accounts and Records:

         The accounts and records of the Registrant are located,  in whole or in
part, at the office of the Registrant and the following locations:

                  NAME                            ADDRESS

         Massachusetts Financial             500 Boylston Street
          Services Company Boston,           Massachusetts 02116

         State Street Bank and               State Street South, 5-West
          Trust Company                      North Quincy, Massachusetts 02171

   
         MFS Service Center                  500 Boylston Street
                                             Boston, Massachusetts 02116
    


Item 32. Management Services:  Inapplicable.

Item 33. Undertakings:  Inapplicable.




                                        -71-
       

                                   SIGNATURES


         Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant  has duly caused this Amendment to its  Registration  Statement to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of Boston and Commonwealth of Massachusetts on the 26th day of March, 1998.

                                        MFS GOVERNMENT MARKETS INCOME TRUST



                                        By: /s/  JAMES R. BORDEWICK, JR.
                                        Name:    James R. Bordewick, Jr.
                                        Title:   Assistant Secretary




                                        -72-


                                INDEX TO EXHIBITS


Exhibit No.             Description of Exhibit              Page


  27        --      Financial Data Schedule.

EX-27

 

<ARTICLE> 6
<CIK> 0000811922
<NAME> MFS GOVERNMENT MARKETS INCOME TRUST
<MULTIPLIER> 1
       
                                                  
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          NOV-30-1997
<PERIOD-START>                             DEC-01-1996
<PERIOD-END>                               MAY-31-1997
<INVESTMENTS-AT-COST>                        537207305
<INVESTMENTS-AT-VALUE>                       536316473
<RECEIVABLES>                                 24286955
<ASSETS-OTHER>                                    4753
<OTHER-ITEMS-ASSETS>                             78008
<TOTAL-ASSETS>                               560686189
<PAYABLE-FOR-SECURITIES>                      35870625
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                      1518013
<TOTAL-LIABILITIES>                           37388638
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                     560537212
<SHARES-COMMON-STOCK>                         71077255
<SHARES-COMMON-PRIOR>                         73384455
<ACCUMULATED-NII-CURRENT>                            0
<OVERDISTRIBUTION-NII>                         4872344
<ACCUMULATED-NET-GAINS>                              0
<OVERDISTRIBUTION-GAINS>                      33645768
<ACCUM-APPREC-OR-DEPREC>                       1278451
<NET-ASSETS>                                 523297551
<DIVIDEND-INCOME>                                    0
<INTEREST-INCOME>                             19805148
<OTHER-INCOME>                                       0
<EXPENSES-NET>                               (2388267)
<NET-INVESTMENT-INCOME>                       17416881
<REALIZED-GAINS-CURRENT>                     (4753399)
<APPREC-INCREASE-CURRENT>                    (9085386)
<NET-CHANGE-FROM-OPS>                          3578096
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                   (19253308)
<DISTRIBUTIONS-OF-GAINS>                             0
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                              0
<NUMBER-OF-SHARES-REDEEMED>                    2307200
<SHARES-REINVESTED>                                  0
<NET-CHANGE-IN-ASSETS>                      (31198467)
<ACCUMULATED-NII-PRIOR>                              0
<ACCUMULATED-GAINS-PRIOR>                            0
<OVERDISTRIB-NII-PRIOR>                      (3035917)
<OVERDIST-NET-GAINS-PRIOR>                  (28892369)
<GROSS-ADVISORY-FEES>                          1907293
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                                2406925
<AVERAGE-NET-ASSETS>                         531190706  
<PER-SHARE-NAV-BEGIN>                             7.56
<PER-SHARE-NII>                                   0.24
<PER-SHARE-GAIN-APPREC>                         (0.17)
<PER-SHARE-DIVIDEND>                            (0.27)
<PER-SHARE-DISTRIBUTIONS>                            0
<RETURNS-OF-CAPITAL>                                 0
<PER-SHARE-NAV-END>                               7.36
<EXPENSE-RATIO>                                   0.91
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                                 0