STATEMENT OF ADDITIONAL INFORMATION

                              HERITAGE MUTUAL FUNDS



    O     CAPITAL APPRECIATION TRUST        O     HIGH YIELD BOND FUND
    O     CORE EQUITY FUND                  O     INTERNATIONAL EQUITY FUND
    O     DIVERSIFIED GROWTH FUND           O     MID CAP STOCK FUND
    O     GROWTH AND INCOME TRUST           O     SMALL CAP STOCK FUND



      This Statement of Additional  Information ("SAI") dated January 2, 2007 as
supplemented  on  January  12,  2007,  should  be read in  conjunction  with the
Prospectus   dated  January  2,  2007  describing  the  shares  of  the  Capital
Appreciation  Trust, the Growth and Income Trust, the Heritage Income Trust-High
Yield Bond Fund and the five series of the Heritage Series Trust,  which are the
Core Equity Fund,  Diversified  Growth Fund, the International  Equity Fund, the
Mid Cap  Stock  Fund  and  the  Small  Cap  Stock  Fund,  (each  a  "fund"  and,
collectively, the "funds").

      This SAI is not a prospectus itself. This SAI is incorporated by reference
into the funds'  Prospectus.  In other  words,  this SAI is legally  part of the
funds' Prospectus.

      The financial statements for the Capital Appreciation Trust for the fiscal
year ended August 31, 2006,  the  financial  statements  for the High Yield Bond
Fund and the Growth and Income  Trust for the fiscal  year ended  September  30,
2006,  and the financial  statements for the five series of Series Trust for the
fiscal year ended October 31, 2006 are  incorporated  herein by reference to the
funds' Annual Reports to Shareholders dated August 31, 2006,  September 30, 2006
and October 31, 2006, respectively. Additionally, stub year financial statements
are available for Capital Appreciation,  High Yield Bond Fund and the Growth and
Income Trust for the fiscal  period  ending on October 31,  2006.  Copies of the
Prospectus  or annual,  stub year and  semiannual  reports to  shareholders  are
available, without charge, upon request by writing to Heritage Asset Management,
Inc. at the address below,  calling (800) 421-4184 or by visiting our website at
HeritageFunds.com.








                         HERITAGE ASSET MANAGEMENT, INC.
               880 Carillon Parkway, St. Petersburg, Florida 33716




                                TABLE OF CONTENTS
                                                                          Page
                                                                          ----

I.    GENERAL INFORMATION....................................................1
II.   INVESTMENT INFORMATION.................................................1
      A.    Investment Policies, Strategies and Risks........................1
      B.    Industry Classifications........................................24
III.  INVESTMENT LIMITATIONS................................................24
      A.    Fundamental Investment Policies for All Funds..................244
      B.    Non-Fundamental Policies for All Funds..........................25
      C.    Exception.......................................................25
IV.   NET ASSET VALUE......................................................255
V.    INVESTING IN THE FUNDS...............................................277
VI.   INVESTMENT PROGRAMS..................................................277
      A.    Retirement Plans...............................................277
      B.    Rights of Accumulation.........................................277
      C.    Class A Letter of Intent.......................................288
VII.  CONVERSION OF CLASS B SHARES.........................................299
VIII. REDEEMING SHARES.....................................................299
      A.    Receiving Payment...............................................30
      B.    Telephone Transactions..........................................30
      C.    Systematic Withdrawal Plan......................................30
      D.    Waiver of CDSC..................................................31
      E.    Redemptions in Kind.............................................31
      F.    Frequent Purchases and Redemptions of Fund Shares...............31
IX.   EXCHANGE PRIVILEGE....................................................32
X.    DISCLOSURE OF PORTFOLIO HOLDINGS......................................32
XI.   TAXES.................................................................33
XII.  SHAREHOLDER INFORMATION...............................................38
XIII. FUND INFORMATION......................................................38
      A.    Management of the Funds.........................................38
      B.    Five Percent Shareholders.......................................44
      C.    Proxy Voting Policies and Procedures............................45
      D.    Investment Adviser and Administrator; Subadvisers...............46
      E.    Portfolio Managers..............................................52
      F.    Portfolio Turnover and Brokerage Practices......................67
      G.    Distribution of Shares..........................................69
      H.    Payments to Dealers.............................................72
      I.         Additional Services to the Funds...........................73
      J.    Potential Liability.............................................74
      APPENDIX A - INVESTMENT TYPES GLOSSARY...............................A-1
      APPENDIX B - COMMERCIAL PAPER / CORPORATE DEBT RATINGS...............B-1

                                       1


I.    GENERAL INFORMATION
      -------------------

      The Heritage  Capital  Appreciation  Trust ("Capital  Appreciation"),  the
Heritage  Growth and Income Trust  ("Growth and  Income"),  the Heritage  Income
Trust  ("Income   Trust")  and  the  Heritage  Series  Trust  ("Series   Trust")
(collectively,  the "Trusts") each was established as a  Massachusetts  business
trust under a Declaration of Trust dated June 21, 1985, July 25, 1986, August 4,
1989 and October 28, 1992, respectively.

      Each Trust is registered as an open-end diversified  management investment
company under the  Investment  Company Act of 1940, as amended (the "1940 Act").
Capital  Appreciation,  Growth and Income  and  Income  Trust each offer  shares
through a single  investment  portfolio.  In the case of Income Trust,  the High
Yield Bond Fund ("High Yield") is the only investment portfolio offered.  Series
Trust currently offers its shares through five separate investment portfolios:

    o  the Core Equity Fund ("Core Equity"),
    o  the Diversified Growth Fund  ("Diversified  Growth") (prior to January 2,
       2004, named Aggressive Growth Fund),
    o  the International Equity Fund ("International  Equity") (prior to July 1,
       2002, named Eagle International Equity Portfolio),
    o  the Mid Cap Stock Fund ("Mid Cap"), and
    o  the Small Cap Stock Fund ("Small Cap").

      Each fund  currently  offers  Class A shares  sold  subject to a front-end
sales  charge  ("Class  A  shares")  and  Class C shares  sold  subject  to a 1%
contingent  deferred  sales  charge  ("CDSC")  ("Class C shares").  In addition,
Capital  Appreciation,  Core Equity,  Diversified  Growth, Mid Cap and Small Cap
each  offer  Class I,  Class  R-3 and  Class R-5  shares,  each  sold  without a
front-end  sales  charge or CDSC.  Each fund,  except  Core  Equity,  previously
offered  Class B shares,  which are no longer for sale.  Until  March 30,  2007,
Class B shares may continue to be acquired through exchanges from Class B shares
of another Heritage Mutual Fund and dividend  reinvestment.  Effective March 30,
2007,  all  remaining  Class B shares of a fund will be converted to the Class A
shares of that fund.

      Each fund  described in this SAI operates for many  purposes as if it were
an independent company. Each fund has its own objective(s), policies, strategies
and portfolio managers, among other characteristics.

II.   INVESTMENT INFORMATION
      ----------------------

      A.    INVESTMENT POLICIES, STRATEGIES AND RISKS
            -----------------------------------------

      This section provides a detailed  description of the securities in which a
fund may invest to achieve  its  investment  objective,  the  strategies  it may
employ and the corresponding  risks of such securities and strategies.  For more
information  regarding the description of various types of securities in which a
fund may invest, please refer to Appendix A, Investment Types Glossary. For more
information on a fund's  principal  strategies and risks,  please see the funds'
Prospectus.

      EQUITY SECURITIES:

      COMMON STOCKS. Each fund may invest in common stocks.

      CONVERTIBLE  SECURITIES.  Each fund may invest in convertible  securities.
While no securities investment is without some risk,  investments in convertible

                                       2


securities  generally entail less risk than the issuer's common stock,  although
the  extent to which  such risk is reduced  depends  in large  measure  upon the
degree to which the convertible security sells above its value as a fixed income
security.  The  market  value of  convertible  securities  tends to  decline  as
interest  rates increase and,  conversely,  increases as interest rates decline.
While convertible  securities  generally offer lower interest or dividend yields
than  nonconvertible  debt  securities  of similar  quality,  they do enable the
investor to benefit from increases in the market price of the underlying  common
stock.  Please see the discussion of "Investment  Grade/Lower  Rated Securities"
below for additional information.

      PREFERRED STOCK. Each fund may invest in preferred stock.

      REAL ESTATE INVESTMENT  TRUSTS ("REITS").  Each fund except High Yield may
invest in REITs.  The risks associated with REITs include defaults by borrowers,
self-liquidation,  failure to qualify as a pass-through entity under the Federal
tax law,  failure to qualify as an exempt entity under the 1940 Act and the fact
that REITs are not diversified.

      WARRANTS AND RIGHTS. Each fund may purchase warrants and all funds, except
High Yield,  may purchase  rights,  which are instruments  that permit a fund to
acquire,  by  subscription,  the capital stock of a corporation  at a set price,
regardless  of the market price for such stock.  The market price of warrants is
usually significantly less than the current price of the underlying stock. Thus,
there is a greater risk that warrants  might drop in value at a faster rate than
the underlying stock. All funds,  except High Yield,  currently do not intend to
invest more than 5% of their respective net assets in warrants.  High Yield does
not have the 5% limitation.  International Equity also may invest in warrants or
rights it acquired as part of a unit or  attached to  securities  at the time of
purchase without any limitation.

      DEBT SECURITIES:

      DEBT SECURITIES.  Each fund may invest in debt securities.

      CORPORATE  DEBT  OBLIGATIONS.  Each  fund may  invest  in  corporate  debt
securities,  including  corporate  bonds,  debentures,  notes and other  similar
corporate debt instruments. Please see the discussion of "Investment Grade/Lower
Rated Securities" below for additional information.

      FIXED AND FLOATING RATE LOANS. High Yield may invest in fixed and floating
rate loans ("Loans") arranged through private  negotiations  between a corporate
borrower or a foreign  sovereign  entity and one or more financial  institutions
("Lenders").  High Yield may invest in such loans in the form of  participations
in Loans  ("Participations")  and  assignments of all or a portion of Loans from
third parties ("Assignments"). A fund may acquire Participations and Assignments
that are high yield,  nonconvertible corporate debt securities or short duration
debt  securities.  Participations  typically  will  result in the fund  having a
contractual relationship only with the Lender and not with the borrower.

      High  Yield  considers  these   investments  to  be  investments  in  debt
securities.  High  Yield,  in  pursuing  its  investment  policies,  may acquire
Participations  and Assignments  that are high yield,  nonconvertible  corporate
debt securities or short duration debt securities.

      High Yield will have the right to receive payments of principal,  interest
and any  fees  to  which  it is  entitled  only  from  the  Lender  selling  the
Participation  and only upon  receipt  by the  Lender of the  payments  from the
borrower.  In connection  with purchasing  Participations,  High Yield generally
will have no right to enforce  compliance  by the borrower with the terms of the
loan  agreement  relating  to the Loan,  nor any rights of set-off  against  the
borrower.  Additionally, High Yield may not benefit directly from any collateral

                                       3


supporting  the Loan in which it has purchased the  Participation.  As a result,
the fund will assume the credit risk of both the borrower and the Lender that is
selling the Participation.  In the event of the insolvency of the Lender selling
a  Participation,  High Yield may be treated as a general creditor of the Lender
and may not benefit from any set-off  between the Lender and the borrower.  High
Yield will acquire  Participations  only if the Lender  interpositioned  between
High Yield and the borrower is determined by the Subadviser to be  creditworthy.
When High Yield purchases Assignments from Lenders, the fund will acquire direct
rights   against  the   borrower  on  the  Loan,   except  that  under   certain
circumstances,  such rights may be more limited than those held by the assigning
Lender.

      High   Yield   may  have   difficulty   disposing   of   Assignments   and
Participations.  Because the market for such  instruments  is not highly liquid,
the fund  anticipates  that  such  instruments  could be sold  only to a limited
number of institutional  investors. The lack of a highly liquid secondary market
may have an  adverse  impact on the value of such  instruments  and will have an
adverse  impact on the fund's  ability to dispose of particular  Assignments  or
Participations  in response to a specific  economic event, such as deterioration
in the  creditworthiness of the borrower.  Thus, the fund will treat investments
in Participations  and Assignments as illiquid for purposes of its limitation on
investments  in  illiquid  securities.  High Yield may revise this policy in the
future.

      BRADY  BONDS.  High  Yield  may  invest  in Brady  Bonds,  which  are debt
securities, generally denominated in U.S. dollars, issued under the framework of
the Brady Plan. Western Asset Management  Company,  the subadviser to High Yield
(the  "Subadviser"),  believes  economic  reforms,  undertaken  by  countries in
connection  with the issuance of Brady Bonds,  make the debt of those  countries
that  have  issued  or  announced  plans to  issue  Brady  Bonds  an  attractive
opportunity  for  investment.  However,  there  can  be no  assurance  that  the
Subadviser's expectations with respect to Brady Bonds will be realized.

      Regardless  of the stated  face  amount and  stated  interest  rate of the
various types of Brady Bonds,  High Yield will purchase Brady Bonds in secondary
markets, as described below.

      In the  secondary  markets,  the price and yield to the  investor  reflect
market  conditions  at the time of  purchase.  Brady  Bonds  issued to date have
traded at a deep discount  from their face value.  Certain  sovereign  bonds are
entitled to "value recovery payments" in certain  circumstance which, in effect,
constitute  supplemental interest payments but generally are not collateralized.
Certain  Brady Bonds have been  collateralized  as to principal  due at maturity
(typically  30 years from the date of  issuance)  by U.S.  Treasury  zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds,  although
the  collateral  is not available to investors  until the final  maturity of the
Brady Bonds.  Collateral  purchases  are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be  collateralized  by cash or high-grade  securities in amounts
that typically  represent between 12 and 18 months of interest accruals on these
instruments  with the balance of the interest  accruals being  uncollateralized.
High Yield may purchase  Brady Bonds with limited or no  collateralization,  and
will  rely  for  payment  of  interest  and  (except  in the  case of  principal
collateralized  Brady Bonds)  principal  primarily  based on the willingness and
ability of the foreign  government to make payment in accordance  with the terms
of the  Brady  Bonds.  Brady  Bonds  issued  to date are  purchased  and sold in
secondary   markets  through  U.S.   securities   dealers  and  other  financial
institutions,  and  generally  are  maintained  through  European  transnational
security  depositories.  A  substantial  portion  of the  Brady  Bonds and other
sovereign debt  securities in which High Yield invests are likely to be acquired
at a discount,  which  involves  certain  considerations  discussed  below under
"Taxes."

      In the event of a default with respect to collateralized  Brady Bonds as a
result of which the payment obligations of the issuer are accelerated,  the U.S.
Treasury zero coupon obligations held as collateral for the payment of principal
will not be distributed to investors,  nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent to the
scheduled  maturity of the  defaulted  Brady  Bonds,  which will  continue to be

                                       4


outstanding,  at which  time the face  amount of the  collateral  will equal the
principal  payments  that  would  have then  been due on the Brady  Bonds in the
normal course. Based upon current market conditions, High Yield would not intend
to purchase  Brady Bonds that, at the time of  investment,  are in default as to
payments.  However,  in light of the residual risk of the Brady Bonds and, among
other factors,  the history of default with respect to commercial  bank loans by
public and private  entities of countries  issuing Brady Bonds,  investments  in
Brady Bonds are to be viewed as speculative.

      FOREIGN  DEBT  SECURITIES.  High  Yield may  invest up to 20% of its total
assets in foreign fixed and floating rate income securities  (including emerging
market  securities),   all  or  a  portion  of  which  may  be  non-U.S.  dollar
denominated. There is no minimum rating criteria for High Yield's investments in
such securities. Investing in the securities of foreign issuers involves special
considerations  that  are  not  typically   associated  with  investing  in  the
securities of U.S issuers.  In addition,  emerging markets are markets that have
risks that are  different  and  higher  than  those in more  developed  markets.
Investments  in  securities  of foreign  issuers may involve risks arising from:
restrictions on foreign investment and repatriation of capital; from differences
between U.S. and foreign securities  markets,  including less volume;  from much
greater  price  volatility  in and relative  illiquidity  of foreign  securities
markets,  different  trading  and  settlement  practices  and less  governmental
supervision and regulation;  from changes in currency  exchange rates, from high
and volatile rates of inflation;  from economic, social and political conditions
and, as with domestic  multinational  corporation;,  from  fluctuating  interest
rates.  Other  investment  risks  include  the  possible  imposition  of foreign
withholding  taxes on  certain  amounts of High  Yield's  income,  the  possible
seizure or nationalization  of foreign assets and the possible  establishment of
exchange  controls,   expropriation,   confiscatory   taxation,   other  foreign
governmental  laws or restrictions  that might affect adversely  payments due on
securities  held by High Yield,  the lack of extensive  operating  experience of
eligible foreign subcustodian's and legal limitations on the ability of the High
Yield to recover assets held in custody by a foreign  subcustodian  in the event
of the  subcustodian's  bankruptcy.  In  addition,  there  may be less  publicly
available  information  about a foreign  issuer  than about a U.S.  issuer,  and
foreign  issuers  may  not be  subject  to the  same  accounting,  auditing  and
financial recordkeeping standards and requirements of U.S. issuers.  Finally, in
the event of a default in any such foreign obligations, it may be more difficult
for High  Yield to obtain or  enforce a  judgment  against  the  issuers of such
obligations.

      ADDITIONAL  RISKS  OF  HIGH  YIELD  FOREIGN   SOVEREIGN  DEBT  SECURITIES.
Investing  in  fixed  and  floating  rate  high  yield  foreign  sovereign  debt
securities  will expose  funds  investing  in such  securities  to the direct or
indirect consequences of political,  social or economic changes in the countries
that issue the securities.  The ability and willingness of sovereign obligors in
developing and emerging  countries or the governmental  authorities that control
repayment of their external debt to pay principal and interest on such debt when
due may depend on general economic and political  conditions within the relevant
country.  Countries, such as those in which a fund may invest, have historically
experienced,  and may  continue to  experience,  high rates of  inflation,  high
interest  rates,  exchange  rate trade  difficulties  and  extreme  poverty  and
unemployment.  Many of these  countries  also  are  characterized  by  political
uncertainty or instability.

      Other  factors that may influence  the ability or  willingness  to service
debt  include,  but are not  limited to: a country's  cash flow  situation,  the
availability  of sufficient  foreign  exchange on the date a payment is due, the
relative  size of its debt  service  burden to the  economy as a whole,  and its
government's  policy  towards  the IMF,  the World Bank and other  international
agencies.  The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations also will be strongly  influenced by the obligor's
balance of payments,  including export performance,  its access to international
credits and  investments,  fluctuations  in interest rates and the extent of its
foreign reserves.  A country whose exports are concentrated in a few commodities
or whose  economy  depends on certain  strategic  imports could be vulnerable to
fluctuations in  international  prices of these  commodities or imports.  To the
extent that a country  receives payment for its exports in currencies other than
dollars,  its  ability to make debt  payments  denominated  in dollars  could be
affected  adversely.  If a foreign sovereign obligor cannot generate  sufficient
earnings from foreign trade to service its external  debt, it may need to depend

                                       5


on  continuing  loans and aid from  foreign  governments,  commercial  banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments,  multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic  reforms  and/or  economic  performance  and the timely  service of its
obligations.  Failure to implement such reforms, achieve such levels of economic
performance  or  repay  principal  or  interest  when  due  may  result  in  the
cancellation of such third parties' commitments to lend funds, which may further
impair the  obligor's  ability or  willingness  to service its debts in a timely
manner.

      Also,  generally,  the cost of  servicing  external  debt will be affected
adversely by rising  international  interest  rates,  because many external debt
obligations  bear interest at rates that are adjusted  based upon  international
interest  rates.  The ability to service  external  debt also will depend on the
level of the  relevant  government's  international  currency  reserves  and its
access to foreign  exchange.  Currency  devaluations may affect the ability of a
sovereign obligor to obtain sufficient  foreign exchange to service its external
debt.

      As a result of the foregoing,  a  governmental  obligor may default on its
obligations. If such an event occurs, High Yield may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the  defaulting  party  itself,  and the  ability of the holder of
foreign  sovereign  debt  securities  to obtain  recourse  may be subject to the
political  climate in the relevant  country.  In addition,  no assurance  can be
given that the holders of commercial bank debt will not contest  payments to the
holders of other  foreign  sovereign  debt  obligations  in the event of default
under their commercial bank loan agreements.

      Sovereign  obligors in  developing  and emerging  countries  are among the
world's largest debtors to commercial banks,  other  governments,  international
financial organizations and other financial institutions. These obligors have in
the past experienced  substantial  difficulties in servicing their external debt
obligations,  which led to defaults on certain obligations and the restructuring
of certain indebtedness.  Restructuring  arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting  outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest  payments.
Holders of  certain  foreign  sovereign  debt  securities  may be  requested  to
participate in the restructuring of such obligations and to extend further loans
to their  issuers.  There can be no  assurance  that the  Brady  Bonds and other
foreign  sovereign  debt  securities  in which High Yield may invest will not be
subject to similar restructuring arrangements or to requests for new credit that
may affect adversely High Yield's holdings. Furthermore, certain participants in
the secondary  market for such debt may be involved  directly in negotiating the
terms of these  arrangements  and may therefore have access to  information  not
available to other market participants.

      INVESTMENT GRADE AND LOWER RATED SECURITIES:

      INVESTMENT  GRADE  SECURITIES.  Each fund may invest in  securities  rated
investment  grade.  Securities  rated in the lowest category of investment grade
are  considered  to have  speculative  characteristics  and  changes in economic
conditions  are more likely to lead to a weakened  capacity to pay  interest and
repay principal than is the case with higher grade bonds. Each fund may retain a
security that has been downgraded  below  investment grade if, in the opinion of
its subadviser, it is in the fund's best interest.

      LOWER  RATED /  HIGH-YIELD  SECURITIES.  Diversified  Growth,  High Yield,
International  Equity,  Growth and  Income,  Mid Cap and Small Cap may invest in
debt securities  rated below  investment  grade.  These  securities are commonly

                                       6


referred  to as "high  yield  securities"  and are  deemed  to be  predominantly
speculative  with  respect to the  issuer's  capacity to pay  interest and repay
principal  and may  involve  major risk  exposure to adverse  conditions.  These
securities  are  subject  to  specific  risks  that  may  not  be  present  with
investments of higher grade securities.  Diversified  Growth,  Mid Cap and Small
Cap  currently  do not  intend to invest  more than 5% of their  respective  net
assets in lower rated/high-yield securities.  International Equity may invest up
to 10% of its net  assets  in  lower  rated/high-yield  securities.  High  Yield
invests at least 80% of its net assets in lower rated/high-yield securities.

      RISK FACTORS OF LOWER RATED / HIGH-YIELD SECURITIES:

      INTEREST RATE AND ECONOMIC RISK. As with all debt  securities,  the market
prices of high yield  securities  tend to decrease when interest  rates rise and
increase when interest rates fall. The prices of high yield securities also will
fluctuate  greatly during periods of economic  uncertainty and changes resulting
in  changes in a fund's net asset  value.  During  these  periods,  some  highly
leveraged high yield  securities  issuers may  experience a higher  incidence of
default  due to  their  inability  to  meet  principal  and  interest  payments,
projected business goals or to obtain additional financing.  In addition, a fund
may need to  replace or sell a junk bond that it owns at  unfavorable  prices or
returns. Accordingly,  those high yield securities held by a fund may affect its
net asset value and performance adversely during such times.

      In a declining interest rate market, if an issuer of a high-yield security
containing a redemption or call provision  exercises  either  provision,  a fund
would have to replace the security, which could result in a decreased return for
shareholders.  Conversely, if a fund experiences unexpected net redemptions in a
rising  interest  rate market,  it might be forced to sell  certain  securities,
regardless of  investment  merit.  While it is  impossible  to protect  entirely
against this risk,  diversification  of a fund's  investment  portfolio  and its
subadviser's  careful analysis of prospective  investment  portfolio  securities
should  minimize the impact of a decrease in value of a  particular  security or
group of securities in the fund's investment portfolio.

      SECURITIES RATINGS AND CREDIT RISK..  Securities ratings are based largely
on the  issuer's  historical  financial  information  and the  rating  agencies'
investment  analysis at the time of rating.  Credit ratings usually evaluate the
safety of principal and interest payment of debt securities,  such as high yield
securities,  but may  not  reflect  the  true  risks  of an  investment  in such
securities.  A reduction in an issuer's  credit  rating may cause that  issuer's
high yield securities to decrease in market value.  Also, credit rating agencies
may  fail  to  change  the  credit   ratings  to  reflect   subsequent   events.
Consequently,  the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate.

                                       7


      A fund's subadviser continually monitors the investments in its respective
investment  portfolio  and carefully  evaluates  whether to dispose of or retain
high yield  securities  whose credit ratings have changed.  A fund's  subadviser
primarily relies on its own credit analysis, including a study of existing debt,
capital  structure,  ability to service debt and pay  dividends,  sensitivity to
economic conditions and other factors in its determination. See APPENDIX B for a
description of corporate debt ratings.

      LIQUIDITY RISK AND VALUATION.  The market for high yield  securities tends
to be less active and primarily dominated by institutional investors compared to
the  market  for  high-quality  debt  securities.  During  periods  of  economic
uncertainty or adverse economic changes,  the market may be further  restricted.
In these conditions,  a fund may have to dispose of its high yield securities at
unfavorable  prices or below fair market value. In addition,  during such times,
reliable  objective  information  may be limited  or  unavailable  and  negative
publicity may adversely affect the public's  perception of the junk bond market.
A  Trust's  Board of  Trustees  ("Board")  or  subadviser  may  have  difficulty
assessing the value of high yield securities  during these times.  Consequently,
any of these factors may reduce the market value of high yield  securities  held
by a fund.

      SHORT-TERM MONEY MARKET INSTRUMENTS:

      BANKERS' ACCEPTANCES.  Each fund may invest in bankers' acceptances.

      High Yield and Growth and  Income may invest in  bankers'  acceptances  of
domestic banks and savings and loans that have assets of at least $1 billion and
capital,  surplus and undivided  profits of over $100 million as of the close of
their most recent fiscal year.  High Yield and Growth and Income may also invest
in  instruments  that are  insured  by the Bank  Insurance  Fund or the  Savings
Institution   Insurance  Fund  of  the  Federal  Deposit  Insurance  Corporation
("FDIC").

      CERTIFICATES  OF  DEPOSIT  ("CDS").  Each fund may invest in CDs issued by
domestic institutions with assets in excess of $1 billion.

      COMMERCIAL PAPER. Each fund may invest in commercial paper that is limited
to  obligations  rated  Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. High
Yield may also invest in other lower quality commercial paper.

      OTHER.  High Yield also may  invest in demand and time  deposits,  savings
shares and high  quality,  short-term,  corporate  debt  obligations,  including
variable rate demand notes, having a maturity of one year or less. Because there
is no secondary  trading market in demand notes,  the inability of the issuer to
make required payments could impact adversely a fund's ability to resell when it
deems advisable to do so.

      REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:

      REPURCHASE AGREEMENTS. Each fund may invest up to 20% of its net assets in
repurchase   agreements  In  accordance   with  the  guidelines  and  procedures
established  by the Board,  a fund may enter  into  repurchase  agreements  with
member banks of the Federal Reserve System,  securities  dealers who are members
of  a  national   securities  exchange  or  market  makers  in  U.S.  Government
securities.  Although  repurchase  agreements carry certain risks not associated
with direct investment in securities,  including possible declines in the market
value of the  underlying  securities and delays and costs to a fund if the other
party becomes bankrupt, a fund intends to enter into repurchase  agreements only
with banks and dealers in  transactions  believed by its  subadviser  to present
minimal credit risks.

      REVERSE  REPURCHASE  AGREEMENTS.  Each fund may  borrow by  entering  into
reverse repurchase  agreements with the same parties with whom it may enter into

                                       8


repurchase  agreements.  Reverse repurchase agreements involve the risk that the
market value of securities  retained in lieu of sale by a fund may decline below
the price of the securities  the fund has sold but is obliged to repurchase.  If
the  buyer  of  securities  under  a  reverse  repurchase  agreement  files  for
bankruptcy  or becomes  insolvent,  such buyer or its  trustee or  receiver  may
receive an extension of time to determine whether to enforce a fund's obligation
to repurchase the securities.  During that time, a fund's use of the proceeds of
the  reverse  repurchase  agreement  effectively  may  be  restricted.   Reverse
repurchase  agreements create leverage, a speculative factor, and are considered
borrowings for the purpose of a fund's limitation on borrowing.

      U.S. GOVERNMENT:

      U.S.  GOVERNMENT  SECURITIES.  U.S.  Government  Securities are securities
issued   or   guaranteed   by  the   U.S.   Government   or  its   agencies   or
instrumentalities.  Some  obligations  issued by U.S.  Government  agencies  and
instrumentalities  are  supported  by the  full  faith  and  credit  of the U.S.
Treasury;  others by the right of the issuer to borrow  from the U.S.  Treasury;
others by discretionary  authority of the U.S.  Government to purchases  certain
obligations of the agency or  instrumentality;  and others only by the credit of
the agency or instrumentality. Those securities bear fixed, floating or variable
rates  of  interest.  Interest  may  fluctuate  based  on  generally  recognized
reference  rates  or the  relationship  of  rates.  While  the  U.S.  Government
currently provides financial support to such U.S.  Government-sponsored agencies
or instrumentalities, no assurance can be given that it will always do so, since
it is not so obligated by law. U.S. Government  securities include U.S. Treasury
bills, notes and bonds, Federal Home Loan Bank obligations, Federal Intermediate
Credit Bank  obligations,  U.S.  Government  agency  obligations  and repurchase
agreements secured thereby.

      ZERO COUPON SECURITIES:

      ZERO COUPON  SECURITIES AND PAY IN KIND BONDS.  Growth and Income and High
Yield may invest in zero  coupon  securities.  The market  prices of zero coupon
securities  generally are more  volatile than the prices of securities  that pay
interest  periodically and are likely to respond to changes in interest rates to
a  greater  degree  than do  other  types  of  debt  securities  having  similar
maturities and credit value.

      High Yield may also invest in  pay-in-kind  bonds,  which involve  special
risk  considerations.  Pay-in-kind  bonds tend to be  subject  to greater  price
fluctuations   in  response  to  changes  in   interest   rates  than   ordinary
interest-paying debt securities with similar maturities.

      Although zero coupon  securities and  pay-in-kind  bonds generally are not
traded on a national securities  exchange,  such securities are widely traded by
brokers and dealers and, to such extent, will not be considered illiquid for the
purposes of High Yield's 15% limitation on investments in illiquid securities.

      The Internal  Revenue Code requires the holder of a zero coupon  security,
certain  pay-in-kind  bonds and certain other securities  acquired at a discount
(such as Brady Bonds) to accrue income with respect to these securities prior to
the receipt of cash payments.  See "Taxes." Accordingly,  to avoid liability for
Federal income and excise taxes, High Yield may be required to distribute income
accrued  with respect to these  securities  and may have to dispose of portfolio
securities under disadvantageous circumstances in order to generate cash to make
the necessary distributions.

      FOREIGN SECURITIES EXPOSURE:

      DEPOSITARY  RECEIPTS.  Each fund except High Yield may invest in sponsored
or unsponsored European Depositary Receipts ("EDRs"), Global Depositary Receipts

                                       9


("GDRs"),  International  Depositary  Receipts ("IDRs"),  Special Drawing Rights
("SDRs") or other similar  securities  representing  interests in or convertible
into securities of foreign issuers (collectively, "Depositary Receipts").

      Issuers of the securities underlying  unsponsored  Depositary Receipts are
not  obligated  to  disclose  material  information  in the United  States  and,
therefore,  there may be less information  available  regarding such issuers and
there may not be a correlation  between such information and the market value of
these  unsponsored  Depositary  Receipts.  For  purposes  of certain  investment
limitations, EDRs, GDRs and IDRs are considered to be foreign securities.

      EURO/YANKEE BONDS.  International Equity may invest in  dollar-denominated
bonds  issued  by  foreign   branches  of  domestic  banks   ("Eurobonds")   and
dollar-denominated  bonds issued by a U.S.  branch of a foreign bank and sold in
the United  States  ("Yankee  bonds").  Investment in Eurobonds and Yankee bonds
entails  certain risks  similar to investment in foreign  securities in general.
These risks are discussed below.

      EURODOLLAR  CERTIFICATES.  Growth and Income  may  purchase  CDs issued by
foreign branches of domestic and foreign banks.  Such obligations may be subject
to  different  risks than are those of domestic  banks or  domestic  branches of
foreign banks. These risks include foreign economic and political  developments,
foreign governmental restrictions that may adversely affect payment of principal
and  interest  on  the  obligations,   foreign  exchange  controls  and  foreign
withholding  and other taxes on  interest  income.  Foreign  branches of foreign
banks  are  not   necessarily   subject  to  the  same  or  similar   regulatory
requirements,  loan  limitations,  and  accounting,  auditing and  recordkeeping
requirements  as are domestic banks or domestic  branches of foreign  banks.  In
addition, less information may be publicly available about a foreign branch of a
domestic bank or a foreign bank than a domestic bank.

      FOREIGN  SECURITIES.  Each fund,  except High Yield, may invest in foreign
securities. In most cases, the best available market for foreign securities will
be on the exchanges or in  over-the-counter  ("OTC") markets located outside the
United   States.   Foreign   stock   markets,   while   growing  in  volume  and
sophistication,  generally  are not as developed as those in the United  States,
and securities of some foreign issuers (particularly those located in developing
countries)  may be less liquid and more volatile  than  securities of comparable
U.S. companies. Their markets and economies may react differently to specific or
global events than the U.S. market and economy.  In addition,  foreign brokerage
commissions  generally are higher than  commissions on securities  traded in the
United States. In general,  there is less overall  governmental  supervision and
regulation of securities  exchanges,  brokers and listed  companies  than in the
United  States.  Investments  in foreign  securities  also  involve  the risk of
possible  adverse  changes  in  investment  or  exchange  control   regulations,
expropriation or confiscatory  taxation,  limitation on or delays in the removal
of funds or other  assets  of a fund,  political  or  financial  instability  or
diplomatic and other developments that could affect such investments.

      International   Equity   may   invest   in   emerging   markets.   Special
considerations (in addition to the considerations  regarding foreign investments
generally) may include greater political uncertainties,  an economy's dependence
on revenues from particular  commodities or on international  aid or development
assistance, currency transfer restrictions, a limited number of potential buyers
for  such  securities  and  delays  and  disruptions  in  securities  settlement
procedures. Compared to the U.S. and other developed countries, emerging markets
countries may have relatively  unstable  governments,  economies based on only a
few industries, present the risk of nationalization of businesses,  restrictions
on foreign  ownership,  or prohibitions on repatriation of assets,  and may have
less protection of property rights than more developed  countries and securities
markets that are less liquid and trade a smaller number of securities. Prices on
these  exchanges  tend to be  volatile  and,  in the past,  securities  in these
countries  have  offered  greater  potential  for gain  (as  well as loss)  than
securities of companies  located in developed  countries.  Political,  legal and
economic  structures in emerging market countries may be undergoing  significant
evolution and rapid development,  and they may lack the social, political, legal
and  economic  stability  characteristics  of more  developed  countries.  Their

                                       10


economies 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.

      No fund will  invest in  foreign  securities  when there are  currency  or
trading  restrictions in force or when, in the judgment of its subadviser,  such
restrictions are likely to be imposed.  However,  certain  currencies may become
blocked  (I.E.,  not freely  available  for  transfer  from a foreign  country),
resulting in the possible  inability  of the fund to convert  proceeds  realized
upon sale of portfolio  securities of the affected  foreign  companies into U.S.
currency.

      Because  investments in foreign companies usually will involve  currencies
of foreign countries and because Core Equity, Diversified Growth,  International
Equity,  Capital Appreciation,  and Growth and Income may temporarily hold funds
in bank  deposits in foreign  currencies  during the  completion  of  investment
programs,  the value of any of the  assets of these  funds as  measured  in U.S.
dollars may be affected  favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the fund may incur costs in
connection with conversions between various  currencies.  Each fund will conduct
its foreign currency exchange  transactions on a spot (I.E.,  cash) basis at the
spot rate prevailing in the foreign currency exchange market.  Additionally,  to
protect  against  uncertainty  in the level of future  exchange  rates,  Capital
Appreciation  and Growth and Income may enter into contracts to purchase or sell
foreign  currencies at a future date (a "forward currency  contract" or "forward
contract").

      AMERICAN DEPOSITARY RECEIPTS ("ADRS"):

      Each fund, except High Yield, may invest in both sponsored and unsponsored
ADRs.

      Holders of unsponsored depository receipts generally bear all the costs of
such  facilities,  and the depository of an unsponsored  facility  frequently is
under no obligation to distribute shareholder  communications  received from the
issuer of the deposited security or to pass through voting rights to the holders
of such receipts of the deposited securities. For purposes of certain investment
limitations,  ADRs are  considered to be foreign  securities  and are subject to
many of the risks  inherent in  investing  in foreign  securities,  as discussed
previously.

      HEDGING INSTRUMENTS - FUTURES, FORWARDS, OPTIONS AND HEDGING TRANSACTIONS:

      GENERAL  DESCRIPTION.  Each  fund,  except  Small  Cap,  may  use  certain
financial  instruments  ("Hedging  Instruments"),  including  futures  contracts
(sometimes  referred to as "futures"),  options,  options on futures and forward
currency  contracts,  to  attempt to hedge the fund's  investment  portfolio  as
discussed below.

      The use of Hedging Instruments is subject to applicable regulations of the
SEC, the exchanges upon which they are traded and the Commodity  Futures Trading
Commission  ("CFTC").  In addition,  a fund's ability to use Hedging Instruments
may be  limited  by tax  considerations.  See  "Taxes."  Pursuant  to claims for
exemption  filed with the National  Futures  Association on behalf of each fund,
except Small Cap, each fund is not deemed to be a "commodity pool operator" or a
"commodity  pool"  under  the  Commodity  Exchange  Act  and is not  subject  to
registration or regulation as such under the Commodity Exchange Act.

      In addition to the  products and  strategies  described  below,  the funds
expect to discover additional  opportunities in connection with options, futures
contracts,  forward currency contracts and other hedging  techniques.  These new
opportunities  may become  available  as each  fund's  subadviser  develops  new
techniques,   as   regulatory   authorities   broaden  the  range  of  permitted
transactions and as new options,  futures contracts,  forward currency contracts

                                       11


or other  techniques  are  developed.  A fund's  subadviser  may  utilize  these
opportunities  to the  extent  that it is  consistent  with a fund's  investment
objective(s) and permitted by the fund's  investment  limitations and applicable
regulatory  authorities.  Although a fund may be  permitted  to use a variety of
Hedging Instruments,  each fund presently intends to purchase,  sell and use for
hedging or  investment  purposes  those  Hedging  Instruments  as specified  and
discussed in the sections that follow.

      SPECIAL  RISKS  OF  HEDGING  STRATEGIES.  The use of  Hedging  Instruments
involves special  considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.

            (1)   Successful  use of most  Hedging  Instruments  depends  upon a
fund's  subadviser's  ability to predict  movements  of the overall  securities,
currency  and  interest  rate  markets,  which  requires  different  skills than
predicting  changes in the prices of  individual  securities.  While each fund's
subadviser is  experienced  in the use of Hedging  Instruments,  there can be no
assurance that any particular hedging strategy adopted will succeed.

            (2)   There might be imperfect correlation,  or even no correlation,
between  price  movements  of a Hedging  Instrument  and price  movements of the
investments being hedged. For example, if the value of a Hedging Instrument used
in a short  hedge  increased  by less than the  decline  in value of the  hedged
investment, the hedge would not be fully successful.  Such a lack of correlation
might  occur due to  factors  unrelated  to the value of the  investments  being
hedged,  such as speculative or other  pressures on the markets in which Hedging
Instruments  are  traded.   The   effectiveness  of  hedges  and  using  Hedging
Instruments  on indices will depend on the degree of  correlation  between price
movements in the index and price movements in the securities being hedged.

            To compensate for imperfect correlation, a fund may purchase or sell
Hedging  Instruments  in a greater  dollar amount than the hedged  securities or
currency if the volatility of the hedged  securities or currency is historically
greater than the volatility of the Hedging Instruments.  Conversely,  a fund may
purchase or sell fewer  contracts if the  volatility  of the price of the hedged
securities  or  currency  is   historically   less  than  that  of  the  Hedging
Instruments.

            (3)   Hedging strategies, if successful,  can reduce risk of loss by
wholly  or  partially  offsetting  the  negative  effect  of  unfavorable  price
movements in the investments being hedged. However,  hedging strategies also can
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a fund entered into a short
hedge because its  subadviser  projected a decline in the price of a security in
the  fund's  investment  portfolio,  and the  price of that  security  increased
instead,  the gain from that increase  might be wholly or partially  offset by a
decline in the price of the Hedging  Instrument.  Moreover,  if the price of the
Hedging  Instrument  declined  by more  than the  increase  in the  price of the
security, the fund could suffer a loss. In either such case, the fund would have
been in a better position had it not hedged at all.

            (4)   As  described  below,  each fund might be required to maintain
assets as "cover",  maintain segregated accounts or make margin payments when it
takes positions in Hedging Instruments  involving  obligations to third parties.
If a fund were unable to close out its positions in such Hedging Instruments, it
might be required  to continue to maintain  such assets or accounts or make such
payments until the position expired or matured.  These requirements might impair
a fund's  ability to sell a portfolio  security or make an  investment at a time
when it would  otherwise  be favorable to do so, or require that the fund sell a
portfolio  security at a  disadvantageous  time. A fund's ability to close out a
position in a Hedging  Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,  the
ability and willingness of the other party to the  transaction  ("counterparty")
to enter into a  transaction  closing out the position.  Therefore,  there is no
assurance  that any hedging  position can be closed out at a time and price that
is favorable to the fund.

                                       12


            COVER FOR HEDGING STRATEGIES. Some Hedging Instruments expose a fund
to an  obligation  to  another  party.  A fund  will  not  enter  into  any such
transactions  unless it owns either (1) an  offsetting  ("covered")  position in
securities,   currencies,   forward  currency  contracts,  options,  or  futures
contracts  or (2) cash and other  liquid  assets with a value,  marked-to-market
daily,  sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above.  Each fund will comply with SEC guidelines
regarding  cover for  instruments  and will, if the  guidelines so require,  set
aside cash or other liquid  assets in an account with the fund's  Custodian,  in
the prescribed amount.

            Assets used as cover or otherwise  held in an account cannot be sold
while the position in the corresponding  Hedging Instrument is open, unless they
are replaced with other  appropriate  assets.  As a result,  the commitment of a
large portion of a fund's assets to cover in  segregated  accounts  could impede
its ability to meet redemption requests or other current obligations.

      OPTIONS:

      Each  fund,  except  Small  Cap,  may use  for  hedging,  substitution  or
investment purposes,  certain options,  including options on securities,  equity
and debt indices and  currencies.  However,  Growth and Income may only purchase
and sell call options on securities and write covered call options on securities
as  discussed  below.  Certain  risks  and  special   characteristics  of  these
strategies are discussed below.

            RISKS OF OPTIONS TRADING.  The purchase of call options can serve as
a long  hedge,  and the  purchase  of put  options  can serve as a short  hedge.
Writing put or call  options  can enable the fund to enhance  income or yield by
reason of the premiums paid by the purchasers of such options.  However,  if the
market price of the security  underlying a put option  declines to less than the
exercise price of the option, minus the premium received,  the fund would expect
to suffer a loss.

            Writing  call options can serve as a limited  short  hedge,  because
declines in the value of the hedged  investment would be offset to the extent of
the  premium  received  for  writing the  option.  However,  if the  security or
currency  appreciates  to a price  higher  than the  exercise  price of the call
option,  it can be expected  that the option will be exercised and the Fund will
be obligated to sell the security or currency at less than its market value.  If
the call option is an OTC option,  the  securities or other assets used as cover
would be  considered  illiquid  to the  extent  described  under  "Illiquid  and
Restricted Securities."

            Writing  put  options  can serve as a  limited  long  hedge  because
increases in the value of the hedged investment would be offset to the extent of
the  premium  received  for  writing the  option.  However,  if the  security or
currency depreciates to a price lower than the exercise price of the put option,
it can be expected  that the put option will be  exercised  and the fund will be
obligated to purchase the security or currency at more than its market value. If
the put option is an OTC option,  the  securities  or other assets used as cover
would be  considered  illiquid  to the  extent  described  under  "Illiquid  and
Restricted Securities."

            The value of an option  position will  reflect,  among other things,
the current market value of the underlying investment,  the time remaining until
expiration,  the  relationship  of the exercise price to the market price of the
underlying  investment,  the  historical  price  volatility  of  the  underlying
investment and general market  conditions.  Options that expire unexercised have
no value.

            A fund  effectively  may terminate its right or obligation  under an
option by entering into a closing  transaction.  If the fund wished to terminate
its obligation to purchase or sell securities or currencies  under a put or call
option it has  written,  it may purchase a put or call option of the same series

                                       13


(I.E., an option identical in its terms to the option previously written);  this
is known as a closing purchase  transaction.  Conversely,  in order to terminate
its right to  purchase  or sell under a call or put option it has  purchased,  a
fund  may  write a call or put  option  of the same  series;  this is known as a
closing sale transaction.  Closing  transactions  essentially permit the fund to
realize  profits or limit losses on its options  positions prior to the exercise
or expiration of the option. Whether a profit or loss is realized from a closing
transaction  depends on the price  movement of the underlying  security,  index,
currency or futures contract and the market value of the option.

      In considering the use of options,  particular note should be taken of the
following:

            (1)   The value of an option  position  will  reflect,  among  other
things, the current market price of the underlying security,  index, currency or
futures contract,  the time remaining until expiration,  the relationship of the
exercise  price to the market  price,  the  historical  price  volatility of the
underlying  instrument  and general  market  conditions.  For this  reason,  the
successful use of options depends upon a fund's subadviser's ability to forecast
the direction of price fluctuations in the underlying instrument.

            (2)   At any given  time,  the  exercise  price of an option  may be
below, equal to or above the current market value of the underlying  instrument.
Purchased  options  that  expire  unexercised  have no  value.  Unless an option
purchased  by a fund is exercised  or unless a closing  transaction  is effected
with  respect to that  position,  a loss will be  realized  in the amount of the
premium paid.

            (3)   A position in an exchange-listed option may be closed out only
on an exchange that  provides a secondary  market for  identical  options.  Most
exchange-listed options relate to futures contracts,  stocks and currencies. The
ability to establish  and close out positions on the exchanges is subject to the
maintenance of a liquid secondary market. Although a fund intends to purchase or
write only  those  options  for which  there  appears to be an active  secondary
market,  there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. In such event, it may not be possible to
effect closing  transactions  with respect to certain  options,  with the result
that the fund would have to exercise  those  options  that it has  purchased  in
order to realize any profit.

            Unlike exchange-traded  options, which are standardized with respect
to the underlying  instrument,  expiration date, contract size and strike price,
the terms of OTC  options  (options  not  traded  on  exchanges)  generally  are
established  through  negotiation  with the other party to the option  contract.
While this type of arrangement  allows a fund greater  flexibility to tailor the
option  to  its  needs,  OTC  options   generally   involve  greater  risk  than
exchange-traded  options,  which are guaranteed by the clearing  organization of
the exchanges where they are traded.  Since closing transactions may be effected
with respect to options traded in the OTC markets (currently the primary markets
of options on debt securities) only by negotiating directly with the other party
to the option  contract,  or in a secondary market for the option if such market
exists,  there can be no assurance  that a fund will,  in fact, be able to close
out an OTC option  position at a favorable  price  prior to  expiration.  In the
event of insolvency of the counterparty,  a fund might be unable to close out an
OTC option position at any time prior to its expiration.

            With respect to options  written by a fund,  the  inability to enter
into a closing  transaction  may result in material  losses to it. For  example,
because a fund may maintain a covered  position  with respect to any call option
it writes on a  security,  it may not sell the  underlying  security  during the
period it is obligated under such option. This requirement may impair the fund's
ability to sell a portfolio security or make an investment at a time when such a
sale or investment might be advantageous.

            (4)   Activities  in the  options  market  may  result  in a  higher
portfolio turnover rate and additional brokerage costs; however, a fund also may
save on  commissions  by using  options as a hedge rather than buying or selling
individual securities in anticipation of market movements.

                                       14


            (5)   The risks of  investment  in options on indices may be greater
than options on securities or  currencies.  Because index options are settled in
cash, when a fund writes a call on an index it cannot provide,  in advance,  for
its potential  settlement  obligations  by acquiring and holding the  underlying
securities. A fund can offset some of the risk of writing a call index option by
holding a  diversified  portfolio  of  securities  similar to those on which the
underlying  index is based.  However,  the fund cannot,  as a practical  matter,
acquire and hold an investment  portfolio containing exactly the same securities
as  underlie  the index  and,  as a  result,  bears a risk that the value of the
securities held will vary from the value of the index.

            Even if a fund could  assemble an investment  portfolio that exactly
reproduced the composition of the underlying  index, it still would not be fully
covered from a risk standpoint  because of the "timing risk" inherent in writing
index  options.  When an index option is exercised,  the amount of cash that the
holder is  entitled  to receive is  determined  by the  difference  between  the
exercise  price  and the  closing  index  level on the date  when the  option is
exercised.  As with other kinds of  options,  a fund as the call writer will not
learn that it has been  assigned  until the next  business day, at the earliest.
The time lag between  exercise  and notice of  assignment  poses no risk for the
writer of a  covered  call on a  specific  underlying  security,  such as common
stock,  because  there the  writer's  obligation  is to deliver  the  underlying
security,  not to pay its value as of a fixed  time in the past.  So long as the
writer  already  owns the  underlying  security,  it can satisfy its  settlement
obligations  by  simply  delivering  it,  and the risk  that its  value may have
declined since the exercise date is borne by the exercising holder. In contrast,
even if the writer of an index  call holds  securities  that  exactly  match the
composition  of the  underlying  index,  it  will  not be able  to  satisfy  its
assignment  obligations by delivering  those  securities  against payment of the
exercise price.  Instead,  it will be required to pay cash in an amount based on
the closing index value on the exercise  date. By the time it learns that it has
been assigned, the index may have declined,  with a corresponding decline in the
value of its investment portfolio.  This "timing risk" is an inherent limitation
on the  ability of index call  writers to cover  their risk  exposure by holding
securities positions.

            If a fund has  purchased an index option and exercises it before the
closing index value for that day is  available,  it runs the risk that the level
of the underlying  index  subsequently  may change.  If such a change causes the
exercised option to fall out-of-the-money,  the fund will be required to pay the
difference  between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.

            As noted above,  Growth and Income may write covered call options on
securities  to  increase  income  in the  form of  premiums  received  from  the
purchasers of the options. Because it can be expected that a call option will be
exercised if the market value of the  underlying  security  increases to a level
greater  than the  exercise  price,  a fund will write  covered  call options on
securities  generally when its subadviser  believes that the premium received by
the fund plus  anticipated  appreciation  in the market price of the  underlying
security up to the exercise price of the option,  will be greater than the total
appreciation in the price of the security.  For Growth and Income, the aggregate
value of the  securities  underlying  call  options  (based  on the lower of the
option price or market) may not exceed 50% of its net assets.

            The strategy also may be used to provide limited  protection against
a decrease in the market price of the security in an amount equal to the premium
received for writing the call option,  less any transaction  costs. Thus, if the
market price of the underlying  security held by a fund declines,  the amount of
such  decline  will be  offset  wholly or in part by the  amount of the  premium
received by the fund. If,  however,  there is an increase in the market price of
the underlying security and the option is exercised,  the fund will be obligated
to sell the  security  at less than its  market  value.  A fund  would  lose the
ability to participate in the value of such securities  above the exercise price
of the call  option.  A fund also  gives up the  ability  to sell the  portfolio
securities used to cover the call option while the call option is outstanding.

                                       15


      FUTURES AND OPTIONS ON FUTURES:

      Core  Equity  may  purchase  and sell  futures on  securities,  indices or
currencies  and  options on futures  for hedging or  investment  purposes.  High
Yield's  investment  in futures and options on futures will not exceed 5% of the
liquidation value of the fund's  investment  portfolio after taking into account
any  unrealized  profits  and  unrealized  losses on any such  contracts  it has
entered.  (In general,  a call option on a futures contract is "in-the-money" if
the value of the underlying futures contract exceeds the strike, exercise, price
of the call; a put option on a futures contract is  "in-the-money"  if the value
of the underlying  futures contract is exceeded by the strike price of the put.)
International Equity may purchase and sell only currency and stock index futures
for hedging or investment purposes. Mid Cap does not anticipate using futures or
options on futures at this time.

      RISKS  OF  FUTURES  AND  OPTIONS  ON  FUTURES  TRADING.  Although  futures
contracts by their terms call for actual delivery or acceptance of currencies or
financial  instruments,  in most cases the  contracts  are closed out before the
settlement date without the making or taking of delivery.  Closing out a futures
contract  sale is  effected  by  purchasing  a  futures  contract  for the  same
aggregate  amount of the specific  type of financial  instrument or currency and
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase,  the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the  initial  sale,  the  seller  realizes a loss.  Similarly,  the
closing out of a futures contract purchase is effected by the purchaser entering
into a futures  contract sale. If the offsetting sale price exceeds the purchase
price,  the  purchaser  realizes a gain,  and if the purchase  price exceeds the
offsetting sale price, he realizes a loss.

      A fund is required to maintain margin  deposits  through which it buys and
sells futures  contracts or writes options on future  contracts.  Initial margin
deposits  vary from  contract  to  contract  and are  subject to change.  Margin
balances  are  adjusted  daily to  reflect  unrealized  gains and losses on open
contracts.  If the price of an open futures or written option position  declines
so that a fund has market exposure on such contract, the broker will require the
fund to deposit  variation  margin.  If the value of an open  futures or written
option  position  increases so that a fund no longer has market exposure on such
contract, the broker will pay any excess variation margin to the fund.

      Most of the  exchanges on which  futures  contracts and options on futures
are traded  limit the amount of  fluctuation  permitted  in futures  and options
prices  during a single  trading  day.  The daily  price limit  establishes  the
maximum amount that the price of a futures contract or option may vary either up
or down  from  the  previous  day's  settlement  price  at the end of a  trading
session.  Once the daily price limit has been  reached in a  particular  type of
contract,  no trades may be made on that day at a price  beyond that limit.  The
daily price limit governs only price  movement  during a particular  trading day
and therefore does not limit potential  losses because the limit may prevent the
liquidation  of  unfavorable  positions.  Futures  contract  and options  prices
occasionally have moved to the daily limit for several  consecutive trading days
with little or no trading,  thereby  preventing prompt liquidation of futures or
options positions and subjecting some traders to substantial losses.

      Another risk in employing  futures contracts and options as a hedge is the
prospect that prices will correlate imperfectly with the behavior of cash prices
for the following reasons.  First, rather than meeting additional margin deposit
requirements,  investors may close contracts  through  offsetting  transactions.
Second, the liquidity of the futures and options markets depends on participants
entering into offsetting  transactions rather than making or taking delivery. To
the extent that participants  decide to make or take delivery,  liquidity in the
futures and options markets could be reduced, thus producing distortion.  Third,
from the point of view of speculators,  the deposit  requirements in the futures
and options markets are less onerous than margin  requirements in the securities
market.  Therefore,  increased  participation  by speculators in the futures and
options markets may cause temporary price distortions. Due to the possibility of
distortion,  a correct forecast of general interest rate, currency exchange rate


                                       16


or security  price trends by a  subadviser  may still not result in a successful
transaction.

      In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures  contracts.  The ability to
establish and close out positions in such options is subject to the existence of
a  liquid  secondary  market.  Compared  to the  purchase  or  sale  of  futures
contracts,  the  purchase of call or put options on futures  contracts  involves
less  potential risk to a fund because the maximum amount at risk is the premium
paid  for  the  options  (plus  transaction  costs).   However,   there  may  be
circumstances  when the  purchase of a call or put option on a futures  contract
would result in a loss to a fund when the purchase or sale of a futures contract
would not,  such as when  there is no  movement  in the price of the  underlying
investment.

      STOCK INDEX FUTURES.  A stock index assigns  relative values to the common
stocks  comprising  the index.  A stock  index  futures  contract is a bilateral
agreement  pursuant  to which two parties  agree to take or make  delivery of an
amount of cash equal to a specified  dollar amount times the difference  between
the stock index value at the close of the last  trading day of the  contract and
the price at which the  futures  contract  is  originally  struck.  No  physical
delivery of the underlying stocks in the index is made.

      The risk of  imperfect  correlation  between  movements  in the price of a
stock index futures  contract and movements in the price of the securities  that
are the subject of the hedge increases as the composition of a fund's  portfolio
diverges from the securities  included in the applicable index. The price of the
stock index futures may move more than or less than the price of the  securities
being hedged.  If the price of the futures contract moves less than the price of
the  securities  that are the subject of the hedge,  the hedge will not be fully
effective  but,  if the price of the  securities  being  hedged  has moved in an
unfavorable direction, the fund would be in a better position than if it had not
hedged  at all.  If the  price of the  securities  being  hedged  has moved in a
favorable  direction,  this  advantage  will be partially  offset by the futures
contract.  If the price of the futures contract moves more than the price of the
securities,  a fund  will  experience  either  a loss or a gain  on the  futures
contract  that will not be  completely  offset by  movements in the price of the
securities  that are the subject of the hedge.  To compensate  for the imperfect
correlation  of  movements  in the  price of the  securities  being  hedged  and
movements in the price of the stock index futures  contracts,  a fund may buy or
sell stock index  futures  contracts in a greater  dollar amount than the dollar
amount of securities being hedged if the historical  volatility of the prices of
such securities is more than the historical volatility of the stock index. It is
also  possible  that,  where a fund  has sold  futures  contracts  to hedge  its
securities  against decline in the market,  the market may advance and the value
of securities  held by the fund may decline.  If this  occurred,  the fund would
lose money on the futures contract and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very  small  degree,  over time the  value of a  diversified  portfolio  of
securities  will tend to move in the same  direction as the market  indices upon
which the futures contracts are based.

      Where stock index  futures  contracts  are  purchased  to hedge  against a
possible  increase in the price of securities before a fund is able to invest in
securities  in an orderly  fashion,  it is possible  that the market may decline
instead.  If a fund then  concludes  not to invest  in  securities  at that time
because of concern as to possible  further market decline for other reasons,  it
will realize a loss on the futures contract that is not offset by a reduction in
the price of the securities it had anticipated purchasing.

      FOREIGN  CURRENCY  HEDGING  STRATEGIES.  Core  Equity may use  options and
futures on foreign  currencies and International  Equity may only use futures on
foreign currencies.

      Currency  hedges can protect  against price movements in a security that a
fund owns or intends to acquire that are attributable to changes in the value of
the currency in which it is denominated.  Such hedges do not,  however,  protect
against price movements in the securities that are attributable to other causes.

                                       17


      A fund might seek to hedge  against  changes in the value of a  particular
currency  when no Hedging  Instruments  on that  currency are  available or such
Hedging  Instruments are more expensive than certain other Hedging  Instruments.
In such cases,  a fund may hedge  against  price  movements in that  currency by
entering into  transactions  using Hedging  Instruments  on another  currency or
basket of currencies,  the values of which its  subadviser  believes will have a
high degree of positive  correlation  to the value of the currency being hedged.
The  risk  that  movements  in the  price  of the  Hedging  Instrument  will not
correlate  perfectly with movements in the price of the currency being hedged is
magnified when this strategy is used.

      The value of  Hedging  Instruments  on foreign  currencies  depends on the
value of the underlying  currency  relative to the U.S. dollar.  Because foreign
currency   transactions   occurring  in  the  interbank   market  might  involve
substantially  larger  amounts  than those  involved in the use of such  Hedging
Instruments,  a fund  could be  disadvantaged  by having to deal in the  odd-lot
market  (generally  consisting of  transactions of less than $1 million) for the
underlying  foreign  currencies at prices that are less favorable than for round
lots.

      There is no  systematic  reporting  of last sale  information  for foreign
currencies or any regulatory  requirement  that quotations be available  through
dealers or other market sources be firm or revised on a timely basis.  Quotation
information  generally  is  representative  of very  large  transactions  in the
interbank  market and thus might not reflect  odd-lot  transactions  where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. If the U.S. futures markets are closed while the markets
for the underlying currencies remain open,  significant price and rate movements
might take place in the  underlying  markets  that  cannot be  reflected  in the
markets for the Hedging Instruments until they reopen.

      Settlement of transactions  involving foreign currencies might be required
to take place within the country issuing the underlying  currency.  Thus, a fund
might be required to accept or make delivery of the underlying  foreign currency
in accordance with any U.S. or foreign regulations  regarding the maintenance of
foreign banking  arrangements by U.S. residents and might be required to pay any
fees,  taxes and charges  associated with such delivery  assessed in the issuing
country.

      FORWARD CURRENCY  CONTRACTS.  Each fund,  except Small Cap, may enter into
forward currency  contracts as discussed below.  Capital  Appreciation may enter
into  contracts to purchase or sell foreign  currencies at a future date that is
not  more  than 30 days  from  the date of the  contract.  International  Equity
generally will not enter into a forward contract with a term of greater than one
year.

      Core Equity,  Growth and Income and International  Equity may enter into a
forward  contract to sell the foreign  currency for a fixed U.S.  dollar  amount
approximating the value of some or all of their respective  portfolio securities
denominated in such foreign currency. International Equity may enter into such a
forward contract when its subadviser  believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar.

      In addition, Core Equity, Capital Appreciation,  International Equity, and
Growth and Income may use forward currency  contracts when its subadviser wishes
to "lock in" the U.S.  dollar price of a security when the fund is purchasing or
selling a security denominated in a foreign currency or anticipates  receiving a
dividend or interest payment denominated in a foreign currency.

      Growth  and  Income  may enter into  forward  currency  contracts  for the
purchase or sale of a specified  currency at a specified future date either with
respect to specific transactions or with respect to portfolio positions in order
to  minimize  the risk to the fund  from  adverse  changes  in the  relationship
between the U.S. dollar and foreign currencies.

                                       18


      Capital  Appreciation,  Core  Equity,  Diversified  Growth,  International
Equity and Growth and Income may seek to hedge against changes in the value of a
particular  currency by using forward contracts on another foreign currency or a
basket of  currencies,  the value of which the fund's  subadviser  believes will
have a positive correlation to the values of the currency being hedged. Use of a
different foreign currency magnifies the risk that movements in the price of the
forward  contract  will not  correlate or will  correlate  unfavorably  with the
foreign currency being hedged.

      In addition,  Core Equity,  International Equity and Growth and Income may
use  forward   currency   contracts  to  shift  exposure  to  foreign   currency
fluctuations  from  one  country  to  another.  For  example,  if a  fund  owned
securities  denominated in a foreign  currency and its subadviser  believed that
currency  would  decline  relative  to another  currency,  it might enter into a
forward  contract to sell an appropriate  amount of the first foreign  currency,
with payment to be made in the second foreign  currency.  Transactions  that use
two foreign  currencies are sometimes  referred to as "cross  hedging." Use of a
different  foreign  currency  magnifies a fund's  exposure  to foreign  currency
exchange rate fluctuations.

      The cost to a fund of engaging in forward  currency  contracts varies with
factors such as the currency involved, the length of the contract period and the
then market conditions  prevailing.  Because forward currency  contracts usually
are entered into on a principal basis, no fees or commissions are involved. When
a fund enters into a forward currency contract, it relies on the counterparty to
make  or  take  delivery  of the  underlying  currency  at the  maturity  of the
contract.  Failure by the  counterparty to do so would result in the loss of any
expected benefit of the transaction.

      As is the  case  with  futures  contracts,  parties  to  forward  currency
contracts can enter into  offsetting  closing  transactions,  similar to closing
transactions  on  futures,  by  entering  into an  instrument  identical  to the
original contract. Secondary markets generally do not exist for forward currency
contracts,  however, with the result that closing transactions  generally can be
made for  forward  currency  contracts  only by  negotiating  directly  with the
counterparty. Thus, there can be no assurance that a fund will, in fact, be able
to close out a forward currency contract at a favorable price prior to maturity.
In addition,  in the event of  insolvency of the  counterparty,  a fund might be
unable to close out a forward  currency  contract at any time prior to maturity.
In either  event,  the fund would  continue  to be  subject to market  risk with
respect  to the  position,  and would  continue  to be  required  to  maintain a
position in the securities or currencies that are the subject of the hedge or to
maintain cash or securities.

      The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities,  measured in the  foreign  currency,  will change  after the forward
currency contract has been  established.  Thus, a fund might need to purchase or
sell  foreign  currencies  in the spot (cash)  market to the extent such foreign
currencies  are not covered by forward  contracts.  The projection of short-term
currency market movements is extremely  difficult,  and the successful execution
of a short-term hedging strategy is highly uncertain.

      COMBINED   TRANSACTIONS.   A  fund  may  purchase  and  write  options  in
combination  with  each  other,  or  in  combination  with  futures  or  forward
contracts,  to  adjust  the  risk  and  return  characteristics  of its  overall
position.  For example, a fund may purchase a put option and write a call option
on the same  underlying  instrument,  in order to construct a combined  position
whose risk and return characteristics are similar to selling a futures contract.
Another  possible  combined  position would involve writing a call option at one
strike price and buying a call option at a lower  price,  in order to reduce the
risk of the written call option in the event of a  substantial  price  increase.
Because combined  options  positions  involve  multiple  trades,  they result in
higher transaction costs and may be more difficult to open and close out.

      A fund's  options and futures  activities may affect its turnover rate and

                                       19


brokerage commission payments.  The exercise of calls or puts written by a fund,
and the sale or purchase of futures contracts,  may cause it to sell or purchase
related investments, thus increasing its turnover rate. Once a fund has received
an  exercise  notice  on an option it has  written,  it cannot  effect a closing
transaction  in order to  terminate  its  obligation  under the  option and must
deliver or receive the underlying securities at the exercise price. The exercise
of puts purchased by a fund may also cause the sale of related investments,  and
increasing  turnover;  although  such  exercise  is within the  fund's  control,
holding a  protective  put might  cause it to sell the related  investments  for
reasons  that  would  not  exist in the  absence  of the put.  A fund will pay a
brokerage  commission  each time it buys or sells a put or call or  purchases or
sells a futures  contract.  Such commissions may be higher than those that would
apply to direct purchases or sales.

      SWAPS, CAPS, FLOORS AND COLLARS:

      Among the  transactions  into  which  International  Equity  may enter are
interest rate,  currency,  index and total return swaps and the purchase or sale
of  related  caps,  floors  and  collars.  The fund  expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio,  to protect  against  currency  fluctuations,  as a
duration management technique or to protect against any increase in the price of
securities the fund anticipates  purchasing at a later date. Interest rate swaps
involve the exchange  with another  party of  respective  commitments  to pay or
receive  interest,  E.G.,  an exchange of floating  rate payments for fixed rate
payments with respect to a notional amount of principal.

      International  Equity will usually enter into swaps on a net basis,  I.E.,
the two payment  systems are netted out in a cash settlement on the payment date
or dates specified in the instrument,  with the fund receiving or paying, as the
case may be, only the net amount of the two  payments.  Inasmuch as these swaps,
caps, floors and collars are entered into for good faith hedging  purposes,  the
fund's subadviser  believes such obligations do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing  restrictions.  The fund will not enter into any swap,  cap,  floor or
collar  transaction  unless, at the time of entering into such transaction,  the
unsecured  long-term  debt  of  the  counterparty,   combined  with  any  credit
enhancements,  is rated at least A by S&P or Moody's or has an equivalent rating
from any other NRSRO or is determined to be of equivalent  credit quality by the
fund's subadviser. If there is a default by the counterparty,  the fund may have
contractual remedies pursuant to the agreements related to the transaction.  The
swap market has grown  substantially  in recent  years,  with a large  number of
banks and  investment  banking  firms  acting both as  principals  and as agents
utilizing  standardized  swap  documentation.  As a result,  the swap market has
become relatively  liquid.  Caps, floors and collars are more recent innovations
for which  standardized  documentation  has not yet been  fully  developed  and,
accordingly, less liquid than swaps.

      International  Equity may enter into credit  default  swap  contracts  for
investment purposes.  As the seller in a credit default swap contract,  the fund
would be required to pay the par (or other  agreed-upon)  value of a  referenced
debt obligation to the  counterparty in the event of a default by a third party,
such as a U.S. or foreign corporate  issuer, on the debt obligation.  In return,
the fund would receive from the  counterparty a periodic stream of payments over
the term of the contract,  provided that no event of default has occurred. If no
default  occurs,  the fund would keep the stream of  payments  and would have no
payment  obligations.  As the  seller,  the fund would be subject to  investment
exposure on the notional amount of the swap.

      International  Equity may also purchase  credit  default swap contracts in
order to  hedge  against  the risk of  default  of debt  securities  held in its
portfolio,  in which case the fund would function as the counterparty referenced
in the preceding paragraph.  This would involve the risk that the investment may

                                       20


expire  worthless  and  would  only  generate  income  in the event of an actual
default  by the  issuer of the  underlying  obligation  (as  opposed to a credit
downgrade or other indication of financial  instability).  It would also involve
credit risk, I.E. that the seller may fail to satisfy its payment obligations to
the fund in the event of a default.

      OPTIONS ON SWAP AGREEMENTS:

      International  Equity may enter into  options  on swap  agreements.  These
transactions  are entered into in an attempt to obtain a particular  return when
it is considered  desirable to do so,  possibly at a lower cost to the fund than
if the fund had  invested  directly in an  instrument  that yielded that desired
return.  The fund may write  (sell)  and  purchase  put and call  swap  options.
Depending on the terms of a particular option agreement, the fund will generally
incur a greater  degree of risk when it writes a swap  option than it will incur
when it purchases a swap option. When the fund purchases a swap option, it risks
losing  only the amount of the  premium it has paid  should it decide to let the
option expire unexercised. However, when the fund writes a swap option, upon the
exercise of the option, the fund will become obligated according to the terms of
the underlying agreement.

      FORWARD COMMITMENTS:

      International  Equity and Growth and Income may make contracts to purchase
securities for a fixed price at a future date beyond  customary  settlement time
("forward  commitments").  However, Growth and Income currently has no intention
of  engaging  in such  transactions  at this time.  A fund may engage in forward
commitments if it either (1) holds and maintains  until the settlement date in a
segregated account,  cash or high-grade debt obligations in an amount sufficient
to meet the  purchase  price or (2) enters into an  offsetting  contract for the
forward sale of securities of equal value that it owns. Forward  commitments may
be considered securities in themselves. They involve a risk of loss if the value
of the security to be purchased  declines  prior to the settlement  date,  which
risk is in  addition to the risk of decline in value of a fund's  other  assets.
When such  purchases  are made through  dealers,  a fund relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to the
fund of an  advantageous  yield or price.  Although a fund  generally will enter
into forward  commitments  with the  intention of acquiring  securities  for its
investment portfolios, each fund may dispose of a commitment prior to settlement
and may realize short-term profits or losses upon such disposition.

      ILLIQUID AND RESTRICTED SECURITIES:

      Each fund will not  purchase or otherwise  acquire any illiquid  security,
agreements  maturing in more than seven days, if, as a result,  more than 15% of
its net assets (taken at current value) would be invested in securities that are
illiquid  by virtue of the  absence  of a readily  available  market or legal or
contractual restrictions on resale. The funds, except High Yield, presently have
no intention of investing  more than 5% of their  respective  assets in illiquid
securities. OTC options and their underlying collateral are currently considered
to be illiquid investments.  Core Equity, Growth and Income, High Yield, and Mid
Cap may sell OTC options and, in connection therewith, segregate assets or cover
its obligations  with respect to OTC options written by these funds.  The assets
used as cover for OTC  options  written  by a fund will be  considered  illiquid
unless OTC  options  are sold to  qualified  dealers who agree that the fund may
repurchase  any OTC option it writes at a maximum  price to be  calculated  by a
formula set forth in the option  agreement.  The cover for an OTC option written
subject to this procedure  would be considered  illiquid only to the extent that
the maximum  repurchase  price under the formula  exceeds the intrinsic value of
the option.

      Not all restricted  securities are deemed  illiquid for the purposes noted
in this section.  There is a large  institutional  market for certain securities
that are not  registered  under the  Securities  Act of 1933, as amended  ("1933
Act").  Rule 144A  under  the 1933 Act,  establishes  a "safe  harbor"  from the

                                       21


registration  requirements of the 1933 Act for resales of certain  securities to
qualified institutional buyers.  Institutional markets for restricted securities
that have developed as a result of Rule 144A provide both readily  ascertainable
values  for  certain  restricted  securities  and the  ability to  liquidate  an
investment  to  satisfy  share  redemption  orders.  An  insufficient  number of
qualified  institutional  buyers  interested  in  purchasing  Rule 144A eligible
securities held by a fund, however,  could adversely affect the marketability of
such portfolio securities and a fund may be unable to dispose of such securities
promptly or at reasonable prices. These securities are deemed to be illiquid for
purposes of compliance limitations on holdings of illiquid securities.

      Pursuant to High Yield's  Guidelines for Purchase of Rule 144A  Securities
("Guidelines")  adopted by the Board of Trustees  ("Board"),  the subadviser may
determine  that certain Rule 144A  Securities are liquid.  The subadviser  takes
into account a number of factors in reaching liquidity decisions,  including (1)
the total  amount of Rule  144A  Securities  being  offered,  (2) the  number of
potential purchasers of the Rule 144A Securities, (3) the number of dealers that
have undertaken to make a market in the Rule 144A Securities,  (4) the frequency
of trading in the 144A Securities, and (5) the nature of the 144A Securities and
how trading is effected (E.G., the time needed to sell the 144A Securities,  how
offers are solicited and the mechanics of transfer.) The continued  liquidity of
Rule 144A securities depends upon various factors,  including the maintenance of
an efficient  institutional market in which such unregistered  securities can be
readily  resold and the  willingness  of the issuer to register  the  securities
under the 1933 Act.

      High Yield may invest up to 25% of its net assets in  securities  that are
either  illiquid  or sold  in  reliance  of Rule  144A  and  are  deemed  by the
subadviser to be liquid. Of this 25% limitation,  no more than 15% of the fund's
net assets may be in any illiquid securities.

      OTHER INVESTMENT COMPANIES AND INDEX SECURITIES:

      INVESTMENT  COMPANIES.  Each fund may  invest in the  securities  of other
investment  companies to the extent that such an investment  would be consistent
with the  requirements  of the 1940 Act.  Investments in the securities of other
investment  companies may involve duplication of advisory fees and certain other
expenses.  By  investing  in  another  investment  company,  a  fund  becomes  a
shareholder  of that  investment  company.  As a result,  a fund's  shareholders
indirectly bear the fund's  proportionate share of the fees and expenses paid by
the  shareholders of the other investment  company,  in addition to the fees and
expenses  fund  shareholders  directly  bear in  connection  with the fund's own
operations.

      INDEX  SECURITIES.  Each fund may invest in Standard and Poor's Depositary
Receipts,  Standard and Poor's MidCap 400 Depositary Receipts, and other similar
index securities, which are considered investments in other investment companies
("Index Securities"). Index Securities are subject to the risks of an investment
in a broadly based portfolio of common stocks.

      OTHER INVESTMENT PRACTICES:

      WHEN-ISSUED   AND   DELAYED   DELIVERY   TRANSACTIONS.   High   Yield  and
International  Equity may enter into agreements with banks or broker-dealers for
the purchase or sale of securities at an agreed-upon price on a specified future
date.  Additionally,  High Yield may purchase on a firm commitment  basis.  Such
agreements might be entered into, for example, when High Yield and International
Equity  anticipate  a  decline  in  interest  rates and is able to obtain a more
advantageous yield by committing  currently to purchase  securities to be issued
later.  When  International  Equity  purchases  securities on a  when-issued  or
delayed delivery basis, it is required either (1) to create a segregated account
with the  Custodian  and to  maintain  in that  account  cash,  U.S.  Government
securities  or other high grade debt  obligations  in an amount equal on a daily
basis to the amount of  International  Equity's  when-issued or delayed delivery
commitments  or (2) to enter into an  offsetting  forward sale of  securities it
owns  equal in value to those  purchased.  International  Equity  will only make
commitments to purchase  securities on a when-issued  or delayed  delivery basis
with the intention of actually acquiring the securities. However, High Yield and
International  Equity may sell these securities before the settlement date if it
is deemed advisable as a matter of investment  strategy.  When the time comes to

                                       22


pay for when-issued or delayed delivery  securities,  International  Equity will
meet its  obligations  from then  available cash flow or the sale of securities,
or,  although  it  would  not  normally  expect  to do so,  from the sale of the
when-issued or delayed delivery  securities  themselves  (which may have a value
greater or less than International Equity's payment obligation).

      At  the  time  that  a fund  purchases  a  security  using  one  of  these
techniques,  a segregated  account consisting of cash or liquid securities equal
to the value of the when-issued or forward or firm commitment securities will be
established and maintained with the Trust's custodian or on the fund's books and
records and will be marked to market daily.  On the delivery date, the fund will
meet  its  obligations  from  securities  that  are  then  maturing  or sales of
securities held in the segregated asset account and/or from available cash flow.
When-issued  and  forward  commitment  securities  may  be  sold  prior  to  the
settlement  date.  The funds will engage in when-issued  and forward  commitment
transactions  only with the intention of actually  receiving or  delivering  the
securities,  as the case may be. However,  if the fund chooses to dispose of the
right to acquire a security prior to its  acquisition or dispose of its right to
deliver or receive against a forward commitment, it can incur a gain or loss. In
addition,  there is always the risk that the securities may not be delivered and
that the fund may incur a loss or will have lost the  opportunity  to invest the
amount set aside for such transaction in the segregated account.

      If the fund  disposes  of the right to  acquire a  when-issued  or forward
commitment security prior to its acquisition or disposes of its right to deliver
against  a  forward  commitment,  it can  incur  a gain or  loss  due to  market
fluctuation. In some instances, the third-party seller of when-issued or forward
commitment securities may determine prior to the settlement date that it will be
unable  to  meet  its  existing   transaction   commitments   without  borrowing
securities.  If  advantageous  from a yield  perspective,  the fund may, in that
event, agree to resell its purchase  commitment to the third-party seller at the
current  market  price on the date of sale and  concurrently  enter into another
purchase  commitment  for such  securities at a later date. As an inducement for
the fund to "roll  over"  its  purchase  commitment,  the  fund  may  receive  a
negotiated fee.

      LOANS OF PORTFOLIO SECURITIES.  Each fund may loan portfolio securities to
qualified broker-dealers.  International Equity may loan portfolio securities to
broker-dealers  or other  financial  institutions.  The  collateral for a fund's
loans  will be  "marked to  market"  daily so that the  collateral  at all times
exceeds  100% of the value of the loan. A fund may  terminate  such loans at any
time and the market risk  applicable  to any security  loaned  remains its risk.
Although  voting  rights,  or rights to  consent,  with  respect  to the  loaned
securities  pass to the borrower,  a fund retains the right to call the loans at
any time on reasonable  notice,  and it will do so in order that the  securities
may be voted by it if the holders of such  securities  are asked to vote upon or
consent to matters  materially  affecting the  investment.  A fund also may call
such loans in order to sell the securities involved.  High Yield may participate
in  securities  loans if they do not exceed 25% of the fund's  total  assets and
will  be  fully  collateralized  at all  times.  The  borrower  must  add to the
collateral  whenever the market value of the securities rises above the level of
such  collateral.  Securities loans involve some risk. A fund could incur a loss
if the borrower  should fail  financially at a time when the value of the loaned
securities is greater than the collateral.  The primary  objective of securities
lending  is to  supplement  a  fund's  income  through  investment  of the  cash
collateral in short-term interest bearing obligations.

      TEMPORARY  DEFENSIVE  PURPOSES.  For temporary  defensive  purposes during
anticipated   periods  of  general  market  decline,   each  fund,   other  than
International  Equity,  may invest up to 100% of its net assets in money  market
instruments, including securities issued by the U.S. Government, its agencies or
instrumentalities and repurchase agreements secured thereby, as well as bank CDs
and  banker's  acceptances  issued  by banks  having  net  assets of at least $1

                                       23


billion as of the end of their most recent  fiscal year,  high-grade  commercial
paper,  and other  long- and  short-term  debt  instruments  that are rated A or
higher by S&P or Moody's.  For a description of S&P or Moody's  commercial paper
and corporate  debt ratings,  see APPENDIX B. Each fund also may take  positions
that are consistent with its principal investment strategies.

      In addition,  for temporary defensive purposes,  International  Equity may
invest all or a major portion of its assets in (1) foreign debt securities,  (2)
debt and  equity  securities  or U.S.  issuers  and (3)  obligations  issued  or
guaranteed  by the United  States or a foreign  government  or their  respective
agencies, authorities or instrumentalities.

      B.    INDUSTRY CLASSIFICATIONS
            ------------------------

      For purposes of  determining  industry  classifications,  each fund relies
primarily  upon  classifications  published by Bloomberg  L.P. If Bloomberg L.P.
does  not have an  industry  classification  for a  particular  security  or the
industry  designated  no longer  appears  reasonable,  Heritage may designate an
appropriate  Bloomberg  L.P.  industry  classification.   In  addition,  if  any
Bloomberg  L.P.  classifications  are determined by Heritage to be so broad that
the  primary  economic  characteristics  of  issuers  within a single  class are
materially  different,  the  funds  will  classify  issuers  within  that  class
according  to  the  Directory  of  Companies  Filing  Annual  Reports  with  the
Securities and Exchange Commission .

III.  INVESTMENT LIMITATIONS
      ----------------------

      A.    FUNDAMENTAL INVESTMENT POLICIES FOR ALL FUNDS
            ---------------------------------------------

      In addition to the limits  disclosed above and the investment  limitations
described in the Prospectus,  the funds are subject to the following  investment
limitations  that are  fundamental  policies and may not be changed  without the
vote of a majority of the outstanding  voting securities of the applicable fund.
Under the 1940 Act, a "vote of a majority of the outstanding  voting securities"
of a fund means the  affirmative  vote of the lesser of (1) more than 50% of the
outstanding  shares of the fund or (2) 67% or more of the  shares  present  at a
shareholders  meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy.

      BORROWING.  The funds may not borrow money, except to the extent permitted
by the 1940  Act,  the  rules  and  regulations  thereunder  and any  applicable
exemptive relief.

      COMMODITIES.  The funds may not purchase or sell  commodities or commodity
contracts  unless  acquired  as a result of  ownership  of  securities  or other
instruments  issued by persons that purchase or sell  commodities or commodities
contracts;  but this shall not  prevent  the Fund from  purchasing,  selling and
entering  into  financial  futures  contracts  (including  futures  contracts on
indices of  securities,  interest  rates and  currencies),  options on financial
futures  contracts  (including  futures  contracts  on  indices  of  securities,
interest rates and currencies),  warrants,  swaps,  forward  contracts,  foreign
currency spot and forward contracts or other derivative instruments that are not
related to physical commodities.

      CONCENTRATION.  Except for any Fund that is  `concentrated' in an industry
or group of  industries  within the  meaning of the 1940 Act,  the Funds may not
purchase  the  securities  of  any  issuer  (other  than  securities  issued  or
guaranteed by the U.S.  Government or any of its agencies or  instrumentalities)
if, as a result,  more than 25% of the Fund's  total assets would be invested in
the securities of companies whose principal business  activities are in the same
industry.

      DIVERSIFICATION. Except to the extent permitted by the 1940 Act, the rules
and regulations  thereunder and any applicable  exemptive relief,  each Fund may
not with respect to 75% of the Fund's total assets,  purchase the  securities of
any issuer (other than securities issued or guaranteed by the U.S. Government or

                                       24


any of its agencies or  instrumentalities,  and  securities of other  investment
companies)  if, as a result,  (a) more than 5% of a Fund's total assets would be
invested in the  securities  of that issuer,  or (b) a Fund would hold more than
10% of the outstanding voting securities of that issuer.

      LOANS, REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES.  The Funds
may make loans only as permitted  under the 1940 Act, the rules and  regulations
thereunder and any applicable exemptive relief.

      REAL ESTATE. The Funds may not purchase or sell real estate,  except that,
to the  extent  permitted  by  applicable  law,  the  Funds  may (a)  invest  in
securities or other instruments  directly or indirectly  secured by real estate,
and (b) invest in securities or other instruments  issued by issuers that invest
in real estate.

      SENIOR SECURITIES.  The Funds may not issue senior  securities,  except to
the extent  permitted by the 1940 Act, the rules and regulations  thereunder and
any applicable exemptive relief.

      UNDERWRITING.  The Funds may not underwrite  securities  issued by others,
except to the extent that the Fund may be considered an  underwriter  within the
meaning  of the 1933  Act in the  disposition  of  restricted  securities  or in
connection with investments in other investment companies.

      B.    NON-FUNDAMENTAL INVESTMENT POLICIES
            -----------------------------------

      The funds  have  adopted  the  following  additional  restrictions  which,
together  with  certain  limits  described  above,  may be  changed by the Board
without  shareholder  approval in compliance with applicable law,  regulation or
regulatory policy.

      INVESTING IN ILLIQUID  SECURITIES.  Each fund may not invest more than 15%
of their net assets in repurchase agreements maturing in more than seven days or
in other illiquid  securities,  including securities that are illiquid by virtue
of  the  absence  of  a  readily   available  market  or  legal  or  contractual
restrictions  as to resale  and  including,  in the case of Growth  and  Income,
privately placed securities.  High Yield has a 15% limitation on the purchase of
illiquid  securities,  but may  invest up to 25% of its net  assets in Rule 144A
securities.

      INVESTING  IN  INVESTMENT  COMPANIES.  Each fund may invest in  securities
issued by other investment companies as permitted by the 1940 Act.

      C.    EXCEPTION
            ---------

      OPTION  WRITING.  Capital  Appreciation  and Small Cap Stock  Fund may not
write put or call options.

      PLEDGING.  Capital  Appreciation may not pledge any securities except that
it may pledge  assets having a value of not more than 10% of its total assets to
secure permitted borrowing from banks.

      Except with respect to borrowing  money,  if a  percentage  limitation  is
adhered to at the time of the  investment,  a later  increase or decrease in the
percentage resulting from any change in value of net assets will not result in a
violation of such restriction.

IV.   NET ASSET VALUE
      ---------------

      The net asset  value per share less any  applicable  sales  charge of each
class of  shares  is  separately  determined  daily as of the  close of  regular
trading (typically 4 p.m. Eastern time or earlier NYSE closing time that day) on
the New York Stock  Exchange (the "NYSE") each day the NYSE is open for business
(each a "Business  Day") The NYSE normally is open for business  Monday  through

                                       25


Friday  except the  following  holidays:  New Year's Day,  Martin  Luther King's
Birthday,  President's Day, Good Friday,  Memorial Day,  Independence Day, Labor
Day,  Thanksgiving  and Christmas Day. The funds value securities or assets held
in their portfolios as follows:

            LISTED SECURITIES. A security listed or traded on the NYSE is valued
at its last sales price on the principal exchange on which it is traded prior to
the time when assets are valued. A security listed on the NASDAQ Stock Market is
valued at the NASDAQ  Official  Closing Price  ("NOCP")  provided by NASDAQ each
business  day. The NOCP is the most recently  reported  price as of 4:00:02 p.m.
Eastern  time,  unless that price is outside the range of the  "inside"  bid and
asked  prices.  If no sale is reported at that time or the security is traded in
the OTC market, market value is based on the most recent quoted bid price.

            FIXED INCOME SECURITIES. Short-term debt securities with a remaining
maturity of sixty (60) days or less as of the valuation  date shall be valued at
cost with accrued  interest or discount earned included in interest  receivable.
Generally,  debt  securities  with a remaining  maturity of more than sixty (60)
days  shall  be  valued  at  representative  quoted  prices  as  provided  by an
independent  pricing  service.  If the validity of pricing  information  on high
yield bonds provided by pricing services  appears to be unreliable,  then dealer
supplied quotes may be used to value those securities.

            OPTIONS AND FUTURES.  Options and futures positions are valued based
on market quotations when readily  available.  Market quotations  generally will
not be available for options traded in the OTC market.

            FOREIGN ASSETS.  Securities and other assets in foreign currency and
foreign  currency  contracts will be valued daily in U.S. dollars at the foreign
currency  exchange rates  prevailing at the time a fund calculates the daily net
asset  value of each  class.  Foreign  currency  exchange  rates  generally  are
determined prior to the close of regular trading on the Exchange.  Occasionally,
a  "significant  event"  affecting  the  value of  foreign  securities  and such
exchange rates occur between the time at which they are determined and the close
of regular  trading on the  Exchange,  which  events will not be  reflected in a
computation of the fund's net asset value. If a "significant  event"  materially
affecting  the value of such  securities  or assets or currency  exchange  rates
occurred  during such time period,  the  securities or assets would be valued at
their fair value as determined in good faith by Heritage or a third-party  under
procedures  established by and under the general  supervision and responsibility
of the Board. The foreign currency exchange  transactions of a fund conducted on
a spot basis are  valued at the spot rate for  purchasing  or  selling  currency
prevailing on the foreign exchange market.

            SHORT-TERM  SECURITIES.  Short-term investments having a maturity of
60 days or less are valued at cost with  accrued  interest  or  discount  earned
included in interest receivable.

            FAIR  VALUE  ESTIMATES.  In the event that (1) price  quotations  or
valuations are not readily available, (2) readily available price quotations are
not reflective of market value (prices deemed unreliable),  or (3) a significant
event has been recognized in relation to a security or class of securities, such
securities will be valued by a Valuation  Committee of Heritage  consistent with
procedures  established by and under the general  supervision and responsibility
of the Board.  Significant events include, but are not limited to, single-issuer
events such as corporate announcements or earnings,  multiple-issuer events such
as natural disasters and significant market fluctuations.

      The funds are open each  Business  Day.  Trading in securities on European
and Far Eastern securities  exchanges and OTC markets normally is completed well
before the funds' close of business on each Business  Day. In addition,  trading
in various  foreign  markets may not take place on all Business Days or may take
place on days  that are not  Business  Days and on which  the  funds'  net asset
values per share are not  calculated.  Calculation of net asset value of a class
of shares does not take place  contemporaneously  with the  determination of the
prices of the majority of the portfolio securities used in such calculation. The
funds  calculate  net asset  value per share and,  therefore,  effect  sales and
redemptions,  as of the close of regular  trading on the NYSE each Business Day.

                                       26


If events  materially  affecting  the value of such  securities  or other assets
occur between the time when their prices are determined  (including  their value
in U.S.  dollars by reference to foreign  currency  exchange rates) and the time
when the funds' net asset value is calculated,  such securities and other assets
may be valued at fair value by methods as  determined  in good faith by or under
procedures established by the Board.

V.    INVESTING IN THE FUNDS
      ----------------------

      Each class of shares are sold at their next  determined net asset value on
Business Days.  Class B shares are no longer  offered for sale.  Until March 30,
2007,  Class B shares may continue to be acquired  through exchange from Class B
shares of another Heritage mutual fund and dividend  reinvestment.  On March 30,
2007, all remaining Class B shares of a fund will be converted to Class A shares
of that fund. The  procedures  for purchasing  shares of a fund are explained in
the Prospectus under "How to Invest."

VI.   INVESTMENT PROGRAMS
      -------------------

      A.    RETIREMENT PLANS
            ----------------

      HERITAGE IRA. An individual who earns compensation and has not reached age
70 1/2  before  the close of the year  generally  may  establish  an  individual
retirement   account  ("IRA").   An  individual  may  make  limited   deductible
contributions  to an IRA through the purchase of shares of the Money Market Fund
and/or other Heritage Mutual Funds  ("Heritage  IRA"). The Internal Revenue Code
of 1986, as amended ("Code"), limits the deductibility of IRA contributions to a
certain maximum detailed in the Code. Additionally,  the Code offers individuals
who  are  age 50 or over by the end of any  year  may  make  additional  special
"catch-up"  contributions  up to certain  maximums per year.  These limits apply
only to taxpayers  who are not active  participants  (and whose  spouses are not
active participants) in employer-provided  retirement plans or who have adjusted
gross income below a certain level;  however,  a married  investor who is not an
active  participant  in such a plan and files a joint income tax return with his
or her spouse (and their combined  adjusted gross income does not exceed certain
maximums  established  in the  Code)  is not  affected  by the  spouse's  active
participant  status.  Nevertheless,  the Code permits other  individuals to make
nondeductible  IRA contributions up to certain amounts specified in the Code. In
addition,  individuals whose earnings (together with their spouse's earnings) do
not exceed a certain level may establish a Roth IRA;  although  contributions to
this type of account are nondeductible,  withdrawals from it will not be taxable
under  certain  circumstances.  A separate  agreement is required to establish a
Heritage  IRA.  A Heritage  IRA also may be used for  certain  "rollovers"  from
qualified benefit plans and from section 403(b) annuity plans. For more detailed
information on a Heritage IRA, please contact Heritage.

      OTHER  RETIREMENT  PLANS.  Fund shares also may be used as the  investment
medium for  qualified  plans  (defined  benefit or  defined  contribution  plans
established   by   corporations,    partnerships   or   sole   proprietorships).
Contributions  to qualified  plans may be made (within certain limits) on behalf
of the employees, including owner-employees, of the sponsoring entity.

      B.    RIGHTS OF ACCUMULATION
            ----------------------

      Certain  investors  may  qualify for the Class A sales  charge  reductions
indicated in the sales charge schedule in the Prospectus by combining  purchases
of  Class  A,  Class B and  Class C  shares  into a  single  "purchase,"  if the
resulting  purchase  totals at least $25,000.  The term  "purchase"  refers to a
single  purchase by an  individual,  or to  concurrent  purchases  that,  in the
aggregate,  are at least equal to the prescribed amounts, by an individual,  his
spouse and their children  purchasing Class A, Class B or Class C shares for his
or their  own  account;  a  single  purchase  by a  trustee  or other  fiduciary
purchasing  Class A,  Class B or Class C shares  for a single  trust,  estate or
single fiduciary  account  although more than one beneficiary is involved;  or a
single purchase for the employee  benefit plans of a single  employer.  The term

                                       27


"purchase" also includes purchases by a "company," as the term is defined in the
1940 Act,  but does not include  purchases by any such company that has not been
in  existence  for at least six  months or that has no  purpose  other  than the
purchase  of mutual fund shares at a  discount.  A  "purchase"  also may include
Class A, Class B or Class C shares  purchased  at the same time through a single
selected  dealer of any other Heritage  Mutual Fund that  distributes its shares
subject to a sales charge.

      The  applicable  Class A shares  initial sales charge will be based on the
total of:

      (i)   the investor's current purchase;

      (ii)  the net asset value (at the close of business on the  previous  day)
            of (a) all Class A, Class B and Class C shares of a fund held by the
            investor  and (b) all  Class A,  Class B and  Class C shares  of any
            other  Heritage  Mutual Fund held by the investor and purchased at a
            time when Class A shares of such other fund were distributed subject
            to a sales charge (including  Heritage Cash Trust shares acquired by
            exchange); and

      (iii) the net  asset  value  of all  Class A,  Class B and  Class C shares
            described in paragraph (ii) owned by another shareholder eligible to
            combine  his  purchase  with  that  of the  investor  into a  single
            "purchase."

      To qualify  for a reduced  sales  charge on a purchase  through a selected
dealer,  the investor or selected  dealer must provide the funds' transfer agent
with  sufficient  information  to verify that each  purchase  qualifies  for the
privilege or discount.

      C.    CLASS A LETTER OF INTENT
            ------------------------

      Investors  also  may  obtain  the  reduced  sales  charges  shown  in  the
prospectus  by  means  of a  written  Letter  of  Intent,  which  expresses  the
investor's  intention  to  invest  not less than  $25,000  within a period of 13
months in Class A shares of a fund or any other Heritage  Mutual Fund subject to
a sales charge. Each purchase of Class A shares under a Letter of Intent will be
made at the  public  offering  price or  prices  applicable  at the time of such
purchase to a single transaction of the dollar amount indicated in the Letter of
Intent. In addition, if you own Class A shares of any other Heritage Mutual Fund
subject to a sales charge,  you may include those shares in computing the amount
necessary to qualify for a sales charge reduction.

      The  Letter of Intent is not a binding  obligation  upon the  investor  to
purchase  the full amount  indicated.  The minimum  initial  investment  under a
Letter of Intent is 5% of such amount.  Class A shares  purchased with the first
5% of such amount will be held in escrow (while remaining registered in the name
of the investor) to secure payment of the higher sales charge  applicable to the
shares  actually  purchased if the full amount  indicated is not purchased,  and
such  escrowed  Class  A  shares  will  be  redeemed  involuntarily  to pay  the
additional sales charge,  if necessary.  When the full amount indicated has been
purchased,  the escrow will be released.  The difference in sales charge will be
used to  purchase  additional  Class A shares of a fund  subject  to the rate of
sales charge  applicable  to the actual amount of the  aggregate  purchases.  An
investor may amend  his/her  Letter of Intent to increase the  indicated  dollar
amount and begin a new 13-month period. In that case, all investments subsequent
to the  amendment  will be made at the sales  charge in  effect  for the  higher
amount. The escrow procedures discussed above will apply.

                                       28


VII.  CONVERSION OF CLASS B SHARES
      ----------------------------

      Class B shares of a fund  automatically  will convert to Class A shares of
that fund,  based on the relative net asset values per share of the two classes,
the  earlier  of (i)  eight  years  after  the end of the  month  in  which  the
shareholder's  order to purchase  the Class B shares was  accepted or (ii) March
30, 2007. For these purposes,  the date of purchase order  acceptance  means (i)
the date on which  the  Class B shares  were  issued  or (ii) for Class B shares
obtained  through an exchange,  or a series of exchanges,  the date on which the
original  Class B shares were  issued.  For  purposes of  conversion  to Class A
shares, Class B shares purchased through the reinvestment of dividends and other
distributions  paid  in  respect  of  Class B  shares  are  held  in a  separate
sub-account.  Each time any Class B shares in the shareholder's  regular account
(other  than those in the  sub-account)  convert  to Class A shares,  a PRO RATA
portion of the Class B shares in the  sub-account  will also  convert to Class A
shares. The portion will be determined by the ratio that the shareholder's Class
B shares converting to Class A shares bears to the  shareholder's  total Class B
shares not acquired through dividends and other distributions.

      The  conversion  feature is subject to the continuing  availability  of an
opinion of counsel to the effect that the dividends and other distributions paid
on Class A shares and Class B shares will not result in "preferential dividends"
under the Code and the conversion of shares does not constitute a taxable event.
If the  conversion  feature  ceased  to apply,  the Class B shares  would not be
converted and would continue to be subject to the higher ongoing expenses of the
Class B shares  beyond  eight years from the date of  purchase.  Heritage has no
reason to believe that this  condition  for the  conversion  feature will not be
met.

VIII. REDEEMING SHARES
      ----------------

      The methods of redemption  are described in the section of the  Prospectus
entitled "How to Sell Your Investment."

      A.    RECEIVING PAYMENT
            -----------------

      If a  request  for  redemption  is  received  by a fund in good  order (as
described  below) before the close of regular  trading on the NYSE (usually 4:00
p.m.  Eastern  time) on a Business  Day,  the shares will be redeemed at the net
asset  value  per  share  determined  as of 4:00 p.m.  Eastern  time,  minus any
applicable  CDSC.  Requests for redemption  received by the fund after 4:00 p.m.
Eastern time will be executed at the net asset value  determined as of 4:00 p.m.
Eastern time on the next  Business Day,  minus any  applicable  CDSC.  Each fund
reserves the right to accept and execute  orders to redeem at such other time as
designated by the fund if it accepts orders on days when the Exchange is closed.

      If shares of a fund are redeemed by a shareholder  through a participating
dealer or participating  bank ("Financial  Advisor"),  the redemption is settled
with the shareholder as an ordinary  transaction  (generally three business days
after the order was received). Payment for shares redeemed normally will be made
by the fund to the Distributor or a Financial Advisor the next business day.

      Other  supporting  legal  documents may be required from  corporations  or
other organizations, fiduciaries or persons other than the shareholder of record
making the request for redemption.  Questions  concerning the redemption of fund
shares can be directed to the Distributor, a financial advisor or to Heritage.

      A redemption request will be considered to be received in "good order" if:

                                       29


      o   the number or amount of shares and the class of shares to be  redeemed
          and shareholder account number have been indicated;
      o   any written request is signed by a shareholder and by all co-owners of
          the account with  exactly the same name or names used in  establishing
          the account;
      o   any written  request is accompanied by certificates  representing  the
          shares that have been issued,  if any, and the certificates  have been
          endorsed  for  transfer  exactly  as the name or names  appear  on the
          certificates or an accompanying stock power has been attached; and
      o   the signatures on any written redemption request of $100,000 have been
          guaranteed  by a  participant  in our  medallion  signature  guarantee
          programs (STAMP, SEMP).

      Each fund has the right to suspend redemption or postpone payment at times
when the Exchange is closed (other than customary  weekend or holiday  closings)
or during  periods of emergency or other periods as permitted by the SEC. In the
case of any such suspension, you may either withdraw your request for redemption
or receive  payment  based upon the net asset  value next  determined,  less any
applicable CDSC,  after the suspension is lifted.  If a redemption check remains
outstanding  after six months,  Heritage  reserves the right to redeposit  those
funds into your account.

      The Board may suspend the right of redemption or postpone payment for more
than seven days at times (1) during  which the NYSE is closed other than for the
customary weekend and holiday closings,  (2) during which trading on the NYSE is
restricted as  determined by the SEC, (3) during which an emergency  exists as a
result  of  which  disposal  by the  funds  of  securities  owned by them is not
reasonably  practicable or it is not reasonably practicable for the funds fairly
to determine  the value of their net assets or (4) for such other periods as the
SEC may by order permit for the protection of the holders of a class of shares.

      B.    TELEPHONE TRANSACTIONS
            ----------------------

      Shareholders may redeem shares by placing a telephone request to a fund. A
fund,  Heritage,  the Distributor and their  Trustees,  directors,  officers and
employees are not liable for any loss arising out of telephone instructions they
reasonably believe are authentic. In acting upon telephone  instructions,  these
parties  use  procedures  that are  reasonably  designed  to  ensure  that  such
instructions  are genuine,  such as (1)  obtaining  some or all of the following
information: account number, name(s) and social security number(s) registered to
the  account,   and  personal   identification;   (2)  recording  all  telephone
transactions;  and (3) sending written  confirmation of each  transaction to the
registered  owner.  If a fund,  Heritage,  the  Distributor  and their Trustees,
directors,  officers and employees do not follow reasonable procedures,  some or
all of them may be liable for any such losses.

      C.    SYSTEMATIC WITHDRAWAL PLAN
            --------------------------

      Shareholders may elect to make systematic  withdrawals from a fund account
on a periodic  basis.  The amounts  paid each period are  obtained by  redeeming
sufficient  shares from an account to provide the withdrawal  amount  specified.
Should a CDSC  apply,  the  liquidation  will be such that you will  receive the
requested amount, less any charges. The Systematic  Withdrawal Plan currently is
not available for shares held in an IRA,  Section 403(b)  annuity plan,  defined
contribution  plan,  simplified  employee pension plan or other retirement plan,
unless the shareholder  establishes to Heritage's  satisfaction that withdrawals
from such an account may be made without  imposition of a penalty.  Shareholders
may change the amount to be paid without charge by contacting Heritage.

      Redemptions  will be made at net asset value determined as of the close of
regular  trading  on  the  Exchange  on a  day  of  each  month  chosen  by  the
shareholders  or a  day  of  the  last  month  of  each  period  chosen  by  the
shareholders,  whichever is applicable.  Except as described in the  Prospectus,
systematic withdrawals may be subject to a CDSC. If the Exchange is not open for

                                       30



business on that day, the shares will be redeemed at net asset value  determined
as of the close of regular  trading on the  Exchange on the  following  Business
Day,  minus  any  applicable  CDSC for Class B shares  and Class C shares.  If a
shareholder elects to participate in the Systematic  Withdrawal Plan,  dividends
and  other  distributions  on all  shares  in the  account  must  be  reinvested
automatically  in fund  shares.  A  shareholder  may  terminate  the  Systematic
Withdrawal  Plan at any time without  charge or penalty by giving written notice
to Heritage.  The funds,  Heritage and the Distributor also reserve the right to
modify or terminate the Systematic Withdrawal Plan at any time.

      A withdrawal  payment is treated as proceeds  from a sale of shares rather
than as a dividend or a capital gain distribution. These payments are taxable to
the extent that the total  amount of the  payments  exceeds the tax basis of the
shares sold. If the periodic  withdrawals exceed reinvested  dividends and other
distributions,  the amount of the  original  investment  may be  correspondingly
reduced.

      Ordinarily, a shareholder should not purchase additional Class A shares of
a fund, if maintaining a Systematic  Withdrawal Plan of Class A shares,  because
the  shareholder may incur tax liabilities in connection with such purchases and
withdrawals.  A fund will not knowingly accept purchase orders from shareholders
for  additional  Class A shares if they  maintain a Systematic  Withdrawal  Plan
unless the purchase is equal to at least one year's  scheduled  withdrawals.  In
addition,  a  shareholder  who  maintains  such a Plan  may  not  make  periodic
investments under each fund's Automatic Investment Plan.

      D.    WAIVER OF CDSC
            --------------

      The  CDSC is  currently  is  waived  for:  (1)  any  partial  or  complete
redemption in connection with a  distribution,  without  penalty,  under section
72(t) of the Code from a qualified  retirement  plan,  including a self-employed
individuals retirement plan (a so-called "Keogh Plan") or IRA upon attaining age
70 1/2;  (2) any  redemption  resulting  from a  tax-free  return  of an  excess
contribution to a qualified employer  retirement plan or an IRA; (3) any partial
or complete  redemption  following  death or  disability  (as defined in section
72(m)(7)  of the Code) of a  shareholder  (including  one who owns the shares as
joint  tenant with his spouse) from an account in which the deceased or disabled
is named,  provided the redemption is requested  within one year of the death or
initial determination of disability (4) shares are sold to make payments through
certain  sales from a  Systematic  Withdrawal  Plan of up to 12% annually of the
account  balance at the  beginning of the plan;  or (5) shares are sold to close
out   shareholder   accounts  that  do  not  comply  with  the  minimum  balance
requirements.

      E.    REDEMPTIONS IN KIND
            -------------------

      A fund is obligated to redeem shares for any  shareholder  for cash during
any 90-day period up to $250,000 or 1% of that fund's net asset value, whichever
is less. Any redemption beyond this amount also will be in cash unless the Board
determines  that further cash  payments will have a material  adverse  effect on
remaining shareholders.  In such a case, a fund will pay all or a portion of the
remainder of the redemption in portfolio instruments,  valued in the same way as
each fund determines net asset value. The portfolio instruments will be selected
in a manner that the Board deems fair and equitable. A redemption in kind is not
as liquid as a cash  redemption.  If a redemption is made in kind, a shareholder
receiving  portfolio  instruments  could receive less than the redemption  value
thereof and could incur certain transaction costs.

      F.    FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES
            -------------------------------------------------

      "Market timing"  typically  refers to the practice of frequent  trading in
the shares of mutual funds in order to exploit  inefficiencies  in fund pricing.
Heritage has no formal or informal  arrangements  to allow customers to trade in
the funds  frequently.  Heritage monitors trading activity in the funds in order
to detect and deter market timing  activities.  In some cases,  such  monitoring

                                       31



results in rejection of purchase or exchange orders. While there is no guarantee
that all market  timing will be detected,  Heritage has adopted a Market  Timing
Policy, described in the funds' prospectus, to deter such activity.

IX.   EXCHANGE PRIVILEGE

      An exchange is effected  through the redemption of the shares tendered for
exchange and the  purchase of shares being  acquired,  at their  respective  net
asset values, as next determined  following receipt by the Fund whose shares are
being  exchanged  of:  (1)  proper  instructions  and all  necessary  supporting
documents or (2) a telephone  request for such exchange in  accordance  with the
procedures set forth in the Prospectus and below. Telephone or telegram requests
for an exchange  received  by a fund before the close of regular  trading on the
Exchange will be effected at the close of regular trading on that day.  Requests
for an exchange  received after the close of regular trading will be effected on
the Exchange's next trading day.

      If you  or  your  Financial  Advisor  are  unable  to  reach  Heritage  by
telephone, an exchange can be effected by sending a telegram to Heritage. Due to
the volume of calls or other unusual  circumstances,  telephone exchanges may be
difficult to implement during certain time periods.

      Each Fund  reserves  the right to: (1)  reject  any order to  acquire  its
shares through exchange or otherwise, (2) restrict or (3) terminate the exchange
privilege at any time. In addition, each Heritage Mutual Fund may terminate this
exchange privilege upon 60 days' notice.

X.    DISCLOSURE OF PORTFOLIO HOLDINGS

      The  funds'  policy  is to  protect  the  confidentiality  of  information
relating to  portfolio  holdings  and to prevent  the  selective  disclosure  of
nonpublic  information.  To this  extent,  neither  the funds or  Heritage  will
provide  portfolio  holdings  information to any  individual,  investor or other
person unless  specifically  authorized by the funds' Chief  Compliance  Officer
("CCO") or as described below.

      Each fund's top 20 portfolio holdings will be posted on the funds' website
no earlier  than 5  business  days  after a  calendar  month's  end and the full
portfolio  holdings  (security  name and percentage of total net assets) will be
posted no earlier than 5 business  days after a calendar  quarter's end and will
be available upon request to the funds' shareholders.  In addition,  each fund's
portfolio  holdings  are  reported  on Form N-Q for its first  and third  fiscal
quarter and are reported on Form N-CSR for its  semi-annual  and annual periods.
See the Prospectus under "Account and Transaction Policies" for more information
regarding public disclosure of the funds' portfolio holdings.

      The funds' Board,  officers and certain  Heritage  employees  have regular
access to the funds'  portfolio  holdings.  In addition to being  subject to the
prohibitions  regarding  disclosure  of, and trading on  non-public  information
described in Heritage's  Code of Ethics,  all Heritage  personnel  must annually
certify to compliance with the funds' policy.  Specifically,  Heritage's Code of
Ethics prohibits employees from revealing non-public  information other than to:
(1) persons whose  responsibilities  require  knowledge of the information;  (2)
regulatory  authorities who have appropriate  jurisdiction  with respect to such
matters  or (3) third  parties  who  utilize  such  information  for  ratings or
performance  analysis.  The CCO  may  approve  access  to the  funds'  portfolio
holdings  by other  persons  in  Heritage  for a  limited  period  of time  upon
determining that the access is in the best interest of the funds' shareholders.

      The funds'  subadvisers  also have regular access to the funds'  portfolio
holdings and must protect the  confidentiality of the funds' portfolio holdings.
The funds,  Heritage and the  Subadvisers  are prohibited from entering into any

                                       32



arrangement to disclose the funds'  portfolio  holdings for  compensation or any
other type of consideration.

      The CCO may provide an entity ("Authorized  Service Provider") with access
to a fund's portfolio  holdings more frequently than is publicly available after
a  determination  by the CCO  that  such  access  serves a  legitimate  business
purpose.  An  Authorized  Service  Provider may not receive  portfolio  holdings
information unless it signs a confidentiality  agreement.  An Authorized Service
Provider may include the Funds' subadvisers and custodian.

      Pursuant to arrangements with third-party  vendors,  Heritage provides the
funds'  portfolio  holdings  information to the Distributor,  Lipper  Analytical
Services  Corporation,  Morningstar,  Bloomberg,  Standard  &  Poor's,  Thompson
Financial  Services,  Inc., and Vickers on a daily,  monthly or quarterly  basis
subject  to  confidentiality  agreements  unless  the  information  is  publicly
available.  Public information  received by third-party  vendors is available no
earlier than 5 days after calendar month or quarter end.

      The CCO will  assess  each ad hoc  request  for  access on a  case-by-case
basis.  Each  request  and the CCO's  response  will be  documented  in writing,
provided to  Heritage's  compliance  department  for  approval and posted on the
funds'  website.  The CCO will send a response  to the  person  making an ad hoc
request  at least one day after it is posted on the funds'  website.  All ad hoc
disclosure requests will be reported to the funds' Board at its next meeting.

      In the event  portfolio  holdings  disclosure  made pursuant to the policy
present a conflict of interest between the funds'  shareholders and Heritage,  a
Subadviser,  the  Distributor  or  any  affiliated  person  of  the  funds,  the
disclosure will not be made unless a majority of the  Independent  Trustees or a
majority of a board committee consisting solely of Independent Trustees approves
such disclosure.

      The CCO will make an annual  report to the funds'  Board on the  operation
and effectiveness of the policy and any changes thereto. In addition,  the Board
will receive any interim reports that the CCO may deem appropriate.

XI.   TAXES
      -----

      GENERAL.  Each fund is treated as a separate  corporation  for Federal tax
purposes  and intends to continue to qualify for  favorable  tax  treatment as a
regulated  investment  company  under  the Code  ("RIC").  To do so, a fund must
distribute  annually to its shareholders at least 90% of its investment  company
taxable income (generally consisting of net investment income, the excess of net
short-term  capital  gain over net  long-term  capital  loss and net gains  from
certain  foreign  currency  transactions,  all determined  without regard to the
dividends-paid  deduction)  ("Distribution  Requirement")  and must meet several
additional  requirements.  With respect to each fund, these requirements include
the  following:  (1) the fund must derive at least 90% of its gross  income each
taxable year from dividends, interest, payments with respect to securities loans
and  gains  from  the  sale  or  other  disposition  of  securities  or  foreign
currencies,  or other income  (including gains from options,  futures or forward
currency  contracts)  derived  with  respect to its  business  of  investing  in
securities or those currencies ("Income Requirement");  (2) at the close of each
quarter  of the  fund's  taxable  year,  at least  50% of the value of its total
assets must be represented by cash and cash items, U.S.  Government  securities,
securities  of other  RICs and other  securities,  with those  other  securities
limited,  in respect of any one issuer,  to an amount that does not exceed 5% of
the value of the fund's total assets and that does not  represent  more than 10%
of the  issuer's  outstanding  voting  securities;  and (3) at the close of each
quarter of the fund's  taxable year, not more than 25% of the value of its total

                                       33


assets may be invested in securities (other than U.S.  Government  securities or
the securities of other RICs) of any one issuer.

      By qualifying  for  treatment as a RIC, a fund (but not its  shareholders)
will be relieved  of Federal  income tax on the part of its  investment  company
taxable  income and net capital gain (the excess of net  long-term  capital gain
over net short-term capital loss) that it distributes to its shareholders.  If a
fund failed to qualify for  treatment as a RIC for any taxable year, it would be
taxed on the full amount of its taxable  income for that year without being able
to deduct the  distributions  it makes to its  shareholders and the shareholders
would  treat all those  distributions,  including  distributions  of net capital
gain, as dividends to the extent of the fund's earnings and profits,  taxable as
ordinary income (except that, for individual shareholders,  all or part of those
dividends may be subject to a maximum federal tax rate of 15%). In addition, the
fund could be required to recognize  unrealized gains, pay substantial taxes and
interest  and  make  substantial   distributions  before  requalifying  for  RIC
treatment.

      Each fund will be subject to a nondeductible  4% excise tax ("Excise Tax")
to the  extent  it  fails  to  distribute  by  the  end  of  any  calendar  year
substantially  all of its ordinary income for that year and its capital gain net
income for the one-year  period ending on October 31 of that year,  plus certain
other amounts.

      DISPOSITION  OF FUND SHARES;  DISTRIBUTIONS.  A redemption  of fund shares
will result in a taxable gain or loss to the redeeming shareholder, depending on
whether the redemption proceeds are more or less than the shareholder's adjusted
basis in the redeemed shares (which  normally  includes any sales charge paid on
Class A  shares).  An  exchange  of  shares of any fund for  shares  of  another
Heritage  Mutual Fund  (including  another fund) generally will have similar tax
consequences.  However, special rules apply when a shareholder disposes of Class
A shares of a fund  through  a  redemption  or  exchange  within  90 days  after
purchase  thereof and  subsequently  acquires  Class A shares of that fund or of
another  Heritage  Mutual Fund  without  paying a sales charge due to the 90-day
reinstatement  or  exchange  privileges.   In  these  cases,  any  gain  on  the
disposition of the original Class A shares will be increased, or loss decreased,
by the amount of the sales charge paid when those shares were acquired, and that
amount will increase the basis in the shares subsequently acquired. In addition,
if  shares  of a fund  are  purchased  (whether  pursuant  to the  reinstatement
privilege or otherwise) within 30 days before or after redeeming other shares of
that fund  (regardless  of class) at a loss,  all or a portion of that loss will
not be deductible and will increase the basis in the newly purchased shares.

      If shares of a fund are sold at a loss after  being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the  extent of any  capital  gain  distributions  received  on those  shares.
Investors  also should be aware that if shares are purchased  shortly before the
record date for a dividend or other distribution,  the shareholder will pay full
price for the shares  and  receive  some  portion of the price back as a taxable
distribution.

      Dividends and other  distributions  a fund declares in the last quarter of
any calendar year that are payable to  shareholders  of record on a date in that
quarter  will be deemed to have  been  paid by that fund and  received  by those
shareholders  on  December  31 of that  year,  if the fund pays them  during the
following  January.  Accordingly,  those  distributions  will be  taxed to those
shareholders for the taxable year in which that December 31 falls.

      Dividends from a fund's  investment  company taxable income are taxable to
its shareholders as ordinary income,  to the extent of its earnings and profits,
whether received in cash or in additional fund shares. Distributions of a fund's
net capital gain,  when  designated as such, are taxable to its  shareholders as
long-term  capital gains,  whether received in cash or in additional fund shares
and regardless of the length of time the shares have been held. A portion of the
dividends  (but  not  the  capital  gain   distributions)  each  fund  pays  (an
insubstantial portion in the case of International  Equity), may be eligible for

                                       34


the 15% maximum Federal income tax rate applicable to dividends that individuals
receive  through 2010 (enacted by the Jobs and Growth Tax Relief  Reconciliation
Act of 2003 ("2003  Act")).  The eligible  portion may not exceed the  aggregate
dividends a fund receives from most domestic  corporations  and certain  foreign
corporations,  unless  that  aggregate  is at least 95% of its gross  income (as
specially  computed),  in which  case,  the entire  dividend  will  qualify.  In
addition, the availability of the 15% rate is subject to certain holding period,
debt-financing  and other  restrictions  imposed  with  respect to the shares on
which the  dividends  are paid. A portion of a fund's  dividends - not exceeding
the aggregate  dividends it receives from domestic  corporations only - also may
be  eligible  for the  dividends-received  deduction  allowed  to  corporations,
subject  to  similar  holding  period,  debt-financing  and other  restrictions.
However,   dividends   a   corporate   shareholder   deducts   pursuant  to  the
dividends-received  deduction are subject indirectly to the Federal  alternative
minimum tax. As a result of enactment of the 2003 Act, any  distributions a fund
makes of net capital gain,  will be subject to a 15% maximum  federal income tax
rate for individual  shareholders.  In addition,  any capital gain an individual
shareholder  recognizes  on a  redemption  or exchange of his or her fund shares
that have been held for more than one year will qualify for that  maximum  rate.
Shareholders  receive  Federal income tax  information  regarding  dividends and
other distributions after the end of each year.

      Each fund is required  to  withhold  28% of all  dividends,  capital  gain
distributions  and redemption  proceeds  otherwise  payable to  individuals  and
certain  other  noncorporate  shareholders  who do not provide  that fund with a
correct  taxpayer  identification  number.  Withholding  at  that  rate  also is
required  from  dividends  and  capital  gain  distributions   payable  to  such
shareholders who otherwise are subject to backup withholding.

      INCOME FROM FOREIGN  SECURITIES.  Dividends and interest a fund  receives,
and  gains  it  realizes,  on  foreign  securities  may be  subject  to  income,
withholding  or other taxes imposed by foreign  countries  and U.S.  possessions
("foreign  taxes")  that would reduce the total  return on its  securities.  Tax
conventions  between  certain  countries  and the U.S.  may reduce or  eliminate
foreign  taxes,  however,  and many  foreign  countries  do not impose  taxes on
capital gains in respect of investments by foreign investors.

      If more than 50% of the value of a fund's total assets at the close of any
taxable year consists of securities of foreign corporations, it will be eligible
to, and may,  file an election  with the  Internal  Revenue  Service  that would
enable its  shareholders,  in effect,  to receive the benefit of the foreign tax
credit with respect to any foreign  taxes it paid. It is  anticipated  that only
International  Equity  will be  eligible  for this  election.  Pursuant  to this
election, the fund would treat those taxes as dividends paid to its shareholders
and each shareholder would be required to (1) include in gross income, and treat
as paid by the  shareholder,  the  shareholder's  proportionate  share  of those
taxes, (2) treat the shareholder's  share of those taxes and of any dividend the
fund paid that represents income sourced from foreign or U.S. possessions as the
shareholder's  own income from those  sources,  and (3) either use the foregoing
information  in  calculating  the foreign tax credit  against the  shareholder's
Federal  income  tax or,  alternatively,  deduct  the taxes  deemed  paid by the
shareholder in computing the shareholder's taxable income. International Equity,
if it makes this election,  will report to its  shareholders  shortly after each
taxable year their  respective  shares of the fund's income from sources  within
foreign  countries and U.S.  possessions and foreign taxes it paid.  Individuals
who have no more  than  $300  ($600  for  married  persons  filing  jointly)  of
creditable  foreign  taxes  included  on Forms 1099 and have no  foreign  source
non-passive  income will be able to claim a foreign tax credit without having to
file the detailed Form 1116 that otherwise is required.

      Each  fund  may  invest  in  the  stock  of  "passive  foreign  investment
companies"   ("PFICs").   A  PFIC  is  any  foreign  corporation  (with  certain
exceptions) that, in general,  meets either of the following tests: (1) at least
75% of its gross  income for the taxable year is passive or (2) an average of at
least 50% of its assets  produce,  or are held for the  production  of,  passive
income.  Under certain  circumstances,  a fund will be subject to Federal income
tax on a portion of any "excess distribution" it receives on the stock of a PFIC
or of any gain on disposition of the stock  (collectively  "PFIC income"),  plus

                                       35


interest  thereon,  even if the fund  distributes  the PFIC  income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the fund's  investment  company  taxable  income and,  accordingly,  will not be
taxable to it to the extent it distributes that income to its shareholders.

      If a fund  invests in a PFIC and elects to treat the PFIC as a  "qualified
electing  fund"  ("QEF"),  then  in  lieu  of the  foregoing  tax  and  interest
obligation,  the fund will be  required  to include in income  each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain, which the
fund  most  likely  would  have  to  distribute  to  satisfy  the   Distribution
Requirement  and avoid  imposition  of the Excise Tax,  even if the fund did not
receive those  earnings and gain from the QEF. In most instances it will be very
difficult,  if  not  impossible,  to  make  this  election  because  of  certain
requirements thereof.

      Each  fund  may  elect  to   "mark-to-market"   its  stock  in  any  PFIC.
"Marking-to-market,"  in this context,  means  including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's  adjusted  basis  therein as of the end of that year.  Pursuant  to the
election,  a fund also would be allowed to deduct (as an ordinary,  not capital,
loss) the  excess,  if any,  of its  adjusted  basis in PFIC stock over the fair
market value thereof as of the taxable  year-end,  but only to the extent of any
net mark-to-market  gains with respect to that stock the fund included in income
for prior taxable years under the election  (and under  regulations  proposed in
1992 that  provided  a similar  election  with  respect  to the stock of certain
PFICs).  A fund's  adjusted  basis in each PFIC's stock  subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.

      Gains or losses: (1) from the disposition of foreign currencies, including
forward    currency    contracts,     (2)    on    the    disposition    of    a
foreign-currency-denominated debt security that are attributable to fluctuations
in the  value of the  foreign  currency  between  the dates of  acquisition  and
disposition  of the  security  and (3) that are  attributable  to exchange  rate
fluctuations  between  the  time a fund  accrues  dividends,  interest  or other
receivables, or expenses or other liabilities, denominated in a foreign currency
and the time the fund actually collects the receivables or pays the liabilities,
generally will be treated as ordinary income or loss. These gains or losses will
increase or decrease the amount of a fund's  investment  company  taxable income
available to be distributed to its shareholders as ordinary income,  rather than
affecting the amount of its net capital gain.

      HEDGING  STRATEGIES.  The  use of  hedging  strategies,  such  as  selling
(writing) and purchasing options and futures contracts and entering into forward
currency contracts,  involves complex rules that will determine,  for income tax
purposes,  the  amount,  character  and timing of  recognition  of the gains and
losses a fund realizes in connection  therewith.  Gains from the  disposition of
foreign  currencies  (except  certain  gains  that  may be  excluded  by  future
regulations),  and gains from options,  futures and forward currency contracts a
fund derives with respect to its business of investing in  securities or foreign
currencies, will be treated as qualifying income under the Income Requirement.

      Some futures,  foreign currency  contracts and "nonequity"  options (I.E.,
certain listed options,  such as those on a "broad-based"  securities  index) in
which a fund may invest  will be subject to section  1256 of the Code  ("Section
1256 Contracts"). Section 1256 Contracts a fund holds at the end of each taxable
year, other than Section 1256 Contracts that are part of a "mixed straddle" with
respect to which it has made an election not to have the following  rules apply,
must be  "marked-to-market"  (that is,  treated  as sold for their  fair  market
value) for Federal income tax purposes, with the result that unrealized gains or
losses will be treated as though they were  realized.  Sixty  percent of any net
gain or loss recognized on these deemed sales,  and 60% of any net realized gain
or loss from any actual  sales of  Section  1256  Contracts,  will be treated as
long-term  capital gain or loss,  and the balance will be treated as  short-term
capital gain or loss.  Section 1256 Contracts also may be  marked-to-market  for
purposes of the Excise Tax.  These rules may operate to increase the amount that
a fund must  distribute  to satisfy the  Distribution  Requirement  (I.E.,  with
respect  to the  portion  treated as  short-term  capital  gain),  which will be

                                       36


taxable to its shareholders as ordinary income,  and to increase the net capital
gain a fund recognizes,  without in either case increasing the cash available to
the fund.

      Code section 1092 (dealing with straddles) also may affect the taxation of
certain Hedging  Instruments in which a fund may invest.  That section defines a
"straddle"  as offsetting  positions  with respect to actively  traded  personal
property;  for these purposes,  options,  futures and forward currency contracts
are  positions  in  personal  property.  Under that  section,  any loss from the
disposition  of a position in a straddle  generally  may be deducted only to the
extent the loss exceeds the unrealized gain on the offsetting position(s) of the
straddle.  In addition,  these rules may postpone the  recognition  of loss that
otherwise would be recognized  under the  mark-to-market  rules discussed above.
The regulations under section 1092 also provide certain "wash sale" rules, which
apply to  transactions  where a position is sold at a loss and a new  offsetting
position  is  acquired  within a  prescribed  period,  and  "short  sale"  rules
applicable  to  straddles.  If a  fund  makes  certain  elections,  the  amount,
character  and timing of the  recognition  of gains and losses from the affected
straddle  positions  would be determined  under rules that vary according to the
elections made. Because only a few of the regulations  implementing the straddle
rules  have  been  promulgated,  the  tax  consequences  to a fund  of  straddle
transactions are not entirely clear.

      If a fund has an "appreciated financial position" - generally, an interest
(including an interest through an option,  futures or forward currency  contract
or short sale) with respect to any stock,  debt instrument (other than "straight
debt") or  partnership  interest  the fair  market  value of which  exceeds  its
adjusted basis - and enters into a "constructive sale" of the position, the fund
will be treated as having made an actual sale  thereof,  with the result that it
will recognize gain at that time. A  constructive  sale generally  consists of a
short sale,  an  offsetting  notional  principal  contract or futures or forward
currency  contract a fund or a related  person  enters into with  respect to the
same or  substantially  identical  property.  In  addition,  if the  appreciated
financial position is itself a short sale or such a contract, acquisition of the
underlying  property  or  substantially  identical  property  will be  deemed  a
constructive sale. The foregoing will not apply,  however, to any transaction by
a fund during any taxable year that otherwise would be treated as a constructive
sale if the  transaction is closed within 30 days after the end of that year and
the fund holds the  appreciated  financial  position  unhedged for 60 days after
that closing  (I.E.,  at no time during that 60-day period is the fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially  identical or related property,  such as having an
option to sell, being  contractually  obligated to sell,  making a short sale or
granting an option to buy substantially identical stock or securities).

      ORIGINAL ISSUE DISCOUNT  SECURITIES.  Growth and Income and High Yield may
acquire zero coupon or other  securities  issued with  original  issue  discount
("OID"). As a holder of those securities,  both Growth and Income and High Yield
must include in its income the OID that accrues on them during the taxable year,
even if it receives no  corresponding  payment on them during the year.  Because
Growth and Income and High Yield annually must distribute  substantially  all of
its  investment  company  taxable  income,  including  any OID,  to satisfy  the
Distribution  Requirement  and avoid  imposition  of the Excise  Tax,  it may be
required  in a  particular  year to  distribute  as a dividend an amount that is
greater than the total amount of cash it actually receives.  Those distributions
will be made from Growth and  Income's  and High Yield's cash assets or from the
proceeds of sales of portfolio securities,  if necessary.  Growth and Income and
High Yield may realize  capital  gains or losses from those  sales,  which would
increase or decrease its  investment  company  taxable income and/or net capital
gain.

      MARKET DISCOUNT SECURITIES.  High Yield may invest in debt securities that
are purchased with "market discount,"  including Brady Bonds and other sovereign
debt  securities.  For these purposes,  market discount is the amount by which a
security's purchase price is exceeded by its stated redemption price at maturity
or, in the case of a  security  that was issued  with OID,  the sum of its issue
price plus accrued OID, except that market discount less than the product of (1)

                                       37


0.25% of the redemption price at maturity times (2) the number of complete years
to maturity after the taxpayer acquired the security is disregarded. Gain on the
disposition  of such a security  purchased  by High Yield (other than a security
with a fixed  maturity  date within one year from its  issuance),  generally  is
treated as ordinary  income,  rather  than  capital  gain,  to the extent of the
security's  accrued  market  discount  at the  time of  disposition.  In lieu of
treating  the  disposition  gain as above,  High Yield may elect to include  all
market  discount  (for the taxable  year in which it makes the  election and all
subsequent  taxable years) in its gross income currently,  for each taxable year
to which the discount is attributable.

      Investors  are advised to consult  their own tax  advisers  regarding  the
treatment of an  investment  in the funds under state and local tax laws,  which
may differ from Federal tax treatment described above.

XII.  SHAREHOLDER INFORMATION
      -----------------------

      Each share of a fund gives the shareholder  one vote in matters  submitted
to  shareholders  for a vote. Each class of shares of each fund has equal voting
rights,  except that, in matters  affecting  only a particular  class or series,
only  shares of that  class or series are  entitled  to vote.  As  Massachusetts
business  trusts,  Capital  Appreciation,  Growth and Income,  Income  Trust and
Heritage  Series  Trust are not  required to hold annual  shareholder  meetings.
Shareholder  approval will be sought only for certain  changes in a Trust's or a
fund's  operation and for the election of Trustees under certain  circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special  meeting  of  shareholders  shall be called by the  Trustees  upon the
written  request of  shareholders  owning at least 10% of a Trust's  outstanding
shares.

XIII. FUND INFORMATION
      ----------------

      A.    MANAGEMENT OF THE FUNDS
            -----------------------

      BOARD OF TRUSTEES.  The  business  affairs of each fund are overseen by or
under the direction of the Board.  The Trustees are  responsible  for overseeing
the funds'  business  affairs and for  exercising  all the funds'  powers except
those  reserved  to the  shareholders.  A Trustee  may be  removed  by the other
Trustees or by a two-thirds vote of the outstanding Trust shares.

      BACKGROUND  OF  TRUSTEES  AND  OFFICERS.  The  following  is a list of the
Trustees and officers of the Trusts with their addresses,  principal occupations
and present  positions,  including any affiliation with Raymond James Financial,
Inc.  ("RJF"),  Heritage  Fund  Distributors,  Inc. or  Heritage,  the length of
service to the Trust,  and the position,  if any, that they hold on the board of
directors/trustees  of companies other than the Trust. Each Trustee,  except for
Lincoln Kinnicutt,  serves as Trustee on the Boards of five investment companies
in the Heritage  Mutual Fund  complex:  Heritage  Cash Trust,  Heritage  Capital
Appreciation Trust, Heritage Growth and Income Trust, Heritage Income Trust, and
Heritage Series Trust,  consisting of a total of ten portfolios.  Mr.  Kinnicutt
serves on the Boards of three of the investment companies in the Heritage Mutual
Fund  complex:  Heritage  Growth and Income  Trust,  Heritage  Income  Trust and
Heritage Series Trust. The principal  address of each Trustee and Officer is 880
Carillon Parkway, St. Petersburg, Florida 33716.


                                       38



- ----------------------------------------------------------------------------------------------------------
                                        Trustees
- ----------------------------------------------------------------------------------------------------------
NAME, AGE AND POSITION,      PRINCIPAL OCCUPATION(S)            NUMBER OF             OTHER
TERM OF OFFICE(A) AND        DURING PAST FIVE YEARS             FUNDS             DIRECTORSHIPS
LENGTH OF TIME SERVED                                           OVERSEEN
                                                                IN FUND
                                                                COMPLEX
- ----------------------------------------------------------------------------------------------------------
Interested Trustees(b):
                                                                         
- ----------------------------------------------------------------------------------------------------------
Thomas A. James* (64)        Chief Executive Officer of         10                OSI Restaurant
Chairman of the Board        RJF since 1969; Chairman of                          Partners, Inc.
and Trustee since 1985       the Board of Raymond James
                             & Associates, Inc. since
                             1986; Chairman of the Board
                             of Eagle Asset Management,
                             Inc. ("Eagle") since 1984.

- ----------------------------------------------------------------------------------------------------------
Richard K. Riess* (57)       Executive Vice President           10                N/A
Trustee since 1985           and Managing Director for
                             Asset Management of RJF
                             since 1998; Chief Executive
                             Officer of Eagle since
                             1996; Chief Executive
                             Officer of Heritage since
                             2000;
- ----------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
- ----------------------------------------------------------------------------------------------------------
C. Andrew Graham (66)        First Financial Advisors,          10                N/A
Trustee since 1985           LTD & Graham Financial
                             Partners, LLC (financial
                             planning, insurance and
                             investment services) since
                             1999
- ----------------------------------------------------------------------------------------------------------
Keith B. Jarrett (58)        President, KBJ, LLC                10                Penn Virginia
Trustee since 2005           (investment company)                                 Resources, MLP
                             since 2001; Principal,
                             Rockport Funding, LLC
                             (specialty finance), and
                             Ajax Partners
                             (investment partnership)
                             since 2003; President and
                             CEO, TF Ventures
                             (information technology),
                             1998-2001.
- ----------------------------------------------------------------------------------------------------------
Lincoln Kinnicutt (61)(c)    Retired since 2002;                7                 N/A
Trustee since 2006           Managing Director of
                             Goldman Sachs 1997-2002
- ----------------------------------------------------------------------------------------------------------
William J. Meurer (63)       Private financial                  10                Sykes Enterprises,
Trustee since 2003           consultant since September                           Incorporated
                             2000                                                 (inbound call
                                                                                  systems)
- ----------------------------------------------------------------------------------------------------------
James L. Pappas (63)         Lykes Professor of Banking         10                N/A
Trustee since 1989;          and Finance at University
Lead Independent             of South Florida 1986 -
Trustee since 2003           2006; President, Graduate
                             School of Banking at
                             University of Wisconsin
                             1995 - 2005;
- ----------------------------------------------------------------------------------------------------------

                                               39


- ----------------------------------------------------------------------------------------------------------
Deborah L. Talbot, PhD (56)  Independent Consultant and         10                N/A
Trustee since 2002           Researcher; Founder and
                             Chairman of the Board,
                             Creative Tampa  Bay since
                             2003; Deans' Advisory
                             Board, College of Arts and
                             Sciences, University of
                             Memphis since 2002.
- ----------------------------------------------------------------------------------------------------------


(a) Trustees  serve for life or until they are  removed,  resign or retire.  The
    Board has  adopted  a Board  Governance  Policy  that  requires  Independent
    Trustees to retire at the age of 72 for those  Trustees  in office  prior to
    August 2000,  and at the age 70 for those Trustees who are elected to office
    after August 2000.
(b) Messrs.  James and Riess are "interested"  persons of the Trust as that term
    is defined by the 1940 Act. Mr. James is affiliated with Eagle, RJA and RJF.
    Mr. Riess is affiliated with Heritage, Eagle and RJF.
(c) Mr. Kinnicutt is not a Trustee of the Heritage Capital Appreciation Trust or
    Heritage Cash Trust.


                                       40



- --------------------------------------------------------------------------------
                                    Officers
- --------------------------------------------------------------------------------
Name, Age and Position, Term of   Principal Occupation(s) During Past Five
Office(a) and Length of Time      Years
Served
- --------------------------------------------------------------------------------
Stephen G. Hill (47)              President of Heritage since 2005;
President since 2005              Director of Heritage since 1994;
                                  President and Chief Operating Officer of
                                  Eagle since 2000; President and Chief
                                  Executive Officer of Awad Asset
                                  Management, Inc. ("Awad") since 2004
- --------------------------------------------------------------------------------
Kenneth C. Clark (48)             Executive Vice President and Chief
Executive Vice President and      Operating Officer of Heritage since
Principal Executive Officer       2000; Director of Heritage since 2005;
since 2000                        Chief Compliance Officer of Heritage
                                  2004 to 2005, Chairman Board of
                                  Trustees, University of West Florida
                                  since 2005,  Trustee, University of West
                                  Florida 2001 to 2005.
- --------------------------------------------------------------------------------
Andrea N. Mullins (39)            Treasurer and Vice President - Finance
Treasurer since 2003; Principal   of Heritage since 2003; Vice President,
Financial Officer and Secretary   Fund Accounting of Heritage 1997 to 2003.
since 2004
- --------------------------------------------------------------------------------
Mathew J. Calabro (40)            Chief Compliance Officer and Senior Vice
Chief Compliance Officer since    President of Heritage since 2005; Vice
2005                              President - Transfer Agency of Heritage
                                  1997 - 2005.
- --------------------------------------------------------------------------------

(a)   Officers each serve one year terms.

Board of Trustees Various Committees.
- -------------------------------------

      AUDIT COMMITTEE.  The Audit Committee consists of Messrs.  Jarrett, Meurer
and Pappas.  The members of the Audit Committee are not "interested"  persons of
the Trusts ("Independent Trustees").The Audit Committee met six times during the
last fiscal year. The primary  responsibilities  of the Trust's Audit  Committee
are, as set forth in its charter,  to make  recommendations to the Board Members
as to:

    o the engagement or discharge of the Trusts' independent auditors (including
      the audit fees charged by auditors);
    o the supervision of investigations into matters relating to audit matters;
    o the review with the independent  auditors and  independent  consultants of
      the results of audits; and
    o addressing any other matters regarding audits and financial statements.

      COMPLIANCE COMMITTEE.  The Compliance Committee consists of Ms. Talbot and
Messrs.  Graham  and  Kinnicutt,  each of whom is an  Independent  Trustee.  Mr.
Kinnicutt only serves as a committee member for Growth and Income Trust,  Income
Trust and Series  Trust.  Ms.  Talbot  serves as  Chairwoman  of the  Compliance
Committee.  The Compliance Committee met four times during the last fiscal year.
The primary responsibilities of the Compliance Committee are:

    o to oversee the Trusts' compliance with all regulatory  obligations arising
      under the applicable Federal securities law, rules and regulations and
    o oversee  management's   implementation  and  enforcement  of  the  Trusts'
      compliance policies and procedures.

                                       41


      NOMINATING COMMITTEE. The Nominating Committee consists of Messrs. Graham,
Jarrett,  Kinnicutt,  Meurer,  Pappas,  and  Ms.  Talbot,  each  of  whom  is an
Independent  Trustee.  The Nominating  Committee's primary  responsibility is to
make  recommendations  to the Board on issues  related  to the  composition  and
operation of the Board,  and  communicate  with  management on those issues.  In
determining  potential  candidates'  qualifications  for Board  membership,  the
Committee may consider all factors it may determine to be relevant to fulfilling
the role of being a member of the Board.  The Nominating  Committee may consider
potential candidates for nomination  identified by one or more shareholders of a
fund. Shareholders can submit recommendations in writing to the attention of the
Chairperson  of the Committee at an address to be maintained by Fund  management
for this purpose.  In order to be considered by the Committee,  any  shareholder
recommendation  must  include  certain  information,  such  as  the  candidate's
business,  professional  or other  relevant  experience  and areas of expertise,
current  business  and home  addresses  and  contact  information,  other  board
positions or prior  experience  and any  knowledge  and  experience  relating to
investment   companies   and   investment   company   governance.   The  primary
responsibilities of the Nominating Committee are:

    o to make  recommendations to the Board on issues related to the composition
      and operation of the Board,
    o communicate with management on those issues, and
    o evaluate and nominate Board member candidates.

      QUALIFIED  LEGAL  COMPLIANCE  COMMITTEE.  The Qualified  Legal  Compliance
Committee  consists of Messrs.  Meurer,  Pappas and Jarrett,  each of whom is an
Independent  Trustee.  The  Qualified  Legal  Compliance  Committee did not meet
during the most recent fiscal year.  The primary  responsibility  of the Trusts'
Qualified Legal Compliance Committee is to receive,  review and take appropriate
action with respect to any report made or referred to the Committee by:

    o an attorney of evidence of a material violation of applicable U.S. federal
      or state  securities  law,  material breach of a fiduciary duty under U.S.
      federal or state law or
    o a similar  material  violation by the Trust or by any  officer,  director,
      employee, or agent of the Trust.

      The following table shows the amount of equity securities in the funds and
in the other  Heritage  Mutual  Funds owned by the  Trustees as of December  31,
2006:

                                       42



- ------------------------------------------------------------------------------------------------------------
                                  Dollar Range of Equity Securities Owned:
- ------------------------------------------------------------------------------------------------------------
                Interested Trustees                    Independent Trustees
                                                                         
- ------------------------------------------------------------------------------------------------------------
                Thomas A.  Richard K.  C. Andrew  Keith      Lincoln      William J.   James L.  Deborah L.
                James      Riess       Graham     Jarret(a)  Kinnicut(b)  Meurer       Pappas    Talbot
- ------------------------------------------------------------------------------------------------------------
Capital           Over     None        $10,001 -  None                    $10,001 -    $10,001 - $10,001 -
Appreciation    $100,000               $50,000                            $50,000      $50,000   $50,000

- ------------------------------------------------------------------------------------------------------------
Core Equity       Over     None        $10,001 -  None       $10,001 and  $10,001 -    $10,001 - $1 -
                $100,000               $50,000               $50,000      $50,000      $50,000   $10,000
- ------------------------------------------------------------------------------------------------------------
Diversified       Over     None        None       None       $10,001 and  $10,001 -    $10,001 -
Growth          $100,000                                     $50,000      $50,000      $50,000
- ------------------------------------------------------------------------------------------------------------
International      Over    None        $10,001 -  None                    $10,001 -    $10,001 -
Equity          $100,000               $50,000                            $50,000      $50,000
- ------------------------------------------------------------------------------------------------------------
Growth and         Over    None        $10,001 -  None                    $10,001 -    $10,001 - $10,001 -
Income          $100,000               $50,000                            $50,000      $50,000   $50,000
- ------------------------------------------------------------------------------------------------------------
High Yield         Over    None        None       None                    $10,001 -    $10,001 -
                $100,000                                                  $50,000      $50,000
- ------------------------------------------------------------------------------------------------------------
Mid Cap            Over    None        $10,001 -  None                    $10,001 -    $10,001 - $10,001 -
                $100,000               $50,000                            $50,000      $50,000   $50,000
- ------------------------------------------------------------------------------------------------------------
Small Cap          Over    None        None       None                    $10,001 -    $10,001 -
                $100,000                                                  $50,000      $50,000
- ------------------------------------------------------------------------------------------------------------
Aggregate          Over    Over        $50,001 -  None       Over           Over         Over    $50,000 -
Dollar Range    $100,000   $100,000    $100,000              $100,000     $100,000     $100,000  $100,000
of Securities
in Heritage
Mutual Funds(c)
- ------------------------------------------------------------------------------------------------------------
(a) Mr. Jarrett was appointed to the Board on August 16, 2005.
(b) Mr. Kinnicutt was elected to the Board on t November 6, 2006, for the Growth and Income
    Trust and the Income Trust and on November 21, 2005 for the Series Trust.
(c) The Heritage Mutual Funds consist of 10 funds, including those listed above and
    Heritage Cash Trust--Money Market Fund and Heritage Cash Trust--Municipal Money Market
    Fund.


      The Trustees and officers of the Trusts,  as a group,  own less than 1% of
each class of each fund's shares outstanding.  Each Trust's Declaration of Trust
provides that the Trustees will not be liable for errors of judgment or mistakes
of fact or law.  However,  they are not protected against any liability to which
they would  otherwise  be subject by reason of willful  misfeasance,  bad faith,
gross negligence or reckless  disregard of the duties involved in the conduct of
their office.

      Except  for  Lincoln  Kinnicutt,  Trustees  of each  Trust  also  serve as
Trustees for Heritage Cash Trust, an investment  company that is also advised by
the Heritage  (collectively  referred to as the "Heritage  Mutual  Funds").  Mr.
Kinnicutt  does not serve as a Trustee of the  Heritage  Cash Trust or  Heritage
Capital  Appreciation Trust and does not receive compensation from these Trusts.
Except for Lincoln  Kinnicutt,  each Trustee of the Heritage Mutual Funds who is
not an employee of Heritage or its affiliates  receives an annual fee of $23,000
and an  additional  fee of $3,000  for each  combined  quarterly  meeting of the
Heritage Mutual Funds attended. In addition, each Audit Committee and Compliance
Committee  member receives $500 per meeting (in person or telephonic),  which is
allocated  among  each  Heritage  Mutual  Fund on a pro  rata  basis.  The  Lead
Independent   Trustee,   Audit  Committee  Chairman  and  Compliance   Committee
Chairwoman  each  receive  an annual  retainer  of  $2,500.  Trustees'  fees and
expenses  are paid  equally by each  portfolio  in the  Heritage  Mutual  Funds.
Because Heritage and other unaffiliated service providers perform  substantially
all of the services necessary for the operation of the Trust, the Trust requires
no employees.  Except for the Chief Compliance Officer, no officer,  director or
employee of Heritage  receives any  compensation  from the Trust for acting as a
director or officer.  The following table shows the compensation  earned by each
Trustee on each Trust's last fiscal year:

                                       43


                               COMPENSATION TABLE

- -------------------------------------------------------------------------------
                          Aggregate Compensation from:                Total
                                                                   Compensation
                                                                     From the
                                                                    Trusts and
                                                                       the
                                                                     Heritage
                                                                      Mutual
                                                                     Funds(b)
                                                                     Paid to
                                                                     Trustees
- --------------------------------------------------------------------------------
                   Capital     Growth and     Income      Series
Trustee Name     Appreciation    Income      Trust(a)      Trust
- -------------------------------------------------------------------------------
INTERESTED TRUSTEES:
- --------------------

Thomas A. James         $0          $0          $0          $0           $0
- -------------------------------------------------------------------------------
Richard K. Riess        $0          $0          $0          $0           $0
- -------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
- ---------------------

C. Andrew Graham     $3,753.53   $3,040.06   $6,080.13   $18,634.62   $39,015.38
- -------------------------------------------------------------------------------
Keith Jarrett(c)     $3,775.97      $0           $0        $269.23    $11,597.16
- -------------------------------------------------------------------------------
Lincoln              $0             $0           $0          $0           $0
Kinnicutt(d)
- -------------------------------------------------------------------------------
William J.           $4,148.25   $3,327.72   $6,655.45   $20,427.88   $42,855.81
Meurer
- -------------------------------------------------------------------------------
James L. Pappas      $4,073.25   $3,327.72   $6,655.45   $20,427.88   $42,630.81
- -------------------------------------------------------------------------------
Deborah L.           $4,030.61   $3,244.39   $6,488.78   $19,908.65   $41,733.65
Talbot
- -------------------------------------------------------------------------------

(a) During the period,  Income also offered shares of an additional portfolio to
    which a portion of Trustee fees was allocated. That portfolio was liquidated
    on October 31, 2005.

(b) The Heritage  Mutual Funds  consist of five separate  registered  investment
    companies,  which are Capital  Appreciation  Trust,  Cash Trust,  Growth and
    Income  Trust,  Income Trust and Series  Trust,  and 10  portfolios of those
    companies.

(c) Mr. Jarrett was appointed to the Board on August 16, 2005.

(d) Mr. Kinnicutt does not serve a Trustee for the Capital Appreciation Trust or
    Heritage  Cash Trust and was elected to the Board of Trustees on November 6,
    2006 for the Growth and Income  Trust and Income  Trust and on November  21,
    2006 for the Series Trust.

      No Trustee will receive any benefits upon retirement.  Thus, no pension or
retirement benefits have accrued as part of any of any Trust's expenses.

      B.    FIVE PERCENT SHAREHOLDERS
            -------------------------

      Listed  below are  shareholders  who owned of record or were  known by the
funds to own  beneficially  five percent or more of the outstanding  shares of a
class of the following funds as of November 30, 2006:



FUND                       CLASS  NAME OF 5% SHAREHOLDER           PERCENT OWNERSHIP
- ----                       -----  ----------------------           -----------------
                                                               
Capital Appreciation Trust   A    Charles Schwab & Co. Inc.              6.60%
                                  San Francisco, CA
Capital Appreciation Trust   I    South Dakota Higher Education         94.51%
                                  Savings Trust
                                  Kansas City, MO
Capital Appreciation Trust  R-5   DCGT as Trustee                        100%
                                  FBO Principal Financial Group
                                  Des Moines, IA

                                       44


Diversified Growth           A    Nationwide Trust Company              21.01%
                                  Columbus, OH
Diversified Growth           I    David E Mason Trustee                  100%
                                  West Dundee, IL
Growth and Income Trust      A    DCGT as Trustee                        9.61%
                                  FBO Principal Financial Group
                                  Des Moines, IA
High Yield Bond Fund         A    DCGT as Trustee                        9.97%
                                  FBO Principal Financial Group
International Equity Fund    A    Prudential Investment                  5.53%
                                  Management Services
                                  Newark, NJ
Mid Cap Stock Fund           A    Charles Schwab & Co. Inc.              6.46%
                                  San Francisco, CA
Mid Cap Stock Fund          R-3   Alerus Financial                      65.94%
                                  Grand Forks, ND
                            R-3   Union Bank Trust Nominee              34.06%
                                  San Francisco, CA
Mid Cap Stock Fund          R-5   DCGT as Trustee                        100%
                                  FBO Principal Financial Group
Small Cap Stock Fund         A    Patterson Co.                          8.98%
                                  Charlotte, NC
Small Cap Stock Fund         I    RBC Dain Rauscher Custodian            6.52%
                                  Durand, WI
                             I    RBC Dain Rauscher Custodian           40.76%
                                  Excelsior, MN
Small Cap Stock Fund        R-3   Wilmington Trust Company               100%
                                  Custodian
                                  Sussex County Medical Associates
                                  Wilmington, DE
Small Cap Stock Fund        R-5   DCGT as Trustee FBO                    100%
                                  Principal Financial Group
                                  Des Moines, IA


      C.    PROXY VOTING POLICIES AND PROCEDURES
            ------------------------------------

      The Board  has  adopted  Proxy  Voting  Policies  and  Procedures  ("Proxy
Policies") wherein the Trust has delegated to each subadviser the responsibility
for voting proxies relating to portfolio securities held by each Fund as part of
their investment advisory services,  subject to the supervision and oversight of
Heritage.  All  such  proxy  voting  duties  shall  be  subject  to the  Board's
continuing  oversight.  Notwithstanding  this  delegation  of  responsibilities,
however,  each Fund retains the right to vote proxies  relating to its portfolio
securities. The fundamental purpose of the Proxy Policies is to ensure that each
vote will be in a manner that  reflects  the best  interest of each Fund and its
shareholders, taking into account the value of a Fund's investments.

      PROXY VOTING GUIDELINES.  Generally,  each subadviser will vote proxies in
accordance with the proxy voting guidelines ("Proxy Guidelines") adopted as part
of each Trust's  Proxy  Policies.  Each  subadviser is permitted to vote a proxy
based  on its own  proxy  policies  if a proxy  presents  an  issue  that is not
addressed in the Proxy Guidelines or the Proxy Guidelines  provide discretion as
to how to vote a proxy.  Each  subadviser  should  vote  proxies to further  the
long-term  economic value of the  underlying  securities.  The Proxy  Guidelines

                                       45


distinguish between routine and non-routine proposals.

      In general,  routine  proposals are those proposals that do not propose to
change the  structure,  bylaws or  operations of the company to the detriment of
shareholders.  Examples of such proposals would include, among other things, the
approval  of  auditors,   election  of  director  and/or   officers,   liability
limitations for directors, and indemnification provisions for directors.

      Non-routine  proposals  would be those proposals more likely to affect the
structure and  operations of the company,  which would have a greater  impact on
the value of the underlying  security.  Examples of non-routine  proposals would
include,  among other things,  decisions as to corporate  restructuring,  poison
pill  provisions,  and changes in  capitalization.  These  proposals may require
special  consideration  by a  subadviser  depending  on whether and how they are
addressed in the Proxy Guidelines.

      CONFLICTS OF INTEREST.  The Proxy Guidelines also address procedures to be
used by each  subadviser  when  there is a  conflict  of  interest  between  the
interests of its respective fund  shareholders and those of the subadviser,  the
fund's principal  underwriter or other affiliated  persons of the fund. Upon the
discovery of a conflict of interest,  the subadviser  must consult with Heritage
to assess the  extent to which  there may be a material  conflict  of  interest.
After such  consultation,  the subadviser  will provide  Heritage with pertinent
written  information  as to how and why the  proxy  was  voted  in a  particular
manner. In addition, the subadviser will provide a quarterly report to the Board
that includes information as to how the conflict was resolved.

      MORE INFORMATION.  Information regarding how proxies were voted during the
most recent  twelve-month period ended June 30 is available without charge, upon
request by calling toll-free,  (800) 421-4184,  accessing the following website:
HeritageFunds.com or by accessing the Trust's most recently filed report on Form
N-PX on the SEC's website at  www.sec.gov.  In addition,  a copy of the Heritage
Mutual  Funds  Proxy  Voting  Guidelines  are also  available  by calling  (800)
421-4184, and will be sent within three business days of receipt of a request.

      D.    INVESTMENT ADVISER AND ADMINISTRATOR; SUBADVISERS
            -------------------------------------------------

      The investment  adviser and  administrator for each fund is Heritage Asset
Management,  Inc. ("Heritage").  Heritage was organized as a Florida corporation
in 1985.  All the capital  stock of  Heritage is owned by RJF.  RJF is a holding
company  that,  through its  subsidiaries,  is engaged  primarily  in  providing
customers  with  a  wide  variety  of  financial  services  in  connection  with
securities,  limited  partnerships,  options,  investment  banking  and  related
fields.

      With respect to each fund, Heritage is responsible for managing the fund's
investment and noninvestment  affairs,  subject to the direction of Heritage and
each fund's  Board.  Each Trust,  on behalf of its  respective  series,  if any,
entered into an Investment  Advisory Agreement  effective January 2, 2007. Under
the Investment  Advisory  Agreement,  Heritage provides a continuous  investment
program for each Fund and determines what securities and other  investments will
be  purchased,  retained,  sold or loaned by each Fund and what  portion of such
assets will be invested or held uninvested as cash. Heritage also is responsible
for effecting  transactions  for each Fund and  selecting  brokers or dealers to
execute such  transactions  for each Fund.  Heritage  may delegate  these duties
subject  to  Board  approval,  and if  required  by the  1940  Act,  shareholder
approval.

      Under  separate  Subadvisory  Agreements,  Eagle and  Goldman  Sachs Asset
Management L.P.  ("GSAM"),  subject to the direction of Heritage and the Capital
Appreciation's   Board,  provide  investment  advice  and  portfolio  management
services to Capital Appreciation for a fee payable by Heritage.  None of Capital

                                       46


Appreciation's   assets  currently  are  allocated  to  Eagle.   Under  separate
Subadvisory  Agreements,  Eagle and Awad Asset  Management,  Inc.  ("Awad") each
provide  investment  advice and portfolio  management  services,  subject to the
direction  of  Heritage  and the Series  Trust's  Board,  to Small Cap for a fee
payable by Heritage.  Under a Subadvisory  Agreement,  Eagle provides investment
advice and portfolio management  services,  subject to direction by Heritage and
the Series Trust's Board, to Core Equity, Diversified Growth, Growth and Income,
Mid Cap and Small Cap for a fee payable by Heritage. None of Growth and Income's
assets currently is allocated to Eagle. Under a separate Subadvisory  Agreement,
Thornburg Investment Management, Inc. ("Thornburg"), subject to the direction of
Heritage  and the Growth and  Income's  Board,  provides  investment  advice and
portfolio  management  services  to  Growth  and  Income  for a fee  payable  by
Heritage.  Under  a  separate  Subadvisory  Agreement,  Julius  Baer  Investment
Management,  LLC  ("Julius  Baer")  provides  investment  advice  and  portfolio
management services, subject to the direction of Heritage and the Series Trust's
Board, to International Equity for a fee payable by Heritage (collectively,  the
"Subadvisory Agreements"). Under a separate Subadvisory Agreement, Western Asset
Management  Company   ("Western")   provides  investment  advice  and  portfolio
management services to High Yield for a fee payable by Heritage.

      The Advisory Agreement and the Subadvisory Agreements were approved by the
Board  (including  all of the  Trustees  who are  not  "interested  persons"  of
Heritage  or  the  subadvisers,  as  defined  under  the  1940  Act)  and by the
shareholders  of the  applicable  funds in  compliance  with the 1940 Act.  Each
Agreement  provides that it will be in force for an initial  two-year period and
it must be  approved  each year  thereafter  by (1) a vote,  cast in person at a
meeting  called for that  purpose,  of a majority of those  Trustees who are not
"interested  persons" of Heritage,  the subadvisers or the Trust, and by (2) the
majority  vote of  either  the  full  Board  or the  vote of a  majority  of the
outstanding shares of a fund.

      The Advisory and Subadvisory  Agreements each automatically  terminates on
assignment,  and each is terminable  on not more than 60 days written  notice by
the  Trust  to  either  party.  In  addition,  the  Advisory  Agreements  may be
terminated on not less than 60 days written  notice by Heritage,  as applicable,
to a fund and the  Subadvisory  Agreements may be terminated on not less than 60
days written notice by Heritage as applicable, or 90 days `written notice by the
subadvisers.  Under the terms of the Advisory Agreement,  Heritage automatically
becomes  responsible for the obligations of the subadvisers  upon termination of
the  Subadvisory  Agreements.  In the event Heritage ceases to be the investment
adviser  of a fund or the  Distributor  ceases to be  principal  distributor  of
shares of a fund, the right of a fund to use the identifying  name of "Heritage"
may be withdrawn.

      Heritage  and the  subadvisers  shall not be liable to either  fund or any
shareholder  for  anything  done or omitted by them,  except  acts or  omissions
involving willful misfeasance, bad faith, gross negligence or reckless disregard
of the  duties  imposed  upon  them by their  agreements  with a fund or for any
losses that may be sustained in the purchase, holding or sale of any security.

      All of the  officers of each fund are officers or directors of Heritage or
its  affiliates.  These  relationships  are described  under  "Management of the
Funds."

      ADVISORY FEES.

      Each fund pays investment  advisory fees to Heritage.  Heritage earned the
following  advisory  fees and  administrative  fees from each  fund  during  the
periods  shown.   The  fees  represent  the  combined  amount  of  advisory  and
administrative  fees. From January 2, 2006, through December 31, 2006, the funds
allocated the management fee rate paid to Heritage between  investment  advisory
and  administrative fee rates. This  administrative fee was previously  combined
with the investment advisory fee.

                                       47


      Note that Capital Appreciation, Growth and Income and High Yield have each
changed their fiscal year end to October 31, 2006.



- --------------------------------------------------------------------------------------
                  Net Investment Advisory and Administrative fees paid to Heritage
                                                      
- --------------------------------------------------------------------------------------
Fund              9/1/06-10/31/06   9/1/05-8/31/06   9/1/04-8/31/05   9/1/03-8/31/04
- --------------------------------------------------------------------------------------
Capital               $750,886      $4,317,613     $3,813,380     $3,328,543
Appreciation
- --------------------------------------------------------------------------------------
                 10/1/06-10/31/06   10/1/05-9/30/06  10/1/04-9/30/05  10/1/03-9/30/04
- --------------------------------------------------------------------------------------
Growth and Income     $76,278        $814,424      $ 985,914       $435,069
- --------------------------------------------------------------------------------------
High Yield            $30,294        $392,467      $ 298,426       $416,452
- --------------------------------------------------------------------------------------
                 11/1/05-10/31/06   11/1/04-10/31/05 11/1/04-10/31/05 11/1/03-10/31/04
- --------------------------------------------------------------------------------------
Core Equity           $714,186       $      0        N/A            N/A
- --------------------------------------------------------------------------------------
Diversified Growth    $1,717,807     $1,617,965     $1,263,720     $1,263,720
- --------------------------------------------------------------------------------------
International         $1,594,371     $  791,468     $  431,921     $  431,921
Equity
- --------------------------------------------------------------------------------------
Mid Cap               $8,338,272     $6,172,022     $3,838,418     $3,838,418
- --------------------------------------------------------------------------------------
Small Cap             $2,747,641     $2,555,219     $1,759,683     $1,759,683
- --------------------------------------------------------------------------------------


      In  addition,  Heritage  has  entered  into  agreements  with each  fund's
subadviser and paid the following fees pursuant to those agreements.



- -------------------------------------------------------------------------------------
                        Subadvisory fees paid by Heritage
- -------------------------------------------------------------------------------------
                                                         
Fund              9/1/06-10/31/06  9/1/05-8/31/06   9/1/04-8/31/05   9/1/03-8/31/04
- -------------------------------------------------------------------------------------
Capital
Appreciation
 GSAM             $250,295         $1,439,204       $1,271,127       $1,109,514
 Eagle            $0               $0               $0               $0

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

                 10/1/06-10/31/06  10/1/05-9/30/06  10/1/04-9/30/05  10/1/03-9/30/04
- ------------------------------------------------------------------------------------
Growth and Income
 Thornburg        $38,139          $407,212         $302,360         $273,623
 Eagle            $0               $0               $ 0              $0
- ------------------------------------------------------------------------------------
High Yield        $15,147          $196,233         $246,713         $274,611
- ------------------------------------------------------------------------------------

                 11/1/05-10/31/06  11/1/04-10/31/05  11/1/03-10/31/04
- ------------------------------------------------------------------------------------
Core Equity       $373,690         $     35,959      N/A
- ------------------------------------------------------------------------------------
Diversified       $858,904         $    808,983      $  631,860
Growth
- ------------------------------------------------------------------------------------
International     $747,186         $    462,387      $  309,339
Equity
- ------------------------------------------------------------------------------------
Mid Cap           $4,171,427       $  3,085,542      $1,923,140
- ------------------------------------------------------------------------------------
Small Cap
  Awad            $705,989         $    667,586      $  399,922
  Eagle           $668,093         $    610,024      $  479,920
- ------------------------------------------------------------------------------------


      Further,  Heritage  has  contractually  agreed to waive each  fund's  2007
fiscal year expenses to the extent that total annual  operating  expenses exceed
certain limits for each class.

                                       48


      Heritage has entered into an administration  agreement with each Trust, on
behalf of its respective  series,  if any. Under the  administration  agreement,
Heritage provides to each Fund and its respective classes all administrative and
clerical  services deemed necessary or advisable for the operation of such Funds
and  classes.  Among other  services,  Heritage  provides all  necessary  office
facilities,  equipment,  and personnel,  prepares required  regulatory  filings,
prepare Board materials and coordinates mailing of prospectuses,  notices, proxy
statements and other shareholder or investor communications.  The fees under the
administration  agreement  are equal to 0.15% of the average daily net assets of
Class A, Class B, Class C and Class R-3  shares and 0.10% of the  average  daily
net assets of Class I and Class R-5 shares

      For each fund, the current  advisory and subadvisory  fees, are determined
as follows:

      Capital Appreciation

            ----------------------------------------------------------
                                  Average daily net       Rate
                                  assets                  charged
            ----------------------------------------------------------
            Investment Advisory Fee
            ----------------------------------------------------------
                                  $0 to $1 billion        0.60%
            ----------------------------------------------------------
                                  Over $1 billion         0.55%
            ----------------------------------------------------------

            ----------------------------------------------------------
            Subadvisory Fee - GSAM
            ----------------------------------------------------------
                                  All assets              0.25%
            ----------------------------------------------------------

            ----------------------------------------------------------
            Subadvisory Fee -
            Eagle                 $0 to $1 billion        0.375%
            ----------------------------------------------------------
                                  Over $1 billion         0.35%
            ----------------------------------------------------------


      Heritage has  contractually  agreed to waive its  investment  advisory fee
and/or reimburse  certain expenses of the fund to the extent that Class A annual
operating expenses exceed 1.35% of the class' average daily net assets,  Class B
and Class C annual operating  expenses exceed 2.15% of that class' average daily
net  assets  for the  fund's  2007  fiscal  year,  Class I and Class R-5  annual
operating  expenses exceed 0.95% of that class' average daily net assets for the
fund's 2007 fiscal year and Class R-3 annual operating  expenses exceed 1.65% of
that  class'  average  daily net assets for the fund's 2007  fiscal  year.  This
expense   limitation   excludes   interest,    taxes,   brokerage   commissions,
extraordinary  expenses and includes offset expense arrangements with the fund's
custodian.  The Board may agree to change fee waivers or reimbursements  without
the  approval  of fund  shareholders.  Any  reimbursement  of fund  expenses  or
reduction in Heritage's  investment advisory fees is subject to reimbursement by
the fund within the  following  two fiscal years if overall  expenses fall below
these percentage limitations.

      Core Equity

            ----------------------------------------------------------
                                  Average daily net       Rate
                                  assets                  charged
            ----------------------------------------------------------
            Investment Advisory Fee
            ----------------------------------------------------------
                                  All assets              0.60%
            ----------------------------------------------------------

            ----------------------------------------------------------
            Subadvisory Fee
            ----------------------------------------------------------
                                  All assets              0.375%
            ----------------------------------------------------------

      Heritage has  contractually  agreed to waive its  investment  advisory fee
and/or reimburse  certain expenses of the fund to the extent that Class A annual
operating  expenses  exceed 1.65% of the class'  average  daily net assets,  and
Class C annual operating  expenses exceed 2.45% of that class' average daily net

                                       49


assets for the fund's 2007 fiscal year,  Class I and Class R-5 annual  operating
expenses  exceed  0.95% of that class'  average  daily net assets for the fund's
2007 fiscal year and Class R-3 annual  operating  expenses  exceed 1.95% of that
class'  average  daily net assets for the fund's 2007 fiscal year.  This expense
limitation  excludes  interest,  taxes,  brokerage  commissions,   extraordinary
expenses and includes offset expense arrangements with the fund's custodian. The
Board may agree to change fee waivers or reimbursements  without the approval of
fund shareholders. Any reimbursement of fund expenses or reduction in Heritage's
investment  advisory  fees is subject to  reimbursement  by the fund  within the
following  two fiscal  years if overall  expenses  fall below  these  percentage
limitations.

      Diversified Growth, Mid Cap, Small Cap

            ----------------------------------------------------------
                                  Average daily net       Rate
                                  assets                  charged
            ----------------------------------------------------------
            Investment Advisory Fee
            ----------------------------------------------------------
                                  $0 to $500 million      0.60%
            ----------------------------------------------------------
                                  $501 million to $1      0.55%
                                  billion
            ----------------------------------------------------------
                                  Over $1 billion         0.50%
            ----------------------------------------------------------

            ----------------------------------------------------------
            Subadvisory Fee       $0 to $500 million      0.375%
            ----------------------------------------------------------
                                  $501 million to $1      0.35%
                                  billion
            ----------------------------------------------------------
                                  Over $1 billion         0.325%
            ----------------------------------------------------------

      For Diversified  Growth,  Heritage has  contractually  agreed to waive its
investment  advisory fee and/or  reimburse  certain  expenses of the fund to the
extent that Class A annual operating expenses exceed 1.60% of the class' average
daily net assets,  Class B and Class C annual operating expenses exceed 2.40% of
that class'  average  daily net assets for the fund's 2007 fiscal year,  Class I
and Class R-5 annual  operating  expenses  exceed  0.95% of that class'  average
daily net assets for the fund's 2007 fiscal year and Class R-3 annual  operating
expenses  exceed  1.90% of that class'  average  daily net assets for the fund's
2007 fiscal year. This expense limitation  excludes interest,  taxes,  brokerage
commissions,  extraordinary  expenses and includes  offset expense  arrangements
with the fund's custodian.  For Mid Cap,  Heritage has  contractually  agreed to
reimburse  certain expenses of the fund and, if necessary,  waive its investment
advisory fees to the extent that Class A annual operating  expenses exceed 1.45%
of the class'  average  daily net assets,  Class B and Class C annual  operating
expenses  exceed  2.25% of that class'  average  daily net assets for the fund's
2007 fiscal year, Class I and Class R-5 annual  operating  expenses exceed 0.95%
of that  class'  average  daily net assets for the fund's  2007  fiscal year and
Class R-3 annual  operating  expenses  exceed 1.75% of that class' average daily
net assets for the fund's 2007 fiscal  year.  This expense  limitation  excludes
interest,  taxes,  brokerage  commissions,  extraordinary  expenses and includes
offset expense  arrangements with the fund's custodian.  For Small Cap, Heritage
has  contractually  agreed to  reimburse  certain  expenses  of the fund and, if
necessary,  waive its investment advisory fees to the extent that Class A annual
operating expenses exceed 1.30% of the class' average daily net assets,  Class B
and Class C annual operating  expenses exceed 2.10% of that class' average daily
net  assets  for the  fund's  2007  fiscal  year,  Class I and Class R-5  annual
operating  expenses exceed 0.95% of that class' average daily net assets for the
fund's 2007 fiscal year and Class R-3 annual operating  expenses exceed 1.60% of
that  class'  average  daily net assets for the fund's 2007  fiscal  year.  This
expense   limitation   excludes   interest,    taxes,   brokerage   commissions,
extraordinary  expenses and includes offset expense arrangements with the fund's
custodian.  For each  fund,  the  Board  may  agree to  change  fee  waivers  or
reimbursements  without the approval of fund shareholders.  Any reimbursement of
fund expenses or reduction in Heritage's  investment advisory fees is subject to
reimbursement  by the fund  within the  following  two  fiscal  years if overall
expenses fall below these percentage limitations.

                                       50


      Growth and Income Trust

            ----------------------------------------------------------
                                  Average daily net       Rate
                                  assets                  charged
            ----------------------------------------------------------
            Investment Advisory Fee
            ----------------------------------------------------------
                                  $0 to $100 million      0.60%
            ----------------------------------------------------------
                                  $101 million to $500    0.45%
                                  million
            ----------------------------------------------------------
                                  Over $500 million       0.40%
            ----------------------------------------------------------
            ----------------------------------------------------------
            Subadvisory Fee       $0 to $100 million      0.375%
            ----------------------------------------------------------
                                  $100 million to $500    0.30%
                                  million
            ----------------------------------------------------------
                                  Over $500 million       0.275%
            ----------------------------------------------------------

      Heritage  contractually has agreed to waive through the fund's 2007 fiscal
year  management  fees  to the  extent  that  total  annual  operating  expenses
attributable  to Class A shares  exceed 1.35% of the average daily net assets or
to the extent that total annual operating  expenses  attributable to Class B and
Class C shares exceed 2.15% of average daily net assets. This expense limitation
excludes interest,  taxes,  brokerage  commissions,  extraordinary  expenses and
includes offset expense  arrangements with the fund's  custodian.  The Board may
agree to change fee  waivers or  reimbursements  without  the  approval  of fund
shareholders.  Any  reimbursement  of fund  expenses or reduction in  Heritage's
investment  advisory  fees is subject to  reimbursement  by the fund  within the
following  two fiscal  years if overall  expenses  fall below  these  percentage
limitations.

      High Yield Bond Fund

            ----------------------------------------------------------
                                  Average daily net       Rate
                                  assets                  charged
            ----------------------------------------------------------
            Investment Advisory Fee
            ----------------------------------------------------------
                                  $0 to $100 million      0.45%
            ----------------------------------------------------------
                                  $101 million to $500    0.35%
                                  million
            ----------------------------------------------------------
                                  Over $500 million       0.30%
            ----------------------------------------------------------
            ----------------------------------------------------------
            Subadvisory Fee       $0 to $100 million      0.30%
            ----------------------------------------------------------
                                  $101 million to $500    0.25%
                                  million
            ----------------------------------------------------------
                                  Over $500 million       0.225%
            ----------------------------------------------------------

      Heritage  contractually has agreed to waive through the fund's 2007 fiscal
year  management  fees  to the  extent  that  total  annual  operating  expenses
attributable  to Class A shares  exceed 1.20% of the average daily net assets or
to the extent that total annual operating  expenses  attributable to Class B and
Class C shares exceed 1.80% of average daily net assets. This expense limitation
excludes interest,  taxes,  brokerage  commissions,  extraordinary  expenses and
includes offset expense  arrangements with the fund's  custodian.  The Board may
agree to change fee  waivers or  reimbursements  without  the  approval  of fund
shareholders.  Any  reimbursement  of fund  expenses or reduction in  Heritage's
investment  advisory  fees is subject to  reimbursement  by the fund  within the
following  two fiscal  years if overall  expenses  fall below  these  percentage
limitations.


                                       51


      International Equity Fund

            ----------------------------------------------------------
                                  Average daily net       Rate
                                  assets                  charged
            ----------------------------------------------------------
            Investment Advisory Fee
            ----------------------------------------------------------
                                  $0 to $100 million      0.85%
            ----------------------------------------------------------
                                  $101 million to $1      0.65%
                                  billion
            ----------------------------------------------------------
                                  Over $1 billion         0.55%
            ----------------------------------------------------------
            ----------------------------------------------------------
            Subadvisory Fee       $0 to $100 million      0.45%
            ----------------------------------------------------------
                                  Over $100 million       0.40%
            ----------------------------------------------------------

      Heritage  contractually has agreed to waive through the fund's 2007 fiscal
year  management  fees to the  extent  that Class A annual  operating  expenses,
exclusive of foreign taxes paid,  exceed 1.65% or to the extent that Class B and
Class C annual  operating  expenses  exceed  2.45% of  average  daily net assets
attributable  to that class  during this fiscal year.  This  expense  limitation
excludes interest,  taxes,  brokerage  commissions,  extraordinary  expenses and
includes offset expense  arrangements with the fund's  custodian.  The Board may
agree to change fee  waivers or  reimbursements  without  the  approval  of fund
shareholders.  Any  reimbursement  of fund  expenses or reduction in  Heritage's
investment  advisory  fees is subject to  reimbursement  by the fund  within the
following  two fiscal  years if overall  expenses  fall below  these  percentage
limitations.

      CLASS-SPECIFIC  EXPENSES.  Each fund may determine to allocate  certain of
its  expenses (in addition to  distribution  fees) to the specific  classes of a
fund's shares to which those expenses are attributable.

      E.    PORTFOLIO MANAGERS
            ------------------

      Each portfolio  manager has provided the information found in this section
      and presented below for Heritage's use in the SAI.

       1).   CAPITAL APPRECIATION TRUST

      Steven M. Barry,  Gregory H. Ekizian, and David G. Shell manage the Fund's
investment  portfolio.  Messrs.  Barry,  Ekizian, and Shell are Chief Investment
Officers ("CIOs") and portfolio  managers of the Goldman Sachs Asset Management,
L.P. Growth Team. All members of the Growth Team discuss their research analysis
and  recommendations  at investment  strategy  meetings.  The entire Growth Team
discusses  and debates  whether the business  being  presented  meets the Growth
Team's  definition of a high-quality  growth business and the  attractiveness of
the current  valuation.  The team  reaches a consensus  on whether a business is
worthy  of a  position  in the  portfolio.  The  CIOs  are  accountable  for all
portfolio  construction  decisions and determine the appropriate weight for each
investment.  Messrs.  Ekizian,  and Shell joined Goldman Sachs Asset Management,
L.P.  ("GSAM") in January 1997 when it acquired Liberty  Investment  Management.
They were senior  portfolio  managers at Liberty prior to the  acquisition.  Mr.
Shell began the strategy at Liberty's  predecessor  firm, Eagle Asset Management
in 1987,  and Mr.  Ekizian  joined in 1990.  Mr.  Barry  joined GSAM as a senior
portfolio manager in 1999.

      As of October 31, 2006, Messrs.  Barry,  Ekizian and Shell are responsible
for the day-to-day management of the following other accounts:

                                         Number of accounts   Total assets
                                         ------------------   ------------
        Registered investment companies         29            $9.07 billion
        Other pooled investment vehicles         0            $0
        Other accounts                         424            $16.9 billion

                                       52


      In 13 of the 424 of the above "other"  accounts,  the advisory fee payable
to GSAM is based upon the account's  performance and the assets managed that pay
the fee are $2,067,480,415.

      Material  Conflicts  of  Interest:   GSAM  portfolio  managers  are  often
responsible for managing one or more funds as well as other accounts,  including
proprietary  accounts,  separate accounts and other pooled investment  vehicles,
such as  unregistered  hedge  funds.  A portfolio  manager may manage a separate
account or other pooled investment  vehicle which may have materially higher fee
arrangements  than Capital  Appreciation  Trust (the "Fund") and may also have a
performance-based  fee.  The  side-by-side  management  of these funds may raise
potential  conflicts of interest  relating to cross  trading,  the allocation of
investment opportunities and the aggregation and allocation of trades.

      GSAM has a  fiduciary  responsibility  to manage all client  accounts in a
fair and equitable  manner. It seeks to provide best execution of all securities
transactions and aggregate and then allocate  securities to client accounts in a
fair and timely manner. To this end, GSAM has developed  policies and procedures
designed to mitigate and manage the  potential  conflicts  of interest  that may
arise from  side-by-side  management.  In  addition,  GSAM has adopted  policies
limiting the circumstances  under which cross-trades may be affected between the
Fund and another client account.  GSAM conducts  periodic  reviews of trades for
consistency with these policies.

      Each  portfolio  manager's  compensation  consists  of a base salary and a
performance  bonus.  Each is paid a base salary that is  competitive  with other
portfolio managers in the industry, based on industry surveys. In addition, each
is  paid a  performance  bonus  that  is  tied  to  the  Growth  Team's  pre-tax
performance  for their clients and the Growth Team's total revenues for the past
year which,  in part, is derived from  advisory  fees and for certain  accounts,
performance  based  fees.  The  performance  bonus  for  portfolio  managers  is
significantly  influenced  by the  following  criteria:  (1)  whether  the  team
performed  consistently with objectives and client commitments;  (2) whether the
team's  performance  exceeded  performance  benchmarks over a market cycle;  (3)
consistency  of  performance  across  accounts  with similar  profiles;  and (4)
communication with other portfolio managers within the research process.

      The  Growth  Team  also  considers  each  portfolio  manager's  individual
performance,  his or her contribution to the overall performance of the strategy
long-term and his/her ability to work as a member of the Team.

      GSAM  and  the  Growth  Team's  decision  may  also be  influenced  by the
following:  the performance of GSAM, the  profitability of Goldman,  Sachs & Co.
and anticipated compensation levels among competitor firms.

      In  addition to base salary and  performance  bonus,  GSAM has a number of
additional benefits/deferred compensation programs for all portfolio managers in
place including (i) a 401K program that enables employees to direct a percentage
of their pretax salary and bonus income into a  tax-qualified  retirement  plan;
(ii) a profit  sharing  program  to  which  Goldman  Sachs & Co.  makes a pretax
contribution;  and  (iii)  investment  opportunity  programs  in  which  certain
professionals  are  eligible  to  participate   subject  to  certain  net  worth
requirements.  Portfolio  managers may also receive  grants of restricted  stock
units and/or stock options as part of their compensation.

      Certain GSAM Portfolio Managers may also participate in the firm's Partner
Compensation  Plan,  which  covers  many of the  firm's  senior  executives.  In
general, under the Partner Compensation Plan, participants receive a base salary
and a bonus (which may be paid in cash or in the form of an equity-based  award)
that is linked to Goldman Sachs' overall financial performance.

                                       53


      As of October 31, 2006,  Mr. Shell owns between  $100,001 and $500,000 and
Messrs. Barry and Ekizian own no Fund shares.

       2).   CORE EQUITY FUND

      Richard Skeppstrom,  CFA Managing Director,  E. Craig Dauer,  Co-Portfolio
Manager,   John  G.  Jordan  III,   Co-Portfolio  Manager  and  Robert  Marshall
Co-Portfolio Manager are responsible for the day-to-day  management of the fund.
(the "Team"). The Team has been managing the fund since inception in May 2005.

      As of  October  31,  2006,  the  Team is  responsible  for the  day-to-day
management of the following other accounts:

                                          Number of accounts     Total assets
                                          ------------------     ------------
        Registered investment companies             4            $286.1 million
        Other pooled investment vehicles            0            $0
        Other accounts                          6,505            $2.3 billion

      In each of the above  accounts,  the  advisory fee payable to Eagle is not
based upon the account's performance.

      When a portfolio  manager has  responsibility  for managing  more than one
account,  potential  conflicts  of interest  may arise.  Those  conflicts  could
include preferential treatment of one account over others in terms of allocation
of  resources or of  investment  opportunities.  Eagle has adopted  policies and
procedures designed to address these potential material conflicts. For instance,
portfolio managers within Eagle are normally responsible for all accounts within
a certain  investment  discipline,  and do not,  absent  special  circumstances,
differentiate   among  the   various   accounts   when   allocating   resources.
Additionally,  Eagle and its advisory affiliates utilize a system for allocating
investment opportunities among portfolios that is designed to provide a fair and
equitable allocation.

      The  officers  and  employees  of Eagle and  accounts in which  affiliated
persons have an investment interest, may at times buy or sell and have positions
in securities which may be those  recommended for purchase or sale to investment
advisory  clients.  In  addition,  Eagle and its  related  persons may also give
advice and take action in the performance of their duties to clients,  which may
differ  from,  or be similar to the  advice  given,  or the timing and nature of
action taken, with respect to their own accounts.  Eagle may combine transaction
orders  placed on behalf of  clients,  including  accounts  in which  affiliated
persons of Eagle have an  investment  interest.  Eagle  seeks to ensure that the
firm and its  employees do not  personally  benefit from the  short-term  market
effects of recommendations to or actions for clients through personal securities
policies and procedures under our firm's Code of Ethics.

      Eagle typically  compensates its portfolio managers based primarily on the
scale and complexity of their portfolio  responsibilities and the performance of
managed funds and accounts.  Each  portfolio  manager is evaluated  based on the
composite  performance  of funds  and  accounts  in each  product  for which the
individual  serves on the portfolio  management team. This evaluation may afford
differing  weights to specific funds,  accounts or products based on a portfolio
manager's  contribution or responsibility to the team. This weighting process is
based on the overall size of a given fund or  investment  product and  portfolio
manager  responsibility  and/or  contribution  and may provide  incentive  for a
portfolio  manager to favor another  account over the fund. A portfolio  manager
may manage a separate account or other pooled investment  vehicle which may have
materially higher fee arrangements than the Fund.

      Eagle has established  procedures to mitigate these  conflicts,  including
review of performance  dispersion  across all firm managed accounts and policies

                                       54


to monitor trading and best execution for all managed accounts and funds

      Eagle  seeks to  maintain a  compensation  program  that is  competitively
positioned  to  attract  and  retain  high  caliber  investment   professionals.
Investment  professionals  receive a base salary and deferred compensation along
with a variable  bonus based on revenues on accounts  under  management  and the
relative (pre-tax)  performance  (typically 1- and 3-year  performance) of these
accounts and various  other  variable  forms of  compensation,  including  stock
options and an Executive  benefit plan.  Eagle has created a  compensation  plan
that provides its investment  professionals with long-term financial  incentives
and  encourages  them to  develop  their  careers  at  Eagle.  Their  investment
professionals are compensated as follows:

    o All portfolio  managers are paid base salaries that are  competitive  with
others in their fields, based on industry surveys;

    o Portfolio managers participate in a revenue-sharing  program that provides
incentives to build a successful investment program over the long term;

    o Additional deferred  compensation plans including  restricted stock awards
and stock option programs may be provided to key investment professionals;

    o All portfolio managers generally are eligible to receive benefits from the
subadviser's  parent company including a 401(k) plan, profit sharing,  Long-Term
Incentive Plan, Employee Stock Option Plan and Employee Stock Purchase Plan.

   The portfolio managers' benchmark for evaluation purposes is the S & P 500.

      As of October 31,  2006,  Mr.  Dauer does not own shares of the Fund.  Mr.
Jordan  owns  between  $10,001  and  $50,000  shares of the Fund.  Mr.  Marshall
personally owns between $50,001 and $100,000 shares of the Fund. Mr.  Skeppstrom
personally owns between $100,001 and $500,000 shares of the Fund.

       3).   DIVERSIFIED GROWTH FUND

      Bert Boksen,  Senior Vice President and Managing  Director of Eagle is the
portfolio  manager of the fund responsible for the day-to-day  management of the
fund.  Mr.  Boksen  has been a  manager  to the  fund  since  1998.  Christopher
Sassouni, D.M.D., Vice President and Assistant Portfolio Manager since 2006.

      As of October 31,  2006,  Mr.  Boksen is  responsible  for the  day-to-day
management of the following other accounts:

                                      Number of accounts      Total assets
                                      ------------------      ------------
       Registered investment companies         13              $806.3 million
       Other pooled investment vehicles         1              $   34 million
       Other accounts                       2,279              $982.3 million

      In the "other pooled investment vehicles" category above, the advisory fee
payable to Eagle is based upon the account's performance.

      Mr. Sassouni does not manage other accounts.

      When a portfolio  manager has  responsibility  for managing  more than one
account,  potential  conflicts  of interest  may arise.  Those  conflicts  could
include preferential treatment of one account over others in terms of allocation
of  resources or of  investment  opportunities.  Eagle has adopted  policies and

                                       55


procedures designed to address these potential material conflicts. For instance,
portfolio managers within Eagle are normally responsible for all accounts within
a certain  investment  discipline,  and do not,  absent  special  circumstances,
differentiate   among  the   various   accounts   when   allocating   resources.
Additionally,  Eagle and its advisory affiliates utilize a system for allocating
investment opportunities among portfolios that is designed to provide a fair and
equitable allocation.

      The  officers  and  employees  of Eagle and  accounts in which  affiliated
persons have an investment interest, may at times buy or sell and have positions
in securities which may be those  recommended for purchase or sale to investment
advisory  clients.  In  addition,  Eagle and its  related  persons may also give
advice and take action in the performance of their duties to clients,  which may
differ  from,  or be similar to the  advice  given,  or the timing and nature of
action taken, with respect to their own accounts.  Eagle may combine transaction
orders  placed on behalf of  clients,  including  accounts  in which  affiliated
persons of Eagle have an  investment  interest.  Eagle  seeks to ensure that the
firm and its  employees do not  personally  benefit from the  short-term  market
effects of recommendations to or actions for clients through personal securities
policies and procedures under our firm's Code of Ethics.

      Eagle typically  compensates its portfolio managers based primarily on the
scale and complexity of their portfolio  responsibilities and the performance of
managed funds and accounts.  Each  portfolio  manager is evaluated  based on the
composite  performance  of funds  and  accounts  in each  product  for which the
individual  serves on the portfolio  management team. This evaluation may afford
differing  weights to specific funds,  accounts or products based on a portfolio
manager's  contribution or responsibility to the team. This weighting process is
based on the overall size of a given fund or  investment  product and  portfolio
manager  responsibility  and/or  contribution  and may provide  incentive  for a
portfolio  manager to favor another  account over the fund. A portfolio  manager
may manage a separate account or other pooled investment  vehicle which may have
materially   higher  fee  arrangements  than  the  Fund  and  may  also  have  a
performance-based fee.

      Eagle has established  procedures to mitigate these  conflicts,  including
review of performance  dispersion  across all firm managed accounts and policies
to monitor trading and best execution for all managed accounts and funds.

      Mr. Boksen is paid a base salary that is competitive  with other portfolio
managers in the industry,  based on industry  surveys.  Mr.  Boksen,  along with
other portfolio managers participate in a revenue-sharing  program that provides
incentives  to build a  successful  investment  program  over the long  term and
additional   deferred   compensation   plans  are  provided  to  key  investment
professionals.  Mr. Boksen also  participates  in a  non-qualified  stock option
program.  Additionally,  Mr. Boksen,  along with all employees  receive benefits
from  Eagle's  parent  company  including a 401(k)  plan,  profit  sharing,  and
Employee  Stock  Purchase  Plan.  Although some  accounts may pay  significantly
higher or lower fees than the Fund,  there is no  difference  between  the basic
methodology used to determine Mr. Boksen's compensation with respect to the Fund
and other Funds managed by Mr.  Boksen.  Mr.  Boksen's  additional  compensation
includes  receipt of 50% of the net profits  generated by the General Partner EB
Management  I. This revenue  sharing  program  provides for an annual  bonus,  a
portion of which may be paid in the form of restricted  stock in Eagle's  parent
company.  Mr.  Boksen's  compensation  is based upon all  accounts  managed  and
performance  is  evaluated  annually.  Performance  is  evaluated  on the entire
composite of accounts and is pre-tax and account weighted.

      Mr. Boksen's  benchmarks for evaluation purposes includes LipperFund Index
for Mutual Fund  performance  and the Russell 2000 index for  separate  accounts
along with peer group rankings such as Callan  Associates and Mercer  Investment
Consulting.

      Mr.  Sassouni is paid a base salary and a bonus that is  competitive  with
other similarly  situated  investment  professionals  in the industry,  based on

                                       56


industry  surveys.  Mr.  Sassouni,  along  with all  Eagle  employees,  receives
benefits from Eagle's parent company  including a 401(k) plan,  profit  sharing,
and  Employee  Stock  Purchase  Plan.  Mr.  Sassouni's  compensation  is on  his
individual  performance as a Senior Research Analyst as well as his contribution
to the results of the  investment  products of Eagle's  small and mid cap teams.
Performance is evaluated on the entire  composite of accounts and is pre-tax and
account  weighted.   In  addition,   Mr.  Sassouni  may  receive  an  additional
compensation and bonus for his contribution as an assistant portfolio manager of
the Fund and other similarly managed accounts.

      Mr.  Sassouni's  benchmarks for evaluation  purposes  includes  LipperFund
Index for Mutual  Fund  performance  and the  Russell  2000  index for  separate
accounts  along with peer group  rankings such as Callan  Associates  and Mercer
Investment Consulting.

      As of October 31,  2006,  Mr.  Boksen owns over  $1,000,000  of the Fund's
shares. Mr. Sassouni owns between $1 and $10,000 of the Fund's shares.

       4).   GROWTH AND INCOME TRUST

      William V. Fries, CFA, has been responsible for the day-to-day  management
of the  investment  portfolio  since  July 2001.  Mr.  Fries has been a Managing
Director and Portfolio  Manager at Thornburg since 1995. Brad Kinkelaar has been
the Managing Director and Portfolio Manager since 1995 has served with Mr. Fries
as a co-manger of the fund since 2006.

      As of October  31,  2006,  Mr.  Fries is  responsible  for the  day-to-day
management of the following other accounts:

                                     Number of accounts      Total assets
                                     ------------------      ------------
       Registered investment companies        17             $12.6 million
       Other pooled investment vehicles       12             $894.6 million
       Other accounts                         7,437          $7.7 billion

In 2 of the 7,437 of the above  "other"  accounts,  the advisory  fee payable to
Thornburg is based upon the account's  performance and the assets  managed  that
pay the fee are $842.3 million.

      As of October 31, 2006, Mr.  Kinkelaar is  responsible  for the day-to-day
management of the following other accounts:

                                     Number of accounts      Total assets
                                     ------------------      ------------
       Registered investment companies         2             $1.97 billion
       Other pooled investment vehicles        0             $0
       Other accounts                          0             $0

None of the above  accounts  have an advisory  fee that is payable to  Thornburg
based upon the account's performance and the assets managed.

      Material  Conflicts  of  Interest:  Most  investment  advisors  and  their
portfolio  managers manage  investments for multiple  clients,  including mutual
funds,  private  accounts,  and retirement  plans. In any case where a portfolio
manager manages the investments of two or more accounts,  there is a possibility
that  conflicts  of  interest  could  arise  between  the  portfolio   manager's
management  of the fund's  investments  and the  manager's  management  of other
accounts. These conflicts could include:
    o Allocating  a  favorable  investment  opportunity  to one  account but not
      another.
    o Directing  one account to buy a security  before  purchases  through other
      accounts increase the price of the security in the marketplace.

                                       57


    o Giving substantially  inconsistent  investment directions at the same time
      to similar accounts, so as to benefit one account over another.
    o Obtaining services from brokers  conducting trades for one account,  which
      are used to benefit another account.

      The fund's  investment  manager,  Thornburg  Investment  Management,  Inc.
("Thornburg")  has informed the fund that it has considered the likelihood  that
any material  conflicts of interest could arise between the portfolio  manager's
management of the fund's investments and the portfolio  manager's  management of
other accounts.  Thornburg has also informed the fund that it has not identified
any such  conflicts that may arise,  and has concluded  that it has  implemented
policies  and  procedures  to identify  and resolve any such  conflict if it did
arise.

      The  compensation  of the  portfolio  manager  includes an annual  salary,
annual bonus, and company-wide  profit sharing.  The portfolio manager also owns
equity shares in the investment  manager,  Thornburg.  Both the salary and bonus
are reviewed  approximately  annually for  comparability  with salaries of other
portfolio managers in the industry, using survey data obtained from compensation
consultants. The annual bonus is subjective.

      Criteria that are considered in formulating the bonus include, but are not
limited  to,  the  following:  revenues  available  to pay  compensation  of the
portfolio  manager and all other  expenses  related to  supporting  the accounts
managed by the portfolio manager,  including the fund;  multiple year historical
total return of accounts managed by the portfolio  manager,  including the fund,
relative to market  performance and similar funds;  single year historical total
return  of  accounts  managed  by the  portfolio  manager,  including  the fund,
relative to market  performance and similar funds;  the degree of sensitivity of
the portfolio  manager to potential tax liabilities  created for account holders
in  generating  returns,  relative  to  overall  return.  There  is no  material
difference in the method used to calculate the portfolio manager's  compensation
with respect to the fund and other  accounts  managed by the portfolio  manager,
except that certain accounts managed by the portfolio manager may have no income
or capital gains tax  considerations.  To the extent that the portfolio  manager
realizes  benefits from capital  appreciation and dividends paid to shareholders
of the  investment  manager,  such  benefits  accrue from the overall  financial
performance of the investment manager. The annual bonus is subjective.

      Criteria that are considered in formulating the bonus include, but are not
limited  to,  the  following:  revenues  available  to pay  compensation  of the
portfolio  manager and all other  expenses  related to  supporting  the accounts
managed by the portfolio manager,  including the fund;  multiple year historical
total return of accounts managed by the portfolio  manager,  including the fund,
relative to market  performance and similar funds;  single year historical total
return  of  accounts  managed  by the  portfolio  manager,  including  the fund,
relative to market  performance and similar funds;  the degree of sensitivity of
the portfolio  manager to potential tax liabilities  created for account holders
in generating returns, relative to overall return.

      Neither Mr. Fries nor Mr. Kinkelaar own any shares of the fund.

       5).   HIGH YIELD BOND FUND
             --------------------

      The day-to-day  management of the fund's investment  portfolio will be the
responsibility of a team of investment  professionals led by Investment Officers
S. Kenneth Leech and Stephen A. Walsh and Portfolio Managers Michael C. Buchanan
and Ian Edmonds.

      OTHER  ACCOUNTS  MANAGED:  As of October 31, 2006,  S.  Kenneth  Leech was
responsible for the day-to-day management of the following other accounts:

                                       58


                                     Number of accounts      Total assets
                                     ------------------      ------------
Registered investment companies           141                $149.3 billion
Other pooled investment vehicles          22                 $25.6 billion
Other accounts                            1,014              $291.2 billion

      In 95 of the 1,014 "other  accounts" with total assets of $30.760 billion,
the advisory fee payable to Western Asset Management  Company  ("Western") or an
affiliate is based on performance.

      As of  October  31,  2006,  Stephen  A.  Walsh  was  responsible  for  the
day-to-day management of the following other accounts:

                                     Number of accounts      Total assets
                                     ------------------      ------------
Registered investment companies           141                $149.3 billion
Other pooled investment vehicles          22                 $25.6 billion
Other accounts                            1,014              $291.2 billion

      In 95 of the 1,014 "other  accounts" with total assets of $30.760 billion,
the advisory fee payable to Western or an affiliate is based on performance.

      As of October  31,  2006,  Michael C.  Buchanan  was  responsible  for the
day-to-day management of the following other accounts:

                                     Number of accounts      Total assets
                                     ------------------      ------------
Registered investment companies           16                 $7.4 billion
Other pooled investment vehicles          2                  $2.5 billion
Other accounts                            15                 $1.2 billion

      In each of the above accounts  managed by Mr.  Buchanan,  the advisory fee
payable to Western was not based on performance.

      It is important to note that the numbers above reflect the overall  number
of  portfolios  managed by Western Mr.  Leech and Mr.  Walsh are involved in the
management  of all of the  portfolios  of Western or an affiliate of Western but
they are not solely responsible for particular portfolios.  Western's investment
discipline  emphasizes a team  approach  that  combines the efforts of groups of
specialists working in different market sectors.  The individuals that have been
identified are responsible for overseeing  implementation  of Western's  overall
investment  ideas and  coordinating  the work of the various sector teams.  This
structure ensures that client portfolios  benefit from a consensus that draws on
the expertise of all team members.

      POTENTIAL CONFLICTS OF INTEREST: Potential conflicts of interest may arise
in connection  with the  management  of multiple  accounts  (including  accounts
managed in a personal  capacity).  These could  include  potential  conflicts of
interest related to the knowledge and timing of a portfolio's trades, investment
opportunities and broker selection. Members of the portfolio management team may
be privy to the size, timing and possible market impact of a portfolio's trades.

      It is possible that an investment  opportunity  may be suitable for both a
portfolio and other  accounts  managed by a member of the  portfolio  management
team, but may not be available in sufficient  quantities for both the High Yield
Bond Fund and the other accounts to participate fully.  Similarly,  there may be

                                       59


limited  opportunity  to sell an  investment  held by a  portfolio  and  another
account.  A conflict may arise where the portfolio  management  team may have an
incentive to treat an account  preferentially as compared to a portfolio because
the account  pays a  performance-based  fee or the  portfolio  management  team,
Western or an  affiliate  has an  interest in the  account.  Western has adopted
procedures for allocation of portfolio transactions and investment opportunities
across  multiple  client  accounts on a fair and equitable  basis over time. All
eligible  accounts  that can  participate  in a trade  share the same price on a
pro-rata  allocation  basis in an attempt to mitigate  any conflict of interest.
Trades are allocated among similarly managed accounts to maintain consistency of
portfolio   strategy,   taking  into  account  cash   availability,   investment
restrictions and guidelines, and portfolio composition versus strategy.

      With  respect  to  securities  transactions  for the  portfolios,  Western
determines which broker or dealer to use to execute each order,  consistent with
their duty to seek best execution of the transaction.  However,  with respect to
certain  other  accounts  (such  as  pooled  investment  vehicles  that  are not
registered investment companies and other accounts managed for organizations and
individuals), Western may be limited by the client with respect to the selection
of brokers or dealers or may be instructed to direct trades through a particular
broker or  dealer.  In these  cases,  trades  for a  portfolio  in a  particular
security may be placed  separately from, rather than aggregated with, such other
accounts.   Having  separate   transactions  with  respect  to  a  security  may
temporarily  affect the market  price of the  security or the  execution  of the
transaction,  or both,  to the  possible  detriment  of a portfolio or the other
account(s) involved.  Additionally, the management of multiple portfolios and/or
other accounts may result in a portfolio  management team devoting  unequal time
and attention to the management of each portfolio and/or other account.

      It is theoretically  possible that the portfolio management team could use
information  to the advantage of other  accounts they manage and to the possible
detriment of a portfolio. For example, the portfolio management team could short
sell a security for an account  immediately  prior to a portfolio's sale of that
security. To address this conflict, Western has adopted procedures for reviewing
and comparing selected trades of alternative investment accounts (which may make
directional  trades such as short sales) with long only accounts  (which include
the portfolios) for timing and pattern  related  issues.  Trading  decisions for
alternative  investment  and long only accounts may not be identical even though
the same portfolio  management  team may manage both types of accounts.  Whether
Western  allocates  a  particular  investment  opportunity  to only  alternative
investment  accounts or to  alternative  investment  and long only accounts will
depend  on  the   investment   strategy   being   implemented.   If,  under  the
circumstances, an investment opportunity is appropriate for both its alternative
investment  and  long  only  accounts,  then it will be  allocated  to both on a
pro-rata basis.

      A portfolio  management  team may also face other  potential  conflicts of
interest in managing a portfolio,  and the  description  above is not a complete
description  of every  conflict  of  interest  that  could be deemed to exist in
managing both a portfolio and the other accounts listed above.

      INVESTMENT  TEAM  COMPENSATION:  With respect to the  compensation  of the
portfolio management team, Western's compensation system assigns each employee a
total compensation "target" and a respective cap. Both the target and respective
cap are derived from annual market  surveys that  benchmark each role with their
job function and peer universe. This method is designed to reward employees with
total  compensation  reflective  of the external  market value of their  skills,
experience, and ability to produce desired results.

      Standard  compensation   includes  competitive  base  salaries,   generous
employee  benefits,  and a retirement plan. In addition,  employees are eligible
for  bonuses.  The bonuses are  structured  to closely  align the  interests  of
employees with those of the Western,  and are  determined by the  professional's
job function and performance as measured by a formal review process. All bonuses
are  completely  discretionary.  One of the  principal  factors  considered is a

                                       60


portfolio  manager's  investment  performance versus appropriate peer groups and
benchmarks.  Because portfolio  managers are generally  responsible for multiple
accounts   (including  the  High  Yield  Bond  Fund)  with  similar   investment
strategies,  they are  compensated on the  performance of the aggregate group of
similar accounts,  rather than a specific account.  A smaller portion of a bonus
payment  is  derived  from  factors  that  include  client   service,   business
development,   length  of  service  to  Western,   management   or   supervisory
responsibilities,  contributions  to  developing  business  strategy and overall
contributions to Western's business.

      Finally, in order to attract and retain top talent, the portfolio managers
are  eligible  for   additional   incentives  in   recognition   of  outstanding
performance.  These are determined  based upon the factors  described  above and
include Legg Mason, Inc. stock options and long-term incentives that vest over a
set period of time past the award date.

      OWNERSHIP OF FUND SHARES:  As of October 31,  2006,  no portfolio  manager
owned any shares of the fund.

       6).   INTERNATIONAL EQUITY FUND

      Rudolph-Riad  Younes,  CFA, Head of International  Equities at Julius Baer
Investment  Management  LLC, and Richard C. Pell,  Chief  Investment  Officer of
Julius Baer Investment  Management LLC, have been responsible for the day-to-day
management  of the fund's  investment  portfolio  since July 2002.  Julius  Baer
Investment  Management  LLC  ("JBIM") has  provided  the  following  information
regarding the managers which is current as of October 31, 2006.

      As of  October  31,  2006,  Mr.  Pell is  responsible  for the  day-to-day
management of the following other accounts:

                                        Number of accounts      Total assets
                                        ------------------      ------------
      Registered investment companies           9              $27,379.4
      Other pooled investment vehicles          9              $ 5,466.0
      Other accounts                            67             $12,998.4

In 3 of the 67 of the above "other"  accounts,  the advisory fee payable to JBIM
is based upon the account's  performance and the assets managed that pay the fee
are $998.4.

      As of October 31,  2006,  Mr.  Younes is  responsible  for the  day-to-day
management of the following other accounts:

                                        Number of accounts      Total assets
                                        ------------------      ------------
      Registered investment companies           9               $26,938.6
      Other pooled investment vehicles          8               $ 5,426.8
      Other accounts                            72              $13,425.9

In 3 of the 72 of the above "other"  accounts,  the advisory fee payable to JBIM
is based upon the account's  performance and the assets managed that pay the fee
are $998.4.

      As Messrs.  Younes and Pell share in the profits of JBIM,  the conflict is
that these  portfolio  managers  may have an  incentive  to allocate  securities
preferentially  to the accounts where JBIM might share in investment  gains.  In
addition,  they may have an incentive to allocate  securities  preferentially to
the accounts for which JBIM receives  higher  investment  advisory fees based on
the assets under  management.  In order to address  these  potential  conflicts,
JBIM's investment  decision-making  and trade allocation policies and procedures
are designed to ensure that none of JBIM's clients are  disadvantaged  in JBIM's


                                       61



management of accounts.  Additionally,  JBIM's internal controls are tested on a
routine schedule as part of the firm's Compliance Monitoring Program.

      Messrs.  Younes and Pell are  compensated  via a  methodology  that uses a
compensation  of  fixed  compensation,  compensation  based on  performance  and
compensation based on tenure.  The fixed portion of their compensation  includes
salary, profit sharing and deferred  compensation.  The performance component is
comprised  of an annual  bonus  and the  tenured  portion  is  comprised  of the
employee stock purchase plan, the 401(k) plan and various  retirement plans. The
performance  portion  utilizes the MSCI EAFE Index and the MSCI ACWI ex US index
as the appropriate  benchmarks for the International Equity product. There is no
difference  in the  methodology  of  compensating  the managers  with any of the
accounts listed as "other accounts" in the above paragraphs.

      Messrs. Younes and Pell do not own any shares of the fund.

       7).   MID CAP STOCK FUND

      Todd McCallister, PhD, CFA, Managing Director of the fund is the co-manger
with Stacey Thomas and is jointly  responsible  for the day to day management of
the fund. Mr.  McCallister has been a portfolio manager for the fund since 1997.
Stacey  Serafini  Thomas,  CFA,  a Vice  President  with  Eagle  since  1999 and
Co-Portfolio  Manager of Eagle serves as Co-Portfolio  Manager of the Fund since
July 1, 2005.

      As of October 31, 2006, Mr. McCallister and Ms. Thomas are responsible for
the day-to-day management of the following other accounts:

                                        Number of accounts      Total assets
                                        ------------------      ------------
      Registered investment companies           6               $305.84 million
      Other pooled investment vehicles          0               $0
      Other accounts                            8,158           $3.5 billion

      In each of the above  accounts,  the  advisory fee payable to Eagle is not
based upon the account's performance.

      When a portfolio  manager has  responsibility  for managing  more than one
account,  potential  conflicts  of interest  may arise.  Those  conflicts  could
include preferential treatment of one account over others in terms of allocation
of  resources or of  investment  opportunities.  Eagle has adopted  policies and
procedures designed to address these potential material conflicts. For instance,
portfolio managers within Eagle are normally responsible for all accounts within
a certain  investment  discipline,  and do not,  absent  special  circumstances,
differentiate   among  the   various   accounts   when   allocating   resources.
Additionally,  Eagle and its advisory affiliates utilize a system for allocating
investment opportunities among portfolios that is designed to provide a fair and
equitable allocation.

      The  officers  and  employees  of Eagle and  accounts in which  affiliated
persons have an investment interest, may at times buy or sell and have positions
in securities which may be those  recommended for purchase or sale to investment
advisory  clients.  In  addition,  Eagle and its  related  persons may also give
advice and take action in the performance of their duties to clients,  which may
differ  from,  or be similar to the  advice  given,  or the timing and nature of
action taken, with respect to their own accounts.  Eagle may combine transaction
orders  placed on behalf of  clients,  including  accounts  in which  affiliated
persons of Eagle have an  investment  interest.  Eagle  seeks to ensure that the
firm and its  employees do not  personally  benefit from the  short-term  market
effects of recommendations to or actions for clients through personal securities
policies and procedures under our firm's Code of Ethics.

                                       62


      Eagle typically  compensates its portfolio managers based primarily on the
scale and complexity of their portfolio  responsibilities and the performance of
managed funds and accounts.  Each  portfolio  manager is evaluated  based on the
composite  performance  of funds  and  accounts  in each  product  for which the
individual  serves on the portfolio  management team. This evaluation may afford
differing  weights to specific funds,  accounts or products based on a portfolio
manager's  contribution or responsibility to the team. This weighting process is
based on the overall size of a given fund or  investment  product and  portfolio
manager  responsibility  and/or  contribution  and may provide  incentive  for a
portfolio  manager to favor another  account over the fund. A portfolio  manager
may manage a separate account or other pooled investment  vehicle which may have
materially higher fee arrangements than the Fund.

      Eagle  seeks to  maintain a  compensation  program  that is  competitively
positioned  to  attract  and  retain  high  caliber  investment   professionals.
Investment  professionals  receive a base salary and deferred compensation along
with a variable  bonus based on revenues on accounts  under  management  and the
relative (pre-tax)  performance  (typically 1- and 3-year  performance) of these
accounts and various  other  variable  forms of  compensation,  including  stock
options and an Executive  benefit plan.  Eagle has created a  compensation  plan
that provides its investment  professionals with long-term financial  incentives
and  encourages  them to  develop  their  careers  at  Eagle.  Their  investment
professionals are compensated as follows:

o All portfolio managers are paid base salaries that are competitive with others
in their fields, based on industry surveys;
o Portfolio  managers  participate  in a  revenue-sharing  program that provides
incentives to build a successful investment program over the long term;
o Additional deferred  compensation plans including  restricted stock awards and
stock option programs may be provided to key investment professionals;
o All portfolio managers generally are eligible to receive benefits from Eagle's
parent company  including a 401(k) plan,  profit  sharing,  Long-Term  Incentive
Plan, and Employee Stock Purchase Plan.

      Mr.  McCallister's  and Ms. Thomas'  benchmarks  for  evaluation  purposes
include Lipper and Morningstar fund rankings for mutual fund performance and the
S&P 400 MidCap  index  along with peer group  rankings  such as that from Callan
Associates and Mercer Investment Consulting.

      Mr.  McCallister  personally owns between  $100,001 and $500,000 shares of
the Fund and Ms. Thomas e owns between $10,001 an d $50,000 of the Fund's shares
as of October 31, 2006.

       8).   SMALL CAP STOCK FUND

      Bert Boksen,  Senior Vice President and Managing  Director of Eagle is the
sole portfolio  manager of the Eagle managed portion of the fund. Mr. Boksen has
been a manager to the fund since 1998.  Eagle Asset  Management  has offered the
following information regarding Mr. Boksen as of September 30, 2006.

      Eagle  currently  holds a 51% ownership  interests in EB Management I, LLC
which acts as the general partner to a limited partnership formed for investment
purposes.  Bert Boksen is a 49% owner of EB Management and the Portfolio Manager
for the Eagle  Aggressive  Growth  Partners  Fund I L.P..  Eagle  also  provides
administrative and investment research services for the general partner. Certain
officers  and  employees  of Eagle  have  investment  interests  in the  limited
partnership.

                                       63


      As of October 31,  2006,  Mr.  Boksen is  responsible  for the  day-to-day
management of the following other accounts:

                                    Number of accounts       Total assets
                                    ------------------       ------------
      Registered investment companies           13           $838.5 million
      Other pooled investment vehicles          1            $34.1 million
      Other accounts                            2,279        $982.4 million

In the "other  pooled  investment  vehicles"  category  above,  the advisory fee
payable to Eagle is based upon the account's performance.

      When a portfolio  manager has  responsibility  for managing  more than one
account,  potential  conflicts  of interest  may arise.  Those  conflicts  could
include preferential treatment of one account over others in terms of allocation
of  resources or of  investment  opportunities.  Eagle has adopted  policies and
procedures designed to address these potential material conflicts. For instance,
portfolio managers within Eagle are normally responsible for all accounts within
a certain  investment  discipline,  and do not,  absent  special  circumstances,
differentiate   among  the   various   accounts   when   allocating   resources.
Additionally,  Eagle and its advisory affiliates utilize a system for allocating
investment opportunities among portfolios that is designed to provide a fair and
equitable allocation.

      The  officers  and  employees  of Eagle and  accounts in which  affiliated
persons have an investment interest, may at times buy or sell and have positions
in securities which may be those  recommended for purchase or sale to investment
advisory  clients.  In  addition,  Eagle and its  related  persons may also give
advice and take action in the performance of their duties to clients,  which may
differ  from,  or be similar to the  advice  given,  or the timing and nature of
action taken, with respect to their own accounts.  Eagle may combine transaction
orders  placed on behalf of  clients,  including  accounts  in which  affiliated
persons of Eagle have an  investment  interest.  Eagle  seeks to ensure that the
firm and its  employees do not  personally  benefit from the  short-term  market
effects of recommendations to or actions for clients through personal securities
policies and procedures under our firm's Code of Ethics.

      Eagle typically  compensates its portfolio managers based primarily on the
scale and complexity of their portfolio  responsibilities and the performance of
managed funds and accounts.  Each  portfolio  manager is evaluated  based on the
composite  performance  of funds  and  accounts  in each  product  for which the
individual  serves on the portfolio  management team. This evaluation may afford
differing  weights to specific funds,  accounts or products based on a portfolio
manager's  contribution or responsibility to the team. This weighting process is
based on the overall size of a given fund or  investment  product and  portfolio
manager  responsibility  and/or  contribution  and may provide  incentive  for a
portfolio  manager to favor another  account over the fund. A portfolio  manager
may manage a separate account or other pooled investment  vehicle which may have
materially higher fee arrangements than the Fund.

      Eagle has established  procedures to mitigate these  conflicts,  including
the review of  performance  dispersion  across  all firm  managed  accounts  and
policies to monitor  trading and best  execution  for all managed  accounts  and
funds.

      Mr. Boksen is paid a base salary that is competitive  with other portfolio
managers in the industry,  based on industry surveys.  Eagle seeks to maintain a
compensation program that is competitively positioned to attract and retain high
caliber investment professionals. Investment professionals receive a base salary
and  deferred  compensation  along with a variable  bonus  based on  revenues on
accounts under management and the relative (pre-tax)  performance  (typically 1-
and 3-year  performance)  of these  accounts and various other variable forms of
compensation,  including stock options and an Executive  benefit plan. Eagle has
created a  compensation  plan that provides its  investment  professionals  with
long-term  financial  incentives and encourages them to develop their careers at

                                       64


Eagle. Their investment professionals are compensated as follows:

o All portfolio managers are paid base salaries that are competitive with others
in their fields, based on industry surveys;

o Portfolio  managers  participate  in a  revenue-sharing  program that provides
incentives to build a successful investment program over the long term;

o Additional deferred  compensation plans including  restricted stock awards and
stock option programs may be provided to key investment professionals;

o All portfolio managers generally are eligible to receive benefits from Eagle's
parent company  including a 401(k) plan,  profit  sharing,  Long-Term  Incentive
Plan, and Employee Stock Purchase Plan.

      Although some accounts may pay significantly higher or lower fees then the
Fund, there is no difference  between the basic methodology used to determine M.
Boksen's  compensation  with respect to the Fund and other Funds  managed by Mr.
Boksen. Mr. Boksen's additional  compensation includes receipt of 50% of the net
profits generated by the General Partner EB Management I.

      Mr. Boksen's  benchmarks for evaluation purposes includes LipperFund Index
for Mutual Fund  performance  and the Russell 2000 index for  separate  accounts
along with peer group rankings such as Callan  Associates and Mercer  Investment
Consulting.

      Mr.  Boksen owns between  $100,001  and $500,000  shares of the Fund as of
October 31, 2006.

      David Adams and John  McPherson are both Managing  Directors of Awad.  Mr.
Adams is the lead Portfolio Manger and Mr. McPherson is the Co-Portfolio Manager
of the Awad portion of the fund since January 1, 2007.

      As of October 31, 2006, Mr. Adams and Mr.  McPherson are  responsible  for
the day-to-day management of the following other accounts:

                                        Number of accounts       Total assets
                                        ------------------       ------------
      Registered investment companies           0                 $0
      Other pooled investment vehicles          0                 $0
      Other accounts                            1                 $2,128,122

      In each of the above  accounts,  the  advisory  fee payable to Awad is not
based upon the account's performance.

      Awad Asset Management,  Inc. currently holds a 75% ownership  interests in
Awad  &  Associates  Inc.  which  acts  as  the  general  partner  to a  limited
partnership formed for investment purposes.  Mr. James D. Awad is a 25% owner of
Awad & Associates  Inc. and the  Portfolio  Manager for the Awad & Associates II
Ltd.  Fund.  Awad  Asset  Management,  Inc.  also  provides  administrative  and
investment  research  services  for the general  partner.  Certain  officers and
employees of Awad have investment interests in the partnership.

      On occasion,  orders for the securities  transactions of a partnership may
be aggregated with orders for Awad's client  accounts.  In such instances,  Awad
will ensure that the  allocation  of  securities  among  Awad's  clients and the
partnership is equitable;  price  averaging may be used for trades executed in a
series of  transactions on the same day. Awad does not invest assets of clients'
accounts in such limited  partnership.  Officers and  employees of Raymond James
Financial,  Inc.  and its  subsidiaries  may have  investment  interest  in such
investment partnership.

                                       65


      Awad's portfolio manager manages other accounts with investment strategies
similar to the portfolio.  Certain conflicts of interest may arise in connection
with the  management  of multiple  portfolios.  As noted above,  fees vary among
these accounts and the portfolio  manager may personally invest in some of these
accounts.  This could create  potential  conflicts of interest where a portfolio
manager may favor  certain  accounts  over others,  resulting in other  accounts
outperforming the Portfolio.  Other potential conflicts include conflicts in the
allocation of investment opportunities and aggregated trading. However, Awad has
developed and  implemented  policies and procedures  designed to ensure that all
clients are treated equitably. In addition,  compliance oversight and monitoring
ensures adherence to policies designed to avoid conflicts. Also, as indicated in
Awad's Code of Ethics there are certain  procedures in place to avoid  conflicts
of interest when the manager and other investment  personnel of Awad buy or sell
securities also owned by, or bought or sold for clients.

      Awad typically  compensates its portfolio  managers based primarily on the
scale and complexity of their portfolio  responsibilities and the performance of
managed funds and accounts.  Awad  portfolio  manager is evaluated  based on the
composite  performance  of funds  and  accounts  in each  product  for which the
individual  serves on the portfolio  management team. This evaluation may afford
differing  weights to specific funds,  accounts or products based on a portfolio
manager's  contribution or responsibility to the team. This weighting process is
based on the overall size of a given fund or  investment  product and  portfolio
manager  responsibility  and/or  contribution  and may provide  incentive  for a
portfolio  manager to favor another  account over the fund. A portfolio  manager
may manage a separate account or other pooled investment  vehicle which may have
materially higher fee arrangements than the Fund.

      Awad has established procedures to mitigate these conflicts, including the
review of performance  dispersion  across all firm managed accounts and policies
to monitor trading and best execution for all managed accounts and funds.

      Messrs.  Adams and  McPherson  are paid a base salary that is  competitive
with other portfolio managers in the industry,  based on industry surveys.  Awad
seeks to maintain a  compensation  program that is  competitively  positioned to
attract   and  retain  high   caliber   investment   professionals.   Investment
professionals  receive a base  salary  and  deferred  compensation  along with a
variable bonus based on revenues on accounts  under  management and the relative
(pre-tax)  performance  (typically 1- and 3-year  performance) of these accounts
and various other variable forms of compensation, including stock options and an
Executive  benefit plan. Awad has created a compensation  plan that provides its
investment professionals with long-term financial incentives and encourages them
to develop their careers at Awad. Their investment professionals are compensated
as follows:

o All portfolio managers are paid base salaries that are competitive with others
in their fields, based on industry surveys. Additionally, portfolio managers are
paid a bonus based on one and three year relative investment performance;

o Portfolio  managers  participate  in a  revenue-sharing  program that provides
incentives to build a successful investment program over the long term;

o Additional deferred  compensation plans including  restricted stock awards and
stock option programs may be provided to key investment professionals;

o All portfolio  managers generally are eligible to receive benefits from Awad's
parent company  including a 401(k) plan,  profit  sharing,  Long-Term  Incentive
Plan,  and Employee  Stock Purchase  Plan.  During  certain  periods,  portfolio

                                       66


managers may be provided minimum  guaranteed  compensation that would exceed the
variable compensation calculation.

      Although some accounts may pay significantly higher or lower fees then the
Fund,  there is no difference  between the basic  methodology  used to determine
Messrs.  Adams and McPherson's  compensation  with respect to the Fund and other
Funds managed by them.

Mr. Adams and Mr.  McPherson's  benchmarks for evaluation  purposes includes may
include  LipperFund Index for Mutual Fund performance and the Russell 2000 index
for separate  accounts along with peer group rankings such as Callan  Associates
and Mercer Investment Consulting.

      Neither Mr. Adams nor Mr. McPherson own any shares of the Fund.

      F.    PORTFOLIO TURNOVER AND BROKERAGE PRACTICES
            ------------------------------------------

      Each fund may  engage in  short-term  transactions  under  various  market
conditions  to a greater  extent than  certain  other  mutual funds with similar
investment  objectives.  Thus,  the turnover  rate may vary greatly from year to
year or  during  periods  within a year.  A fund's  portfolio  turnover  rate is
computed by dividing  the lesser of  purchases  or sales of  securities  for the
period by the average  value of portfolio  securities  for that  period.  A 100%
turnover rate would occur if all the securities in a fund's portfolio,  with the
exception of securities  whose  maturities at the time of  acquisition  were one
year or less,  were sold and either  repurchased or replaced  within one year. A
high  rate of  portfolio  turnover  (100% or  more)  generally  leads to  higher
transaction  costs and may result in a greater  number of taxable  transactions.
The following table shows the turnover rate for each fund for the periods shown:

        -------------------------------------------------------------
                                          Turnover rate
        -------------------------------------------------------------
        Fund                   9/1/05-8/31/06      9/1/04-8/31/05
        -------------------------------------------------------------
        Capital Appreciation         58%                 42%
        -------------------------------------------------------------

                              10/1/05-9/30/06     10/1/04-9/30/06
        -------------------------------------------------------------
        Growth and Income            54%                 73%
        -------------------------------------------------------------
        High Yield                   63%                 25%
        -------------------------------------------------------------

                              11/1/05-10/31/06    11/1/04-10/31/05
        -------------------------------------------------------------
        Core Equity                  43%                 66%
        -------------------------------------------------------------
        Diversified Growth          111%                 75%
        -------------------------------------------------------------
        International Equity         58%                 78%
        -------------------------------------------------------------
        Mid Cap                     180%                146%
        -------------------------------------------------------------
        Small Cap                    49%                 50%
        -------------------------------------------------------------

      The subadvisers are responsible for the execution of each fund's portfolio
transactions  and must  seek the most  favorable  price and  execution  for such
transactions.  Best execution,  however,  does not mean that a fund  necessarily
will be paying the lowest commission or spread available. Rather, each fund also
will  take  into  account  such  factors  as size of the  order,  difficulty  of
execution,  efficiency of the executing broker's facilities and any risk assumed
by the executing broker.

      It is a common practice in the investment  advisory  business for advisers
of investment  companies and other institutional  investors to receive research,
statistical and quotation  services from  broker-dealers  who execute  portfolio
transactions  for the clients of such  advisers.  Consistent  with the policy of
most favorable price and execution,  the subadvisers may give  consideration  to

                                       67


research, statistical and other services furnished by brokers or dealers, and to
potential access to initial public offerings ("IPOs") that may be made available
by such  broker-dealers.  In  addition,  the  subadvisers  may place orders with
brokers who provide  supplemental  investment and market research and securities
and economic analysis and may pay to these brokers a higher brokerage commission
or spread than may be charged by other  brokers,  provided that the  subadvisers
determine in good faith that such commission or spread is reasonable in relation
to the value of brokerage  and research  services  provided.  Such  research and
analysis may be useful to the subadvisers in connection with services to clients
other than the funds. A fund also may purchase and sell portfolio  securities to
and from  dealers  who provide it with  research  services.  However,  portfolio
transactions  will not be  directed by the funds to dealers on the basis of such
research services.

      The subadvisers may use the Distributor, an affiliated broker-dealer,  its
affiliates  or certain  affiliates  of Heritage and Eagle as a broker for agency
transactions  in  listed  and OTC  securities  at  commission  rates  and  under
circumstances consistent with the policy of best execution.  Commissions paid to
the Distributor, its affiliates or certain affiliates of Heritage and Eagle will
not exceed "usual and  customary  brokerage  commissions."  Rule l7e-1 under the
1940 Act defines "usual and customary"  commissions to include  amounts that are
"reasonable  and fair  compared  to the  commission,  fee or other  remuneration
received  or to be  received  by other  brokers in  connection  with  comparable
transactions   involving  similar  securities  being  purchased  or  sold  on  a
securities exchange during a comparable period of time."

      The  subadvisers  also may  select  other  brokers  to  execute  portfolio
transactions.  In the OTC market,  each fund generally deals with primary market
makers  unless  a more  favorable  execution  can  otherwise  be  obtained.  The
following table shows the aggregate  brokerage  commissions paid for the periods
shown.



- ------------------------------------------------------------------------------------------
                                                            
Fund                9/1/06-10/31/06   9/1/05-8/31/06   9/1/04-8/31/05   9/1/03-8/31/04
- ------------------------------------------------------------------------------------------
Capital
Appreciation
- ------------
Total               $60,819           $697,564         $432,486         $493,569
Paid to
Distributor         $ 3,056           $0               $  1,400         $0
% to Distributor    5%                0%               0.32%            0%
% of transactions   3.3%              0%               0.595%           0%
  w/ Distributor
- ------------------------------------------------------------------------------------------

                    10/1/06-10/31/06   10/1/05-9/30/06   10/1/04-9/30/05   10/1/03-9/30/04
- ------------------------------------------------------------------------------------------
Growth and Income
- -----------------
Total               $9,529            $100,259         $116,241         $141,630
Paid to
Distributor         $0                $  1,312         $0               $  1,685
% to Distributor    0%                1.3%             0%               1.19%
% of transactions   0%                0.56%            0%               1.25%
  w/ Distributor
- ------------------------------------------------------------------------------------------
High Yield
- ----------
Total               $0                $0               $0               $0
Paid to
Distributor         $0                $0               $0               $0
% to Distributor    0%                0%               0%               0%
% of transactions   0%                0%               0%               0%
  w/ Distributor
- ------------------------------------------------------------------------------------------

                    11/1/05-10/31/06                   11/1/04-10/31/05   11/1/03-10/31/04
- ------------------------------------------------------------------------------------------
Core Equity
- -----------
Total               $166,576                           $23,669             N/A
Paid to
Distributor         $0                                 $0
% to Distributor    0%                                 0%
% of transactions   0%                                 0%
  w/ Distributor
- ------------------------------------------------------------------------------------------

                                       68


- ------------------------------------------------------------------------------------------
Diversified Growth
- ------------------
Total               $656,262                           $445,753         $480,402
Paid to
Distributor         $  9,246                           $ 10,438         $ 20,644
% to Distributor    1.4%                               2.34%            4.30%
% of transactions   0.97%                              1.76%            3.14%
  w/ Distributor
- ------------------------------------------------------------------------------------------
International Equity
- --------------------
Total               $392,555                           $277,306         $332,632
Paid to
Distributor         $    319                           $  6,948         $  2,491
% to Distributor    0.1%                               2.51%            0.75%
% of transactions   0.07%                              2.46%            0.92%
  w/ Distributor
- ------------------------------------------------------------------------------------------
Mid Cap
- -------
Total               $4,654,992                         $3,396,214       $2,024,119
Paid to
Distributor         $   54,463                         $   37,000       $    6,545
% to Distributor    1.2%                               1.09%            0.32%
% of transactions   1.28%                              0.66%            0.38%
  w/ Distributor
- --------------------------------------------------------------------------------
Small Cap
- ---------
Total               $679,309                           $854,134         $602,569
Paid to
Distributor         $  68,764                          $ 35,154         $ 36,525
% to Distributor    10.1%                              4.12%            6.06%
% of transactions   5.07%                              2.31%            3.65%
  w/ Distributor
- --------------------------------------------------------------------------------



      Each  fund  may not  buy  securities  from,  or sell  securities  to,  the
Distributor  as  principal.   However,  the  Board  has  adopted  procedures  in
conformity  with Rule 10f-3  under the 1940 Act whereby  each fund may  purchase
securities  that are  offered in  underwritings  in which the  Distributor  is a
participant.  The Board will consider the ability to recapture  fund expenses on
certain  portfolio  transactions,  such as  underwriting  commissions and tender
offer  solicitation  fees, by conducting  such  portfolio  transactions  through
affiliated  entities,  including  the  Distributor,  but only to the extent such
recapture would be permissible under applicable regulations, including the rules
of  the   National   Association   of   Securities   Dealers,   Inc.  and  other
self-regulatory organizations.

      Pursuant  to Section  11(a) of the  Securities  Exchange  Act of 1934,  as
amended,  each  fund  has  expressly  consented  to  the  Distributor  executing
transactions on an exchange on its behalf.

      Pursuant  to  Section  17(j) of the 1940 Act and Rule 17j-1  there  under,
Heritage, the Adviser, each subadviser and the Distributor have adopted Codes of
Ethics ("Codes"). These Codes permit portfolio managers and other access persons
of the applicable  funds to invest in securities that may be owned by the funds,
subject to certain  restrictions.  The Codes are on public file with, and may be
obtained from, the SEC.

      G.    DISTRIBUTION OF SHARES
            ----------------------

      DISTRIBUTION.  Shares of each fund are  offered  continuously  through the
funds'   principal   underwriter,   Heritage   Fund   Distributors,   Inc.  (the
"Distributor"), a subsidiary of Heritage and through other participating dealers

                                       69


or banks that have  dealer  agreements  with the  Distributor.  The  Distributor
receives  commissions  consisting  of that  portion of the sales load  remaining
after the dealer  concession  is paid to  participating  dealers or banks.  Such
dealers  may be  deemed  to be  underwriters  pursuant  to  the  1933  Act.  The
Distributor  and  Financial  Advisors  or banks  with whom the  Distributor  has
entered  into dealer  agreements  offer  shares of each fund as agents on a best
efforts  basis and are not obligated to sell any specific  amount of shares.  In
this connection,  the Distributor makes  distribution and servicing  payments to
participating dealers.

      DISTRIBUTION  AGREEMENT.  Each fund had adopted a  Distribution  Agreement
pursuant to which the  Distributor  bears the cost of making  information  about
each fund available through  advertising,  sales literature and other means, the
cost of printing and mailing  prospectuses  to persons other than  shareholders,
and salaries and other expenses  relating to selling  efforts.  The  Distributor
also  pays  service  fees  to  dealers  for  providing   personal   services  to
shareholders and for maintaining  shareholder accounts.  Each fund pays the cost
of registering and qualifying its shares under state and federal securities laws
and typesetting of its prospectuses  and printing and distributing  prospectuses
to existing shareholders.

      The  Distribution  Agreements  may be  terminated  at any  time on 60 days
written  notice  without  payment of any penalty by either party.  Each fund may
effect  such  termination  by  vote  of a  majority  of the  outstanding  voting
securities of a fund or by vote of a majority of the Independent  Trustees.  For
so long as either Plan is in effect, selection and nomination of the Independent
Trustees shall be committed to the discretion of such disinterested persons.

      RULE 12B-1  DISTRIBUTION  PLAN. Each fund has adopted a Distribution  Plan
under Rule 12b-1 for each class of shares  (each a "Plan" and  collectively  the
"Plans").  These  Plans  permit  a  fund  to pay  the  Distributor  the  monthly
distribution  and service  fee out of the fund's net assets to finance  activity
that is  intended to result in the sale and  retention  of each class of shares.
The funds used all Class A, Class B, Class C and Class R-3 12b-1 fees to pay the
Distributor.  Each Plan was  approved by the Board,  including a majority of the
Trustees who are not  interested  persons of a fund (as defined in the 1940 Act)
and who have no direct or indirect  financial  interest in the  operation of the
Plan or the Distribution  Agreement (the "Independent  Trustees").  In approving
such Plans, the Board determined that there is a reasonable likelihood that each
fund  and its  shareholders  will  benefit  from  each  Plan.  Each  Plan may be
terminated by vote of a majority of the  Independent  Trustees,  or by vote of a
majority of the  outstanding  voting  securities of a class of a fund. The Board
reviews quarterly a written report of Plan costs and the purposes for which such
costs have been incurred. A Plan may be amended by vote of the Board,  including
a majority of the Independent  Trustees,  cast in person at a meeting called for
such  purpose.  Any  change  in  a  Plan  that  would  increase  materially  the
distribution cost to a class requires shareholder approval of that class.

      The  Distribution  Agreements  and each Plan will  continue  in effect for
successive one-year periods, provided that each such continuance is specifically
approved  (1) by the vote of a majority of the  Independent  Trustees and (2) by
the vote of a majority  of the entire  Board cast in person at a meeting  called
for that  purpose.  If a Plan is  terminated,  the  obligation of a fund to make
payments  to the  Distributor  pursuant to the Plan will cease and the fund will
not be required to make any payment past the date the Plan terminates.

      Heritage  has  entered  into  agreements  with the  Distributor  and other
financial  intermediaries  to provide  certain  services on behalf of the funds.
Such  services  include,  but  are  not  limited  to,  account  opening,  record
retention,  processing cash receipts from and  disbursements to shareholders and
preparing  account  statements.  As  compensation,  Heritage  pays  from its own
resources, a service fee of up to 0.25% of average daily net assets of each fund
to the Distributor and other broker-dealers.

                                       70


      As  compensation   for  services   rendered  and  expenses  borne  by  the
Distributor  in  connection  with the  distribution  of  Class A  shares  and in
connection  with  personal  services  rendered to Class A  shareholders  and the
maintenance of Class A shareholder  accounts,  each fund of the Series Trust may
pay the Distributor  distribution and service fees of up to 0.35% of that fund's
average daily net assets  attributable  to Class A shares of that fund.  Capital
Appreciation  Trust  and  Growth  and  Income  Trust  may  pay  the  Distributor
distribution  and service fees of up to 0.50% of that fund's  average  daily net
assets  attributable to Class A shares of that fund.  Currently,  each fund pays
the  Distributor  a fee  of  up  to  0.25%  of  its  average  daily  net  assets
attributable to Class A shares.  These fees are computed daily and paid monthly.
The Distributor,  on Class C shares, may retain the first 12 months distribution
fee for  reimbursement  of  amounts  paid to the  broker-dealer  at the  time of
purchase.

      As  compensation   for  services   rendered  and  expenses  borne  by  the
Distributor in connection  with the  distribution  of Class B shares and Class C
shares and in connection with personal  services rendered to Class B and Class C
shareholders  and the  maintenance of Class B and Class C shareholder  accounts,
each fund,  except High Yield, pays the Distributor a service fee of 0.25% and a
distribution  fee of 0.75% of that fund's average daily net assets  attributable
to Class B  shares  and  Class C  shares.  High  Yield  may pay the  Distributor
distribution  and service fees of up to 0.80% of that fund's  average  daily net
assets  attributable  to Class A shares of that fund.  These  fees are  computed
daily and paid monthly.

      As  compensation   for  services   rendered  and  expenses  borne  by  the
Distributor  in  connection  with the  distribution  of Class R-3  shares and in
connection with personal  services  rendered to Class R-3  shareholders  and the
maintenance  of Class R-3  shareholder  accounts,  each fund offering  Class R-3
shares pays the  Distributor  a service fee of 0.25% and a  distribution  fee of
0.25% of that fund's average daily net assets  attributable to Class R-3 shares.
These fees are computed daily and paid monthly.

      With  respect to Class I and Class R-5  shares,  the funds  offering  such
shares do not currently pay the Distributor a 12b-1 fee.

      The following  table  illustrates  the amount of class specific 12b-1 fees
paid by the  funds to the  Distributor  for the 2006  fiscal  year  ended on the
indicated  date.  All 12b-1 fees were paid to Raymond James &  Associates,  Inc.
("RJA"), the former Distributor.

       -----------------------------------------------------------------------
             FUND           FISCAL     CLASS A    CLASS B    CLASS C     R-3
                           YEAR END

       -----------------------------------------------------------------------
       Capital             August 31   $956,381   $413,457 $1,406,027      $0
       Appreciation
       -----------------------------------------------------------------------
       Core Equity        October 31    $51,082        N/A   $128,306      $0
       -----------------------------------------------------------------------
       Diversified        October 31   $350,071   $175,778   $686,447      $0
       Growth
       -----------------------------------------------------------------------
       Growth and Income  September 30 $145,523    $95,776   $437,184     N/A
       -----------------------------------------------------------------------
       High Yield         September 30  $85,600    $68,781   $180,590     N/A
       -----------------------------------------------------------------------
       International      October 31   $179,725    $52,321   $971,744     N/A
       Equity
       -----------------------------------------------------------------------
       Mid Cap            October 31 $1,962,523   $590,757 $3,196,096    $277
       -----------------------------------------------------------------------
       Small Cap          October 31   $635,784   $116,238   $966,521      $1
       -----------------------------------------------------------------------

      Further,  Capital  Appreciation,  Growth  and  Income  and High Yield each
changed  their  fiscal  year end to  October  31,  2006.  Each fund paid RJA the
following  class  specific  12b-1 fees for the period  subsequent  to the former
fiscal year end to October 31, 2006:

       ------------------------------------------------------------------------
             FUND             PERIOD        CLASS A     CLASS B     CLASS C
       ------------------------------------------------------------------------
       Capital            9/1/06-10/31/06    $159,342     $65,401     $244,588
       Appreciation
       ------------------------------------------------------------------------
       Growth and Income 10/1/06-10/31-06     $14,454      $8,318      $39,763
       ------------------------------------------------------------------------
       High Yield        10/1/06-10/31-06      $6,638      $5,181      $13,969
       ------------------------------------------------------------------------

                                       71


H.    PAYMENTS TO DEALERS.
      -------------------

      The  Distributor  may elect to re-allow the entire initial sales charge to
dealers  for all  sales  with  respect  to  which  orders  are  placed  with the
Distributor during a particular period. Dealers to whom substantially the entire
sales charge is re-allowed  may be deemed to be  "underwriters"  as that term is
defined under the 1933 Act.

      The financial  advisor  through which you purchase your shares may receive
all or a portion of the sales charges and Rule 12b-1 fees  discussed  above.  In
addition to those payments,  Heritage or one or more of its corporate affiliates
(collectively,  the "Affiliates") may make additional cash payments to financial
advisors  in  connection  with  the  promotion  and  sale of  shares  of  funds.
Affiliates  make these payments from their own  resources,  which in the case of
the  Distributor  may include the  retention  of  underwriting  concessions  and
payments the Distributor  receives under the Rule 12b-1 plans.  These additional
cash  payments are  described  below.  The  categories  described  below are not
mutually  exclusive.  The same financial advisor may receive payments under more
than one or all  categories.  Many financial  advisors that sell shares of funds
receive one or more types of these cash payments.  Financial  advisors negotiate
the  cash  payments  to be paid  on an  individual  basis.  Where  services  are
provided,  the costs of  providing  the  services  and the  overall  package  of
services provided may vary from one financial advisor to another.  Affiliates do
not make an independent assessment of the cost of providing such services.

      In this context,  "financial  advisors" include any broker,  dealer,  bank
(including bank trust departments),  registered  investment  advisor,  financial
planner,  retirement plan  administrator  and any other  financial  intermediary
having a selling,  administration  or similar  agreement with one or more of the
Affiliates.

      REVENUE SHARING  PAYMENTS.  Affiliates  make revenue  sharing  payments as
incentives  to certain  financial  advisors to promote and sell shares of funds.
The benefits  that  Affiliates  receive when they make these  payments  include,
among other things, placing funds on the financial advisor's funds sales system,
placing funds on the financial advisor's preferred or recommended fund list, and
access  (in some  cases on a  preferential  basis  over  other  competitors)  to
individual  members of the financial  advisor's  sales force or to the financial
advisor's  management.  Revenue  sharing  payments are sometimes  referred to as
"shelf space" payments because the payments compensate the financial advisor for
including  funds in its fund sales  system (on its  "sales  shelf").  Affiliates
compensate  financial  advisors  differently  depending  typically  on the level
and/or type of considerations provided by the financial advisor.

      The revenue sharing payments Affiliates make may be calculated on sales of
shares of funds ("Sales-Based  Payments").  Such payments also may be calculated
on the average daily net assets of the  applicable  funds  attributable  to that
particular  financial advisor  ("Asset-Based  Payments").  Sales-Based  Payments
primarily create incentives to make new sales of shares of funds and Asset-Based
Payments  primarily create  incentives to retain previously sold shares of funds
in investor  accounts.  Affiliates  may pay a financial  advisor  either or both
Sales-Based Payments and Asset-Based Payments.

      ADMINISTRATIVE AND PROCESSING  SUPPORT PAYMENTS.  Affiliates also may make
payments  to  certain  financial  advisors  that sell fund  shares  for  certain
administrative services, including record keeping and sub-accounting shareholder
accounts.  Payments for these services  typically do not exceed 0.25% of average
annual assets.  Affiliates also may make payments to certain financial  advisors
that sell fund shares in connection  with client  account  maintenance  support,

                                       72


statement  preparation  and transaction  processing.  The types of payments that
Affiliates may make under this category include, among others, payment of ticket
charges per purchase or exchange order placed by a financial advisor, payment of
networking fees, or one-time payments for ancillary  services such as setting up
funds on a financial advisor's mutual fund trading systems.

      OTHER CASH PAYMENTS. From time to time, Affiliates,  at their expense, may
provide additional  compensation to financial advisors which sell or arrange for
the sale of shares of the funds. This additional  compensation may be offered to
the extent not prohibited by state laws or any  self-regulatory  agency, such as
the NASD, Inc. ("NASD").  Affiliates make payments for entertainment events they
deem  appropriate,  subject to Affiliate  guidelines and  applicable  law. These
payments may vary  depending  upon the nature of the event or the  relationship.
Such  compensation  provided by Affiliates may include  financial  assistance to
financial advisors that enable Affiliates to
   o  participate in an/or present at conferences or seminars, sales or training
      programs for invited registered representatives and other employees,
   o  client  entertainment,  client and investor  events,  and other  financial
      advisor-sponsored events, and
   o  travel expenses,  including lodging incurred by registered representatives
      and other employees in connection with client  prospecting,  retention and
      due diligence trips.

      Affiliates are motivated to make the payments  described  above since they
promote  the sale of fund  shares  and the  retention  of those  investments  by
clients of financial advisors. To the extent financial advisors sell more shares
of funds or  retain  shares  of funds  in their  clients'  accounts,  Affiliates
benefit from the incremental management and other fees paid to Affiliates by the
funds with respect to those assets.

      In certain  cases these  payments  could be  significant  to the financial
advisor.  Your financial  advisor may charge you additional  fees or commissions
other than those disclosed in this SAI. You can ask your financial advisor about
any payments it receives  from  Affiliates  or the funds,  as well as about fees
and/or commissions it charges.

      I.     ADDITIONAL SERVICES TO THE FUNDS
             --------------------------------

      ADMINISTRATIVE,  FUND  ACCOUNTING AND TRANSFER AGENT  SERVICES.  Heritage,
subject to the control of the Board, will:

      o  manage,  supervise and conduct the  administrative and business affairs
         of each fund;

      o  furnish office space and equipment;

      o  oversee the activities of the subadvisers and the Custodian; and

      o  pay all  salaries,  fees and  expenses of officers and Trustees of each
         fund who are affiliated with Heritage.

      Heritage is the transfer and dividend  disbursing  agent for each fund and
provides certain shareholder servicing activities for customers of the funds. In
addition,  Heritage is the fund  accountant  for each fund except  International
Equity.  State  Street  Bank & Trust is the fund  accountant  for  International
Equity. Each fund pays directly for fund accounting and transfer agent services.

      The following table shows the fees paid to Heritage as fund accountant for
each of the indicated periods for all funds except International Equity:

                                       73



- ------------------------------------------------------------------------------------
                            Fund Accounting Fees Paid
- ------------------------------------------------------------------------------------
                                                           
Fund               9/1/06-10/31/06   9/1/05-8/31/06   9/1/04-8/31/05   9/1/03-8/31/04
- ------------------------------------------------------------------------------------
Capital            $  16,559         $  92,633        $  70,983        $  62,312
Appreciation
- ------------------------------------------------------------------------------------

                  10/1/06-10/31/06  10/1/05-9/30/06  10/1/04-9/30/05  10/1/03-9/30/04
- ------------------------------------------------------------------------------------
Growth and Income  $   7,826         $  93,964        $  67,110        $  59,989
- ------------------------------------------------------------------------------------
High Yield         $   9,347         $ 109,251        $  84,009        $  76,357
- ------------------------------------------------------------------------------------

                  11/1/05-10/31/06  11/1/04-10/31/05 11/1/03-10/31/04
- ------------------------------------------------------------------------------------
Core Equity        $  94,352         $  28,031        N/A
- -------------------------------------------------------------------------------------
Diversified Growth $  95,857         $  73,242        $  64,126
- -------------------------------------------------------------------------------------
Growth and Income                    $  67,110        $  59,989
- -------------------------------------------------------------------------------------
High Yield                           $  84,009        $  76,357
- -------------------------------------------------------------------------------------
Mid Cap            $  96,252         $  73,353        $  64,402
- -------------------------------------------------------------------------------------
Small Cap          $  96,352         $  73,157        $  64,619
- -------------------------------------------------------------------------------------


      CUSTODIAN.  State Street Bank and Trust  Company,  P.O. Box 1912,  Boston,
Massachusetts  02105,  serves as custodian of each fund's assets.  The Custodian
also provides portfolio accounting and certain other services for the funds.

      LEGAL  COUNSEL.  Kirkpatrick  & Lockhart  Preston  Gates Ellis LLP, 1601 K
Street NW, Washington, D.C. 20006, serves as counsel to the funds.

      INDEPENDENT     REGISTERED     CERTIFIED    PUBLIC     ACCOUNTING    FIRM.
PricewaterhouseCoopers LLP, 101 E. Kennedy Boulevard, Suite 1500, Tampa, Florida
33602, is the independent  registered  certified public  accounting firm for the
funds.  The Financial  Statements of the funds that appear in this SAI have been
incorporated by reference into the SAI. The financial statements were audited by
PricewaterhouseCoopers  LLP, independent  registered certified public accounting
firm.

      J.     POTENTIAL LIABILITY
             -------------------

      Under certain circumstances, shareholders may be held personally liable as
partners  under  Massachusetts  law for  obligations  of a fund.  To protect its
shareholders,  each fund has  filed  legal  documents  with  Massachusetts  that
expressly  disclaim the liability of its shareholders for acts or obligations of
a fund.  These  documents  require notice of this disclaimer to be given in each
agreement,  obligation  or  instrument  each fund or its Trustees  enter into or
sign. In the unlikely event a shareholder is held personally liable for a fund's
obligations,  that fund is required to use its property to protect or compensate
the  shareholder.  On  request,  a fund will  defend  any claim made and pay any
judgment  against a shareholder for any act or obligation of a fund.  Therefore,
financial loss  resulting  from liability as a shareholder  will occur only if a
fund itself  cannot  meet its  obligations  to  indemnify  shareholders  and pay
judgments against them.

      The Trust's  Declaration  of Trust  provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However,  they are not
protected  against any  liability  to which they would  otherwise  be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.


                                       74


                                          Appendix A
                                    INVESTMENT TYPES GLOSSARY

      EQUITY SECURITIES:

      COMMON STOCKS.  Common stocks represent the residual ownership interest in
the issuer.  They are  entitled  to the income and  increase in the value of the
assets  and  business  of the  entity  after all of its  obligations,  including
preferred  stock,  are  satisfied.  Common stocks  generally have voting rights.
Common  stocks  fluctuate  in  price  in  response  to  many  factors  including
historical  and  prospective  earnings of the  issuer,  the value of its assets,
general economic  conditions,  interest rates,  investor  perceptions and market
liquidity.

      CONVERTIBLE  SECURITIES.  Convertible  securities include corporate bonds,
notes  and  preferred  stock  that  can be  converted  into or  exchanged  for a
prescribed  amount of common  stock of the same or a different  issuer  within a
particular  period  of time at a  specified  price  or  formula.  A  convertible
security  entitles  the  holder to receive  interest  paid or accrued on debt or
dividends  paid on preferred  stock until the  convertible  stock  matures or is
redeemed, converted or exchanged. While no securities investment is without some
risk,  investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the  convertible  security sells above
its value as a fixed income security. The market value of convertible securities
tends to decline as  interest  rates  increase  and,  conversely,  increases  as
interest rates  decline.  While  convertible  securities  generally  offer lower
interest  or dividend  yields than  nonconvertible  debt  securities  of similar
quality,  they do enable the  investor to benefit  from  increases in the market
price of the underlying  common stock.  Please see the discussion of "Investment
Grade/Lower Rated Securities" below for additional information.

      PREFERRED  STOCK. A preferred stock blends the  characteristics  of a bond
and common stock.  It can offer the higher yield of a bond and has priority over
common stock in equity ownership,  but does not have the seniority of a bond and
its  participation  in the issuer's  growth may be limited.  Preferred stock has
preference  over common  stock in the receipt of  dividends  and in any residual
assets  after  payment to  creditors  if the issuer is  dissolved.  Although the
dividend is set at a fixed annual rate, in some  circumstances it can be changed
or omitted by the issuer.

      REAL ESTATE  INVESTMENT  TRUSTS  ("REITS").  Equity  REITs own real estate
properties,  and their revenue comes principally from rent.  Mortgage REITs loan
money to real estate owners,  and their revenue comes  principally from interest
earned on their mortgage  loans.  Hybrid REITs combine  characteristics  of both
equity  and  mortgage  REITs.  The value of an equity  REIT may be  affected  by
changes in the value of the  underlying  property,  while a mortgage REIT may be
affected by the quality of the credit extended. The performance of both types of
REITs depends upon conditions in the real estate industry, management skills and
the amount of cash flow.  The risks  associated  with REITs include  defaults by
borrowers,  self-liquidation,  failure to qualify as a pass-through entity under
the Federal tax law,  failure to qualify as an exempt  entity under the 1940 Act
and the fact that REITs are not diversified.

      WARRANTS  AND  RIGHTS.  Warrants  may be either  perpetual  or of  limited
duration but they usually do not have voting rights or pay dividends. The market
price of warrants is usually  significantly  less than the current  price of the
underlying  stock.  Thus,  there is a greater risk that  warrants  might drop in
value at a faster rate than the underlying stock.

      DEBT SECURITIES:


                                      A-1


      DEBT  SECURITIES.  The  market  value  of debt  securities  is  influenced
primarily  by changes in the level of  interest  rates.  Generally,  as interest
rates  rise,  the market  value of debt  securities  decreases.  Conversely,  as
interest rates fall, the market value of debt securities increases. Factors that
could result in a rise in interest rates,  and a decrease in the market value of
debt securities,  include an increase in inflation or inflation expectations, an
increase in the rate of U.S.  economic growth, an increase in the Federal budget
deficit or an increase in the price of commodities such as oil.

      FIXED AND FLOATING RATE LOANS. Fixed and floating rate loans ("Loans") are
loans arranged through private  negotiations  between a corporate  borrower or a
foreign  sovereign  entity and one or more financial  institutions  ("Lenders").
Loans  may be in the  form of  participations  in Loans  ("Participations")  and
assignments  of all or a portion of Loans from  third  parties  ("Assignments").
These investments are considered to be investments in debt securities.

      BRADY BONDS. Brady Bonds, which are debt securities, generally denominated
in U.S.  dollars,  are issued under the  framework of the Brady Plan.  The Brady
Plan is an initiative  announced by former U.S. Treasury  Secretary  Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness.  In restructuring its external debt under
the Brady Plan  framework,  a debtor  nation  negotiates  with its existing bank
lenders,  as well as multilateral  institutions,  such as the International Bank
for  Reconstruction  and  Development  (the "World Bank") and the  International
Monetary  Fund (the  "IMF").  The Brady  Plan  framework,  as it has  developed,
contemplates  the  exchange of external  commercial  bank debt for newly  issued
bonds ("Brady Bonds").  Brady Bonds also may be issued with respect to new money
being advanced by existing  lenders in connection  with the debt  restructuring.
The World Bank and/or the IMF  support  the  restructuring  by  providing  funds
pursuant  to loan  agreements  or other  arrangements,  which  enable the debtor
nation to  collateralize  the new Brady Bonds or to repurchase  outstanding bank
debt at a  discount.  These  arrangements  with the World  Bank  and/or  the IMF
require  debtor  nations  to agree to the  implementation  of  certain  domestic
monetary and fiscal reforms.  Such reforms have included the  liberalization  of
trade and foreign investment,  the privatization of state-owned  enterprises and
the setting of targets for public  spending and  borrowing.  These  policies and
programs seek to promote the debtor  country's  economic growth and development.
Investors  should  recognize that the Brady Plan only sets forth general guiding
principles for economic  reform and debt reduction,  emphasizing  that solutions
must be negotiated on a  case-by-case  basis  between  debtor  nations and their
creditors.

      Agreements  implemented  under  the  Brady  Plan to date are  designed  to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each  country  differ.  The types of  options  have  included  the  exchange  of
outstanding  commercial bank debt for bonds issued at 100% of face value of such
debt that carry a below-market  stated rate of interest  (generally known as par
bonds),  bonds issued at a discount from the face value of such debt  (generally
known as discount  bonds),  bonds bearing an interest rate which  increases over
time, and bonds issued in exchange for the  advancement of new money by existing
lenders.  Discount  bonds  issued to date under the  framework of the Brady Plan
generally have borne interest computed  semiannually at a rate equal to 13/16 of
one percent  above the  then-current  six month London  Inter-Bank  Offered Rate
("LIBOR").

      FOREIGN  DEBT  SECURITIES.  A foreign  debt  security  may have  fixed and
floating rate income securities (including emerging market securities), all or a
portion of which may be non-U.S.  dollar denominated and which include: (a) debt
obligations  issued  or  guaranteed  by  foreign  national,  provincial,  state,
municipal or other  governments  with taxing  authority or by their  agencies or
instrumentalities,  including Brady Bonds; (b) debt obligations of supranational
entities;  (c) debt  obligations  of the U.S.  Government  issued in  non-dollar
securities;  (d) debt  obligations and other fixed income  securities of foreign

                                      A-2


corporate  issuers  (both  dollar  and  non-dollar  denominated);  and (e)  U.S.
corporate issuers (both Eurodollar and non-dollar denominated).

      INVESTMENT GRADE/LOWER RATED SECURITIES:

      INVESTMENT  GRADE   SECURITIES.   Investment   grade  securities   include
securities  rated BBB or above by  Standard  & Poor's  ("S&P") or Baa by Moody's
Investors  Service,  Inc.  ("Moody's")  or,  if  unrated,  are  deemed  to be of
comparable quality by a fund's subadviser.

      LOWER RATED / HIGH-YIELD SECURITIES. Lower rated/high-yield securities are
securities rated below investment grade, I.E., rated below BBB or Baa by S&P and
Moody's,  respectively,  or unrated securities determined to be below investment
grade by its  subadviser.  These  securities  are commonly  referred to as "high
yield securities" and are deemed to be predominantly speculative with respect to
the issuer's  capacity to pay interest and repay principal and may involve major
risk exposure to adverse  conditions.  These  securities are subject to specific
risks that may not be present with investments of higher grade securities.

      SHORT-TERM MONEY MARKET INSTRUMENTS:

      BANKERS'  ACCEPTANCES.   Bankers'  acceptances  generally  are  negotiable
instruments (time drafts) drawn to finance the export, import, domestic shipment
or storage of goods.  They are termed "accepted" when a bank writes on the draft
its agreement to pay it at maturity,  using the word "accepted." The bank is, in
effect,  unconditionally guaranteeing to pay the face value of the instrument on
its maturity  date.  The acceptance may then be held by the accepting bank as an
asset,  or it may be sold in the secondary  market at the going rate of interest
for a specified maturity.  Maturities on bankers'  acceptances that are eligible
for  purchase  usually  range  from 20 to 180 days  but may  extend  for  longer
periods.

      CERTIFICATES OF DEPOSIT ("CDS"). CDs available for investment by the funds
are issued by domestic  institutions  with  assets in excess of $1 billion.  The
FDIC is an agency of the U.S.  Government  that  insures the deposits of certain
banks and savings and loan associations up to $100,000 per deposit. The interest
on such  deposits  may not be  insured to the  extent  this  limit is  exceeded.
Current  Federal  regulations  also permit such  institutions  to issue  insured
negotiable  CDs in amounts of $100,000 or more,  without  regard to the interest
rate ceilings on other deposits. To remain fully insured, these investments must
be limited to $100,000 per insured bank or savings and loan association.

      COMMERCIAL  PAPER.  Commercial  paper  includes  notes,  drafts or similar
instruments  payable on demand or having a maturity at the time of issuance  not
exceeding nine months,  exclusive of days of grace or any renewal  thereof.  See
Appendix B for a description of commercial paper ratings.

      REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:

      REPURCHASE AGREEMENTS.  A repurchase agreement is a transaction in which a
fund  purchases  securities and commits to resell the securities to the original
seller at an agreed  upon date.  The  resale  price  reflects  a market  rate of
interest  that is  unrelated  to the coupon rate or  maturity  of the  purchased
securities.

      REVERSE REPURCHASE  AGREEMENTS.  Under a reverse repurchase  agreement,  a
fund sells  securities  and agrees to  repurchase  them at a mutually  agreed to
price.  If  required,  at the  time  a fund  enters  into a  reverse  repurchase
agreement,  it will establish and maintain a segregated account with an approved
custodian  containing  liquid  high-grade  securities,  marked-to-market  daily,
having a value not less than the repurchase price (including accrued interest).


                                      A-3


      U.S. GOVERNMENT AND ZERO COUPON SECURITIES:

      U.S.  GOVERNMENT  SECURITIES.  U.S.  Government  Securities are securities
issued   or   guaranteed   by  the   U.S.   Government   or  its   agencies   or
instrumentalities.  Some  obligations  issued by U.S.  Government  agencies  and
instrumentalities  are  supported  by the  full  faith  and  credit  of the U.S.
Treasury;  others by the right of the issuer to borrow  from the U.S.  Treasury;
others by discretionary  authority of the U.S.  Government to purchases  certain
obligations of the agency or  instrumentality;  and others only by the credit of
the agency or instrumentality. Those securities bear fixed, floating or variable
rates  of  interest.  Interest  may  fluctuate  based  on  generally  recognized
reference rates or the relationship of rates.

      ZERO COUPON  SECURITIES AND PAY IN KIND BONDS.  Zero coupon securities are
debt  obligations  that do not  entitle  the holder to any  periodic  payment of
interest prior to maturity or a specified date when the securities  begin paying
current  interest.  Zero coupon  securities  are issued and traded at a discount
from their face amount or par value, which discount rate varies depending on the
time remaining until cash payments begin,  prevailing interest rates,  liquidity
of the security, and the perceived credit quality of the issuer.

      Pay-in-kind  bonds pay all or a portion of their  interest  in the form of
debt or  equity  securities.  Pay-in-kind  bonds  may also be  issued  by a wide
variety of corporate and governmental issuers.

      FOREIGN SECURITIES EXPOSURE:

      DEPOSITARY RECEIPTS. Sponsored or unsponsored European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), International Depositary Receipts
("IDRs"),  Special Drawing Rights ("SDRs") or other similar securities represent
interests in or convertible  into securities of foreign  issuers  (collectively,
"Depositary  Receipts").  Depositary Receipts are not necessarily denominated in
the same currency as the underlying  securities into which they may be converted
and are subject to foreign securities risks, as discussed below.

      EDRs and IDRs are receipts  typically  issued by a European  bank or trust
company  evidencing  ownership of the underlying  foreign  securities.  GDRs are
issued  globally  for trading in  non-U.S.  securities  markets  and  evidence a
similar ownership arrangement.

      EURO/YANKEE BONDS.  International Equity may invest in  dollar-denominated
bonds  issued  by  foreign   branches  of  domestic  banks   ("Eurobonds")   and
dollar-denominated  bonds issued by a U.S.  branch of a foreign bank and sold in
the United States ("Yankee bonds").

      EURODOLLAR  CERTIFICATES.  Growth and Income  may  purchase  CDs issued by
foreign branches of domestic and foreign banks.  Domestic and foreign Eurodollar
certificates,  such as CDs and time deposits,  may be general obligations of the
parent bank in addition to the issuing  branch or may be limited by the terms of
a specific obligation or governmental regulation.

      AMERICAN DEPOSITARY RECEIPTS ("ADRS"):

      Sponsored and unsponsored  ADRs are receipts that represent  interests in,
or are convertible into,  securities of foreign issuers.  These receipts are not
necessarily  denominated in the same currency as the underlying  securities into
which they may be converted.

      ADRs may be purchased through "sponsored" or "unsponsored"  facilities and
also  include New York Shares  ("NYRs").  A  sponsored  facility is  established
jointly by the issuer of the  underlying  security and a  depository,  whereas a
depository may establish an unsponsored  facility  without  participation by the

                                      A-4


issuer  of the  depository  security.  Generally,  ADRs in  registered  form are
designed  for use in the U.S.  securities  market  and ADRs in  bearer  form are
designed for use outside the United States.  For purposes of certain  investment
limitations,  ADRs are  considered to be foreign  securities  and are subject to
many of the risks  inherent in  investing  in foreign  securities,  as discussed
previously.

      HEDGING INSTRUMENTS - FUTURES, FORWARDS, OPTIONS AND HEDGING TRANSACTIONS:

      GENERAL    DESCRIPTION.    Certain   financial    instruments    ("Hedging
Instruments"),  include futures contracts  (sometimes referred to as "futures"),
options,  options on futures and forward currency contracts, to attempt to hedge
the fund's investment portfolio as discussed below.

      Hedging strategies can be broadly  categorized as "short hedges" and "long
hedges." A short hedge is the purchase or sale of a Hedging Instrument  intended
partially  or fully to  offset  potential  declines  in the value of one or more
investments  held in a fund's  investment  portfolio.  Thus, in a short hedge, a
fund takes a position in a Hedging Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged. A long hedge
is the purchase or sale of a Hedging  Instrument  intended partially or fully to
offset  potential  increases in the acquisition  cost of one or more investments
that the fund intends to acquire. Thus, in a long hedge, a fund takes a position
in a Hedging Instrument whose price is expected to move in the same direction as
the price of the prospective investment being hedged.

      Hedging  Instruments  on  securities  generally  are used to hedge against
price movements in one or more particular  securities positions that a fund owns
or intends to acquire. Hedging Instruments on indices may be used to hedge broad
market sectors.

      OPTIONS:

      Options may include  options on  securities,  equity and debt  indices and
currencies.

      CHARACTERISTICS  OF OPTIONS TRADING. A call option gives the purchaser the
right to buy, and obligates the writer to sell, the underlying investment at the
agreed-upon price during the option period. A put option gives the purchaser the
right to sell, and obligates the writer to buy, the underlying investment at the
agreed-upon price during the option period. Purchasers of options pay an amount,
known as a premium,  to the option  writer in  exchange  for the right under the
option contract.

      FUTURES AND OPTIONS ON FUTURES:

      GUIDELINES AND  CHARACTERISTICS OF FUTURES AND OPTIONS ON FUTURES TRADING.
The  purchase  of futures or call  options on futures can serve as a long hedge,
and the sale of futures or the purchase of put options on futures can serve as a
short hedge.  Writing call options on futures  contracts  can serve as a limited
short hedge,  using a strategy  similar to that used for writing call options on
securities or indices.  Similarly,  writing put options on futures contracts can
serve as a  limited  long  hedge.  Futures  contracts  and  options  on  futures
contracts can also be purchased and sold to attempt to enhance income or yield.

      STOCK INDEX FUTURES.  A stock index assigns  relative values to the common
stocks  comprising  the index.  A stock  index  futures  contract is a bilateral
agreement  pursuant  to which two parties  agree to take or make  delivery of an
amount of cash equal to a specified  dollar amount times the difference  between
the stock index value at the close of the last  trading day of the  contract and
the price at which the  futures  contract  is  originally  struck.  No  physical
delivery of the underlying stocks in the index is made.

      The risk of  imperfect  correlation  between  movements  in the price of a
stock index futures  contract and movements in the price of the securities  that
are the subject of the hedge increases as the composition of a fund's  portfolio

                                      A-5


diverges from the securities  included in the applicable index. The price of the
stock index futures may move more than or less than the price of the  securities
being hedged.  If the price of the futures contract moves less than the price of
the  securities  that are the subject of the hedge,  the hedge will not be fully
effective  but,  if the price of the  securities  being  hedged  has moved in an
unfavorable direction, the fund would be in a better position than if it had not
hedged  at all.  If the  price of the  securities  being  hedged  has moved in a
favorable  direction,  this  advantage  will be partially  offset by the futures
contract.  If the price of the futures contract moves more than the price of the
securities,  a fund  will  experience  either  a loss or a gain  on the  futures
contract  that will not be  completely  offset by  movements in the price of the
securities  that are the subject of the hedge.  To compensate  for the imperfect
correlation  of  movements  in the  price of the  securities  being  hedged  and
movements in the price of the stock index futures  contracts,  a fund may buy or
sell stock index  futures  contracts in a greater  dollar amount than the dollar
amount of securities being hedged if the historical  volatility of the prices of
such securities is more than the historical volatility of the stock index. It is
also  possible  that,  where a fund  has sold  futures  contracts  to hedge  its
securities  against decline in the market,  the market may advance and the value
of securities  held by the fund may decline.  If this  occurred,  the fund would
lose money on the futures contract and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very  small  degree,  over time the  value of a  diversified  portfolio  of
securities  will tend to move in the same  direction as the market  indices upon
which the futures contracts are based.

      Where stock index  futures  contracts  are  purchased  to hedge  against a
possible  increase in the price of securities before a fund is able to invest in
securities  in an orderly  fashion,  it is possible  that the market may decline
instead.  If a fund then  concludes  not to invest  in  securities  at that time
because of concern as to possible  further market decline for other reasons,  it
will realize a loss on the futures contract that is not offset by a reduction in
the price of the securities it had anticipated purchasing.

      FORWARD  CURRENCY  CONTRACTS.  A forward  currency  contract  involves  an
obligation  of a fund to purchase or sell  specified  currency at a future date,
which may be any fixed number of days from the date of the contract  agreed upon
by the parties at a price set at the time of the contract.  These  contracts are
traded in the interbank  market  conducted  directly  between  currency  traders
(usually large commercial banks) and their customers.

      Forward currency  transactions  may serve as long hedges - for example,  a
fund may purchase a forward  currency  contract to lock in the U.S. dollar price
of a security  denominated  in a foreign  currency  that it intends to  acquire.
Forward  currency  contract  transactions  also may serve as short  hedges - for
example,  a fund may sell a forward currency contract to lock in the U.S. dollar
equivalent  of the proceeds  from the  anticipated  sale of a security or from a
dividend or interest payment on a security denominated in a foreign currency.

      The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities,  measured in the  foreign  currency,  will change  after the forward
currency contract has been  established.  Thus, a fund might need to purchase or
sell  foreign  currencies  in the spot (cash)  market to the extent such foreign
currencies  are not covered by forward  contracts.  The projection of short-term
currency market movements is extremely  difficult,  and the successful execution
of a short-term hedging strategy is highly uncertain.

      COMBINED   TRANSACTIONS.   A  fund  may  purchase  and  write  options  in
combination  with  each  other,  or  in  combination  with  futures  or  forward
contracts,  to  adjust  the  risk  and  return  characteristics  of its  overall
position.  For example, a fund may purchase a put option and write a call option
on the same  underlying  instrument,  in order to construct a combined  position
whose risk and return characteristics are similar to selling a futures contract.
Another  possible  combined  position would involve writing a call option at one
strike price and buying a call option at a lower  price,  in order to reduce the
risk of the written call option in the event of a  substantial  price  increase.

                                      A-6


Because combined  options  positions  involve  multiple  trades,  they result in
higher transaction costs and may be more difficult to open and close out.

      A fund's  options and futures  activities may affect its turnover rate and
brokerage commission payments.  The exercise of calls or puts written by a fund,
and the sale or purchase of futures contracts,  may cause it to sell or purchase
related investments, thus increasing its turnover rate. Once a fund has received
an  exercise  notice  on an option it has  written,  it cannot  effect a closing
transaction  in order to  terminate  its  obligation  under the  option and must
deliver or receive the underlying securities at the exercise price. The exercise
of puts purchased by a fund may also cause the sale of related investments,  and
increasing  turnover;  although  such  exercise  is within the  fund's  control,
holding a  protective  put might  cause it to sell the related  investments  for
reasons  that  would  not  exist in the  absence  of the put.  A fund will pay a
brokerage  commission  each time it buys or sells a put or call or  purchases or
sells a futures  contract.  Such commissions may be higher than those that would
apply to direct purchases or sales.

      SWAPS, CAPS, FLOORS AND COLLARS:

      A  currency  swap is an  agreement  to  exchange  cash flows on a notional
amount  of two or more  currencies  based  on the  relative  value  differential
between or among them and an index swap is an  agreement to swap cash flows on a
notional  amount  based on  changes  in the  values of a  reference  index.  The
purchaser  of a cap is  entitled  to receive  payments  on a notional  principal
amount from the party  selling  such cap to the extent  that a  specified  index
exceeds a  predetermined  interest  rate or amount.  The purchaser of a floor is
entitled  to receive  payments  on a notional  principal  amount  from the party
selling  such  floor  to the  extent  that  a  specified  index  falls  below  a
predetermined  interest rate of amount. A collar is a combination of a cap and a
floor that preserves a certain return within a  predetermined  range of interest
rates or values.

      OPTIONS ON SWAP AGREEMENTS:

      A swap option is a contract that gives a  counterparty  the right (but not
the  obligation)  to enter  into a new swap  agreement  or to  shorten,  extend,
cancel,  or otherwise  modify an existing  swap  agreement,  at some  designated
future time on specified  terms.  The fund may write (sell) and purchase put and
call swap options.  Depending on the terms of a particular option agreement, the
fund may incur a greater  degree  of risk when it writes a swap  option  than it
will incur when it  purchases  a swap  option.  When the fund  purchases  a swap
option,  it risks  losing  only the amount of the  premium it has paid should it
decide to let the option  expire  unexercised.  However,  when the fund writes a
swap  option,  upon the exercise of the option,  the fund will become  obligated
according to the terms of the underlying agreement.

      INDEX SECURITIES:

      INDEX  SECURITIES.   Index  Securities  represent  interests  in  a  fixed
portfolio  of common  stocks  designed  to track the  price and  dividend  yield
performance of a broad-based securities index, such as the Standard & Poor's 500
Composite  Stock Index  ("S&P 500  Index"),  but are traded on an exchange  like
shares of common stock. The value of Index Securities  fluctuates in relation to
changes in the value of the  underlying  portfolio of securities.  However,  the
market price of Index  Securities may not be equivalent to the PRO RATA value of
the index it tracks.  Index Securities are subject to the risks of an investment
in a broadly based portfolio of common stocks.



                                      A-7


                                   APPENDIX B
                                   ----------

                            COMMERCIAL PAPER RATINGS

The rating services'  descriptions of commercial paper ratings in which the fund
may invest are:

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER DEBT RATINGS
- ----------------------------------------------------------------------------

PRIME-1.  Issuers  (or  supporting  institutions)  rated  PRIME-1  (P-1)  have a
superior  ability for  repayment  of senior  short-term  debt  obligations.  P-1
repayment   ability  will  often  be   evidenced   by  many  of  the   following
characteristics:  leading market positions in well-established  industries; high
rates of return on funds employed;  conservative  capitalization  structure with
moderate reliance on debt and ample asset protection;  broad margins in earnings
coverage  of  fixed  financial   charges  and  high  internal  cash  generation;
well-established  access to a range of financial  markets and assured sources of
alternate liquidity.

PRIME-2.  Issuers (or supporting institutions) rated PRIME-2 (P-2) have a strong
ability for repayment of senior short-term debt obligations.  This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings  trends  and  coverage  ratios,  while  sound,  may be more  subject to
variation. Capitalization characteristics,  while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
- ---------------------------------------------------------

A-1.  This  designation  indicates  that the degree of safety  regarding  timely
payment is very strong.  Those issues  determined  to possess  extremely  strong
characteristics are denoted with a plus sign (+) designation.

A-2.   Capacity  for  timely   payment  of  issues  with  this   designation  is
satisfactory.  However,  the  relative  degree  of  safety is not as high as for
issues designated "A-1".

CORPORATE DEBT RATINGS

The rating  services'  descriptions  of corporate debt ratings in which the fund
may invest are:

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE DEBT RATINGS
- ---------------------------------------------------------------------

Aaa - Bonds that 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 that 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 that make the
long-term risks appear somewhat larger than the Aaa securities.

A - Bonds that 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 that
suggest a susceptibility to impairment sometime in the future.


                                      B-1


Baa - Bonds that 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  that 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  that 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.

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

C - Bonds that 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.

      Moody's  applies  numerical  modifiers,  1, 2 and 3 in each generic rating
classification  from Aa  through B in its  corporate  bond  rating  system.  The
modifier 1  indicates  that the  company  ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates  that  the  company  ranks  in the  lower  end of its  generic  rating
category.

DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
- -------------------------------------------------------

AAA - Debt  rated AAA has the  highest  rating  assigned  by  Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA - Debt  rated  AA has a very  strong  capacity  to  pay  interest  and  repay
principal and differs from the higher rated issues only in small degree.

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

BBB - Debt rated BBB is regarded as having an adequate  capacity to pay interest
and  repay  principal.   Whereas  it  normally  exhibits   adequate   protection
parameters,  adverse  economic  conditions  or changing  circumstances  are more
likely to lead to a weakened  capacity to pay interest and repay  principal  for
debt in this category than for debt in higher rated categories.

BB, B, CCC, CC, C - Debt rated "BB," "B," "CCC,"  "CC," and "C" is regarded,  on
balance,  as predominantly  speculative with respect to capacity to pay interest
and  repay  principal  in  accordance  with the  terms of the  obligation.  "BB"
indicates  the  lowest  degree  of  speculation  and "C" the  highest  degree of

                                      B-2


speculation.  While  such debt will  likely  have some  quality  and  protective
characteristics,  these are  outweighed  by large  uncertainties  or major  risk
exposures to adverse conditions.

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

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

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

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

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

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

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

NR -  Indicates  that no  public  rating  has  been  requested,  that  there  is
insufficient  information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.




                                      B-3