NATIONWIDE SEPARATE ACCOUNT TRUST, 497, 1999-05-05

NATIONWIDE SEPARATE ACCOUNT TRUST
497, 1999-05-05

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<PAGE> 1

Nationwide(R) Separate Account Trust

- - Nationwide(R) Total Return Fund

- - Nationwide(R) Capital Appreciation Fund

- - Nationwide(R) Government Bond Fund

- - Nationwide(R) Money Market Fund

May 1, 1999

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Funds' shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 2

FUND SUMMARIES

NATIONWIDE TOTAL RETURN FUND...................................................3
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE CAPITAL APPRECIATION FUND...........................................5
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE GOVERNMENT BOND FUND................................................7
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE MONEY MARKET FUND...................................................9
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

MORE ABOUT THE FUNDS..........................................................11
Temporary Defensive Positions
Principal Investment Techniques

MORE ABOUT THE GOVERNMENT BOND FUND...........................................12
Principal Risks
Principal Investment Techniques

MORE ABOUT THE MONEY MARKET FUND..............................................14
Principal Risks
Principal Investment Techniques

MANAGEMENT....................................................................15
Management's Discussion of
Funds' Performance

BUYING AND SELLING FUND SHARES................................................19
Who Can Buy Shares of the Funds
Purchase Price
Selling Shares
Restrictions on Sales
Year 2000
Dividends and Distributions
Tax Status

FINANCIAL HIGHLIGHTS..........................................................21

ADDITIONAL INFORMATION................................................BACK COVER

TABLE OF CONTENTS

2
<PAGE> 3
FUND SUMMARIES

This prospectus provides information about four funds offered by Nationwide
Separate Account Trust, which include two stocks funds, a bond fund and a money
market fund (together the "Funds"). The "Stock Funds" means both of the stock
funds.

Nationwide Total Return Fund

OBJECTIVE

The investment objective of the Fund is to obtain reasonable, long-term total
return on invested capital. The Fund's investment objective can be changed by
the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

The Fund is slightly more conservative than the Capital Appreciation Fund, since
it seeks total return through a flexible combination of current income and
capital appreciation. In other words, the Fund also looks for stocks and other
securities that pay dividends and other income, instead of relying solely on the
security's prospect for increasing in value. To achieve its objective, the Fund
invests primarily in the common stock and convertible securities of companies
with consistent earnings performance and generally intends to be fully invested
in these securities.

The Fund generally looks for companies whose earnings are expected to
consistently grow faster than other companies in the market. It will typically
hold the securities of no more than 70 companies at any time. It usually will
sell securities if:

- - the price of the security is overvalued
- - the company's earnings are consistently lower than expected
- - more favorable opportunities are identified.

PRINCIPAL RISKS

Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases.

STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.

SMALL NUMBER OF HOLDINGS RISK. Because the Fund typically holds fewer securities
than other stock funds, the price fluctuations of any security will have a
greater impact on the Fund.

For additional information, see "More About the Funds."

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility -- or variability -- of the
Fund's annual total returns over time and shows that fund performance can change
from year to year. The annual returns shown in the bar chart do not include
charges that may be imposed by variable annuity contracts or variable life
insurance polices. The table shows the Fund's average annual total returns for
certain time periods compared to the returns of a broad-based securities index.
The bar chart and table provide some indication of the risks of investing in the
Fund. Remember, however, that past performance does not guarantee similar
results in the future.

ANNUAL TOTAL RETURNS:

Best Quarter: 17.0%, 4th qtr. of 1998
Worst Quarter: -13.6%, 3rd qtr. of 1990

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
The Fund 18.07% 19.43% 15.44%
The S&P 500 Index* 28.58% 24.05% 19.19%
</TABLE>

*The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held stocks
of large U.S. companies -- gives a broad look at how the stock prices of large
U.S. companies have performed. Unlike mutual fund returns, the Index does not
incur expenses. If expenses were deducted, the actual returns of the Index
would be lower.

3
<PAGE> 4
FUND SUMMARIES continued

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1)
(paid directly from an investment) None
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.59%
Other Expenses 0.06%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 0.65%
====
</TABLE>

(1) Sales charges may be imposed by variable annuity contracts or variable life
insurance policies if the Fund's shares are purchased by a life insurance
separate account as an investment option for these contracts or policies.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholders's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$66 $208 $362 $810
</TABLE>

4
<PAGE> 5

NATIONWIDE CAPITAL APPRECIATION FUND

OBJECTIVE

The Fund seeks long-term capital appreciation. The Fund's investment objective
can be changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

The Fund focuses on investments that the Fund believes will increase in value
over the long run--typically three to ten years--and not short-term gain. To
achieve its objective, the Fund primarily invests in the common stock of large
capitalization companies. Under normal market conditions, the Fund invests at
least 65% of its total assets in common stock and convertible securities and
generally intends to be fully invested in these securities.

The Fund looks for companies whose earnings are expected to consistently grow
faster than other companies in the market. It will typically hold the securities
of no more than 70 companies at any time. It generally will sell securities if:

- - the price of the security is overvalued

- - the company's earnings are consistently lower than expected

- - more favorable opportunities are identified.

PRINCIPAL RISKS

SMALL NUMBER OF HOLDINGS RISK. Because the Fund typically holds fewer securities
than other stock funds, the price fluctuations of any security will have a
greater impact on the Fund.

RISK RELATED TO INVESTING FOR GROWTH. Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the Fund focuses on growth-style stocks, the Fund's
performance may at times be better or worse than the performance of stock funds
that focus on other types of stocks, or that have a broader investment style.

For additional information, see "More About the Funds."

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility--or variability--of the Fund's
annual total returns over time and shows that fund performance can change from
year to year. The annual returns shown in the bar chart do not include charges
that may be imposed by variable annuity contracts or variable life insurance
polices. The table shows the Fund's average annual total returns for certain
time periods compared to the returns of a broad-based securities index. The bar
chart and table provide some indication of the risks of investing in the Fund.
Remember, however, that past performance does not guarantee similar results in
the future.

ANNUAL TOTAL RETURNS:

Best Quarter: 20.5%, 4th qtr. of 1998
Worst Quarter: -9.5%, 3rd qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION*
------ ------- ----------
<S> <C> <C> <C>
The Fund 29.96% 23.10% 19.32%
The S&P 500 Index** 28.58% 24.05% 19.88%
</TABLE>

*The Fund commenced operations on April 15, 1992.

**The Standard & Poor's 500 Index--an unmanaged index of 500 widely-held stocks
of large U.S. companies--gives a broad look at how the stock prices of large
U.S. companies have performed. Unlike mutual fund returns, the Index does not
incur expenses. If expenses were deducted, the actual returns of the Index
would be lower.

5
<PAGE> 6
FUND SUMMARIES continued

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1)
(paid directly from an investment) None
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.60%
Other Expenses 0.07%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 0.67%
====
</TABLE>

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$68 $214 $373 $835
</TABLE>

6
<PAGE> 7

NATIONWIDE GOVERNMENT BOND FUND

OBJECTIVE

The investment objective of the Fund is to provide as high a level of income as
is consistent with the preservation of capital. The Fund's investment objective
can be changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

To achieve its goal, the Fund seeks an attractive risk-adjusted total return,
with an emphasis on current income. It seeks to achieve its goal by investing at
least 65% of its total assets in U.S. Government and agency bonds, bills, and
notes. The Fund may also invest in mortgage-backed securities issued by U.S.
Government agencies. The Fund's dollar-weighted average portfolio maturity
generally will be three to seven years.

To select investments that fit the Fund's objectives, the portfolio manager uses
interest rate expectations, yield-curve analysis, economic forecasting, market
sector analysis, and other techniques. The goal is to find obligations that
present good value and pay attractive interest rates.

The Fund may also look for U.S. Government and agency securities that it
believes are undervalued, with the goal of buying them at attractive prices and
watching them increase in value. A security may be sold to take advantage of
more favorable opportunities.

The Fund's portfolio manager will consider the duration of particular debt
securities and the Fund's overall portfolio when managing the Fund. Duration is
a calculation that seeks to measure the price sensitivity of a debt security or
a mutual fund that primarily invests in debt securities to changes in interest
rates. The Fund will have a duration of three to six years.

PRINCIPAL RISKS

INTEREST RATE RISK. Interest rate risk is the risk that increases in market
interest rates may decrease the value of debt securities held by the Fund. In
general, the prices of debt securities fall when interest rates increase and
rise when interest rates decrease. Typically, the longer the maturity of a debt
security, the more sensitive it is to price shifts as a result of interest rate
changes.

CREDIT RISK. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. In addition, there is a risk that the rating of a debt security of the Fund
may be lowered if an issuer's financial condition changes, which may lead to a
greater price fluctuation in the Fund.

PREPAYMENT RISK. The issuers of mortgage-backed securities held by the Fund may
be able to repay principal in advance, and are especially likely to do so when
interest rates fall. Changes in prepayment rates can make the price and yield of
mortgage--backed securities volatile. When mortgage--backed securities are
prepaid, the Fund may have to reinvest in securities with a lower yield. The
Fund also may fail to recover premiums paid for the securities, resulting in an
unexpected capital loss. In addition, rising interest rates may cause
prepayments to occur at a slower than expected rate, thereby effectively
lengthening the maturity of the security and making the security more sensitive
to interest rate changes.

LIQUIDITY RISK. Liquidity risk is the risk that a security cannot be sold, or
cannot be sold quickly, at an acceptable price.

INFLATION RISK. There is also inflation risk, which affects the value of
fixed-rate investments such as debt securities. If the Government Bond Fund buys
debt securities when inflation and interest rates are low, the value of these
debt securities could fall as inflation rises. This could happen as investors
find debt securities with lower interest rates less attractive than debt
securities that pay higher interest rates. The Government Bond Fund is also
subject to liquidity risk, which is the risk that a security cannot be sold, or
cannot be sold quickly, at an acceptable price.

For additional information, see "More About the Funds."

7
<PAGE> 8
FUND SUMMARIES continued

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility--or variability--of the Fund's
annual total returns over time and shows that fund performance can change from
year to year. The annual returns shown in the bar chart do not include charges
that may be imposed by variable annuity contracts or variable life insurance
polices. The table shows the Fund's average annual total returns for certain
time periods compared to the returns of a broad-based securities index. The bar
chart and table provide some indication of the risks of investing in the Fund.
Remember, however, that past performance does not guarantee similar results in
the future.

ANNUAL TOTAL RETURNS:

Best Quarter: 7.8%, 2nd qtr. of 1989
Worst Quarter: -2.8%, 1st qtr. of 1994

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
The Fund 8.91% 7.27% 9.35%
The Merrill Lynch Government Master Index* 9.85% 7.21% 9.17%
</TABLE>

*The Merrill Lynch Government Master Index gives a broad look at how the prices
of U.S. government bonds have performed. Unlike mutual fund returns, the Index
does not incur expenses. If expenses were deducted, the actual returns of the
Index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1)
(paid directly from an investment) None
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.50%
Other Expenses 0.07%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 0.57%
====
</TABLE>

(1) Sales charges may be imposed by variable annuity contracts or variable life
insurance polices if the Fund's shares are purchased by a life insurance
separate account as an investment option for these contracts or policies.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$58 $183 $318 $714
</TABLE>

8
<PAGE> 9

NATIONWIDE MONEY MARKET FUND

OBJECTIVE

The Fund seeks as high a level of current income as is consistent with the
preservation of capital and maintenance of liquidity. The Fund's investment
objective can be changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

The Fund seeks to achieve its investment objective by investing in high-quality
money market obligations maturing in 397 days or less, including corporate
obligations, U.S. Government and agency bonds, bills and notes, the obligations
of foreign governments, and the obligations of U.S. banks and U.S. branches of
foreign banks, if denominated in U.S. dollars. The Fund may also invest in
floating and adjustable rate obligations and asset-backed commercial paper. The
Fund's dollar-weighted average maturity will be 90 days or less.

The Fund invests in securities which the portfolio manager believes to have the
best return potential. Because the Fund invests in short-term securities, it
will generally sell securities only to meet liquidity needs, to maintain target
allocations and to take advantage of more favorable opportunities.

PRINCIPAL RISKS

CREDIT RISK. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. This risk is significantly reduced due to the short-term nature of the debt
securities held by the Fund. In addition, there is a risk that the rating of a
debt security may be lowered if the issuer's financial condition changes. This
could lead to a greater fluctuation in the value of the Fund.

MONEY MARKET FUND RISK. Although the Fund's objective is to preserve capital,
there can be no guarantee that the Fund will be able to maintain a stable net
asset value of $1.00 per share; therefore you could lose money. Investments in
the Fund are not bank deposits and are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.

For additional information, see "More About the Funds."

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility--or variability--of the Fund's
annual total returns over time and that fund performance can change from year to
year. The annual returns shown in the bar chart do not include charges that may
be imposed by variable annuity contracts or variable life insurance polices. The
table shows the Fund's average annual total returns for certain time periods
compared to the returns of a broad-based securities index. The bar chart and
table provide some indication of the risks of investing in the Fund. Remember,
however, that past performance does not guarantee similar results in the future.

ANNUAL TOTAL RETURNS:

Best Quarter: 2.3%, 1st qtr. of 1989
Worst Quarter: 0.7%, 2nd qtr. of 1993

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
The Fund 5.27% 5.04% 5.42%
The Consumer Price Index* 1.61% 2.37% 3.14%
</TABLE>

* The Consumer Price Index is an index of prices that measures the change in the
cost of basic goods and services over time. The Consumer Price Index is
frequently used to measure inflation in the United States.

9
<PAGE> 10
FUND SUMMARIES continued

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1)
(paid directly from an investment) None
Annual Fund Operating Expenses
(deducted from Fund assets)
Management Fees 0.40%
Other Expenses 0.06%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 0.46%
====
</TABLE>

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$47 $148 $258 $579
</TABLE>

10
<PAGE> 11
MORE ABOUT THE FUNDS

The Funds may use the following principal investment techniques to increase
returns, protect assets or diversify investments. These techniques are subject
to certain risks. For additional information about the Fund's investment
strategies and techniques, see the Statement of Additional Information.

TEMPORARY DEFENSIVE POSITIONS

In response to economic, political or unusual market conditions, each Fund may
invest up to 100% of its assets in cash or money market obligations. Should this
occur, a Fund may not meet its investment objectives and may miss potential
market upswings.

MORE ABOUT THE STOCK FUNDS

Principal Investment Techniques
The Stock Funds may invest in the following securities:

CONVERTIBLE SECURITIES. In addition to investing in common stocks, each of the
Stock Funds may invest in convertible securities -- also known as
convertibles -- including bonds, debentures, notes, preferred stocks, and other
securities. Convertibles are a hybrid security that have characteristics of both
bonds and stocks. Like bonds, they pay interest. Because they can be converted
into common stock within a set period of time, at a specified price or formula,
convertibles also offer the chance for capital appreciation, like common stock.

Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as the underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however, may sustain their value better than the
common stock because they pay income, which tends to be higher than common stock
dividend yields.

Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," higher-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.

Convertibles tend to be more secure than common stock (companies must generally
pay holders of convertibles before they pay holders of common stock), but they
are typically less secure than similar non-convertible securities such as bonds
(bondholders must be generally paid before holders of convertibles and common
stock). Because convertibles are usually subordinate to bonds in terms of
payment priority, convertibles typically are rated below investment grade by a
nationally recognized rating agency, or they are not rated at all.

11
<PAGE> 12
MORE ABOUT THE GOVERNMENT BOND FUND

PRINCIPAL RISKS

PREPAYMENT RISK AND EXTENSION RISK. Prepayments of principal on mortgage-backed
securities affect the average life of a pool of these securities. Mortgage
prepayments are affected by the level of interest rates and other factors. In
periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-backed securities. In periods
of falling interest rates, the prepayment rate tends to increase, shortening the
average life of a pool of mortgage-related securities. Prepayment risk is the
risk that, because prepayments generally occur when interest rates are falling,
the Fund may have to reinvest the proceeds from prepayments at lower rates.
Extension risk is the risk that anticipated payments on principal may not occur,
typically because of a rise in interest rates, and the expected maturity of the
security will increase. During periods of rapidly rising interest rates, the
anticipated maturity of a security may be extended past what the portfolio
manager anticipated, affecting the maturity and volatility of the Fund.

PRINCIPAL INVESTMENT TECHNIQUES

The Government Bond Fund may invest in the following securities:

U.S. GOVERNMENT SECURITIES. These securities include U.S. Treasury bills, U.S.
Treasury notes, bonds issued or guaranteed by the U.S. Government, and
securities issued by U.S. Government agencies. These agencies and securities
include:

- - The Federal Housing Administration, the Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA pass-through
certificates, which are backed by the full faith and credit of the United
States

- - The Federal Home Loan Banks

- - The Federal National Mortgage Association ("FNMA")

- - The Student Loan Marketing Association and Federal Home Loan Mortgage
Corporation ("FHLMC")

- - The Federal Farm Credit Banks.

Although there is virtually no credit risk with U.S. Government securities,
neither the U.S. Government nor its agencies guarantee the market value of their
securities. Interest rate changes, prepayment rates and other factors may affect
the value of these securities.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are bonds that are
secured by and paid from a pool of mortgage loans on real property and issued or
guaranteed by the U.S. Government or one of its agencies.

Collateralized Mortgage Obligations (CMOs) are securities that have mortgage
loans or mortgage pass-through securities, such as GNMA, FNMA or FHLMC
certificates as their collateral. CMOs purchased by the Government Bond Fund are
issued by the U.S. Government or its agencies.

These securities may be subject to interest rate risk. CMOs or other
mortgage-backed securities are also subject to prepayment risk. With respect to
prepayment risk, when interest rates fall, homeowners may refinance their loans,
and mortgage-backed securities secured by such loans will be paid off sooner
than the portfolio manager anticipated. Reinvesting the returned principal in a
lower interest rate market reduces the Government Bond Fund's income.
Mortgage-backed securities are also subject to extension risk and the
possibility of losing principal as a result of prepayments.

FLOATING AND VARIABLE RATE SECURITIES. Floating- and variable-rate securities
are securities that do not have fixed interest rates; the rates change
periodically. The interest rate on floating-rate securities varies with changes
in the underlying index (such as the Treasury bill rate), while the interest
rate on variable-rate securities changes at preset times based upon an
underlying index. Some of the floating- or variable-rate securities will be
callable by the issuer, which means they can be paid off before their maturity
date.

These securities are subject to interest rate risk like other securities. In
addition, because they may be callable, these securities are also subject to the
risk that the Government Bond Fund will be repaid prior to the stated maturity
and that the principal will be reinvested in a lower interest rate market,
reducing the Government Bond Fund's income. The Government Bond Fund will only
purchase floating- and variable-rate securities of the same quality as the
securities it would otherwise purchase.

MATURITY AND DURATION. Every security has a stated maturity date when the issuer
must repay the security's entire principal value to the investor. However, many
securities are "callable," meaning their principal can be repaid earlier, on or
after specified call dates. Securities are most likely to be called when
interest rates are falling because the issuer can refinance at a lower rate,
just as a homeowner refinances a mortgage. In that environment, a security's
"effective maturity" is usually its nearest call date. For example, the rate at
which homeowners pay down their mortgage principal determines the effective
maturity of mortgage-backed securities.

A bond mutual fund has no real maturity, but it does have a weighted average
maturity. This number is an average of the stated or effective maturities of the
underlying bonds, with each bond's maturity "weighted" by the percentage of fund
assets it represents. Funds that target maturities normally use

12
<PAGE> 13

the effective rather than stated maturities of the bonds in the portfolio when
computing the average. This provides additional flexibility in portfolio
management but, all else being equal, could result in higher volatility than a
fund targeting a stated maturity or maturity range.

Duration is a calculation that seeks to measure the price sensitivity of a debt
security or a mutual fund that primarily invests in debt securities to changes
in interest rates. It measures this sensitivity more accurately than maturity
because it takes into account the time value of cash flows generated over the
life of the debt security. Future interest and principal payments are discounted
to reflect their present value and then are multiplied by the number of years
they will be received to produce a value expressed in years - the duration.
Effective duration takes into account call features and sinking fund payments
that may shorten a debt security's life.

13
<PAGE> 14
MORE ABOUT THE MONEY MARKET FUND

PRINCIPAL RISKS

The Money Market Fund is a low-risk investment compared to most other
investments. Given its objective -- to preserve capital, generate income and
maintain liquidity -- the Money Market Fund invests in low-risk, high-quality
securities. No investment, however, is free of all risk. Any time an investor
buys commercial paper or similar obligations, there is credit risk and interest
rate risk.

PRINCIPAL INVESTMENT TECHNIQUES

The Money Market Fund may invest in the following securities:

MONEY MARKET OBLIGATIONS. These include:

- - U.S. Government securities with remaining maturities of 397 days or less

- - Commercial paper rated in one of the two highest categories of any nationally
recognized statistical rating organization ("rating agency")

- - Asset-backed commercial paper whose own rating or the rating of any guarantor
is in one of the two highest categories of any rating agency

- - Short-term bank obligations rated in one of the two highest categories by any
rating agency (with respect to obligations maturing in one year or less)

- - Repurchase agreements relating to debt obligations that the
Fund could purchase directly

- - Unrated debt obligations with remaining maturities of 397 days or less that
are determined by Nationwide Advisory Services, Inc. to be of comparable
quality to the securities described above.

Generally, money market obligations will not increase in value, but they are
high quality investments that offer a fixed rate of return, as well as
liquidity.

These securities are subject to interest rate risk like other securities. In
addition, because they may be callable, these securities are also subject to the
risk that the Money Market Fund will be repaid prior to the stated maturity and
that the principal will be reinvested in a lower interest rate market that
reduces the Money Market Fund's income. The Money Market Fund will only purchase
floating- and variable-rate securities of the same quality as the debt
securities it would otherwise purchase.

REPURCHASE AGREEMENTS. When entering into a repurchase agreement, the Fund
essentially makes a short-term loan to a qualified bank or broker-dealer. The
Fund buys securities that the seller has agreed to buy back at a specific time
and at a set price that includes interest. There is a risk that the seller will
be unable to buy back the securities at the time required and the Fund could
experience delays in recovering the amounts owed to it.

ASSET-BACKED COMMERCIAL PAPER. The Fund may invest in asset-backed commercial
paper that is secured by and paid from a pool of assets such as installment loan
contracts, leases of various types of property and receivables from credit
cards. Asset-backed commercial paper is issued and supported by private issuers.
This type of commercial paper is also subject to interest rate risk and credit
risk.

14
<PAGE> 15
MANAGEMENT
MANAGEMENT'S DISCUSSION OF FUNDS' PERFORMANCE

The following is management's discussion of the performance of the Funds for the
year ended December 31, 1998. This discussion provides an overview of the
economy and how it affected the Funds during the year. It also provides a look
into the current and future investment techniques and strategies of the Funds
from the perspective of the portfolio managers.

TOTAL RETURN FUND

The total return for the Fund for the year ended December 31, 1998, was 18.07%,
assuming all distributions were reinvested, compared to 28.58% for the S&P 500
Index.
The sources of strength and weakness among the Fund's holdings did not change
much from mid-year to year-end. The drug and healthcare stocks turned in strong
performance virtually across the board, and certainly aided overall results.
Over the long term, this appears to be a favorable sector, and the Fund made
significant additions to its holdings during the second half of the year. As a
result of these additions, plus the strong appreciation, the percentage of
assets invested in drug stocks went from 8.7% at the beginning of the year, to
15.7% at year-end. Individual stocks that did particularly well over the period
included Comcast and IBM. Sectors that hurt results included property casualty
insurers, where the Fund holds significant positions in Allstate and Chubb. With
the exception of Exxon and Mobil, the oil industry also performed poorly. While
Allstate and Chubb continue to maintain solid long-term outlooks as strong
companies, the oil sector is one where the Fund has significantly cut back on
its holdings. The long-term outlook for companies in the oil sector has
deteriorated significantly due to reduction in demand growth from developing
countries, and that outlook does not justify the amount of assets the Fund had
invested in the stocks. From 15.4% of assets at the beginning of the year, the
weighting dropped to less than 7% at year-end. As of the date of this prospectus
the Fund expects to continue its current investment strategies.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE TOTAL RETURN FUND AND THE
S&P 500*

<TABLE>
<CAPTION>
TOTAL RETURN FUND S&P 500
----------------- -------
<S> <C> <C>
Start 10.000 10.000
89 11.322 13.162
90 10.413 12.754
91 14.420 16.631
92 15.599 17.896
93 17.303 19.693
94 17.489 19.952
95 22.576 27.441
96 27.507 33.737
97 35.602 44.990
98 42.037 57.846
</TABLE>

*The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held stocks
of large U.S. companies -- gives a broad look at how the stock prices of large
U.S. companies have performed. Unlike mutual fund returns, the Index does not
incur expenses. If expenses were deducted, the actual returns of the Index
would be lower.

TOTAL RETURN FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ------ ------- --------
<S> <C> <C>
18.07% 19.43% 15.44%
</TABLE>

Past performance is not predictive of future performance.

CAPITAL APPRECIATION FUND

The total return for the Fund for the year ended December 31, 1998, was 29.96%,
assuming all distributions were reinvested, compared to 28.58% for the S&P 500
Index.

The Fund continues to benefit from the outstanding performance of pharmaceutical
stocks. Warner-Lambert and Schering-Plough, two of the three largest holdings,
both gained over 75% during the year. Both companies continue to achieve
impressive and consistent growth from their drug portfolios. Based on current
trends it appears that this growth will remain strong in the future.

IBM, the Fund's largest holding, has been a strong performer. The stock returned
77% for the year. The company's services business has grown rapidly for some
time. Recently its hardware sales accelerated as well.

The market decline during the Fall offered an opportunity to add quality names
in the financial sector to the portfolio. MBNA has consistently maintained
credit quality far superior to its competitors in the credit card industry. It
has continued to demonstrate a high rate of consistent earnings growth. The Fund
added shares at attractive valuations during the market decline. Associates
First Capital and Merrill Lynch are additional quality financial names added to
the Fund this year.

15
<PAGE> 16
MANAGEMENT continued

Another financial name added to the portfolio is SunAmerica. American
International Group (AIG) announced their acquisition of SunAmerica during
August. AIG is a very high quality multi-line insurer with attractive growth
opportunities both domestically and internationally. Purchasing shares of
SunAmerica had the effect of buying AIG at a discount to its market price.

As of the date of this prospectus, the Fund anticipates continuing its current
practices of investing in companies related to pharmaceuticals and financial
services.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE CAPITAL APPRECIATION FUND
AND THE S&P 500*

<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND S&P 500
------------------------- -------
<S> <C> <C>
4/15/92* 10 10
92 10.578 10.447
93 11.595 11.496
94 11.49 11.647
95 14.863 16.019
96 18.748 19.695
97 25.215 26.264
98 32.77 33.769
</TABLE>

*The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held stocks
of large U.S. companies -- gives a broad look at how the stock prices of large
U.S. companies have performed. Unlike mutual fund returns, the Index does not
incur expenses. If expenses were deducted, the actual returns of the Index
would be lower.

CAPITAL APPRECIATION FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

<TABLE>
<CAPTION>
1 YEAR 5 YEARS LIFE*
- ------ ------- -----
<S> <C> <C>
29.96% 23.10% 19.32%
</TABLE>

* Inception Date 4/15/92.

Past performance is not predictive of future performance.

GOVERNMENT BOND FUND

The total return for the one year period ended December 31, 1998 was 8.91% for
the Fund versus the average return of 8.19% for the Lipper Variable
Insurance -- General U.S. Government Funds.

Continued low inflation, a surprisingly large U.S. budget surplus, and turmoil
in world financial markets created a good backdrop for Treasury securities with
30 year Treasury yields falling to 5.09% from 5.92%. Intermediate Treasuries
performed even better with 2 year Treasury yields falling to 4.53% from 5.64%,
while 10 year Treasuries fell to 4.65% from 5.74%. Though Treasury securities
performed well, spread sectors in the government market lagged. Spread
instruments provide additional return over Treasury securities and include
Agency obligations and Collateralized Mortgage Obligations (CMOs).

During the year, Agency paper was purchased at levels not seen since the early
1980s. Positions in the Fund in CMOs were reduced early in the year as the
risk/reward profile became unfavorable. As rates continued to fall, prepayment
fears among participants caused spreads to widen to attractive levels and some
positions in CMOs were added to the Fund's portfolio. Finally, positions in long
Treasury bonds and zero coupon securities were added to enhance returns in the
falling interest rate environment.

As of the date of this prospectus, the outlook for this coming year promises to
be interesting. The portfolio will need to be balanced to weather the domestic
forces of growth, inflation (or deflation) and will, of course, be impacted by
equity market volatility. Further collapses in developing countries can not be
ruled out and could spark another flight to quality and drive yields to new
lows. These risks highlight the importance of diversification for individual
investors.

Current holdings include 65% in Treasury and Agency obligations, 31% in CMOs and
the remainder in repurchase agreements.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE GOVERNMENT BOND FUND AND

MANAGEMENT continued

THE MERRILL LYNCH GOVERNMENT MASTER INDEX*

<TABLE>
<CAPTION>
GOVERNMENT BOND FUND ML GOVERNMENT MASTER INDEX
-------------------- --------------------------
<S> <C> <C>
88 10 10
89 11.397 11.413
90 12.48 12.421
91 14.564 14.31
92 15.709 15.342
93 17.204 16.972
94 16.648 16.424
95 19.769 19.431
96 20.458 19.967
97 22.436 21.884
98 24.435 24.039
</TABLE>

GOVERNMENT BOND FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ------ ------- --------
<S> <C> <C>
8.91 % 7.27% 9.35%
</TABLE>

Past performance is not predictive of future performance.

16
<PAGE> 17

MONEY MARKET FUND

At December 31, 1998, the Fund had net assets of $1.3 billion with an average
maturity of 33 days. The average maturity is generally kept between 25-45 days.
The largest Fund holdings were again in those sectors which offered higher
spreads compared to other segments and included Broker/Dealers at 14% of the
portfolio, followed by Consumer/Sales Finance at 13%. Industry concentration is
kept at 25% or below. Tier 1 commercial paper accounted for 91% of the portfolio
followed by U.S. Government and Agency Securities at 8% and Canadian Government
Obligations at 1%. Fund's holdings are generally kept below 4% per issuer. At
December 31, 1998, the largest Fund holding for any one issuer was 3.2%.

Financial markets were extremely volatile during the year due to the financial
crisis in Asia, the Japanese recession, and the Long Term Capital Management
bailout. Over a period of seven weeks the Federal Reserve cut interest rates
three times by lowering the Fed Funds rate and the Discount rate to 4.75% and
4.50%, respectively. By acting as quickly as it did, the Federal Reserve
signaled that its goal is to provide liquidity during times of market turmoil.
Economic indicators suggest that the U.S. economy continues to expand with low
inflationary pressures.

The Fund's yield remained competitive when compared to the Consumer Price Index
(CPI). At December 31, 1998, the CPI was 1.61% compared to the twelve month
return of 5.27% for the Fund. The Fund continues to invest in only first tier
money market instruments. An internal credit review is completed on every issuer
prior to investment. As of the date of this prospectus, the Fund intends to
continue its current investment strategies.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE MONEY MARKET FUND AND THE
CONSUMER PRICE INDEX*

<TABLE>
<CAPTION>
MONEY MARKET FUND CONSUMER PRICE INDEX
----------------- --------------------
<S> <C> <C>
88 10 10
89 10.911 10.464
90 11.787 11.118
91 12.475 11.449
92 12.9 11.788
93 13.256 12.111
94 13.771 12.425
95 14.549 12.748
96 15.294 13.179
97 16.098 13.402
98 16.947 13.618
</TABLE>

MONEY MARKET FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- ------ ------- --------
<S> <C> <C>
5.27 % 5.04% 5.42%
</TABLE>

Past performance is not predictive of future performance.

INVESTMENT MANAGER

Nationwide Advisory Services, Inc. ("NAS"), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the assets and supervises the daily
business affairs of Nationwide Separate Account Trust (the "Trust"). NAS and its
predecessors have managed investments, including mutual funds and other
institutional accounts, since 1965. As of December 31, 1998, NAS had
approximately $11.3 billion in assets under management.

Each Fund pays NAS a management fee, which is based on the Funds' average daily
net assets. The total fee paid by each of the Funds for the fiscal year ended
December 31, 1998, expressed as a percentage of the Funds' average daily net
assets, was as follows:

<TABLE>
<CAPTION>
FUND FEE
- ---- ----
<S> <C>
Total Return Fund 0.59%
Capital Appreciation Fund 0.60%
Government Bond Fund 0.50%
Money Market Fund 0.40%
</TABLE>

TOTAL RETURN FUND

Portfolio Manager: John M. Schaffner is the portfolio manager for the Total
Return Fund. He has managed the Total

17
<PAGE> 18
MANAGEMENT continued

Return Fund since 1982. He also manages the Nationwide Growth Fund.

CAPITAL APPRECIATION FUND

Portfolio Manager: Charles Bath is the portfolio manager of the Capital
Appreciation Fund. Mr. Bath has managed the Capital Appreciation Fund since
1992. He has also managed the Nationwide Fund since 1985.

GOVERNMENT BOND FUND

Portfolio Manager: Gary Hunt is the portfolio manager for the Government Bond
Fund. Mr. Hunt joined Nationwide in 1992 as a securities analyst. Mr. Hunt has
been co-manager of the Government Bond Fund since May 1, 1997. Starting May
1999, Mr. Hunt will take over sole responsibility for the Fund. He is also
manager of the Nationwide Long-Term U.S. Government Bond Fund and Nationwide
Intermediate U.S. Government Bond Fund.

MONEY MARKET FUND

Portfolio Manager: Karen G. Mader is the portfolio manager of the Money Market
Fund. She has managed the Money Market Fund since 1987.

18
<PAGE> 19
BUYING AND SELLING FUND SHARES

WHO CAN BUY SHARES OF THE FUNDS

Shares of the Funds are currently sold to separate accounts of Nationwide Life
Insurance Company and its wholly owned subsidiary, Nationwide Life and Annuity
Insurance Company, to fund benefits payable under variable life insurance
policies and variable annuity contracts. Shares of the Funds may also be sold to
affiliated Funds of Funds, and may in the future be sold to other insurance
companies. Shares are not sold to individual investors.

Because variable annuity contracts or variable life insurance policies may have
different provisions with respect to the timing and method of purchases,
exchanges and redemptions, contract or policy owners should contact their
insurance company directly for details concerning these transactions.

PURCHASE PRICE

The purchase price of each share of a Fund is its "net asset value" (or NAV)
next determined after the order is received. No sales charge is imposed on the
purchase of a Fund's shares. Generally, NAV is determined by dividing the total
market value of the securities owned by a Fund, less its liabilities, by the
total number of its outstanding shares. NAV is determined at the close of
regular trading on the New York Stock Exchange (usually 4 p.m. Eastern Time) on
each day the Exchange is open for trading.

NAS does not determine NAV on the following days:

- - Christmas Day

- - New Year's Day

- - Martin Luther King Jr. Day

- - Presidents' Day

- - Good Friday

- - Memorial Day

- - Independence Day

- - Labor Day

- - Thanksgiving Day

- - other days when the New York Stock Exchange is not open.

NAS reserves the right not to determine NAV when:

- - a Fund has not received any orders to purchase, sell, or exchange shares

- - changes in the value of a Fund's portfolio do not affect the NAV.

If current prices are not available for a security, or if NAS determines that
the price of a security does not represent its fair value, the security may be
valued at fair value in accordance with procedures adopted by the Board of
Trustees. To the extent that a Fund's investments are traded in markets that are
open when the New York Stock Exchange is closed, the value of the Fund's
investments may change on days when shares cannot be purchased or redeemed.

SELLING SHARES

Shares may be sold (redeemed) at any time, subject to certain restrictions. The
redemption price is the NAV next determined after the order is received. Of
course, the value of the shares sold may be more or less than their original
purchase price depending upon the market value of a Fund's investments at the
time of sale.

RESTRICTIONS ON SALES

Shares of a Fund may not be redeemed or a Fund may delay paying the proceeds
from a redemption when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or if trading is restricted or an
emergency exists.

YEAR 2000

NAS has developed a plan to address the Year 2000 issue. The problem is that
many existing computer programs use only two digits to identify a year (for
example, the year 1998 would be represented by the digits "98"). In such
programs, the year 2000 will be represented by "00," which a computer could
interpret as the year 1900. If not corrected, many computer applications could
fail or create erroneous results. Since 1996, NAS has been evaluating its
exposure to this issue by reviewing its operating systems and outside service
provider systems. NAS expects all system changes and replacements needed to
achieve Year 2000 compliance to be completed by the end of the second quarter of
1999. Compliance testing will be completed in the second quarter of 1999.
Outside service providers and business partners will be required to certify
compliance by the end of the second quarter of 1999.

19
<PAGE> 20
BUYING AND SELLING FUND SHARES continued

DIVIDENDS AND DISTRIBUTIONS

Substantially all of a Fund's net investment income, if any, will be paid as a
dividend each quarter in the form of additional shares of the Fund. Any net
capital gains realized by a Fund from the sale of its portfolio securities will
be declared and paid to shareholders annually.

TAX STATUS

The tax treatment of payments made under a variable annuity contract or variable
life insurance policy is described in the prospectus for the contract or policy.
Generally, the owners of variable annuity contracts and variable life insurance
policies are not taxed currently on income or gains realized under such
contracts until the income or gain is distributed. However, income distributions
from these contracts and policies will be taxable at ordinary income tax rates.
In addition, distributions made to an owner who is younger than 59 1/2 may be
subject to a 10% penalty tax. Investors should ask their own tax advisors for
more information on their own tax situation, including possible state or local
taxes.

Please refer to the Statement of Additional Information for more information
regarding the tax treatment of the Funds.

20
<PAGE> 21

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Funds'
financial performance for the past 5 years or, if shorter, the period of the
Funds' operations. Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Funds, assuming reinvestment
of all dividends and distributions. The information for the years ended December
31, 1998 and 1997 has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Funds' financial statements, are included in the annual report,
which is available upon request. Information for the years ended December 31,
1996 and prior were audited by other auditors.

<TABLE>
<CAPTION>
TOTAL RETURN FUND
----------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 16.38 $ 13.27 $ 11.54 $ 9.70 $ 10.10
Net investment income 0.19 0.23 0.24 0.31 0.21
Net realized gain (loss) and unrealized
appreciation (depreciation) on investments 2.77 3.65 2.26 2.49 (0.10)
---------- ---------- ---------- -------- --------
Total from investment operations 2.96 3.88 2.50 2.80 0.11
---------- ---------- ---------- -------- --------
Dividends from net investment income (0.19) (0.23) (0.25) (0.31) (0.28)
Dividends from net realized gain from investment
transactions (0.75) (0.52) (0.52) (0.65) (0.23)
Dividends in excess of net realized gain from
investment transactions -- (0.01) -- -- --
Dividends from tax return of capital -- (0.01) -- -- --
---------- ---------- ---------- -------- --------
Total distributions (0.94) (0.77) (0.77) (0.96) (0.51)
---------- ---------- ---------- -------- --------
Net increase (decrease) in net asset value 2.02 3.11 1.73 1.84 (0.40)
---------- ---------- ---------- -------- --------
NET ASSET VALUE -- END OF PERIOD $ 18.40 $ 16.38 $ 13.27 $ 11.54 $ 9.70
========== ========== ========== ======== ========
Total Return 18.07% 13.85% 21.84% 29.09% 1.07%
Ratios and supplemental data:
Net Assets, end of period (000) $2,343,437 $1,849,241 $1,179,876 $814,964 $534,821
Ratio of expenses to average net assets 0.65% 0.54% 0.51% 0.51% 0.52%
Ratio of net investment income to average net
assets 1.05% 1.54% 1.99% 2.84% 2.76%
Portfolio turnover 17.13% 13.85% 16.18% 16.12% 12.06%
</TABLE>

<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND
----------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 21.21 $ 16.28 $ 13.48 $ 10.92 $ 11.20
Net investment income 0.19 0.20 0.21 0.23 0.18
Net realized gain (loss) and unrealized
appreciation (depreciation) on investments 6.14 5.39 3.29 2.96 (0.28)
---------- ---------- ---------- -------- --------
Total from investment operations 6.33 5.59 3.50 3.19 (0.10)
---------- ---------- ---------- -------- --------
Dividends from net investment income (0.19) (0.20) (0.22) (0.23) (0.18)
Dividends from net realized gain from investment
transactions (0.76) (0.46) (0.48) (0.40) --
---------- ---------- ---------- -------- --------
Total distributions (0.95) (0.66) (0.70) (0.63) (0.18)
---------- ---------- ---------- -------- --------
Net increase (decrease) in net asset value 5.38 4.93 2.80 2.56 (0.28)
---------- ---------- ---------- -------- --------
NET ASSET VALUE -- END OF PERIOD $ 26.59 $ 21.21 $ 16.28 $ 13.48 $ 10.92
========== ========== ========== ======== ========
Total Return 29.96% 34.49% 26.14% 29.35% (0.90)%
Ratios and supplemental data:
Net Assets, end of period (000) $1,064,498 $ 481,738 $ 211,474 $ 81,237 $ 60,442
Ratio of expenses to average net assets 0.67% 0.56% 0.52% 0.54% 0.56%
Ratio of net investment income to average net
assets 0.83% 1.10% 1.53% 1.89% 1.76%
Portfolio turnover 10.67% 10.88% 22.19% 20.28% 11.21%
</TABLE>

21
<PAGE> 22

FINANCIAL HIGHLIGHTS continued

<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
--------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 11.38 $ 11.04 $ 11.36 $ 10.20 $ 11.26
Net investment income 0.63 0.69 0.69 0.71 0.69
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments 0.37 0.34 (0.32) 1.16 (1.06)
---------- ---------- ---------- -------- --------
Total from investment operations 1.00 1.03 0.37 1.87 (0.37)
---------- ---------- ---------- -------- --------
Dividends from net investment income (0.63) (0.69) (0.69) (0.71) (0.69)
Dividends from net realized gain from
investment transactions (0.06) -- -- -- --
---------- ---------- ---------- -------- --------
Total distributions (0.69) (0.69) (0.69) (0.71) (0.69)
---------- ---------- ---------- -------- --------
Net increase (decrease) in net asset
value 0.31 0.34 (0.32) 1.16 (1.06)
---------- ---------- ---------- -------- --------
NET ASSET VALUE -- END OF PERIOD $ 11.69 $ 11.38 $ 11.04 $ 11.36 $ 10.20
========== ========== ========== ======== ========
Total Return 8.91% 9.67% 3.49% 18.74% (3.23)%
Ratios and supplemental data:
Net Assets, end of period (000) $ 761,897 $ 475,392 $ 459,247 $454,016 $391,253
Ratio of expenses to average net assets 0.57% 0.53% 0.51% 0.51% 0.51%
Ratio of net investment income to average
net assets 5.60% 6.19% 6.23% 6.45% 6.46%
Portfolio turnover 32.03% 68.61% 33.75% 97.05% 111.40%
</TABLE>

<TABLE>
<CAPTION>
MONEY MARKET FUND
--------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income 0.05 0.05 0.05 0.06 0.04
Dividends from net investment income (0.05) (0.05) (0.05) (0.06) (0.04)
---------- ---------- ---------- -------- --------
Net increase (decrease) in net asset
value -- -- -- -- --
---------- ---------- ---------- -------- --------
NET ASSET VALUE -- END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ======== ========
Total Return 5.27% 5.26% 5.12% 5.66% 3.88%
Ratios and supplemental data:
Net Assets, end of period (000) $1,373,334 $ 993,597 $ 983,529 $737,408 $828,027
Ratio of expenses to average net assets 0.46% 0.51% 0.51% 0.52% 0.54%
Ratio of net investment income to average
net assets 5.15% 5.16% 5.00% 5.51% 4.00%
</TABLE>

22
<PAGE> 23

INFORMATION FROM NATIONWIDE

Please read this Prospectus before investing. The following documents--which may
be obtained free of charge--contain additional information about the Funds:

- - Statement of Additional Information (SAI) (incorporated by reference into this
Prospectus)

- - Annual Report

- - Semi-Annual Report

FOR ADDITIONAL INFORMATION CONTACT:

Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215

FOR INFORMATION AND ASSISTANCE:

1-800-848-6331 (toll free, 8 a.m. - 5 p.m. Eastern Time)

INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION

Copies of Fund documents may be obtained from the Securities and Exchange
Commission as follows:

IN PERSON:

Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)

BY MAIL:

Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009

(The Securities and Exchange Commission charges a fee to copy any documents.)

VIA THE INTERNET:

http://www.sec.gov

THE TRUST'S INVESTMENT COMPANY ACT FILE NO: 811-3213

APO-1103-M
<PAGE> 24

Nationwide(R) Separate Account Trust

- - Nationwide(R) Small Company Fund

MAY 1, 1999

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved this Fund's shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 25

FUND SUMMARY

NATIONWIDE SMALL COMPANY FUND..................................................3
Objective and Principal Strategies
Principal Risks
Performance
Fees and Expenses

MORE ABOUT THE FUND............................................................5
Investment Strategies of the Multiple Subadvisers
Principal Risks
Foreign Risk
Other Investment Techniques
Temporary Defensive Positions

MANAGEMENT.....................................................................8
Management's Discussion of Fund Performance
Investment Manager
Multi-Manager Structure
The Subadvisers

BUYING AND SELLING FUND SHARES................................................11
Who Can Buy Shares of the Funds
Purchase Price
Selling Shares
Restrictions on Sales
Year 2000
Dividends and Distributions
Tax Status

FINANCIAL HIGHLIGHTS..........................................................13

ADDITIONAL INFORMATION................................................BACK COVER

TABLE OF CONTENTS

2
<PAGE> 26
FUND SUMMARY

This prospectus provides information about the Nationwide Small Company Fund
offered by Nationwide Separate Account Trust.
Nationwide Small Company Fund

OBJECTIVE

The Fund seeks long-term growth of capital. The Fund's investment objective can
be changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES
The Fund invests primarily in equity securities of small capitalization
companies. Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities of companies whose equity market
capitalizations at the time of investment are similar to the market
capitalizations of companies in the Russell 2000(R) Index(1) (the "Russell
2000"). These companies are known as small cap companies. The Russell 2000(R),
published by The Frank Russell Company, is an index consisting of approximately
2000 companies with small market capitalizations relative to the market
capitalizations of other U.S. companies. Market capitalization is a common way
to measure the size of a company based on the price of its common stock; it is
simply the number of outstanding shares of the company multiplied by the current
stock price. The Russell 2000 Index is reconstituted annually to reflect changes
in the marketplace. As of June 30, 1998, the market capitalizations for
companies in the Russell 2000 range from approximately $222 million to $1.4
billion.
The balance of the Fund's assets may be invested in equity securities of
companies whose market capitalizations exceed that of small companies. The Fund
may also invest in foreign securities.
Each of the Fund's subadvisers will adhere to its own buy and sell strategy and
portfolio turnover rate will not be considered a limiting factor for the Fund,
but may result in higher transaction costs and increased volatility.
As part of its responsibilities to the Fund, Nationwide Advisory Services,
Inc. ("NAS"), the Fund's investment adviser, initially selects the Fund's
subadvisers and monitors their performance on an ongoing basis. NAS has
selected the following subadvisers for the Fund: The Dreyfus Corporation,
Lazard Asset Management, Neuberger Berman, LLC, Strong Capital Management,
Inc., and Warburg Pincus Asset Management, Inc. Each subadviser manages a
portion of the Fund's investment portfolio. They have been chosen because
they approach investing in small cap securities in different ways, and NAS
believes that diversification among securities and investment styles will
increase the potential for investment return and potentially reduce risk
and volatility. For a description of the investment strategies used by
each subadviser, see "Investment Strategies of the Multiple Subadvisers."

PRINCIPAL RISKS
Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases.
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
The Fund focuses on a more narrow portion of the overall stock market by
investing primarily in companies with smaller market capitalizations. Therefore,
the impact of these factors on small companies may affect the Fund more than if
the Fund were to invest more broadly in the overall stock market.

MID/SMALL CAP RISK. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more established companies. The stocks of
medium-size and

- ---------------
1 The Russell 2000(R) Index is a registered service mark of the Frank Russell
Company which does not sponsor and is in no way affiliated with the Fund.

3
<PAGE> 27
Fund Summary continued

This prospectus provides information about the Nationwide Small Company Fund
offered by Nationwide Separate Account Trust.

small companies are usually less stable in price and less liquid than the stocks
of larger companies.

FOREIGN RISK. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement. In
addition, the "Euro" began serving as a new common currency for participating
European nations on January 1, 1999. It is unclear whether the newly created
accounting, clearing, settlement, and payment systems for the new currency will
be adequate.

SECTOR RISK. Sector risk is the risk that a certain sector of the economy (e.g.,
the healthcare or entertainment industry, may perform differently than other
sectors or the market as a whole. As a subadviser or multiple subadvisers
together allocate more of the Fund's portfolio holdings to a particular sector,
the Fund's performance will be more susceptible to any economic, business or
other developments which generally affect that sector.

SPECIAL SITUATION COMPANIES RISK. Special situation companies are companies
which may be subject to acquisitions, consolidations, mergers, reorganizations
or other unusual developments that can affect a company's market value. If the
anticipated benefits of the development do not materialize, the value of the
special situation company may decline.

RISKS RELATED TO DIFFERENT INVESTMENT STYLES. Different investment styles tend
to shift into and out of favor with stock market investors depending on market
and economic conditions. The mix of investment styles used by the subadvisers
may result in lower Fund performance if a single investment style -- such as
investing in growth stocks -- is currently in favor with investors.

NON-DIVERSIFIED RISK. The Fund may invest a greater percentage of its assets in
one or more companies compared with other funds. Therefore, changes in the
market value of a single company or industry may have a greater impact on the
value of the Fund's Portfolio.

For more detailed information about the Fund's investments and risks see "More
About the Fund."

PERFORMANCE

ANNUAL TOTAL RETURNS:

Best quarter: 18.0%, 4th qtr. of 1998
Worst quarter: -19.3%, 3rd qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 1.01% 17.34%
The Russell 2000(R) Index** -2.24% 12.64%
</TABLE>

* The Fund began operations on October 23, 1995.

** The Russell 2000(R) Index is an index consisting of approximately 2000
companies with small market capitalizations relative to the market
capitalizations of other U.S. companies. Unlike mutual fund returns, the
Russell 2000 Index does not include expenses. If expenses were deducted, the
actual returns of this Index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
an investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 1.00%
Other Expenses 0.07%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.07%
====
</TABLE>

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$109 $340 $590 $1,306
</TABLE>

4
<PAGE> 28
MORE ABOUT THE FUND

This prospectus provides information about the Nationwide Small Company Fund
offered by Nationwide Separate Account Trust.

INVESTMENT STRATEGIES OF THE MULTIPLE SUBADVISERS.

The following is a description of the investment strategies used by each
subadviser of this multi-managed fund. Each subadviser manages a portion of the
Fund's assets in accordance with the investment objective and principal
strategies as described previously.

THE DREYFUS CORPORATION uses a blended approach, investing in growth stocks,
value stocks or stocks that exhibit characteristics of both. Using fundamental
research and direct management contact, the subadviser seeks stocks with
superior prospects for accelerated earnings growth. They also seek special
situations, such as a corporate restructuring or management changes, that could
increase the stock price of a special situation company.

The subadviser uses a sector management approach, supervising a team of sector
managers who each make buy and sell decisions within their respective areas of
expertise. The sector weightings of this portion of the Fund typically
approximate those of the Russell 2000.

The subadviser typically sells a stock when the reasons for buying it no longer
apply, or when the company begins to show deteriorating fundamentals or poor
relative performance.

LAZARD ASSET MANAGEMENT invests primarily in equity securities, principally
common stocks, of relatively small non-U.S. companies that it believes are
undervalued based on their earnings, cash flow or asset value. It will choose
companies that are similar in size to those in the Morgan Stanley Capital
International Europe, Australia and Far East Small Cap Index (the "MSCI EAFE
Small Cap Index"). The MSCI EAFE Small Cap Index is an unmanaged index of
securities listed on foreign stock exchanges.
The subadviser generally invests its portion of the Fund's assets in equity
securities of companies located in at least three different foreign countries.
The allocation among geographic regions may shift from time to time based on the
subadviser's judgment. However, currently, the subadviser intends to invest
primarily in companies based in Continental Europe, the United Kingdom, the
Pacific Basin, Latin America and Canada. The subadviser chooses to buy small
non-U.S. companies that have one or more of the following characteristics:

- - are undervalued relative to their earnings, cash flow or asset values;

- - have an attractive price/value relationship with expectations that some
catalyst will cause the perception of value to change within two years;

- - are out of favor due to circumstances which are unlikely to harm the company's
franchise or earnings power;

- - have low projected price-to-earnings or price-to-cash flow multiples;

- - have the potential to become a larger factor in the company's business;

- - have significant debt but high levels of free cash flow; and

- - have a relatively short corporate history with the expectation that the
business may grow.

Lazard may sell a security for any of the following reasons:

- - its price rises to a level where it no longer reflects value (target
valuation);

- - the underlying investment assumptions are no longer valid;

- - company management changes direction; and/or

- - external events occur (e.g., changes in geo-political risk, regulations,
taxes, or competitive positions).

NEUBERGER BERMAN, LLC looks for undervalued small cap companies whose current
product lines and balance sheets are strong. Factors in identifying these
companies may include:

- - above-average returns

- - an established market niche

- - circumstances that would make it difficult for new competitors to enter the
market

- - the ability of the companies to finance their own growth

- - sound future business prospects.

This approach is designed to let the Fund benefit from potential increases in
stock prices while limiting the risks typically associated with small company
stocks.

5
<PAGE> 29
More About the Fund continued

At times, the subadviser may emphasize certain industries that it believes will
benefit from market or economic trends. At the time a stock is purchased, the
subadviser will set a target price at which it will sell that security. The
managers, in fact, will begin to pare back the position when the stock is within
10% of the target price. If its analysis of a security turns out to be
incorrect, the subadviser will generally seek to liquidate the holding as soon
as possible, although it occasionally may delay selling a security in
anticipation of a better selling opportunity.

STRONG CAPITAL MANAGEMENT, INC. invests in companies whose earnings it believes
to be in a relatively strong growth trend, and, to a lesser extent, in companies
in which further growth is not anticipated but which the subadviser feels are
undervalued. In seeking companies with favorable growth prospects, the
subadviser looks for factors such as:

- - prospects for above-average sales and earnings growth

- - high return on invested capital

- - overall financial strength

- - competitive advantages, including innovative products and services

- - effective research, product development and marketing

- - stable, capable management.

The manager may choose to sell a stock if its growth prospects become less
attractive or its fundamental qualities decline.

WARBURG PINCUS ASSET MANAGEMENT, INC. seeks to identify companies with
attractive growth potential by looking for:

- - companies still in the developmental stage

- - older companies that appear to be entering a new stage of growth

- - companies providing products or services with a high unit volume growth rate.

In selling portfolio securities, the subadviser may consider factors such as
whether a security meets the subadviser's target price, the growth prospects of
a security or sector and changes in a company's fundamentals.

The subadviser may also invest in emerging growth companies or small or medium
sized companies that have passed their start-up phase, show positive earnings,
and offer potential for accelerated earnings growth. Emerging growth companies
generally stand to benefit from new products or services, technological
developments, changes in management or other factors.

PRINCIPAL RISKS

SMALL CAP RISK. Historically, small cap companies have been more volatile in
price than larger company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth prospects
of small companies, the lower degree of liquidity in the markets for such
securities, the greater impact caused by changes in investor perception of
value, and the greater sensitivity of small cap companies to changing economic
conditions. In addition, small cap companies may:

- - lack depth of management

- - be unable to generate funds necessary for growth or development

- - be developing or marketing new products or services for which markets are not
yet established and never become established

- - market products or services which may become quickly obsolete.

Small cap companies in the technology and biotechnology industries may be
subject to abrupt or erratic price movements. Therefore, while small cap
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.

FOREIGN RISK.

- - COUNTRY. General securities market movements in any country in which the Fund
has investments, are likely to affect the value of the Fund's securities that
trade in that country. These movements will affect the Fund's share price and
the Fund's performance. The political, economic and social structures of some
countries in which the Fund invests may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of the imposition of exchange controls, currency devaluations,
foreign ownership limitations, expro-

6
<PAGE> 30

priation, restrictions on removal of currency or other assets, nationalization
of assets, punitive taxes and certain custody and settlement risks.

- - COMPANY. Foreign companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies,
and their securities may not be as liquid as securities of similar U.S.
companies. Foreign stock exchanges, trading systems, brokers and companies
generally have less government supervision and regulation than in the U.S. The
Fund may have greater difficulty voting proxies, exercising shareholders
rights, pursuing legal remedies and obtaining judgments with respect to
foreign investments in foreign courts than with respect to U.S. companies in
U.S. courts.

- - CURRENCY. Some of the Fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the Fund owns and the Fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency.

OTHER INVESTMENT TECHNIQUES

The Statement of Additional Information contains additional information about
the Fund, including other investment techniques that are not described in this
prospectus. To obtain a copy, see the back cover page.

TEMPORARY DEFENSIVE POSITIONS

In response to economic, political or unusual market conditions, the Fund may
invest up to 100% of its assets in cash or money market obligations. Should this
occur, the Fund may not meet its investment objectives and may miss potential
market upswings.

7
<PAGE> 31
MANAGEMENT

MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

The following is management's discussion of the performance of the Fund for the
year ended December 31, 1998. This discussion provides an overview of the
economy and how it affected the Fund during the year. It also provides a look
into the current and future investment techniques and strategies of the Fund
from the perspective of the portfolio managers.

The total return for the Fund was up 1.01% for the one year period ending
December 31, 1998. This compares to the Russell 2000(R) Index which was down
2.24%, for the same period. The small-cap stock sector for both the domestic and
foreign holdings performed very strongly in the first and fourth quarters, while
the sector was down in the second quarter and was down substantially in the
third quarter. The Fund outperformed its benchmark in all four quarters of 1998.
The strongest market sectors were technology, health care, and services.
Laggards were energy, which continued to face a weak pricing structure, and
utilities.

At year end, the Fund held a very diversified portfolio of 450 issues. It had
14.2% of net assets in foreign stocks, as compared to 18.7% at the end of 1997.
Overall, the Fund's largest sectors were: Health Care (7.2%), Computer Software
(6.8%), Computer Service (5.1%), Commercial Services (4.5%), and Banks/Savings &
Loans (3.9%).

The portfolio managers of the Fund maintain a positive outlook for 1999. Their
expectation is that the economy will continue to be characterized by stable but
moderate growth and very low inflation. Prospects look good for the Fund's
small-cap holdings in technology, health care, and consumer sectors. Volatility
will continue to be an issue in 1999 as valuations move back into peak levels
and uncertainties in the world economy continue to unfold. Broader stock
leadership is expected, which includes the best growing mid and small-cap
markets. This should translate to continued improvement in performance of
small-cap markets relative to large-caps.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SMALL COMPANY FUND AND
THE RUSSELL 2000 INDEX*

<TABLE>
<CAPTION>
SMALL COMPANY FUND RUSSELL 2000 INDEX
------------------ ------------------
<S> <C> <C>
'11/1/95' 10 10
'12/31/95' 11.386 10.695
'12/31/96' 13.848 12.463
'12/31/97' 15.803 15.234
'12/31/98' 15.962 14.894
</TABLE>

* The Russell 2000(R) Index is an index consisting of approximately 2000
companies with small market capitalizations relative to the market
capitalizations of other U.S. companies. Unlike mutual fund returns, the
Russell 2000 Index does not include expenses. If expenses were deducted, the
actual returns of this Index would be lower.
SMALL COMPANY FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** The Fund commenced operations 10/23/95.
Past performance is not predictive of future performance.

INVESTMENT MANAGER

Nationwide Advisory Services, Inc. ("NAS"), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the assets and supervises the daily
business affairs of Nationwide Separate Account Trust (the "Trust"). Subject to
the supervision and direction of the Trustees, NAS allocates Fund assets among
the subadvisers and evaluates and monitors the performance of subadvisers. NAS
is authorized to select and place portfolio investments on behalf of the Fund;
however, NAS does not intend to do so at this time. NAS and its predecessors
have managed investments since 1965. As of December 31, 1998, NAS had
approximately $11.3 billion in assets under management.

The Fund pays NAS a management fee, which is based on the Fund's average daily
net assets. The total fee paid by the Fund for the fiscal year ended December
31, 1998 -- expressed as a percentage of the Fund's average daily net
assets -- was as follows:

<TABLE>
<CAPTION>
FUND FEE
---- ----
<S> <C>
Small Company Fund 1.00%
</TABLE>

MULTI-MANAGER STRUCTURE

NAS and the Trust have received from the Securities and Exchange Commission an
exemptive order for a multi-manager structure that allows NAS to hire, replace
or terminate subadvisers without the approval of shareholders. The order also
allows NAS to revise a subadvisory agreement with Trustee approval but without
shareholder approval. If a new subadviser is hired, shareholders will receive
information about the new subadviser within 90 days of the change. The order
allows the Fund to operate more efficiently and with greater flexibility.

NAS provides the following oversight and evaluation services to the Fund:

- - performing initial due diligence on prospective subadvisers for the Fund

- - monitoring the performance of the subadvisers through ongoing analysis, as
well as periodic consultations

- - communicating performance expectations and evaluations to the subadvisers

- - ultimately recommending to the Board of Trustees whether a subadviser's
contract should be renewed, modified or terminated.

8
<PAGE> 32
Management continued

NAS does not expect to recommend frequent changes of subadvisers. NAS will
periodically provide written reports to the Board of Trustees regarding the
results of its evaluation and monitoring functions. Although NAS will monitor
the performance of the subadvisers, there is no certainty that any subadviser or
the Fund will obtain favorable results at any given time.

THE SUBADVISERS

Subject to the supervision of NAS and the Trustees, a subadviser will manage all
or a portion of the Fund's assets in accordance with the Fund's investment
objective and strategies. With regard to the portion of the Fund assets
allocated to it, each subadviser makes investment decisions for the Fund and, in
connection with such investment decisions, places purchase and sell orders for
securities.

The following are the subadvisers for the Fund:

THE DREYFUS CORPORATION ("Dreyfus"), located at 200 Park Avenue, New York, New
York 10166, was formed in 1947. As of March 31, 1999, Dreyfus managed or
administered approximately $120 billion in assets for approximately 1.7 million
investor accounts nationwide.

Portfolio Managers: The primary portfolio managers for the portion of the Fund's
portfolio managed by Dreyfus are Paul Kandel and Hilary Woods. Mr. Kandel serves
as a Senior Sector Manager for the technology and telecommunications industries
in the Small Capitalization Equity Group. Prior to joining Dreyfus in October
1994, Mr. Kandel was a manager at Ark Asset Management where he researched and
recommended stocks and initial public offerings in the telecommunications,
technology and selected media industries.

Ms. Woods serves as a Senior Sector Manager for the capital goods industries in
the Small Capitalization Equity Group. She has held this position and worked in
the Dreyfus Equity Research Department since 1987.

NEUBERGER BERMAN, LLC. ("Neuberger Berman") has offices located at 605 Third
Avenue, New York, New York 10158. Neuberger Berman and its predecessor firms and
affiliates have specialized in the management of no-load mutual funds since
1950. Neuberger Berman and its affiliates manage securities accounts that had
approximately $55 billion of assets as of December 31, 1998. Neuberger Berman is
a member firm of the NYSE and other principal exchanges and acts as the Fund's
primary broker in the purchase and sale of securities for the portion of the
Fund's portfolio managed by Neuberger Berman.

Portfolio Managers: Judith M. Vale, who has been a member of the Small Cap Group
since 1992, and Robert D'Alelio, who has been a member of the Small Cap Group
since 1996, are responsible for the day-to-date management of Neuberger Berman's
advisory activities for the Fund. Ms. Vale and Mr. D'Alelio also have primary
responsibility for the day-to-day management of the Neuberger Berman Genesis
Portfolio. Prior to joining Neuberger Berman, Mr. D'Alelio was a senior
portfolio manager at another firm.

STRONG CAPITAL MANAGEMENT, INC. ("Strong"), P.O. Box 2936, Milwaukee, Wisconsin
53201, was formed in 1974. Since then its principal business has been providing
investment advice for individuals and institutional accounts. Strong provides
investment management services for mutual funds and other investment portfolios
representing assets of over $32 billion as of December 31, 1998.

Portfolio Managers: Ronald C. Ognar, a Chartered Financial Analyst with more
than 30 years of investment experience, is primarily responsible for Strong's
portion of the Fund's portfolio. He also manages the Strong Growth Fund, the
Strong Growth Fund II and the Strong Growth 20 Fund; he co-manages the Strong
Total Return Fund and the Strong Mid Cap Growth Fund.

WARBURG PINCUS ASSET MANAGEMENT, INC. ("Warburg") is a professional investment
advisory firm which provides investment services to investment companies,
employee benefit plans, endowment funds, foundations and other institutions and
individuals. As of December 31, 1998, Warburg managed approximately $22 billion
of assets including approximately $11 billion of investment company assets.
Warburg's address is 466 Lexington Avenue, New York, New York 10017-3147.

On February 15, 1999, the parent companies of Warburg and Credit Suisse Group
announced that they reached an agreement for Credit Suisse Group to acquire
Warburg. It is expected that Warburg will be combined with Credit Suisse Asset
Management (New York), the institutional asset management and mutual fund arm of
Credit Suisse Group. As of December 31, 1998, Credit Suisse Asset Management had
global assets under management of $210 billion. Under the terms of the
arrangement, no immediate changes are planned to Warburg's investment portfolio
managers and investment professionals.

Portfolio Managers: The portfolio managers for Warburg's portion of the Fund are
Elizabeth B. Dater and Stephen J. Lurito. Ms. Dater and Mr. Lurito are also
co-portfolio managers of Warburg Pincus Emerging Growth Fund and Warburg Pincus
Small Company Growth Portfolio. Ms. Dater is a managing director of Warburg and
has been a portfolio manager of Warburg since 1978. Mr. Lurito is a managing
director of Warburg and has been with Warburg since 1987.

LAZARD ASSET MANAGEMENT ("Lazard") manages approximately $64 billion in
investments for corporations, endowments, public and private pension plans and
wealthy

9
<PAGE> 33

individuals as of March 31, 1999 and is recognized as one of the premier global
investment advisory firms. Lazard has offices located at 30 Rockefeller Plaza,
New York, New York, 10112 as well as in San Francisco. In addition, Lazard
provides asset management services worldwide through its affiliates in London,
Tokyo, Frankfurt, Cairo and Sydney.

Portfolio Managers: Lazard manages its portion of the Small Company Fund on a
team basis. The team is involved in all levels of the investment process. This
team approach allows every portfolio manager to benefit from his/her peers, and
clients to receive the firm's best thinking, not that of a single portfolio
manager. Lazard's international equity investment team operates under the
guidance of Herbert W. Gullquist, Vice Chairman, Managing Director and Chief
Investment Officer with responsibility for overall adherence to the firm's
investment principles, and John R. Reinsberg, Managing Director responsible for
International/Global Equity management, overseeing the team's day-to-day
operations and monitoring the composition of the portfolio to ensure appropriate
diversification.

10
<PAGE> 34
BUYING AND SELLING FUND SHARES

WHO CAN BUY SHARES OF THE FUND

Shares of the Fund are currently sold to separate accounts of Nationwide Life
Insurance Company and its wholly owned subsidiary, Nationwide Life and Annuity
Insurance Company, to fund benefits payable under variable life insurance
policies and variable annuity contracts. Shares of the Fund may also be sold to
affiliated Funds of Funds, and may in the future be sold to other insurance
companies. Shares are not sold to individual investors.

The separate accounts purchase shares of the Fund in accordance with variable
account allocation instructions received from owners of the variable annuity
contracts or variable life insurance policies. The Fund then uses the proceeds
to buy securities for its portfolio.

PURCHASE PRICE

The purchase price of each share of the Fund is its "net asset value" (or NAV)
next determined after the order is received. No sales charge is imposed on the
purchase of the Fund's shares. Generally, NAV is determined by dividing the
total market value of the securities owned by the Fund, less its liabilities, by
the total number of its outstanding shares. NAV is determined at the close of
regular trading on the New York Stock Exchange (usually 4 p.m. Eastern Time) on
each day the Exchange is open for trading.

NAS does not determine NAV on the following days:

- - Christmas Day

- - New Year's Day

- - Martin Luther King Jr. Day

- - Presidents' Day
- - Good Friday

- - Memorial Day
- - Independence Day

- - Labor Day

- - Thanksgiving Day

- - other days when the New York Stock Exchange is not open.

NAS reserves the right not to determine NAV when:

- - the Fund has not received any orders to purchase, sell, or exchange shares

- - changes in the value of the Fund's portfolio do not affect the NAV.

If current prices are not available for a security, or if NAS determines that
the price of a security does not represent its fair value, the security may be
valued at fair value in accordance with procedures adopted by the Board of
Trustees. To the extent that the Fund's investments are traded in markets that
are open when the New York Stock Exchange is closed, the value of the Fund's
investments may change on days when shares cannot be purchased or redeemed.

SELLING SHARES

RESTRICTIONS ON SALES

Shares of the Fund may not be redeemed or the Fund may delay paying the proceeds
from a redemption when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or if trading is restricted or an
emergency exists.

YEAR 2000

11
<PAGE> 35

Buying and Selling Fund Shares continued

DIVIDENDS AND DISTRIBUTIONS

Substantially all of the Fund's net investment income, if any, will be paid as a
dividend each quarter in the form of additional shares of the Fund. Any net
capital gains realized by the Fund from the sale of its portfolio securities
will be declared and paid to shareholders annually.

TAX STATUS

Please refer to the Statement of Additional Information for more information
regarding the tax treatment of the Fund.

12
<PAGE> 36

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund, assuming reinvestment of all dividends and
distributions. The information for the years ended December 31, 1998 and 1997
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, is included in the annual report, which is
available upon request. Information for the years ended December 31, 1996 and
prior were audited by other auditors.

<TABLE>
<CAPTION>
SMALL COMPANY FUND
--------------------------------------------------------------
PERIOD
OCTOBER 23, 1995
YEARS ENDED DECEMBER 31, (COMMENCEMENT OF
---------------------------------------- OPERATIONS) THROUGH
1998 1997 1996 DECEMBER 31, 1995
---------- -------- -------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 15.85 $ 13.89 $ 11.42 $ 10.00
Net investment income 0.03 0.01 0.06 0.02
Net realized gain and unrealized appreciation
on investments and translation of assets and
liabilities in foreign currencies 0.13 2.40 2.55 1.42
-------- -------- -------- -------
Total from investment operations 0.16 2.41 2.61 1.44
-------- -------- -------- -------
Dividends from net investment income -- -- (0.06) (0.02)
Dividends from net realized gain from
investment and foreign currency transactions -- (0.45) -- --
Dividends in excess of net realized gain from
investment and foreign currency transactions -- -- (0.08) --
-------- -------- -------- -------
Total distributions -- (0.45) (0.14) (0.02)
-------- -------- -------- -------
Net increase in net asset value 0.16 1.96 2.47 1.42
-------- -------- -------- -------
NET ASSET VALUE -- END OF PERIOD $ 16.01 $ 15.85 $ 13.89 $ 11.42
======== ======== ======== =======
Total Return 1.01% 17.35% 22.83% 14.38%
Ratios and supplemental data:
Net Assets, end of period (000) $406,569 $343,808 $180,840 $17,155
Ratio of expenses to average net assets 1.07% 1.11% 1.20% 1.25%*
Ratio of expenses to average net assets** 1.07% 1.11% 1.20% 1.74%*
Ratio of net investment income to average net
assets 0.21% 0.05% 0.60% 1.32%*
Ratio of net investment income to average net
assets** 0.21% 0.05% 0.60% 0.83%*
Portfolio turnover 141.27% 134.38% 136.74% 9.03%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

13
<PAGE> 37

INFORMATION FROM NATIONWIDE

Please read this Prospectus before investing. The following documents -- which
may be obtained free of charge -- contain additional information about the Fund:

- - Statement of Additional Information (SAI) (incorporated by reference into this
Prospectus)

- - Annual Report

- - Semi-Annual Report

FOR ADDITIONAL INFORMATION CONTACT:

Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215

FOR INFORMATION AND ASSISTANCE:

1-800-848-6331 (toll free, 8 a.m. - 5 p.m. Eastern Time)

INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION

Copies of Fund documents may be obtained from the Securities and Exchange
Commission as follows:

IN PERSON:

Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)

BY MAIL:

Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009

(The Securities and Exchange Commission charges a fee to copy any documents)

VIA THE INTERNET:

http://www.sec.gov

THE TRUST'S INVESTMENT COMPANY ACT FILE NO: 811-3213

APO-3018-D
<PAGE> 38

Nationwide(R) Separate Account Trust

- - Nationwide(R) Income Fund

May 1, 1999

FUND SUMMARY

NATIONWIDE INCOME FUND.........................................................3
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

MORE ABOUT THE FUND............................................................5
Investment Strategies of
the Multiple Subadvisers
Principal Risks
Principal Investment Techniques
Other Investment Techniques
Temporary Defensive Positions

MANAGEMENT.....................................................................7
Management's Discussion of Fund Performance
Investment Manager
Multi-Manager Structure
The Subadvisers

BUYING AND SELLING FUND SHARES.................................................9
Who Can Buy Shares of the Fund
Purchase Price
Selling Shares
Restrictions on Sales
Year 2000
Dividends and Distributions
Tax Status

FINANCIAL HIGHLIGHTS..........................................................11

ADDITIONAL INFORMATION................................................BACK COVER

TABLE OF CONTENTS

2
<PAGE> 40
FUND SUMMARY

This prospectus provides information about the Nationwide Income Fund offered by
Nationwide Separate Account Trust.

Nationwide(R) Income Fund

OBJECTIVE

The Fund seeks to provide as high a level of income as is consistent with
reasonable concern for safety of principal. The Fund's investment objective may
be changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

The Fund invests at least 65% of its assets, under normal market conditions, in
investment grade corporate bonds (rated in the four highest categories by a
nationally recognized statistical rating organization ("rating agency")) and
U.S. Government securities. The Fund also invests in mortgage-backed securities
and repurchase agreements.

As part of its responsibilities to the Fund, Nationwide Advisory Services,
Inc. ("NAS"), the Fund's investment adviser, initially selects the Fund's
subadvisers and monitors their performance on an ongoing basis. NAS has chosen
NCM Capital Management Group, Inc. and Smith Graham & Co. Asset Managers, L.P.
each to manage a portion of the Fund's portfolio. These subadvisers have been
chosen because they approach investing in debt obligations in different ways,
and NAS believes that diversification among securities and styles will
increase the potential for investment return and reduce risk and volatility.
For a description of the investment strategies used by each subadvisers, see
"Investment Strategies of the Multiple Subadvisers".
PRINCIPAL RISKS

CREDIT RISK. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. In addition, there is a risk that the rating of a debt security may be
lowered if an issuer's financial condition changes, which may lead to a greater
price fluctuation in the Fund.

PREPAYMENT RISK. The issuers of mortgage-backed securities may be able to repay
principal in advance, and are especially likely to do so when interest rates
fall. Changes in pre-payment rates can make the price and yield of mortgage-
backed securities volatile. When mortgage-backed securities are prepaid, the
Fund may have to reinvest in securities with a lower yield. The Fund also may
fail to recover premiums paid for the securities, resulting in an unexpected
capital loss. In addition, rising interest rates may cause prepayments to occur
at a slower than expected rate, thereby effectively lengthening the maturity of
the security and making the security more sensitive to interest rate changes.

INFLATION RISK. There is also inflation risk, which affects the value of
fixed-rate investments such as debt securities. If the Fund buys debt securities
when inflation and interest rates are low, the value of these debt securities
could fall as inflation rises. This could happen as investors find debt
securities with lower interest rates less attractive than debt securities that
pay higher interest rates. The Fund is also subject to liquidity risk, which is
the risk that a security cannot be sold, or cannot be sold quickly, at an
acceptable price.

For more detailed information about the Fund's investment techniques and risks,
see "More About the Fund."

3
<PAGE> 41
Fund Summary continued

PERFORMANCE

No performance information is provided because the Fund had been in operation
for less than a year as of December 31, 1998.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
an investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.45%
Other Expenses 0.56%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.01%
====
</TABLE>

(2) Until further notice, Nationwide Advisory Services, Inc. has agreed to waive
management fees and, if necessary, to reimburse "Other Expenses" so that
Total Annual Fund Operating Expenses will not exceed 0.75%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the costs would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$103 $322 $558 $1,236
</TABLE>

4
<PAGE> 42
MORE ABOUT THE FUND

INVESTMENT STRATEGIES OF THE MULTIPLE SUBADVISERS

NCM CAPITAL MANAGEMENT GROUP, INC. selects a diversified portfolio of investment
grade debt securities for its portion of the Fund's assets in an effort to
minimize overall credit risk. The subadviser will choose the average maturity
and duration of its portion of the Fund's portfolio based on the intermediate
and longer-term outlook of interest rates, the economy and financial markets
rather than short-term fluctuations in interest rates or economic statistics.

The subadviser then determines which sectors of the fixed income market offer
the highest potential for attractive returns. After analyzing current and
prospective developments in the economy and financial markets, the subadviser
chooses those securities that offer the greatest potential for higher returns
over a specific time period. The subadviser will sell securities if more
favorable opportunities are identified.

SMITH GRAHAM & CO. ASSET MANAGERS, L.P. emphasizes a global perspective in
determining strategic allocations and setting target portfolio guidelines. The
subadviser's investment process incorporates both quantitative and qualitative
inputs from its strategy teams. The teams focus on duration, yield curve, and
sector rotation to enhance performance.

The subadviser uses proprietary software models to identify areas of the fixed
income market that may offer the potential for the best returns for the least
amount of risk. Additional returns on the Fund's portfolio are obtained by
purchasing securities the subadviser feels are undervalued relative to other
securities within each sector. The subadviser will buy and sell securities as
more favorable opportunities are identified.

PRINCIPAL RISKS AND TECHNIQUES

The Fund may use the following principal investment techniques to increase
returns, protect assets or diversify investments. These techniques are subject
to certain risks. For additional information about the Fund's investment
strategies and techniques, see the Statement of Additional Information.

PRINCIPAL INVESTMENT TECHNIQUES

INVESTMENT GRADE DEBT SECURITIES. These include U.S. Government debt securities,
corporate debt securities and municipal debt securities that have been rated
within the four highest rating categories by a rating agency. In evaluating a
debt security, a rating agency measures the financial condition and stability of
the issuer and assigns a rating. If a rating agency changes a debt security's
rating, it may affect the security's value.

MORTGAGE-BACKED SECURITIES. U.S. Government mortgage-backed securities are
securities that are secured by and paid from a pool of mortgage loans on real
property and issued or guaranteed by the U.S. Government or one of its agencies.
Mortgage-backed securities may also be issued by private issuers.

Collateralized mortgage obligations (CMOs) are securities that have mortgage
loans or mortgage pass-through securities, such as GNMA, FNMA or FHLMC
certificates, as their collateral. CMOs can be issued by the U.S. Government or
its agencies or by private lenders.

These securities are subject to interest rate risk and credit risk if they are
issued by private issuers. CMOs and other mortgage-backed securities are also
subject to prepayment risk. With respect to prepayment risk, when interest rates
fall, homeowners may refinance their loans and the mortgage-backed securities
secured by these loans will be paid off sooner than the portfolio manager
anticipated. Reinvesting the returned principal in a lower interest rate market
reduces the Fund's income. Mortgage-backed securities are also subject to
extension risk and the possibility of losing principal as a result of
prepayments.

These securities are subject to interest rate risk like other securities. In
addition, because they may be callable, these securities are also subject to the
risk that the Fund will be repaid prior to the stated maturity and that the
principal will be reinvested in a lower interest rate market, reducing the
Fund's income. The Fund will only purchase floating-and variable-rate securities
of the same quality as the securities it would otherwise purchase.

U.S. GOVERNMENT SECURITIES. These securities include Treasury bills, notes,
bonds and other securities issued or guaranteed by the U.S. Government and
securities issued by U.S. Government agencies, including:

5
<PAGE> 43
More About the Fund continued

- - The Federal Home Loan Banks

- - The Federal National Mortgage Association ("FNMA")

- - The Student Loan Marketing Association and Federal Home Loan Mortgage
Corporation ("FHLMC")

- - The Federal Farm Credit Banks.

PRINCIPAL RISKS

PREPAYMENT RISK AND EXTENSION RISK. Prepayments of principal on mortgage-backed
securities affect the average life of a pool of such securities. Prepayments are
affected by the level of interest rates and other factors. In periods of rising
interest rates, the prepayment rate tends to decrease, lengthening average life
of a pool of mortgage-backed securities. In periods of falling interest rates,
the prepayment rate tends to increase, shortening the average life of a pool of
mortgage-backed securities. Prepayment risk is the risk that, because
prepayments generally occur when interest rates are falling, a Fund may have to
reinvest the proceeds from prepayments at lower rates. Extension risk is the
risk that anticipated payments on principal may not occur, typically because of
a rise in interest rates, and the expected maturity of the security will
increase. During periods of rapidly rising interest rates, the anticipated
maturity of a security may be extended past what the portfolio manager
anticipated, affecting the maturity and volatility of the Fund.

OTHER INVESTMENT TECHNIQUES

The Statement of Additional Information ("SAI") contains additional information
about the Fund, including other investment techniques. To obtain a copy of the
SAI, see the back cover page.

TEMPORARY DEFENSIVE POSITIONS

6
<PAGE> 44
MANAGEMENT

MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

The following is managements discussion of the performance of the Fund for the
year ended December 31, 1998. This discussion provides an overview of the
economy and how it affected the Fund during the year. It also provides a look
into the current and future investment techniques and strategies of the Fund
form the perspective of the portfolio managers.

The total return for the Fund for the 11 months from inception to December 31,
1998 was 7.13%. This compares to the 8.08% return of its blended benchmark
(50-50% Lehman Brothers Government/Corporate and Intermediate Treasury Indices).
The Fund's results were produced using a conservative investment style focusing
on U.S. Treasuries and Agency holdings, with 78.2% of the Fund's market value at
year-end. As the Fund gains more assets, it will continue to increase holdings
in other instruments, such as high quality corporate bonds and mortgage-backed
securities. At year-end, these other instruments accounted for 16.6% of the
Fund's market value. Their spreads are widening relative to Treasuries, and
should improve the Fund's returns relative to its benchmark.

With investors' flight to quality and a very uncertain world economy, demand for
U.S. Treasuries increased substantially in 1998. These factors drove yields
down, and the interest curve steepened. The 2-year Treasury went from 5.67% to
4.52% while the 30-year Treasury went from 5.94% to 5.12%, respectively, during
1998. This helped the Fund's market value while reducing its yield.

The U.S. economy has been strong despite weakness in world markets. We expect
the U.S. economy to continue to show growth in 1999, but to slow from prior
rates of gain. Continuing troubled spots in world financial markets will
continue to cause market uncertainty. In the face of this, the Fund is
over-weighted in the intermediate part of the curve. This position allows the
Fund to participate yet puts the Fund in a slightly defensive posture facing the
possibility of a steepening interest curve. The Fund's subadvisers are
optimistic that interest rates will decline from current levels as the new year
unfolds. The big question remains as to timing of these moves. There are many
economic cross-currents that will require the subadvisers to remain flexible and
pragmatic with respect to their portfolio strategy in these uncertain times.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE INCOME FUND, THE LEHMAN
BROTHERS TREASURY INDEX* AND LEHMAN BROTHERS INTERMEDIATE TREASURY INDEX*.

<TABLE>
<CAPTION>
INCOME FUND LB TREASURY LB INTERMEDIATE
----------- ----------- ---------------
<S> <C> <C> <C>
1/20/98 10 10 10
3/31/98 8 10.051 10.065
6/30/98 7 10.319 10.25
9/30/98 9 10.913 10.746
12/31/98 12.6 10.897 10.769
</TABLE>

* The Lehman Brothers Treasury Index and Lehman Brothers Intermediate Treasury
Index are unmanaged indices of U.S. Treasury securities that give a broad
look at the performance of these securities. Unlike mutual funds, the indices
do not incur expenses. If expenses were deducted the actual returns of the
indices would be lower.

INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

LIFE**
-----
7.13%

**The Income Fund commenced operations 1/20/98.

Past performance is not predictive of future performance.

INVESTMENT MANAGER

Nationwide Advisory Services, Inc. ("NAS"), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the assets and supervises the daily
business affairs of Nationwide Separate Account Trust (the "Trust"). Subject to
the supervision and direction of the Trustees, NAS allocates Fund assets among
the subadvisers and evaluates and monitors the performance of subadvisers. NAS
also selects and places money market investments on behalf of the Fund. NAS and
its predecessors have managed investments, including mutual funds and other
institutional accounts, since 1965. As of December 31, 1998, NAS had
approximately $11.3 billion in assets under management.

The annual management fee payable by the Fund to NAS, expressed as a percentage
of the Fund's average daily net assets, is as follows:

<TABLE>
<CAPTION>
FUND FEE
---- ----
<S> <C>
The Income Fund 0.45%
</TABLE>

7
<PAGE> 45
Management continued

MULTI-MANAGER STRUCTURE

NAS provides the following oversight and evaluation services to the Fund:

- - performing initial due diligence on prospective subadvisers for the Fund

- - monitoring the performance of the subadvisers through ongoing analysis, as
well as periodic consultations

- - communicating performance expectations and evaluations to the subadvisers

- - ultimately recommending to the Board of Trustees whether a subadviser's
contract should be renewed, modified or terminated.

NAS does not expect to recommend frequent changes of subadvisers. NAS will
periodically provide written reports to the Board of Trustees regarding the
results of its evaluation and monitoring functions. Although NAS will monitor
the performance of the subadvisers, there is no certainty that any subadviser or
Fund will obtain favorable results at any given time.

THE SUBADVISERS

Subject to the supervision of NAS and the Trustees, a subadviser will manage all
or a portion of the Fund's assets in accordance with the Fund's investment
objective and strategies. With regard to the portion of the Fund assets
allocated to it, each Subadviser makes investment decisions for the Fund and, in
connection with such investment decisions, places purchase and sell orders for
securities.

The following are the subadvisers for the Fund.

NCM CAPITAL MANAGEMENT GROUP, INC. ("NCM Capital") was founded in 1986 and
serves as one of the Fund's subadvisers. Its offices are located at 103 W. Main
St., Durham, NC 27701. As of December 31, 1998, NCM Capital had approximately
$4.4 billion in assets under management.

Portfolio Manager: The primary portfolio manager of the portion of the Fund's
portfolio managed by NCM Capital is Paul L. Van Kampen, CFA. Mr. Van Kampen
joined NCM Capital as Senior Vice President and the Director of Fixed Income
Research in 1995. Prior to joining NCM Capital, he was an Executive Director of
Aon Advisors, Inc.

SMITH GRAHAM AND CO. ASSET MANAGERS, L.P. ("Smith Graham") also serves as a
subadviser to the Fund. Its corporate offices are located at 6900 Chase Tower,
600 Travis Street, Houston, Texas 77002-3007. Smith Graham serves as an
investment adviser to a variety of corporate, foundation, public, Taft Hartley,
and mutual fund clients. The firm provides domestic, global and international
money management. As of December 31, 1998, Smith Graham managed approximately
$2.3 billion of assets.

Portfolio Manager: The primary portfolio manager of the portion of the Fund's
portfolio managed by Smith Graham is Brian Stine, Vice President and Portfolio
Manager. Mr. Stine joined Smith Graham in January 1993 and currently serves as a
Portfolio Manager.

8
<PAGE> 46
BUYING AND SELLING FUND SHARES

WHO CAN BUY SHARES OF THE FUND

Shares of the Fund are currently sold to separate accounts of Nationwide Life
Insurance Company or its wholly owned subsidiary, Nationwide Life and Annuity
Insurance Company, to fund benefits payable under variable life insurance
policies and variable annuity contracts. Shares of the Fund may also be sold to
affiliated Funds of Funds, and may in the future be sold to other insurance
companies. Shares are not sold to individual investors.

PURCHASE PRICE

NAS does not determine NAV on the following days:

- - Christmas Day

- - New Year's Day

- - Martin Luther King Jr. Day

- - Presidents' Day
- - Good Friday

- - Memorial Day
- - Independence Day

- - Labor Day

- - Thanksgiving Day

- - other days when the New York Stock Exchange is not open.

NAS reserves the right not to determine NAV when:

- - the Fund has not received any orders to purchase, sell, or exchange shares

- - changes in the value of the Fund's portfolio do not affect the NAV.

If current prices are not available for a security, or if NAS determines that
the price of a security does not represent its fair value, the security may be
valued at fair value in accordance with procedures adopted by the Board of
Trustees. To the extent that the Fund's investments are traded in markets that
are open when the New York Stock Exchange is closed, the value of the Fund's
investments may change on days when shares cannot be purchased or redeemed.

SELLING SHARES

RESTRICTIONS ON SALES

YEAR 2000

9
<PAGE> 47
Buying and Selling Fund Shares continued

DIVIDENDS AND DISTRIBUTIONS

TAX STATUS

Please refer to the Statement of Additional Information for more information
regarding the tax treatment of the Fund.

10
<PAGE> 48

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned on an
investment in the Fund, assuming reinvestment of all dividends and
distributions. This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Fund's financial statements, is included in the
annual report, which is available upon request.

<TABLE>
<CAPTION>
INCOME FUND
----------------------------
PERIOD
JANUARY 20, 1998
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1998
----------------------------
<S> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $10.00
Net investment income 0.42
Net realized gain (loss) and unrealized appreciation
(depreciation) on investments and translation of assets
and liabilities in foreign currencies 0.29
------
Total from investment operations 0.71
------
Dividends from net investment income (0.42)
Dividends from net realized gain from investment
transactions (0.04)
------
Total distributions (0.46)
------
Net increase (decrease) in net asset value 0.25
------
NET ASSET VALUE -- END OF PERIOD $10.25
======
Total Return 7.13%
Ratios and supplemental data:
Net Assets, end of period (000) $4,964
Ratio of expenses to average net assets 0.75%*
Ratio of expenses to average net assets** 1.01%*
Ratio of net investment income to average net assets 4.68%*
Ratio of net investment income to average net assets** 4.42%*
Portfolio turnover 157.21%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

11
<PAGE> 49

INFORMATION FROM NATIONWIDE

Please read this Prospectus before investing. The following documents-which may
be obtained free of charge-contain additional information about the Fund:

- - Statement of Additional Information (SAI) (incorporated by reference into this
Prospectus)

- - Annual Report

- - Semi-Annual Report

FOR ADDITIONAL INFORMATION CONTACT:

Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215

FOR INFORMATION AND ASSISTANCE:

1-800-848-6331 (toll free, 8 a.m. -- 5 p.m. Eastern Time)

INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION

Copies of Fund documents may be obtained from the Securities and Exchange
Commission as follows:

IN PERSON:

Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)

BY MAIL:

Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009

(The Securities and Exchange Commission charges a fee to copy any documents.)

VIA THE INTERNET:

http://www.sec.gov

THE TRUST'S INVESTMENT COMPANY ACT FILE NO: 811-3213

APO-4429
<PAGE> 50

Nationwide(R) Separate Account Trust

- - Nationwide(R) Strategic Growth Fund

- - Nationwide(R) Strategic Value Fund

- - Nationwide(R) Select Advisers
Mid Cap Fund

- - Nationwide(R) Small Cap Value Fund

- - Nationwide(R) Select Advisers
Small Cap Growth Fund

- - Nationwide(R) Global Equity Fund

- - Nationwide(R) Equity Income Fund

- - Nationwide(R) Balanced Fund

- - Nationwide(R) Multi Sector Bond Fund

- - Nationwide(R) High Income Bond Fund

May 1, 1999

FUND SUMMARIES

NATIONWIDE STRATEGIC GROWTH FUND...............................................3
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE STRATEGIC VALUE FUND................................................5
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE SELECT ADVISERS MID CAP FUND........................................7
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses
Investment Strategies of the Multiple Subadvisers

NATIONWIDE SMALL CAP VALUE FUND...............................................10
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE SELECT ADVISERS SMALL CAP GROWTH FUND..............................12
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses
Investment Strategies of the Multiple Subadvisers
NATIONWIDE GLOBAL EQUITY FUND.................................................14
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE EQUITY INCOME FUND.................................................17
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE BALANCED FUND......................................................19
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE MULTI SECTOR BOND FUND.............................................22
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

NATIONWIDE HIGH INCOME BOND FUND..............................................25
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

MORE ABOUT THE FUNDS..........................................................28
Principal Risks and Techniques
Other Investment Techniques
Temporary Defensive Positions

MANAGEMENT....................................................................31
Management's Discussion of Fund Performance
Investment Management

BUYING AND SELLING FUND SHARES................................................46
Who can Buy Shares of the Funds
Purchase Price
Selling Shares
Restrictions on Sales
Year 2000
Dividends and Distributions
Tax Status

FINANCIAL HIGHLIGHTS..........................................................48

ADDITIONAL INFORMATION................................................BACK COVER

2
<PAGE> 52
FUND SUMMARIES

This prospectus provides information about ten funds offered by Nationwide
Separate Account Trust (together, the "Funds").

Nationwide Strategic Growth Fund

OBJECTIVE

The Fund seeks capital growth. The Fund's investment objective can be changed by
the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

Nationwide Advisory Services, Inc. ("NAS") has selected Strong Capital
Management, Inc. as a subadviser to manage the Fund's portfolio on a day-to-day
basis. The Fund focuses on common stocks of U.S. and foreign companies that the
subadviser believes are reasonably priced and have above-average growth
potential. The Fund's portfolio can include stocks of companies of any size. The
subadviser may decide to sell a stock when the company's growth prospects become
less attractive. The subadviser's buy/sell strategy is not limited by the
turnover rate of the Fund's portfolio. The subadviser may participate in
frequent portfolio transactions, which will lead to higher transaction costs.

PRINCIPAL RISKS

Portfolio turnover risk. The Fund will attempt to buy securities with the intent
of holding them for investment, but the subadviser may engage in active and
frequent trading of securities if doing so is in the best interest of the Fund.
A higher portfolio turnover rate may result in higher transaction costs for the
Fund and increase the volatility of the Fund.

Stock market risk. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.

Risks related to investing for growth. Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the Fund focuses on growth-style stocks, the Fund's
performance may at times be better or worse than the performance of stock funds
that focus on other types of stocks, or that have a broader investment style.

Mid/small cap risk. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more established companies. The stocks of
medium-size and small companies are usually less stable in price and less liquid
than the stocks of larger companies.

Foreign risk. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement. In
addition, the "Euro" began serving as a new common currency for participating
European nations on January 1, 1999. It is unclear whether the newly created
accounting, clearing, settlement and payment systems for the new currency will
be adequate.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The annual returns shown in the bar chart do not include charges
that may be imposed by variable annuity contracts or variable life insurance
polices. The table shows the Fund's average annual total returns for certain
time periods compared to the returns of a broad-based securities index. The bar
chart and table provide some indication of the risks of investing in the Fund.
Remember, however, that past performance does not guarantee similar results in
the future.

3
<PAGE> 53
FUND SUMMARIES continued

ANNUAL TOTAL RETURNS:

Best Quarter: 20.7%, 4th Qtr. of 1998
Worst quarter: -14.0%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 14.59% 14.53%
The S&P/Barra Mid Cap 400
Growth Index** 34.73% 31.28%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The S&P/Barra Mid Cap 400 Growth Index -- an unmanaged index of companies in
the S&P 400 Mid Cap Index whose stocks have higher price-to-book
ratios -- gives a broad look at how the prices of growth style stocks of
medium-size U.S. companies have performed. Unlike mutual funds, the S&P/Barra
Mid Cap 400 Growth Index does not incur expenses. If expenses were deducted,
the actual returns of this Index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.90%
Other Expenses 0.65%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.55%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 1.00%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$158 $490 $845 $1,846
</TABLE>

4
<PAGE> 54

Nationwide Strategic Value Fund

OBJECTIVE

The Fund's primary investment objective is long-term capital appreciation, and
portfolio securities are selected primarily with a view to achievement of this
objective. The Fund's investment objective can be changed by the Fund's Trustees
without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected Schafer Capital Management, Inc. as a subadviser to manage the
Fund's portfolio on a day-to-day basis through a subcontract with Strong Capital
Management, Inc. The Fund invests primarily in common stocks of medium and
large-size companies. The subadviser selects stocks of companies that have
above-average growth potential, but also are inexpensive relative to market
averages. The Fund invests approximately equal amounts of its assets in the
stocks of the portfolio at the time of purchase, and generally invests all of
its assets in U.S. and foreign common stock and convertible securities. The
subadviser sells holdings when they are no longer attractive based on their
growth potential or price.

PRINCIPAL RISKS

Risks related to investing for value. Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the Fund generally focuses on value-style stocks,
the Fund's performance may at times be better or worse than the performance of
stock funds that focus on other types of stocks, or that have a broader
investment style.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The annual returns shown in the bar chart do not include charges
that may be imposed by variable annuity contracts or variable life insurance
policies. The table shows the Fund's average annual total returns for certain
time periods compared to the returns of a broad-based securities index. The bar
chart and table provide some indication of the risks of investing in the Fund.
Remember, however, that past performance does not guarantee similar results in
the future.

ANNUAL TOTAL RETURNS:

Best quarter: 26.4%, 4th Qtr. of 1998
Worst quarter: -22.9%, 3rd Qtr. of 1998

5
<PAGE> 55
FUND SUMMARIES continued

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 0.39% 1.74%
The S&P 500 Index** 28.58% 30.82%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held
stocks of large U.S. companies -- gives a broad look at how the stock prices
of large U.S. companies have performed. Unlike mutual fund returns, the S&P
500 Index does not incur expenses. If expenses were deducted, the actual
returns of this Index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.90%
Other Expenses 0.33%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.23%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 1.00%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$125 $390 $676 $1,489
</TABLE>

6
<PAGE> 56

Nationwide Select Advisers Mid Cap Fund

OBJECTIVE

The Fund has as its investment objective capital appreciation. The Fund's
investment objective can be changed by the Fund's Trustees without shareholder
approval.

PRINCIPAL STRATEGIES

The Fund will invest at least 65% of its total assets in equity securities of
companies with market capitalizations between $500 million and $7 billion, also
known as mid cap companies. However, the average market capitalizations may
fluctuate over time. In addition, if these companies continue to satisfy other
investment policies, the Fund may continue to hold the securities of these
companies even if their market capitalizations grow above $7 billion. Market
capitalization is a common way to measure the size of a company based on the
price of its common stock; it's simply the number of outstanding shares of the
company multiplied by the current share price. The Fund may also invest in
special situation companies.

As part of its responsibilities to the Fund, NAS initially selects the
Fund's subadvisers and monitors their performance on an ongoing basis. NAS
has chosen First Pacific Advisors, Inc., Pilgrim Baxter & Associates, Ltd.
and Rice, Hall, James & Associates each to manage a portion of the Fund.
Each of them has been chosen because they approach investing in mid cap
securities in different ways. NAS believes that diversification among
securities and styles will increase the potential for investment return
and reduce risk and volatility. For a description of the investment
strategies used by each subadviser, see "Investment Strategies of the
Multiple Subadvisers."

The Fund focuses on a more narrow portion of the overall stock market by
investing primarily in mid-cap companies. Therefore, the impact of these factors
on mid-cap companies may affect the Fund more than if the Fund were to invest
more broadly in the overall stock market.

Risks related to different investment styles. Different investment styles tend
to shift in and out of favor with stock market investors depending on market and
economic conditions. The mix of investment styles used by the subadvisers may
result in lower Fund performance if a single investment style -- such as
investing in growth stocks -- is currently in favor with investors.

Special situation companies risk. Special situation companies are companies
which may be subject to acquisitions, consolidations, mergers, reorganizations
or other unusual developments that can affect a company's market value. If the
anticipated benefits of the development do not materialize, the value of the
special situation company may decline.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

7
<PAGE> 57
FUND SUMMARIES continued

ANNUAL TOTAL RETURNS:

Best quarter: 18.7%, 4th Qtr. of 1998
Worst quarter: -14.1%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 10.81% 8.91%
The S&P 400 Mid Cap Index** 19.09% 21.51%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The S&P 400 Mid Cap Index -- an unmanaged index of 400 stocks of medium-size
U.S. companies -- gives a broad look at how the stock prices of medium-size
U.S. companies have performed. Unlike mutual funds, the S&P 400 Mid Cap Index
does not incur expenses. If expenses were deducted, the actual returns of
this index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 1.05%
Other Expenses 0.49%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.54%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 1.20%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$157 $486 $839 $1,835
</TABLE>

INVESTMENT STRATEGIES OF THE MULTIPLE SUBADVISERS

First Pacific Advisors, Inc. seeks value in all parts of a company's capital
structure, searching for securities that reflect low price/earnings ratio (P/Es)
and trade at discounts to private market value. Private market value is the
subadviser's internal assessment of a security's value after factoring in other
relevant factors. The P/E of a stock is the price of a stock divided by its
earnings per share; it gives an investor an idea of how much the investor is
paying for a company's earning power. In its stock selection process, the
subadviser looks for a high return on capital, a solid balance sheet, meaningful
cash flow, an active share repurchase program, insider buying, superior
management seeking to maximize shareholder value and projected earnings growth
exceeding the stock market average. In evaluating debt obligations, including
convertible debt, the subadviser attempts to identify current interest rate
trends. By investing in a combination of stocks and debt obligations, the
subadviser seeks to broaden the universe of investment opportunities while
increasing diversification and lowering portfolio volatility. The subadviser
will sell a security if it no longer meets the criteria outlined above or if a
more favorable opportunity is identified.

8
<PAGE> 58

Pilgrim Baxter & Associates, Ltd. invests in companies which it believes have an
outlook for strong earnings growth and the potential for significant capital
appreciation. The subadviser uses a two-step investment process by starting with
a universe of rapidly growing companies with market capitalizations between $500
million and $7 billion and then creating a smaller universe of growing companies
based on analysis through proprietary software and research models that
incorporate important attributes of successful growth. Using fundamental
research, the subadviser looks at financial records, evaluates each company's
earnings quality, and assesses the sustainability of the company's current
growth trends. Ultimately, the subadviser seeks to construct an investment
portfolio that possesses strong growth characteristics. The subadviser will sell
a security if it cannot sustain these growth characteristics.

Rice, Hall, James & Associates normally invests at least 65% of its portion of
the Fund's total assets in equity securities of companies with market
capitalizations of between $300 million to $2.5 billion at the time of initial
purchase. The subadviser believes that there are greater pricing inefficiencies
for small/mid cap securities than larger capitalization securities because this
range of the market has less analyst coverage. The subadviser will tend to
choose from relatively underfollowed securities. The Fund will invest in
companies that the subadviser believes will increase in price within a one to
two year period because of a change that is not anticipated by the market, such
as a new product introduction, new management or new markets. The subadviser
will sell securities from time to time as more favorable opportunities are
identified.

9
<PAGE> 59
FUND SUMMARIES continued

Nationwide Small Cap Value Fund

OBJECTIVE

The Fund has as its investment objective capital appreciation through investment
in a diversified portfolio of equity securities of companies with a median
market capitalization of approximately $1 billion. The Fund's investment
objective can be changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected The Dreyfus Corporation as a subadviser to manage the Fund's
portfolio on a day-to-day basis. The Fund intends to pursue its investment
objective by investing, under normal market conditions, at least 75% of its
total assets in equity securities of companies whose equity market
capitalizations at the time of investment are similar to the market
capitalizations of companies in the Russell 2000(R) Index, known as small cap
companies. The Russell 2000, published by the Frank Russell Company, is an index
consisting of approximately 2000 companies with small market capitalizations
relative to the market capitalizations of other U.S. companies. Currently the
market capitalizations of companies in the Russell 2000 range from approximately
$222 million to $1.4 billion. The Fund may invest up to 20% of its total assets
in equity securities of foreign companies. The subadviser will sell a stock if
the subadviser no longer considers the company to be of value.

The Fund will invest in stocks of U.S. and foreign companies which the
subadviser considers to be "value" companies. The subadviser generally believes
that such companies have relatively low price to book ratios, low price to
earnings ratios or higher than average dividend payments in relation to price.

Smaller capitalization companies are often under valued for one of the following
reasons: (1) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly traded companies, are often less
interested in smaller capitalization companies because of the difficulty of
acquiring a meaningful position without purchasing a large percentage of the
company's outstanding equity securities; and (2) such companies may not be
regularly researched by securities analysts, which could result in greater
discrepancies in valuation.

PRINCIPAL RISKS

The Fund focuses on a more narrow portion of the overall stock market by
investing primarily in companies with smaller market capitalizations. Therefore,
the impact of these factors on small companies may affect the Fund more than if
the Fund were to invest more broadly in the overall stock market.

Risks related to investing for value. Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the Fund generally focuses on value-style stocks,
the Fund's performance at times may be better or worse than the performance of
stock funds that focus on other types of stocks, or that have a broader
investment style.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

10
<PAGE> 60

PERFORMANCE

ANNUAL TOTAL RETURNS:

Best quarter: 26.4%, 4th Qtr. of 1998
Worst quarter: -26.3%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund -3.06% -4.00%
Russel 2000 Value Index** -6.45% -1.90%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The Russell 2000(R) Value Index measures the performance of approximately
2000 of the largest U.S. companies with lower price-to-book ratios and lower
forecasted growth values relative to other large U.S. companies. Unlike
mutual fund returns, the Russel 200 Value Index does not include expenses. If
expenses were deducted, the actual returns of this index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.90%
Other Expenses 0.43%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.33%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 1.05%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$135 $421 $729 $1,601
</TABLE>

11
<PAGE> 61
FUND SUMMARIES continued

Nationwide Select Advisers Small Cap Growth Fund

OBJECTIVE

The Fund seeks capital growth. The Fund's investment objective can be changed by
the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

The Fund seeks to achieve its investment objective from a broadly diversified
portfolio of equity securities issued by U.S. and foreign companies with market
capitalizations in the range of companies represented by the Russell 2000, known
as small cap companies. Under normal market conditions, the Fund will invest at
least 65% of its total assets in the equity securities of small cap companies.
The balance of the Fund's assets may be invested in equity securities of larger
cap companies. Equity securities include preferred stocks, securities
convertible into common stock and warrants for the purchase of common stock. The
Fund may also invest in foreign securities.

Market capitalization is a common way to measure the size of a company based on
the price of its common stock; it's simply the number of outstanding shares of
the company multiplied by the current share price. The Russell 2000, published
by The Frank Russell Company, is an index consisting of approximately 2000
companies with small market capitalizations relative to the market
capitalizations of other U.S. companies. Currently the market capitalizations
for companies in the Russell 2000 range from approximately $222 million to $1.4
billion.

As part of its responsibilities to the Fund, NAS initially selects the
Fund's subadvisers and monitors their performance on an ongoing basis. NAS
has chosen Franklin Advisers, Inc., Miller Anderson & Sherrerd, LLP and
Neuberger Berman, LLC each to manage a portion of the Fund. The
subadvisers have been chosen because they approach investing in small cap
companies different ways. NAS believes that diversification among
securities and styles will increase the potential for investment return
and reduce risk and volatility. For a description of the investment
strategies used by each subadviser, see "Investment Strategies of the
Multiple Subadvisers."

PRINCIPAL RISKS

Foreign risk. Investments in foreign securities involve risks in addition to
those of investments in U.S. companies. These risks include political and
economic risks, currency fluctuations, higher transaction costs, and delayed
settlement. In addition, the "Euro" began serving as a new common currency for
participating European nations on January 1, 1999. It is unclear whether the
newly created accounting, clearing, settlement, and payment systems for the new
currency will be adequate.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

12
<PAGE> 62

PERFORMANCE

No performance information is provided because the Select Advisers Small Cap
Growth Fund will not begin operations until about May 1, 1999.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 1.10%
Other Expenses(2) 0.58%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(3) 1.68%
====
</TABLE>

(2) Because the Fund is new and does not yet have any operating history, "Other
Expenses" are based upon estimates for the current fiscal year.

(3) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 1.30%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
3
1 YEAR YEARS
------ -------
<S> <C>
$171 $530
</TABLE>

INVESTMENT STRATEGIES OF THE MULTIPLE SUBADVISERS

Franklin Advisers, Inc. is a research driven, "bottom-up" fundamental investor
and pursues a disciplined "growth at a reasonable price" strategy. Relying on a
team of analysts to provide in-depth industry expertise, the subadviser chooses
small cap companies that it believes are positioned for rapid growth in
revenues, earnings or assets, and whose common stocks are selling at reasonable
prices. The subadviser evaluates small cap companies for distinct and
sustainable competitive advantages, such as a particular marketing or product
niche, proven technology, and industry leadership - all factors the subadviser
believes point to strong, long-term growth potential. The subadviser diversifies
its allocation of the Fund's assets across many industries and, from time to
time, may invest substantially in certain sectors, including technology and
biotechnology. The subadviser will sell securities from time to time as more
favorable opportunities are identified.

Miller Anderson & Sherrerd, LLP focuses on companies that demonstrate high
earnings growth rates, growth stability, and rising profitability. In
particular, the subadviser invests in companies that appear to be capable of
producing earnings that consistently beat market expectations. The subadviser
uses computer analysis to identify stocks based on earnings' predictions and
then conducts extensive fundamental research, examining financial records and
identifying those companies with the most attractive earnings revisions.
Finally, the subadviser reviews the valuation of these stocks to eliminate the
most overvalued stocks from consideration. The subadviser also follows a strict
sell discipline and will sell stocks when their earnings revision scores fall to
unacceptable levels, fundamental research uncovers unfavorable trends, or
valuations are excessive relative to the stocks' growth prospects.

Neuberger Berman, LLC's growth equity group takes a growth approach to selecting
stocks, looking for new companies that are in the developmental stage as well as
older companies that appear poised to grow because of new products, markets or
management. Factors in identifying these firms may include financial strength, a
strong position relative to competitors and a stock price that is reasonable in
light of its growth rate.

Neuberger Berman follows a disciplined selling strategy, and may sell a stock
when it reaches a target price, fails to perform as expected, or appears
substantially less desirable than another stock.

13
<PAGE> 63
FUND SUMMARIES continued

Nationwide Global Equity Fund

OBJECTIVE

The Fund seeks to provide a high total return from a globally diversified
portfolio of equity securities. The Fund's investment objective can be changed
by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected J.P. Morgan Investment Management Inc. as a subadviser to
manage the Fund's portfolio on a day-to-day basis. The Fund invests in equity
securities, primarily from developed countries. Normally the Fund's investments
will be from issuers in at least five different countries, which will usually
include the United States. Under normal conditions, the Fund will invest at
least 65% of its assets in equity securities. The subadviser uses a disciplined
process to seek to enhance the Fund's returns and reduce its volatility relative
to the Morgan Stanley Capital International World Index (MSCI World Index), the
Fund's benchmark. The Fund will use derivatives for hedging and for risk
management (i.e. to establish or adjust exposure to particular securities,
markets or currencies). Although the Fund may use derivatives that incidentally
involve leverage, it does not use them for the specific purpose of leveraging
its portfolio.

PRINCIPAL RISKS

The subadviser follows a three-step process that combines country
allocation, stock selection through fundamental research and currency
management.

Country Allocation. The Subadviser takes an in-depth look at the relative
valuations and economic prospects of different countries in order to
determine which countries to emphasize. The Subadviser first ranks the
countries and then a team of strategists makes country allocation
decisions for the Fund. The Fund may overweight or underweight countries
relative to the MSCI World Index.

Stock Selection. In choosing stocks, the Fund emphasizes those that are
undervalued according to the Subadviser's proprietary research. First
various models are used to quantify the Subadviser's fundamental stock
research, producing a ranking of companies within each industry according
to their relative value. The Fund then buys and sells stocks using
research and valuation rankings, as well as the subadviser's assessment of
other factors, including:

- Catalysts that could trigger a change in a stock's price

- Potential reward compared to potential risk

- Temporary mispricings caused by market overreactions

Currency Management. The Subadviser actively manages currency exposure in
conjunction with its country allocation and stock selection in an attempt
to protect and possibly enhance the Fund's returns. It manages the
currency exposure of foreign investments relative to the MSCI World Index,
and may hedge foreign currency exposure into the U.S. dollar or from one
foreign currency into another.

14
<PAGE> 64

Derivative risk. The Fund invests in securities that are considered to be
derivatives. The value of derivatives (like futures and options) is dependent
upon the performance of underlying assets, securities or indicies. If the
underlying assets, securities or indicies do not perform as expected, the value
of the derivative. Derivatives are more volatile and riskier than traditional
investments. To the extent the Fund enters into these transactions, their
success will depend upon the subadviser's ability to predict pertinent market
movement.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

The following bar chart and table show two aspects of the Fund: volatility and
performance. The bar chart shows the volatility -- or variability -- of the
Fund's annual total returns over time and shows that fund performance can
change. The annual returns shown in the bar chart do not include charges that
may be imposed by variable annuity contracts or variable life insurance polices.
The table shows the Fund's average annual total returns for certain time periods
compared to the returns of a broad-based securities index. The bar chart and
table provide some indication of the risks of investing in the Fund. Remember,
however, that past performance does not guarantee similar results in the future.

ANNUAL TOTAL RETURNS:

Best quarter: 19.1%, 4th Qtr. of 1998
Worst quarter: -12.5%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 19.14% 17.47%
Morgan Stanley Capital
International (MSCI)
World Index** 24.34% 22.02%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The Morgan Stanley Capital International (MSCI) World Index -- an unmanaged
index of companies whose securities are listed on the stock exchanges of the
U.S., Europe, Canada, Australia, and the Far East -- gives a broad look at
how the stock prices of these companies have performed. Unlike mutual funds,
the MSCI World Index does not incur expenses. If expenses were deducted, the
actual returns of this Index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND SELLING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 1.00%
Other Expenses 0.46%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.46%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 1.20%.

15
<PAGE> 65

FUND SUMMARIES continued

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.
The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$149 $462 $797 $1,746
</TABLE>

16
<PAGE> 66

Nationwide Equity Income Fund

OBJECTIVE

The Fund has as its investment objective above average income and capital
appreciation. The Fund's investment objective can be changed by the Fund's
Trustees without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected Federated Investment Counseling as a subadviser to manage the
Fund's portfolio on a day-to-day basis. The Fund pursues its investment
objective by investing primarily in income producing U.S. and foreign equity
securities and securities that are convertible into common stock.

The subadviser ordinarily uses the "value" style of investing, selecting
securities that generally have a comparatively low volatility in share price
relative to the overall equity market and that may provide relatively high
dividend income. When the subadviser uses a "value" style of investing, the
price of the securities held by the Fund may not, under certain market
conditions, increase as rapidly as stocks selected primarily for their growth
attributes.

To determine the timing of purchases of portfolio securities, the subadviser
compares the current stock price of an issuer with the subadviser's judgment as
to that stock's current and expected value based on projected future earnings.
The subadviser sells a portfolio security if it determines that the issuer's
prospects have deteriorated, or if it finds an attractive security which the
subadviser deems has superior risk and return characteristics to a security held
by the Fund.

Companies that are generally in the same industry may be grouped together in
broad categories called sectors. The subadviser diversifies the Fund's
investments, limiting the Fund's risk exposure with respect to the individual
securities and industry sectors comprising the S&P 500 Index. The S&P 500 Index,
published by Standard & Poor's Corporation, is an index consisting of
approximately 500 widely-held stocks of large U.S. companies. In attempting to
remain relatively sector-neutral, and in order to manage sector risk, the
subadviser attempts to limit the Fund's exposure to each industry sector in the
S&P 500 Index, as a general matter, to not less than 80% nor more than 120% of
the S&P 500 Index's allocation to that sector.

PRINCIPAL RISKS

Sector risk. Companies that are generally in the same industry may be grouped
together in broad categories called sectors. Sector risk is the risk that a
certain sector of the economy (e.g., the health care or entertainment industry)
may perform differently than other sectors or the market as a whole. As the
subadviser allocates more of the Fund's portfolio holdings to a particular
sector, the Fund's performance will be more susceptible to any economic,
business or other developments which generally affect that sector.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

17
<PAGE> 67
FUND SUMMARIES continued

ANNUAL TOTAL RETURNS:

Best quarter: 16.2%, 4th Qtr. of 1998
Worst quarter: -9.0%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 15.13% 14.64%
The S&P 500 Index** 28.58% 30.82%
</TABLE>

* The Fund commenced operations on October 31, 1997.
** The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held
stocks of large U.S. companies -- gives a broad look at how the stock prices
of large U.S. companies have performed. Unlike mutual fund returns, the S&P
500 Index does not include expenses. If expenses were deducted, the actual
returns of this Index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDERS MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.80%
Other Expenses 0.35%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.15%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 0.95%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$117 $365 $633 $1,398
</TABLE>

18
<PAGE> 68

Nationwide Balanced Fund

OBJECTIVE

The primary investment objective of the Fund is to obtain above average income
(compared to a portfolio entirely invested in equity securities). The Fund's
secondary objective is to take advantage of opportunities for growth of capital
and income. The Fund's investment objective can be changed by the Fund's
Trustees without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected Salomon Brothers Asset Management Inc. as a subadviser to
manage the Fund's portfolio on a day-to-day basis. The Fund invests in a broad
range of equity and fixed income securities of both U.S. and foreign issuers.
The Fund varies its allocations between equity and fixed income securities
depending on the subadviser's view of economic and market conditions, fiscal and
monetary policy and security values. However, under normal market conditions, at
least 40% of the Fund's total assets are invested in equity securities and at
least 25% of the Fund's total assets are invested in fixed income senior
securities, including mortgage- and asset-backed securities.

Credit Quality. The Fund's investments in fixed-income securities are primarily
investment grade, rated in the four highest rating categories by a nationally
recognized statistical rating organization (a "rating agency"), but the Fund may
invest up to 20% of its assets in nonconvertible fixed income securities rated
below investment grade or in unrated securities of equivalent quality.
Securities rated below investment grade are commonly referred to as "junk
bonds."

Maturity. The Fund's investments in fixed-income securities may be of any
maturity.

The subadviser considers both macroeconomic and issuer specific factors in
selecting debt securities for the Fund's portfolio. In assessing the appropriate
maturity rating and sector weighting of the Fund's portfolio, the subadviser
considers a variety of macroeconomic factors that are expected to influence
economic activity and interest rates. These factors include fundamental economic
indicators, Federal Reserve monetary policy and the value of the U.S. dollar
compared to other currencies. Once the subadviser determines the preferable
portfolio characteristics, the subadviser selects individual securities based
upon the terms of the securities (such as yields compared to U.S. Treasuries or
comparable issuers), liquidity and rating, and sector and issuer
diversification. The subadviser also employs fundamental research and due
diligence, examining the financial records of an issuer to assess an issuer's:

- - credit quality, taking into account financial condition and profitability

- - future capital needs

- - potential for change in rating and industry outlook

- - competitive environment and management ability

In selecting equity securities for the Fund, the subadviser applies a bottom-up
analysis, focusing on companies with:

- - large market capitalizations (market capitalization is simply the number of
outstanding shares multiplied by current share price)

- - favorable dividend yields and price to earnings ratios (the price to earnings
ratio is the price of a stock divided by its earnings per share, which
provides a measure of how much an investor is paying for the company's earning
power)

- - stocks that are less volatile than the market as a whole

- - strong balance sheets

- - a catalyst for appreciation and restructuring potential, product innovation or
new development

The subadviser sells a security when more favorable opportunities are
identified.

PRINCIPAL RISKS

19
<PAGE> 69
FUND SUMMARIES continued

addition, the "Euro" began serving as a new common currency for participating
European nations on January 1, 1999. It is unclear whether the newly created
accounting, clearing, settlement, and payment systems for the new currency will
be adequate.

Interest rate risk. Interest rate risk is the risk that increases in market
interest rates may decrease the value of debt securities held by the Fund. In
general, the prices of debt securities fall when interest rates increase and
rise when interest rates decrease. Typically, the longer the maturity of a debt
security, the more sensitive it is to price shifts as a result of interest rate
changes.

Credit risk. Credit risk is the risk that the issuer of a debt security will be
unable to make the required payments of interest and/or repay the principal when
due. In addition, there is a risk that the rating of a debt security may be
lowered if an issuer's financial condition changes, which may lead to a greater
price fluctuation in the Fund. These risks are particularly strong for lower
rated securities.

Lower-rated securities risk. Investment in lower-rated or high yield securities
involves substantial risk of loss. These securities are considered speculative
with respect to the issuer's ability to pay interest and principal when due and
are susceptible to default or decline in market value due to adverse economic
and business developments. The market values of high yield securities tends to
be very volatile, and these securities are less liquid than investment grade
debt securities. For these reasons, an investment in the Fund is subject to the
following specific risks:

- - increased price sensitivity to changing interest rates and to adverse economic
and business developments

- - greater risk of loss due to default or declining credit quality

- - greater likelihood that adverse economic or company specific events will make
the issuer unable to make interest and/or principal payments when due

- - negative market sentiments toward high yield securities may depress their
price and liquidity. If this occurs, it may become difficult to price or
dispose of a particular security held by the Fund.

Prepayment risk. The issuers of mortgage-backed and asset-backed securities may
be able to repay principal in advance, and are especially likely to do so when
interest rates fall. Changes in pre-payment rates can make the price and yield
of mortgage- and asset-backed securities volatile. When mortgage- and
asset-backed securities are prepaid, the Fund may have to reinvest in securities
with a lower yield. The Fund also may fail to recover premiums paid for the
securities, resulting in an unexpected capital loss. In addition, rising
interest rates may cause prepayments to occur at a slower than expected rate,
thereby effectively lengthening the maturity of the security and making the
security more sensitive to interest rate changes.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

ANNUAL TOTAL RETURNS:

Best quarter: 6.9%, 1st Qtr. of 1998
Worst quarter: -4.8%, 3rd Qtr. of 1998

20
<PAGE> 70

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 8.07% 8.26%
The S&P 500 Index** 28.58% 30.82%
The Lehman Brothers Aggregate
Bond Index** 8.69% 8.76%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held
stocks of large U.S. companies -- gives a broad look at how the stock prices
of large U.S. companies have performed. The Lehman Brothers Aggregate Bond
Index -- an unmanaged index of U.S. Treasury, agency, corporate, and mortgage
pass-through securities -- gives a broad look at the performance of these
securities. Unlike mutual funds, the S&P 500 Index and the Lehman Brothers
Aggregate Bond Index do not incur expenses. If these indices incurred
expenses, their returns would be lower. The Fund contains both equity and
fixed income securities in its portfolio. As a result, the Fund's performance
should be compared to both indices together rather than to any one index
individually.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY BUYING AND
HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.75%
Other Expenses 0.21%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 0.96%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 0.90%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$98 $306 $530 $1,172
</TABLE>

21
<PAGE> 71
FUND SUMMARIES continued

Nationwide Multi Sector Bond Fund

OBJECTIVE

The primary objective of the Fund is to seek a high level of current income. The
Fund also seeks capital appreciation. The Fund's investment objective can be
changed by the Fund's Trustees without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected Salomon Brothers Asset Management, Inc. as a subadviser to
manage the Fund's portfolio on a day-to-day basis. The Fund invests primarily in
a globally diverse portfolio of fixed income securities. The subadviser has
broad discretion to allocate the Fund's assets among the following segments of
the international market for fixed income securities:

- - U.S. government obligations

- - Investment grade U.S. corporate debt

- - Non-investment grade U.S. corporate debt

- - Mortgage- and asset-backed securities

- - Sovereign debt (foreign government debt)

- - Brady Bonds

- - Investment and non-investment grade foreign corporate obligations.

Fixed income securities may have all types of interest rate payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent deferred
payment, in kind, and auction rate features.

Credit quality. The Fund invests in fixed income securities across a range of
credit qualities and may invest a substantial portion of its assets in
obligations rated below investment grade (rated below the four highest rating
categories by a nationally recognized statistical rating organization (a "rating
agency")), or, if unrated, of equivalent quality as determined by the
subadviser. Below investment grade securities are commonly referred to as "junk
bonds".

Maturity. The Fund has no specific average portfolio maturity requirement, but
generally anticipates maintaining a range of 4.5 to 10 years. The Fund may hold
individual securities of any maturity.

The subadviser seeks to measure the relative risks and opportunities of each
market segment based upon economic, market, political, currency and technical
data and the subadviser's own assessment of economic and market conditions. The
subadviser then seeks to create an optimal risk/return allocation of the Fund's
assets among various segments of the fixed income market. After the subadviser
makes its segment allocations, the subadviser uses traditional credit analysis
to identify individual securities for the Fund's portfolio. The subadviser sells
a security to maintain its optimal risk/return allocation for the Fund.

In selecting corporate debt for investment, the subadviser considers the
issuer's:

- - Financial condition

- - Sensitivity to economic conditions and trends

- - Operating history

- - Experience and track record of management.

In selecting foreign government debt for investment, the subadviser considers
the:

- - Economic and political conditions within the issuer's country

- - Debt levels and debt service ratios outside the issuer's country

- - Issuer's access to capital markets

- - Issuer's debt service payment history.

In selecting U.S. government obligations and mortgage-backed securities for
investment, the subadviser considers the following factors:

- - Yield curve shifts

- - Credit quality

- - Changing pre-payment patterns.

PRINCIPAL RISKS

22
<PAGE> 72

lead to a greater price fluctuation in the Fund. These risks are particularly
strong for lower rated securities.

Sector risk. Companies that are generally in the same industry may be grouped
together in broad categories called sectors. Sector risk is the risk that a
certain sector may perform differently than other sectors or the market as a
whole. As the adviser allocates more of a Fund's portfolio holdings to a
particular sector, the Fund's performance will be more susceptible to any
economic, business or other developments which generally affect that sector.

- - Increased price sensitivity to changing interest rates and to adverse economic
and business developments

- - Greater risk of loss due to default or declining credit quality

- - Greater likelihood that adverse economic or company specific events will make
the issuer unable to make interest and/or principal payments when due

- - Negative market sentiment towards high yield securities may depress their
price and liquidity. If this occurs, it may become difficult to price or
dispose of a particular security held by the Fund.

Liquidity risk. Liquidity risk is the risk that a security cannot be sold, or
cannot be sold quickly, at an acceptable price.

For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

ANNUAL TOTAL RETURNS:

Best quarter: 2.6%, 4th Qtr. of 1998
Worst quarter: -2.0%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 2.60% 3.16%
Lehman Brothers Aggregate Bond
Index** 8.69% 8.76%
</TABLE>

* The Fund commenced operations on October 31, 1997.

** The Lehman Brothers Aggregate Bond Index -- an unmanaged index of U.S.
Treasury, agency, corporate, and mortgage pass-through securities -- gives a
broad look at the performance of these securities. Unlike mutual funds, the
Lehman Brothers Aggregate Bond Index does not incur expenses. If expenses
were deducted, the actual returns of this Index would be lower.

23
<PAGE> 73
FUND SUMMARIES continued

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 0.90%.

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$98 $306 $530 $1,172
</TABLE>

24
<PAGE> 74

Nationwide High Income Bond Fund

OBJECTIVE

The Fund seeks to provide high current income. The Fund's investment objective
can be changed without shareholder approval.

PRINCIPAL STRATEGIES

NAS has selected Federated Investment Counseling as a subadviser to manage the
Fund's portfolio on a day-to-day basis. The Fund provides exposure to the
high-yield, lower-rated corporate bond market. At least 65% of the Fund's total
assets are invested in corporate bonds that are rated BBB or lower or that are
unrated but of comparable quality. There is no minimum acceptable rating for a
security to be purchased or held in the Fund's portfolio.

The subadviser actively manages the Fund's portfolio, seeking to realize the
potentially higher returns of high yield bonds by minimizing default risk and
other risks through security selection and diversification. Some of the fixed
income securities may be convertible into stock of the issuer or otherwise react
more closely to movements of the stock market rather than the bond market.

The methods by which the subadviser attempts to reduce the risks involved
in lower-rated securities include:

Credit Research. The subadviser performs its own credit analysis in
addition to using rating agencies and other sources, and may have
discussions with the issuer's management or other investment analysts
regarding issuers. The subadviser performs a credit-intensive,
fundamental analysis of the financial records of the issuer which focuses
on the financial condition of high yield issuers. In selecting a
portfolio security, the subadviser also analyzes the issuer's business
and product strength, competitive position and responsiveness to changing
business and market conditions, management expertise, and financial
condition and anticipated cash flow and earnings to assess whether the
security's risk is commensurate with its potential return. In evaluating
an issuer, the subadviser places special emphasis on the estimated
current value of the issuer's assets rather than its historical cost.

Diversification. The subadviser invests in securities of many different
issuers, industries, and economic sectors to reduce portfolio risk.

Economic Analysis. The subadviser analyzes current developments and
trends in the economy and in the financial markets.

Sell decisions occur when the subadviser's fundamental outlook changes or when
its fundamental outlook differs from consensus as determined by over- (or
under-) valuation in the marketplace. In both cases, fundamental analysis drives
the sell process.

The fixed income securities that the Fund purchases include corporate debt
securities, zero coupon securities, convertible securities and preferred stocks.
The Fund may invest in fixed income securities of issuers based outside the U.S.
The securities of foreign issuers in which the Fund invests are primarily traded
in the U.S. and are denominated in U.S. dollars.

PRINCIPAL RISKS

Lower-rated securities risk. Investment in lower-rated or high yield securities
involves substantial risk of loss. These

25
<PAGE> 75
FUND SUMMARIES continued

securities are considered speculative with respect to the issuer's ability to
pay interest and principal when due and are susceptible to default or decline in
market value due to adverse economic and business developments. The market
values of high yield securities tends to be very volatile, and these securities
are less liquid than investment grade debt securities. For these reasons an
investment in the Fund is subject to the following specific risks:

- - Increased price sensitivity to changing interest rates and to adverse economic
and business developments

- - Greater risk of loss due to default or declining credit quality

- - Greater likelihood that adverse economic or company
specific events will make the issuer unable to make interest and/or principal
payments when due

- - Negative market sentiments toward high yield securities may depress their
price and liquidity. If this occurs, it may become difficult to price or
dispose of a particular security in the Fund.

Call risk. Call risk is the possibility that an issuer may redeem a debt
security before maturity ("call"). An increase in the likelihood of a call may
reduce the security's price. If a debt security is called, the Fund may have to
reinvest the proceeds in other debt securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

Liquidity risk. Liquidity risk is the risk that a security cannot be sold, or
cannot be sold quickly, at an acceptable price.
For more detailed information about the Fund's investments and risks, see "More
About the Funds."

PERFORMANCE

ANNUAL TOTAL RETURNS:

Best quarter: 4.7%, 4th Qtr. of 1998
Worst quarter: -3.3%, 3rd Qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98:

<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION*
------ ----------------
<S> <C> <C>
The Fund 5.80% 7.04%
Lehman Brothers High Yield
Index** 1.60% 2.97%
</TABLE>

* The Fund commenced operation on October 31, 1997.

** The Lehman Brothers High Yield Index -- an unmanaged index of bonds that are
rated below investment grade -- gives a broad look at the performance of
these securities. Unlike mutual funds, the Lehman Brothers High Yield Index
does not incur expenses. If this index incurred expenses, the actual returns
of this index would be lower.

FEES AND EXPENSES

THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT A SHAREHOLDER MAY PAY WHEN
BUYING AND HOLDING SHARES OF THE FUND.

<TABLE>
<S> <C>
Shareholder Fees(1) (paid directly from
your investment) None
Annual Fund Operating Expenses (deducted
from Fund assets)
Management Fees 0.80%
Other Expenses 0.32%
----
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.12%
====
</TABLE>

(2) Until further notice, NAS has agreed to waive management fees and, if
necessary, to reimburse "Other Expenses" so that Total Annual Operating
Expenses will not exceed 0.95%.

26
<PAGE> 76

EXAMPLE

This example shows what a shareholder could pay in expenses over time. A
shareholder can also use this example to compare the cost of this Fund with
other mutual funds.

The example assumes that a shareholder invests $10,000 in the Fund for the time
periods indicated and sells all shares at the end of those time periods. It also
assumes a 5% return each year, the Fund's operating expenses will not change,
and there are no fee waivers or expense reimbursements in effect. Although a
shareholder's actual costs may be higher or lower, based on these assumptions
the cost would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$114 $356 $617 $1,363
</TABLE>

27
<PAGE> 77
MORE ABOUT THE FUNDS

PRINCIPAL RISKS AND TECHNIQUES

The Funds may use the following principal investment techniques to increase
returns, protect assets or diversify investments. These techniques are subject
to certain risks. For additional information about the Funds' investment
strategies and techniques, see the Statement of Additional Information.

Principal Risks

SMALL CAP RISK. Historically, the securities of small cap companies have been
more volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of small companies, the lower degree of liquidity in the
markets for such securities, the greater impact caused by changes in investor
perception of value, and the greater sensitivity of small cap companies to
changing economic conditions. In addition, small cap companies may:

- - lack depth of management

- - be unable to generate funds necessary for growth or development

- - be developing or marketing new products or services for which markets are not
yet established and may never become established

- - market products or services which may become quickly obsolete.

FOREIGN RISK

- - COUNTRY. General securities market movements in any country in which a Fund
has investments, are likely to affect the value of a Fund's securities that
trade in that country. These movements will affect a Fund's share price and a
Fund's performance. The political, economic and social structures of some
countries in which a Fund invests may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of the imposition of exchange controls, currency devaluations,
foreign ownership limitations, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes and
certain custody and settlement risks.

- - COMPANY. Foreign companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Foreign stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. A Fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to U.S. companies in U.S. courts.

- - CURRENCY. Some of a Fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what a Fund owns and a Fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars. Devaluation of
currency by a country's government or banking authority also has a significant
impact on the value of any securities denominated in that currency.

PREPAYMENT RISK AND EXTENSION RISK. Prepayments of principal on mortgage- and
asset-backed securities affect the average life of a pool of such securities.
Prepayments are affected by the level of interest rates and other factors. In
periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-and asset-backed securities.
In periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage- and asset-backed securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds from
prepayments at lower rates. Extension risk is the risk that anticipated payments
on principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of rapidly
rising interest rates, the anticipated maturity of a security may be extended
past what the portfolio manager anticipated, affecting the maturity and
volatility of a Fund.

Principal Investment Techniques

GROWTH AND VALUE STOCKS. Due to their relatively low valuations, value stocks
are typically less volatile than growth stocks. In comparison, a growth stock's
price may be more directly linked to market developments than a value stock's
price. However, value stocks tend to have higher dividend yields than growth
stocks. This means they depend less on price changes for returns. Accordingly,
they might not participate in upward market movements, but may be less

28
<PAGE> 78

adversely affected in a down market compared to lower yielding stocks.

PREFERRED STOCK. Shareholders of preferred stocks normally have the right to
receive dividends at a fixed rate but do not participate in other amounts
available for distribution by the issuer. Dividends on preferred stock may be
cumulative, and cumulative dividends must be paid before common shareholders
receive any dividends. Because preferred stock dividends usually must be paid
before common stock dividends, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks do not
represent a liability of the issuer and, therefore, do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible securities may be subordinated to other preferred stock of the same
issuer.

CONVERTIBLE SECURITIES. Convertible securities--also known as
convertibles--include bonds, debentures, notes, preferred stocks, and other
securities. Convertibles are a hybrid security that have characteristics of both
bonds and stocks. Like bonds, they pay interest. Because they can be converted
into common stock within a set period of time, at a specified price or formula,
convertibles also offer the chance for capital appreciation, like common stocks.

Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as an underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however, may sustain their value better than the
common stock because they pay income, which tends to be higher than common stock
dividend yields.

Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," better-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.

Convertibles tend to be more secure than common stock (companies must generally
pay holders of convertibles before they pay holders of common stock ), but they
are typically less secure than similar non-convertible securities such as bonds
(bondholders must generally be paid before holders of convertibles and common
stock ). Because convertibles are usually subordinate to bonds in terms of
payment priority, convertibles typically are rated below investment grade by a
nationally recognized rating agency, or they are not rated at all.

WARRANTS. A warrant is a security that gives the holder of the warrant the right
to buy common stock at a specified price for a specified period of time.
Warrants are considered speculative and have no value if they are not exercised
before their expiration date.

ZERO COUPON SECURITIES. Zero coupon securities pay no interest during the life
of the security, and are issued by a wide variety of corporate and governmental
issuers. Certain zero coupon securities are sold at a deep discount.

Zero coupon securities may be subject to greater price changes as a result of
changing interest rates than bonds that make regular interest payments. Their
value tends to grow more during periods of falling interest rates and,
conversely, tends to fall more during periods of rising interest rates than
bonds that make regular interest payments. Although they are not traded on a
national securities exchange, they are widely traded by brokers and dealers, and
are considered liquid. Investors in zero coupon securities are required by
federal income tax laws to pay interest on the payments they would have received
had a payment been made. So, to avoid federal income tax liability, a Fund may
be required to make distributions to shareholders and may have to sell some of
its assets at inappropriate times in order to generate cash to make
distributions.

These securities are subject to interest rate risk like other securities. In
addition, because they may be callable, these securities are also subject to the
risk that they will be repaid prior to their stated maturity and that the repaid
principal will be reinvested in a lower interest rate market, reducing a Fund's
income. A Fund will only purchase floating-and variable-rate securities of the
same quality as the securities it would otherwise purchase.

U.S. GOVERNMENT SECURITIES. These securities include Treasury bills, notes, and
bonds, securities issued or guaranteed by the U.S. Government and securities
issued by U.S. Government agencies, including:

29
<PAGE> 79
MORE ABOUT THE FUNDS continued

- - The Federal Home Loan Banks

- - The Federal National Mortgage Association ("FNMA")

- - The Student Loan Marketing Association and Federal Home Loan Mortgage
Corporation ("FHLMC")

- - The Federal Farm Credit Banks.

Although there is virtually no credit risk with these U.S. Government
Securities, neither the U.S. Government nor its agencies guarantee the market
value of their securities. Interest rate changes, prepayment and other factors
may affect the value of these securities.

MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. U.S. Government mortgage-backed
securities are securities that are secured by and paid from a pool of mortgage
loans on real property and issued or guaranteed by the U.S. Government or one of
its agencies. Mortgage-backed securities may also be issued by private issuers.

These securities are subject to interest rate risk and credit risk if they are
issued by private issuers. CMOs and other mortgage-backed securities are also
subject to prepayment risk. With respect to prepayment risk, when interest rates
fall, homeowners may refinance their loans and the mortgage-backed security will
be paid off sooner than the portfolio manager anticipated. Reinvesting the
returned principal in a lower interest rate market reduces the Fund's income.
Mortgage-backed securities are also subject to extension risk and the
possibility of losing principal as a result of prepayments.

Asset-backed securities are securities that are secured by and paid from a pool
of underlying assets, such as automobile installment sales contracts, home
equity loans, property leases and credit card receivables. Asset-backed
securities are generally issued by private issuers.

DERIVATIVES. A derivative is a contract whose value is based on the performance
of an underlying financial asset, index or other investment. For example, an
option is a derivative because its value changes in relation to the performance
of an underlying stock. The value of an option on a futures contract varies with
the value of the underlying futures contract, which in turn varies with the
value of the underlying commodity or security. Derivatives are available based
on the performance of assets, interest rates, currency exchange rates, and
various domestic foreign indexes. Derivatives afford leverage and can also be
used in hedging portfolios.

SOVEREIGN DEBT. Sovereign debt includes:

- - Fixed income securities issued or guaranteed by foreign governments and
governmental agencies

- - Fixed income securities issued by government owned, controlled or sponsored
foreign entities

- - Debt securities issued by entities created to restructure the fixed income
securities issued by any of the above issuers

- - Brady Bonds, which are debt securities issued under the framework of the Brady
Plan as a means for debtor nations to restructure their outstanding external
indebtedness

- - Participations in loans between foreign governments and financial institutions

- - Fixed income securities issued by supranational entities such as the World
Bank or the European Economic Community. A supranational entity is a bank,
commission or company established or financially supported by the national
governments of one or more countries to promote reconstruction or development.

OTHER INVESTMENT TECHNIQUES

The Statement of Additional Information contains additional information about
the Funds, including the Funds' other investment techniques. To obtain a copy,
see the back cover page.

TEMPORARY DEFENSIVE POSITIONS

30
<PAGE> 80
MANAGEMENT

MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

The following is management's discussion of the performance of the Funds (except
the Select Advisers Small Cap Growth Fund) for the year ended December 31, 1998.
This discussion provides an overview of the economy and how it affected the
Funds during the year. It also provides a look into the current and future
investment techniques and strategies of the Funds from the perspective of the
portfolio managers.

Nationwide Strategic Growth and Strategic Value Funds. The year began with a
broad rally in the U.S. equity markets as large, small, and mid cap stocks all
posted strong first quarter gains. The rally stalled in mid-April amid concerns
about corporate earnings weakness stemming from the Asian financial crisis.
April also marked the beginning of the market divergence between high-growth
large cap stocks and the rest of the market, which punished small cap and value
stocks for much of 1998. Large cap stocks shook off the fears and continued to
climb resulting in another record high for the S&P 500 in mid-July.

Another wave of selling ensued in late summer, again on fears that the Asian
crisis would de-stabilize prices and lead to slower economic growth in the U.S.
This sparked a massive flight to U.S. Treasury securities, a tightening of
credit conditions, and a near shut-down of the U.S. corporate bond markets. By
early autumn, small cap and value stocks were firmly entrenched in a bear
market, and even the large-caps flirted with 20% declines from their July peaks.

Sentiment quickly reversed when a recovery in the foreign markets and three
interest rate cuts by the Federal Reserve, including a surprise reduction
between their normally scheduled meetings, sparked a rapid recovery in U.S.
stocks. Large cap and technology-related issues led the resurgence as investors
scrambled to put their heavy cash positions back to work. Internet stocks and
initial public offerings were traded up to such high levels that traditional
valuation measures became pointless. Not even presidential impeachment could
restrain the broad market rally, which finally brought small and mid cap stocks
out of hibernation. Growth stocks continued to outperform value stocks in all
market cap segments as investors paid up for companies with visible earnings.

Strategic Growth Fund. Despite a strong showing in the fourth quarter, the Fund
underperformed its benchmark, the S&P/Barra Mid Cap 400 Growth Index, in 1998.
The market turned its favor toward large cap stocks early in the year and
remained focused on a handful of liquid, megacap names until the very last week
of the fourth quarter. The Fund's slant toward small- and medium-sized companies
hurt relative performance in one of the narrowest markets since the early
seventies. As of December 31, 1998, the median market cap of the Fund was $3.6
billion, compared with the S&P 500, which was $60.3 billion.

During the year, the Fund pared its holdings in slower growing sectors such as
consumer staples, energy, and financials, and shifted to higher growth sectors,
such as technology. The Fund emphasized technology during the period due to the
sector's high earnings visibility for the coming quarters. Healthcare holdings
were also increased marginally. In summary, areas of emphasis included
technology, healthcare, and retail. The Fund had little or no exposure to basic
materials, energy, cyclicals, or utilities.

Looking ahead to 1999, we foresee an economy characterized by stable, moderate
growth and very low inflation. Prospects for stable or rising earnings growth
should help technology, healthcare, and consumer sectors to lead the market.
Volatility will continue to be an issue in 1999 as valuations are back to peak
levels and any uncertainty can bring sudden and sharp corrections. Provided the
economy avoids a recession, corporate earnings remain positive, and the federal
reserve maintains its bias towards easing interest rates, high quality growth
stocks should outperform. We also expect to see broader stock leadership, which
includes the best growing mid and small cap stocks.

31
<PAGE> 81
MANAGEMENT continued
COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE STRATEGIC GROWTH FUND AND
THE S&P/BARRA MID CAP 400 GROWTH INDEX*

<TABLE>
<CAPTION>
STRATEGIC GROWTH FUND S&P/BARRA MID CAP 400 GROWTH INDEX
--------------------- ----------------------------------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 10,220 10,197
3/31/98 11,211 11,442
6/30/98 11,281 11,417
9/30/98 9,699 9,684
12/31/98 11,711 13,751
</TABLE>

* The S&P/Barra Mid Cap 400 Growth Index -- an unmanaged index of companies in
the S&P 400 Mid Cap Index whose stocks have higher price-to-book
ratios -- gives a broad look at how the prices of growth style stocks of
medium-size U.S. companies have performed. Unlike mutual funds, the S&P/Barra
Mid Cap 400 Growth Index does not incur expenses. If expenses were deducted,
the actual returns of this Index would be lower.

STRATEGIC GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Strategic Growth Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

Strategic Value Fund. Despite a strong fourth quarter finish, the Fund
underperformed its benchmark, the S&P 500 Index, for the year. Investments in
commodities-based industries, such as steel and mining, underperformed
throughout the year as commodities prices fell precipitously. The Fund was
significantly underweighted in expensive technology stocks, which further hurt
relative performance. Energy stocks continued to slump on falling oil prices due
to excess global supply. It was not until the fourth quarter that the market
began to broaden to include more small and mid cap companies, which have
struggled since April.

During the period, the Fund's subadviser was very conscientious about owning
stocks that fit its investment criteria. The Fund now has a portfolio that
trades at 12 times estimated 1999 earnings estimates, compared with the S&P 500,
which trades at a multiple over 24 times forward earnings. The Fund reduced its
commitment in basic materials, utilities, technology, and capital equipment, and
increased transportation, and financials.

The Fund's subadviser expects that the focus of investors on a limited number of
the very largest stocks will eventually run its course and that, ultimately, the
general market will trade at valuations which are reasonable when compared to
the actual and expected underlying earnings growth rates. The strong performance
of small and mid cap stocks in the fourth quarter indicates that the first step
in the broadening of the market may have begun, and the Fund and its subadviser
are hopeful that it will continue.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE STRATEGIC VALUE FUND AND
THE S&P 500 INDEX*

<TABLE>
<CAPTION>
STRATEGIC VALUE FUND S&P 500
-------------------- -------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 10,163 10,642
3/31/98 11,068 12,127
6/30/98 10,474 12,527
9/30/98 8,071 11,281
12/31/98 10,202 13,683
</TABLE>

* The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held
stocks of large U.S. companies -- gives a broad look at how the stock prices
of large U.S. companies have performed. Unlike mutual fund returns, the S&P
500 Index does not incur expenses. If expenses were deducted, the actual
returns of this Index would be lower.

STRATEGIC VALUE FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Strategic Value Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

Nationwide Select Advisers Mid Cap Fund. The Fund returned 10.81% for 1998, as
compared to 19.09% for the Fund's benchmark, the S&P Mid-Cap 400. The Fund's
exposure to smaller to mid-cap companies proved to be difficult. Small cap
stocks have been under pressure and have been trading dramatically cheaper than
large-cap stocks for an extended period. The Fund's benchmark is market-cap
weighted, which means that it is more influenced by the larger cap stocks
included in the index. If it were equally weighted, the results for this index
in 1998 would have been 5.0%, or about one-fourth of the reported return. Better
returns have been generated from a select group of the largest cap stocks in the
index.

Relative fundamentals associated with the Fund have improved. As 1998 came to an
end, many of the year's problems lost their intensity. Investors became less
concerned with the "Asian contagion" and the threat of global economic problems.
The Federal Reserve Board's three rate cuts, strong employment data, and an
ever-spending U.S. consumer have allayed fears of domestic recession. The year

32
<PAGE> 82

ended on a positive note, with the Conference Board reporting that the Index of
Leading Economic Indicators rose 0.6% in November. This is the largest one-month
rise in almost two years.

The Fund's strategy is to continue focusing on small to mid-cap companies with
improving earnings expectations. The current economic environment is
characterized by a more difficult and slowing trend for earnings. This should
especially be true for the larger-cap companies included in the Fund. The Fund's
focus on smaller to mid-cap, niche-oriented companies should become more
attractive to investors looking for performance.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SELECT ADVISERS MID CAP FUND
AND THE S&P 400 MID CAP INDEX*

<TABLE>
<CAPTION>
SELECT ADVISORS MID CAP FUND S&P 400 MID CAP INDEX
---------------------------- ---------------------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 9,964 10,541
3/31/98 10,850 11,701
6/30/98 10,824 11,450
9/30/98 9,299 9,795
12/31/98 11,041 12,553
</TABLE>

* The S&P 400 Mid Cap Index -- an unmanaged index of 400 stocks of medium-size
U.S. companies -- gives a broad look at how the stock prices of medium-size
U.S. companies have performed. Unlike mutual funds, the S&P 400 Mid Cap Index
does not incur expenses. If expenses were deducted, the actual returns of this
index would be lower.

SELECT ADVISERS MID CAP FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Select Advisers Mid Cap Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

Nationwide Small Cap Value Fund. For the year the Fund was down 3.1% while the
Russell 2000 Index was down 6.5%.

The continued divergence in performance between large-cap and small-cap stocks
and between growth and value stocks was particularly extreme in 1998. The S&P
Barra Growth Index, which includes the largest growth stocks, was up 42.2% for
the year while the Russell 2000 Value Index, a measure of the performance of
smaller value stocks, was down 6.5%. The Fund's subadviser believes this
dramatic spread in valuation levels, the largest in over 25 years, has created a
compelling opportunity for long-term investors in smaller capitalization stocks.

Technology, which is the Fund's largest sector weighting, was also the best
performing sector in 1998. The Fund was overweighted in technology issues
beginning last year after the stocks declined in the wake of economic problems
in Southeast Asia. Industry demand slowed, earnings were under pressure and the
group underperformed until the fourth quarter. Stock prices were up dramatically
last quarter as business started to improve, excess inventories were reduced and
pricing firmed. The major commitments are in personal computer component
manufacturers, semi-conductor capital equipment producers and software
companies. The Learning Company, Quantum, Maxtor and Symantec were all strong
contributors to 1998 performance. Although the portfolio is subject to change,
the Fund continues to be overweighted in technology shares, as valuations remain
attractive.

The Fund has a strong commitment to the health care sector as business momentum
is very positive and product innovation and cost containment continues to drive
performance. The focus is on services, the cheapest part of the health care
sector, and select medical products companies whose potential is not yet
reflected in their stock prices. Major contributors to 1998's performance in the
health care sector were Beckman Coulter, ConMed and Wellpoint. Many medical
product companies, rich in technology and with good earnings growth prospects,
continue to be undervalued.

The energy sector was the Fund's biggest disappointment last year. The Fund was
overweighted because many of the domestic exploration and production companies
were selling at all-time low valuations. This sector has performed poorly
because oil prices have been under pressure due to weak global demand. We have
recently reduced the exposure, but remain overweighted due to extremely
attractive valuations.

The Fund's underweighting in the financial services and utilities sectors
continues. Financial services companies are currently selling at high valuation
levels given their slowing growth prospects. Although utilities outperformed in
1998, as investors sought a safe haven from the volatile and uncertain global
markets, they were unattractive to the Fund before their recent gains and are
even less attractive today.

33
<PAGE> 83
MANAGEMENT continued
COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SMALL CAP VALUE FUND AND
THE RUSSELL 2000 VALUE INDEX*

<TABLE>
<CAPTION>
SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
-------------------- ------------------------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 9,839 10,452
3/31/98 10,924 11,325
6/30/98 10,241 10,916
9/30/98 7,547 8,965
12/31/98 9,537 9,778
</TABLE>

* The Russell 2000(R) Value Index measures the performance of approximately 2000
of the largest U.S. companies with lower price-to-book ratios and lower
forecasted growth values relative to other large U.S. companies. Unlike mutual
fund returns, the Russel 200 value Index does not include expenses. If
expenses were deducted, the actual returns of this index would be lower.

SMALL CAP VALUE FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Small Cap Value Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

Nationwide Select Advisers Small Cap Growth Fund. No discussion of performance
is provided because the Fund will not begin operations until about May 1, 1999

Nationwide Global Equity Fund. The total return for the Fund was 19.14% for the
period while the return of the MSCI World Index was 24.34%. The Fund
outperformed its peer group for the year -- the Lipper Variable Annuity Global
Funds Average, which was 16.19%.

Global equity markets achieved a very credible return over the course of 1998,
despite a very difficult period during the summer months. European equity
markets, in particular, started the year in a strong fashion, reflecting the
continued optimism over the prospects for corporate profits. U.S. stock markets
staged an impressive rise during the fourth quarter, driving results for the
entire year to an unprecedented four year high. However, the global market
turmoil in the summer months negatively impacted the U.S. and Continental
European markets as investor sentiment waned. The global market turmoil in the
third quarter turned to global market euphoria in the fourth quarter as markets
everywhere rallied strongly. Stocks were helped by moves to ease monetary policy
in the U.S. and Europe, with the Federal Reserve Board cutting the overnight
rate twice during the quarter, and towards year-end, the European Central Bank
orchestrating a coordinated rate cut. While many continue to worry about a
slowing global economy, the quick responses from central banks and the
overreaction to negative news during the summer provided room for pleasing
equity returns.

In contrast to the U.S. and Europe, the Japanese market fell over the year,
although the strength of the Yen in the final quarter resulted in a positive
return in U.S. dollars. The outlook for the Japanese economy remains gloomy with
economic growth likely to slip further into recession this year. The extreme
weakness in consumer confidence remains a major problem, as does the recent
strength of the Yen.

Throughout the year, within the U.S. and Europe, the markets have been very
focused, rewarding "growth" companies and emphasizing the very largest, but not
necessarily fundamentally better, value companies. Against this backdrop, the
Fund's underweight position in the U.S. and stock picking in Continental Europe
detracted from performance. However, the Fund's underweight position in Japan
enhanced performance throughout the period. On the currency side, the Fund's
overweighted U.S. dollar position, versus an underweighted yen position,
contributed positively to performance.

After a strong fourth quarter, most equity markets again appear overvalued. This
is particularly true in the U.S. where corporate earnings are anticipated to
come under pressure as a result of weaker foreign demand, excess capacity and
slower domestic capital spending. European stocks are less overvalued, despite
an outlook for corporate profits that may not be as exciting as investors were
prepared to believe earlier in the year. The trend towards corporate
restructuring continues intact in Europe, providing support for the equity
markets. The injection of public money into the Japanese banking system is
hardly a positive force for long-term restructuring but at least the danger of
widespread banking collapse has been averted, and near term the Fund's
subadviser has become less pessimistic about the outlook for the equity market.

34
<PAGE> 84

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE GLOBAL EQUITY FUND AND
THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX*

<TABLE>
<CAPTION>
GLOBAL EQUITY FUND MSCI INDEX
------------------ ----------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 10,118 10,274
3/31/98 11,204 11,709
6/30/98 11,557 11,911
9/30/98 10,118 10,448
12/31/98 12,054 12,615
</TABLE>

* The Morgan Stanley Capital International (MSCI) World Index -- an unmanaged
index of companies whose securities are listed on the stock exchanges of the
U.S., Europe, Canada, Australia, and the Far East -- gives a broad look at how
the stock prices of these companies have performed. Unlike mutual funds, the
MSCI World Index does not incur expenses. If expenses were deducted, the
actual returns of this Index would be lower.

GLOBAL EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Global Equity Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

Nationwide Equity Income Fund. The S&P 500 Index has just completed its fourth
consecutive year of 20%+ gains. After falling nearly 20% from its July 17 market
peak, the S&P began a dramatic recovery in early October to finish the year with
a total return of 28.58%. While this is an extremely impressive showing, it was
accompanied by volatility which had been absent for a number of years.
Additionally, the advance was concentrated in a handful of companies.
Specifically, 20 stocks accounted for 59% of the market's rise, while 100 stocks
accounted for 85% of its gain. Unfortunately, the median gain for a stock in the
S&P 500 Index was only 2% with over 70% of the stocks lagging the index return.
On an equal-weighted basis, the S&P 500 Index returned 12.93%. For the fourth
quarter of 1998 the Fund returned 16.03%, surpassing the 13.35% return for the
average equity income fund, as reported by Lipper Analytical Services. On a
year-to-date basis, the Fund's total return of 15.13% is ahead of the 10.89%
return of the average equity income fund.

The economic outlook for 1999 appears weak, particularly on a global basis. Only
limited signs point to a bottoming of Asian economies, while Latin American
economies continue to decelerate. The U.S. economic picture is mixed. Industrial
production is weakening even as consumer spending and confidence remain strong,
aided by declines in energy prices and interest rates. In fact, inflation is
close to zero and deflation has become a real fear. Hardly an industry has had
any pricing power in this environment. The U.S. Federal Reserve along with
central banks around the world have attempted to prevent recessions by reducing
interest rates numerous times since the beginning of October. These efforts have
served to increase liquidity and have fueled the dramatic recovery in the stock
markets, including the U.S. market. However, as 1999 progresses, the earnings
growth of both U.S. and foreign companies will likely continue to decelerate.
Additionally, investors will become increasingly aware of potential problems
relating to Y2K compliance. This promises to bring more volatility to the
market.

In the current environment, the Fund believes companies will be challenged to
provide consistent earnings and revenue growth. Companies successful in this
regard should see their stock prices rewarded. The Fund's focus on identifying
high quality, market-leading companies with such attributes has been a core
strategy and has helped the Fund's performance. Furthermore, the Fund holds
higher yielding convertible securities and common stocks which have exhibited
defensive qualities in market downturns. Currently, 30% of the Fund's holdings
are in common stocks which have raised their dividend.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE EQUITY INCOME FUND AND
THE S&P 500 INDEX*

<TABLE>
<CAPTION>
EQUITY INCOME FUND S&P 500
------------------ -------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 10,177 10,642
3/31/98 10,913 12,127
6/30/98 11,082 12,527
9/30/98 10,086 11,281
12/31/98 11,717 13,683
</TABLE>

* The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held
stocks of large U.S. companies -- gives a broad look at how the stock prices
of large U.S. companies have performed. Unlike mutual fund returns, the S&P
500 Index does not include expenses. If expenses were deducted, the actual
returns of this Index would be lower.

EQUITY INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Equity Income Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

35
<PAGE> 85
MANAGEMENT continued
Nationwide Balanced Fund. For the year 1998, the Nationwide Balanced Fund posted
a 8.07% return versus a blended return of 18.63% for the Salomon Brothers Broad
Investment Grade Bond Index (50%) and the S&P 500 Index (50%). Underperformance
was attributed to the Fund's continued conservative equity allocation and value
style. In an environment characterized by extremely momentum driven markets, the
Fund performed less than the market due to its value style.

The equity market finished its fourth consecutive year of returns in excess of
20% with the S&P 500 returning 28.58%. Investors experienced significant
volatility during the year as the S&P 500 increased more than 20% through early
July, only to fall back into negative territory in the beginning of October.
Worldwide political and economic turmoil resulted in a loss of confidence by
U.S. equity investors late in the summer. By early Fall, however, the Federal
Reserve Board came to the market's rescue by cutting the federal funds rate and
discount rate. Three consecutive reductions increased investor confidence and
provided liquidity to fuel the market's strong fourth quarter performance.

As the stock and credit markets rallied after the first Federal Reserve rate
cut, the need for the safety of U.S. Treasury securities was reduced. Ten year
and longer U.S. Treasury securities rose about 20 basis points in yield and
helped drag the Salomon Broad Investment Grade Bond Index to a -0.45% return for
the month of October. Spread sectors of the market such as mortgage backed
securities, corporate bonds and asset backed securities all did better as the
overall reduction in the global risk premium led to an improving disposition in
those markets. Two additional reductions increased investor confidence and
provided liquidity to fuel the market's strong fourth quarter performance.
Large-cap growth stocks were the only stocks that really drove performance for
the year 1998. We anticipate security markets will be more subdued in 1999.

In the equity portion of the portfolio the Fund maintained its strategy to
significantly overweight those companies in which the Fund's subadvisers had the
greatest conviction, i.e. position and concentration. In light of the lack of
liquidity in the market, the Fund took advantage of rallies to weed out its
weaker holdings and raise cash to mid single digit levels. The Fund kept its
overweight stance in the consumer and financial sectors with such new additions
as Pepsico, Avon Products, BankAmerica, and Pharmacia & Upjohn. The Fund was
positioned conservatively for the year, to give investors the upside potential
through the Fund's exposure to equities while limiting downside risk.

The Fund's subadviser expects value stocks to receive better valuation in the
current year, as well as better performance. We believe the portfolio is in a
good position to withstand further market declines if any are experienced and to
participate in market appreciation. Although the portfolio is subject to change,
presently, as of December 31, 1998 42% of the portfolio is allocated to Common
Stocks, 7% to Convertible Securities, 26% to Investment Grade, 14% to High Yield
and 11% to Cash.

After seven years of uninterrupted growth, the U.S. economy faces a period of
slowing expansion and threatened instability. Although key areas of economic
activity remain buoyant, gradual slowing remains a likely scenario for 1999. The
Federal Reserve Board will probably condition further easing on renewed
intensification of financial stress on evidence that demand pressures are
receding.

The Fund expects interest rates to generally move lower in the first few months
of the year, followed by a gradual rise through the end of 1999. With the
expectation of further Federal Reserve Board easing, the Fund looks for the
yield curve to steepen. As such, long-term bonds may stabilize in a range
centered on 5% as long-term inflation expectations fall.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE BALANCED FUND, THE S&P
500 INDEX AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX*

<TABLE>
<CAPTION>
LB AGGR. BOND S&P 500 BALANCED FUND
------------- ------- -------------
<S> <C> <C> <C>
10/31/97 $10,000 $10,000 $10,000
12/31/97 10,147 10,642 10,146
3/31/98 10,306 12,127 10,844
6/30/98 10,547 12,527 10,839
9/30/98 10,993 11,281 10,323
12/31/98 11,030 13,683 10,965
</TABLE>

* The Standard & Poor's 500 Index -- an unmanaged index of 500 widely-held
stocks of large U.S. companies -- gives a broad look at how the stock prices
of large U.S. companies have performed. The Lehman Brothers Aggregate Bond
Index -- an unmanaged index of U.S. Treasury, agency, corporate, and mortgage
pass-through securities -- gives a broad look at the performance of these
securities. Unlike mutual funds, the S&P 500 Index and the Lehman Brothers
Aggregate Bond Index do not incur expenses. If these indices incurred
expenses, their returns would be lower. The Fund contains both equity and
fixed income securities in its portfolio. As a result, the Fund's performance
should be compared to both indices together rather than to any one index
individually.

BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Balanced Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

36
<PAGE> 86

Nationwide Multi Sector Bond Fund. For the year 1998, the Fund returned 2.60%
versus 4.82% for the Lipper General Bond category and 8.69% for the Lehman
Brothers Aggregate Bond Index. The Fund's underperformance was largely due to
its exposure to high yield and emerging markets debt during the unexpected
credit crisis in the summer of 1998.

For bonds, 1998 was a mixture of good and bad news. The good news was that
interest rates fell approximately 1% across the Treasury yield curve. Though low
inflation did contribute to lower bond yields, exogenous factors such as equity
market fears, default fears and expectations of spreading global economic
weakness caused investors to seek the safety and liquidity of the Treasury
sector. The bad news came for any bond that wasn't a Treasury, as yield spreads
across all sectors of the domestic bond universe widened toward unexplainable
and unsustainable levels. High yield bonds and emerging market debt suffered
through their worst performances in years.

Early in 1998, domestic demand readings in the U.S. remained exceptionally
strong, benefiting from low interest rates, generation-low unemployment rates
and sky-high consumer confidence. Lower quality high yield bonds outperformed,
allowing the Fund to reap profits and upgrade into higher quality bonds. The
Fund maintained a neutral duration relative to the Lehman Brothers Aggregate
Bond Index and added to its over weighting in mortgage backed securities.
Discount coupon mortgages and seasoned pass through mortgages continued to be
selected as they offered a more attractive convexity profile than higher coupon
securities. The Fund ended the first quarter with 34% U.S. investment grade
bonds, 24% high yield bonds, 15% emerging markets debt, 3% non-U.S. government
bonds and 24% cash.

The Fund maintained its weightings in the high yield sector throughout the
second quarter, as credit fundamentals remained favorable. The Fund continued to
seek opportunities to upgrade credit quality and moved to a more defensive
position within the sector. In the emerging markets sector of the portfolio, the
Fund lowered its exposure to Russia and added Bulgaria and Peru. Mexico and
Argentina continued to be core holdings as their fundamentals remained strong.

During the third quarter, heightened global market volatility caused the Fund to
commit to a more defensive stance in its high yield sector and lower its
allocations to the emerging markets debt sector. The Fund continued to decrease
its exposure to Russia and increase its position in Argentina and Mexico as
fundamentals appeared more favorable. The Fund continued to favor discount and
coupon mortgage backed securities in the investment grade portion of the
portfolio. The Fund ended the third quarter with 52% U.S. investment grade
bonds, 24% high yield bonds, 14% emerging market debt, 5% non-U.S. dollar
denominated bonds and 5% cash.

During the fourth quarter, high yield and emerging debt markets snapped back
strongly when it became apparent to investors that the financial market crisis
was stabilizing. Bold steps taken by the Federal Reserve at lowering short-term
interest rates and restoring liquidity in the markets began to put investors at
ease. The Fund maintained its stance in the high yield sector of the portfolio
as credit spreads had room to improve. The Fund increased its allocation to the
emerging markets debt sector during the quarter as hedge fund liquidations
dissipated and credit fundamentals stabilized.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE MULTI SECTOR BOND FUND AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX*

<TABLE>
<CAPTION>
MULTI SECTOR BOND FUND LBAB INDEX
---------------------- ----------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 10,104 10,136
3/31/98 10,308 10,418
6/30/98 10,308 10,415
9/30/98 10,101 10,008
12/31/98 10,367 10,257
</TABLE>

* The Lehman Brothers Aggregate Bond Index -- an unmanaged index of U.S.
Treasury, agency, corporate, and mortgage pass-through securities -- gives a
broad look at the performance of these securities. Unlike mutual funds, the
Lehman Brothers Aggregate Bond Index does not incur expenses. If expenses were
deducted, the actual returns of this Index would be lower.

MULTI SECTOR BOND FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** Multi Sector Bond Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

37
<PAGE> 87

Nationwide High Income Bond Fund. The 12 months ended December 31, 1998 was
marked by volatility and generally disappointing returns from a high yield bond
perspective. There were several reasons for the volatility and disappointing
returns. First, problems in the international arena and, more importantly, its
impact on the domestic economy was an area of concern for high yield investors.
At the start of the year, Asia was the main concern but this spread to Russia
and Latin America as the year progressed. Also, the stock market swoon in
mid-summer and hedge fund problems in the latter part of the year highlighted
the somewhat fragile state of the world financial system. Also, falling
commodity prices, while good for consumers, are a negative for high yield
companies in the energy, forest products, metals and mining sectors. Finally,
the economic consensus in the latter part of 1998 pointed to a slowing of the
domestic economy in 1999. These factors caused the yield spread between high
yield bonds and U.S. Treasury securities, an indicator of the market's perceived
default risk, to increase by approximately 280 basis points during the year.
These factors caused high yield bonds to underperform high quality bonds. For
example, the Lehman Brothers High Yield Bond Index returned 1.60%, substantially
underperforming the Lehman Brothers Aggregate Bond Index, a measure of high
quality bond performance, which returned 8.69%.

The Fund returned 5.80% for the year, outperforming both the Lehman Brothers
High Yield Bond Index mentioned above as well as the Lipper High Current Yield
Fund Average, which returned -0.44% during the year. Several factors positively
impacted the Fund's returns during the year. First, the Fund was underweighted
in CCC-rated securities, the lowest quality sector of the market, which was most
impacted by the spread widening that occurred. The Fund had no direct exposure
to emerging markets which negatively impacted several of the funds in the Lipper
average. The Fund was also underweighted in energy and commodity related issuers
which underperformed during the year. Overweights in the telecommunications,
broadcasting and cable TV sectors aided performance as these sectors
outperformed the overall market. Corporate actions such as calls, tenders or
acquisition activity involving Viacom, Echostar, Charter Communications and
Allied Waste positively impacted performance.

As we look out into 1999, many contradicting factors are present. On the
negative side, concerns continue regarding the domestic economy's ability to
continue to grow while many of our trading partners, such as Japan, most of Asia
and parts of Latin America, experience economic problems. Falling commodity
prices continue to present problems for specific high yield issuers. The
uncertainty of Y2K and ".com mania" in the equity markets are also causes for
concern. On the plus side, the consensus economic forecast sees the domestic
economy continuing its remarkable growth for another year although at a somewhat
slower pace. Inflation remains almost non-existent and interest rates are low.
The Federal Reserve Board would appear ready to counteract any signs of
recession with further cuts in interest rates. Most importantly, the yield
spread between high yield bonds and U.S. Treasury securities remains very wide
especially in light of the amazing resilience of the domestic economy. Overall,
wide spreads and positive economic growth should make 1999 a good year for high
yield securities although security selection will be key as slowing growth and
little pricing power, especially in the commodity area, will make for a
challenging environment for many high yield issuers. The Fund maintains its bias
toward high quality operating companies within the high yield market, to
companies in secularly growing industries such as telecommunications and
companies in sectors with stable business profiles like food products, cable TV
and broadcasting.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE HIGH INCOME BOND FUND AND THE
LEHMAN BROTHERS HIGH YIELD INDEX*

<TABLE>
<CAPTION>
HIGH INCOME BOND FUND LBHY INDEX
--------------------- ----------
<S> <C> <C>
10/31/97 $10,000 $10,000
12/31/97 10,228 10,185
3/31/98 10,708 10,527
6/30/98 10,790 10,643
9/30/98 10,436 10,159
12/31/98 10,821 10,348
</TABLE>

* The Lehman Brothers High Yield Index -- an unmanaged index of bonds that are
rated below investment grade -- gives a broad look at the performance of these
securities. Unlike mutual funds, the Lehman Brothers High Yield Index does not
incur expenses. If this index incurred expenses, the actual returns of this
index would be lower.

HIGH INCOME BOND FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED 12/31/98

** High Income Bond Fund commenced operations 10/31/97.
Past performance is not predictive of future performance.

38
<PAGE> 88

INVESTMENT MANAGEMENT

Investment Manager

Nationwide Advisory Services, Inc. ("NAS"), Three Nationwide Plaza, Columbus,
Ohio 43215, manages the investment of the assets and supervises the daily
business affairs of the Nationwide Separate Account Trust (the "Trust"). Subject
to the supervision and direction of the Trustees, NAS also determines the
allocation of Fund assets among the subadvisers and evaluates and monitors the
performance of the subadvisers. NAS is also authorized to select and place
portfolio investments on behalf of a Fund; however, NAS does not intend to do so
at this time. NAS and its predecessors have managed investments since 1965,
including mutual funds and other institutional accounts. As of December 31,
1998, NAS had approximately $11.3 billion in assets under management.

Each Fund pays NAS a management fee, which is based on the Funds' average daily
net assets. The total fee paid by each of the Funds (except the Select Advisers
Small Cap Growth Fund) for the fiscal year ended December 31, 1998 -- expressed
as a percentage of each Fund's average daily net assets--was as follows:

<TABLE>
<CAPTION>
FUND FEE
---- ----
<S> <C>
Strategic Growth Fund 0.90%
Strategic Value Fund 0.90%
Select Advisers Mid Cap Fund 1.05%
Small Cap Value Fund 0.90%
Select Advisers Small Cap Growth Fund 1.10%(1)
Global Equity Fund 1.00%
Equity Income Fund 0.80%
Balanced Fund 0.75%
Multi Sector Bond Fund 0.75%
High Income Bond Fund 0.80%
</TABLE>

(1) Represents the annual management fee payable to NAS, expressed as a
percentage of the Fund's average daily net assets.

Multi-Management Structure

NAS and the Trust have received from the Securities and Exchange Commission an
exemptive order for a multi-manager structure that allows NAS to hire, replace
or terminate subadvisers without the approval of shareholders. The order also
allows NAS to revise a subadvisery agreement with Trustee approval but without
shareholder approval. If a new subadviser is hired, shareholders will receive
information about the new subadviser within 90 days of the change. The order
allows the Funds to operate more efficiently and with greater flexibility.

NAS provides the following oversight and evaluation services to the Funds:

- - performing initial due diligence on prospective subadvisers for the Funds

- - monitoring the performance of the subadvisers through ongoing analysis, as
well as periodic consultations

- - communicating performance expectations and evaluations to the subadvisers

- - ultimately recommending to the Board of Trustees whether a subadviser's
contract should be renewed, modified or terminated.

NAS does not expect to recommend frequent changes of subadvisers. NAS will
periodically provide written reports to the Board of Trustees regarding the
results of its evaluation and monitoring functions. Although NAS will monitor
the performance of the subadvisers, there is no certainty that any subadviser or
Fund will obtain favorable results at any given time.

The Subadvisers. Subject to the supervision of NAS and the Trustees, a
subadviser will manage all or a portion of a Fund's assets in accordance with a
Fund's investment objective and strategies. With regard to the portion of the
Fund assets allocated to it, each subadviser makes investment decisions for a
Fund and, in connection with such investment decisions, places purchase and sell
orders for securities.

The following are the subadvisers for the Funds.

Strategic Growth Fund. STRONG CAPITAL MANAGEMENT INC. ("Strong"), P.O. Box
2936, Milwaukee, Wisconsin 53201, is a subadviser for the Strategic Growth Fund.
Strong was formed in 1974. Since then, its principal business has been providing
investment advice for individuals and institutional accounts. Strong provides
investment management services for mutual funds and other investment portfolios
representing assets of over $32 billion as of December 31, 1998.

PORTFOLIO MANAGER: Ronald C. Ognar, a Chartered Financial Analyst with more than
30 years of investment experience, is primarily responsible for the Strategic
Growth Fund's portfolio. He also manages the Strong Growth Fund, the Strong
Growth Fund II and the Strong Growth 20 Fund; he co-manages the Strong Total
Return Fund and the Strong Mid Cap Growth Fund.

Strategic Value Fund. SCHAFER CAPITAL MANAGEMENT, INC. ("Schafer Capital"), 101
Carnegie Center, Princeton, New Jersey 08540, manages the Strategic Value Fund
through a sub-contract with Strong. Schafer Capital was formed in 1984. As of
December 31, 1998, Schafer had approximately

39
<PAGE> 89
MANAGEMENT continued

$1.6 billion in assets under management. These assets are managed for other
mutual funds and pension plans.

PORTFOLIO MANAGER: David K. Schafer has been in the investment management
business for more than twenty-five years. Mr. Schafer is the President of
Schafer Capital and is primarily responsible for the day-to-day management of
the Strategic Value Fund's portfolio. In 1981, Mr. Schafer founded Schafer
Capital.

Equity Income Fund and High Income Bond Fund. FEDERATED INVESTMENT COUNSELING
("FEDERATED"), a subsidiary of Federated Investors, Inc., is the subadviser for
the Equity Income Fund and High Income Bond Fund with offices located at
Federated Investors Tower, Pittsburgh, PA 15222-3779. As of December 31, 1998,
Federated had approximately $111 billion in assets under management,
representing the assets of other mutual funds and private accounts.

EQUITY INCOME FUND PORTFOLIO MANAGERS: Linda A. Duessel and Steven J. Lehman are
primarily responsible for the day-to-day management of the Equity Income Fund's
portfolio. Ms. Duessel joined Federated Investors, Inc. in 1991 and has been a
Vice President of a subsidiary of the subadviser since 1995. From 1991 through
1995, Ms. Duessel was an Assistant Vice President of a subsidiary of the
subadviser. Mr. Lehman joined Federated Investors, Inc. in May 1997 as a Vice
President. From 1985 to May 1997, Mr. Lehman served as a Portfolio Manager, then
Vice President/Senior Portfolio Manager, at First Chicago NBD.

HIGH INCOME BOND FUND PORTFOLIO MANAGERS: Mark E. Durbiano and Constatine
Kartsonas have been primarily responsible for the day-to-day management of the
High Income Bond Fund's portfolio since its inception. Mr. Durbiano joined
Federated Investors, Inc. in 1982 and has been a Senior Vice President of a
subsidiary of the subadviser since 1996. Mr. Kartsonas joined Federated
Investors, Inc. in 1994 as an Investment Analyst. Since January 1997, Mr.
Kartsonas has been an Assistant Vice President of a subsidiary of the
subadviser.

Small Cap Value Fund. THE DREYFUS CORPORATION ("DREYFUS") is the subadviser for
the Small Cap Value Fund. Dreyfus, located at 200 Park Avenue, New York, New
York 10166, was formed in 1947. As of December 31, 1998, the subadviser managed
or administered approximately $18 billion in assets for approximately 1.8
million investor accounts nationwide.

PORTFOLIO MANAGER: Peter I. Higgins has primary day-to-day responsibility for
management of the Fund's portfolio. He has held that position since the
inception of the Fund, and has been employed by the subadviser since May 1996
pursuant to a dual employee agreement between the subadviser and The Boston
Company Asset Management, Inc. ("TBC Asset Management"), an affiliate of the
subadviser. Mr. Higgins has been employed by TBC Asset Management or its
predecessor since May 1991.

Select Advisers Small Cap Growth Fund. FRANKLIN ADVISERS, INC. ("FRANKLIN") is
located at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo, California
94403-7777. Franklin and its affiliates act as investment manager to numerous
other investment companies and accounts. Together with its affiliates, Franklin
managed over $220 billion in assets as of December 31, 1998.

PORTFOLIO MANAGERS: Edward Jamieson, Senior Vice President, joined the Franklin
Templeton Group in 1987. He also manages the Franklin Small Cap Growth Fund.

Michael McCarthy, Portfolio Manager, joined the Franklin Templeton Group in
1992. He also manages the Franklin Small Cap Fund.

Aidan O'Connell, Portfolio Manager, joined the Franklin Templeton Group in 1998.
Prior to joining the Franklin Templeton Group, Mr. O'Connell was with Hambrecht
& Quist. He also manages the Franklin Small Cap Growth Fund.

MILLER ANDERSON & SHERRERD, LLP ("MAS") is located at One Tower Bridge, West
Conshohocken, Pennsylvania 19428-0868. MAS is owned by indirect subsidiaries of
Morgan Stanley Dean Witter & Co. ("MSDW") and is a division of Morgan Stanley
Dean Witter Investment Management ("MSDW Investment Management"). MAS provides
investment advisory services to employee benefit plans, endowment funds,
foundations and other institutional investors. As of December 31, 1998, MSDW
Investment Management had in excess of $163 billion in assets under management.

PORTFOLIO MANAGERS: Arden C. Armstrong, Managing Director, Morgan Stanley Dean
Witter & Co., joined MAS in 1986. She joined the MAS Funds' management team for
the Mid Cap Growth portfolio in 1990, the Growth portfolio in 1993 the Equity
portfolio in 1994, and the Small Cap Growth portfolio in 1998.

David P. Chu, Vice President, Morgan Stanley Dean Witter & Co., joined MAS in
1998. He served as Senior Equity Analyst from 1992 to 1997 and as Co-Portfolio
Manager in 1997 for NationsBank and its subsidiary, Trade Street Investment
Associates. He joined the MAS Funds' management team for the Mid Cap Growth
portfolio and the Small Cap Growth portfolio in 1998.

NEUBERGER BERMAN, LLC ("NEUBERGER BERMAN") is located at 605 Third Avenue, New
York, New York 10158. Neuberger Berman and its affiliates and predecessor firms
have specialized in the management of no-load mutual funds since 1950. Neuberger
Berman and its affiliates manage securities accounts that had approximately $55
billion of assets as of December 31, 1998. Neuberger Berman is a member firm of

40
<PAGE> 90

the New York Stock Exchange and other principal exchanges and acts as the Fund's
primary broker in the purchase and sale of securities for the portion of the
Fund's portfolio managed by Neuberger Berman.

PORTFOLIO MANAGERS: Michael F. Malouf has been with Neuberger Berman since 1998
as a portfolio manager. He is also a Vice President of its affiliate, Neuberger
Berman Management Inc. From 1991 to 1998 he served as an analyst, and then as
portfolio manager, at Dresdner RCM Global Investors LLC.

Jennifer K. Silver is a principal of Neuberger Berman and a Vice President of
its affiliate, Neuberger Berman Management Inc. She has been the Director of the
Growth Equity Group since 1997. From 1981 to 1997, she was an analyst and a
portfolio manager at Putnam Investments.

Global Equity Fund. J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. MORGAN"), 522
Fifth Avenue, New York, New York 10036, a wholly-owned subsidiary of J.P. Morgan
& Co. Incorporated, a bank holding company, is the subadviser for the Global
Equity Fund. The subadviser offers a wide range of investment management
services and acts as investment adviser to corporate and institutional clients.
The subadviser uses a sophisticated, disciplined, collaborative process for
managing all asset classes. As of December 31, 1998, the subadviser had assets
under management of $308 billion, including approximately $11.6 billion in
global equity portfolios.

PORTFOLIO MANAGERS: Paul Quinsee and Nigel Emmett are primarily responsible for
the day-to-day management of the Fund's portfolio. Paul Quinsee, Vice President,
joined the subadviser in 1992 as an international equity portfolio manager.
Nigel Emmett, Vice President, joined the subadviser in 1997 as an international
equity portfolio manager. Previously, he worked as an assistant manager for two
years at Brown Brothers Harriman & Co. in New York and as a portfolio manager
for four years at Gartmore Investment Management in London.

Balanced Fund and Multi Sector Bond Fund. SALOMON BROTHERS ASSET MANAGEMENT,
INC. ("SBAM") is the subadviser for the Balanced Fund and Multi Sector Bond Fund
with offices located at 7 World Trade Center, New York, New York 10048. The
subadviser, together with affiliates in London, Frankfurt, Tokyo and Hong Kong,
provides a broad range of fixed-income and equity investment advisory services
to various individuals and institutional clients located throughout the world,
and serves as investment adviser to various investment companies. As of December
31, 1998, SBAM and its worldwide investment advisory affiliates managed
approximately $29 billion of assets.

In connection with its service as subadviser to the Fund, SBAM has entered into
a subadvisery agreement with its London-based affiliate, Salomon Brothers Asset
Management Limited, whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, pursuant to which SBAM has delegated
responsibility for management of the Fund's investments in
non-dollar-denominated debt securities and currency transactions.

BALANCED FUND PORTFOLIO MANAGER: George J. Williamson is primarily responsible
for the day-to-day management of the Fund. Mr. Williamson has been a portfolio
manager with SBAM and its predecessor Lehman Management since 1979.

MULTI SECTOR BOND FUND PORTFOLIO MANAGERS: Roger Lavan is primarily responsible
for the mortgage-backed securities and U.S. government securities portions of
the Multi Sector Bond Fund. Mr. Lavan joined the subadviser in 1990 and is a
Portfolio Manager and Quantitative Fixed Income Analyst. He is responsible for
working with senior portfolio managers to monitor and analyze market
relationships and identify and implement relative value transactions in the
subadviser's investment company and institutional portfolios which invest in
mortgage-backed securities and U.S. Government securities.

David J. Scott is primarily responsible for the portion of the Multi Sector Bond
Fund relating to currency transactions and investments in non-dollar denominated
debt securities. Mr. Scott joined SBAM Limited in April 1994.

Peter J. Wilby is primarily responsible for the high yield and sovereign bond
portions of the Multi Sector Bond Fund. Mr. Wilby, who joined the subadviser in
1989, is a Managing Director of Salomon Brothers and the subadviser and Senior
Portfolio Manager of the subadviser, responsible for the subadviser's investment
company and institutional portfolios which invest in high yield non-U.S. and
U.S. corporate debt securities and high yield foreign debt securities.

Select Advisers Mid Cap Fund. FIRST PACIFIC ADVISORS, INC. ("FIRST PACIFIC"),
located at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California
90064, acts as one of the Fund's subadvisers. First Pacific, together with its
predecessors, has been in the investment advisory business since 1954. As of
December 31, 1998, First Pacific managed assets of approximately $3.5 billion
for seven investment companies, including one closed-end investment company and
more than 25 institutional accounts.

PORTFOLIO MANAGER: Mr. Steven Romick is responsible for managing the portion of
the Fund's assets allocated to First Pacific. Mr. Romick has 12 years of
experience in the investment management business. He is currently a Senior Vice
President of First Pacific. From 1990-1996, Mr. Romick

41
<PAGE> 91
MANAGEMENT continued

was chairman of Crescent Management, an investment advisory firm he founded.

PILGRIM BAXTER & ASSOCIATES, LTD. ("PILGRIM BAXTER"), 825 Duportail Road, Wayne,
Pennsylvania 19087, a professional investment management firm and registered
investment adviser in business since 1982, is one of the Fund's subadvisers. As
of December 31, 1998, Pilgrim Baxter had discretionary management authority with
respect to approximately $12 billion in assets. In addition to advising a
portion of the Fund, Pilgrim Baxter provides advisory services to pension and
profit-sharing plans, charitable institutions, corporations, trusts and estates,
and other investment companies.

PORTFOLIO MANAGER: Jeffrey A. Wrona serves as manager for the portion of the
Fund allocated to Pilgrim Baxter. Mr. Wrona joined Pilgrim Baxter from Munder
Capital Management, where he worked as a Senior Portfolio Manager for seven
years. There, he co-founded Munder's Mid Cap Growth product and managed both
mutual fund and separate account portfolios.

RICE, HALL, JAMES & ASSOCIATES ("RICE, HALL"), founded in 1974 and located at
600 West Broadway, Suite 1000, San Diego, California 92101, is one of the Fund's
subadvisers. Rice Hall provides investment management services to individual and
institutional investors. As of December 31, 1998, Rice, Hall had approximately
$1.3 billion in assets under management, primarily on behalf of institutional
and individual investors.

PORTFOLIO MANAGERS: The investment professionals of Rice, Hall responsible for
day-to-day management of that portion of the Fund allocated to Rice, Hall are as
follows:

Samuel R. Trozzo, a Partner of Rice, Hall with over thirty-six years'
experience, founded Rice, Hall in 1974.

Thomas W. McDowell, Jr. is President and Chief Executive Officer of Rice, Hall
with over seventeen years' investment experience. Mr. McDowell joined Rice Hall
in 1984.

David P. Tessmer is Partner and Co-Director of Research of Rice, Hall with over
thirty years' investment experience. Mr. Tessmer joined Rice, Hall in 1986.
Timothy A. Todaro is Partner and Co-Director of Research of Rice, Hall with over
seventeen years' investment experience. Mr. Todaro joined Rice, Hall in 1983.

Gary S. Rice is Partner of Rice, Hall with fifteen years' investment experience.
Mr. Rice joined Rice, Hall in 1983.

Douglas Sheres is Partner of Rice, Hall with over five years' investment
experience. Prior to joining Rice, Hall in March of 1998, he was an
Institutional Sales professional with Merrill Lynch in San Diego. Previously he
was a Research Analyst with Pacific Asset Management.

Historical Performance of the Subadvisers

Each of the Funds, other than the Select Advisers Small Cap Growth Fund, which
will begin operations about May 1, 1999, began operations on October 31, 1997.
The following table shows the Funds' historical performance:

AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER 31, 1998)

<TABLE>
<CAPTION>
FUND 1 YEAR SINCE INCEPTION
---- ------- ---------------
<S> <C> <C>
Strategic Growth Fund 14.59% 14.53%
Strategic Value Fund 0.39% 1.74%
Select Advisers Mid Cap
Fund 10.81% 8.91%
Small Cap Value Fund -3.06% -4.00%
Global Equity Fund 19.14% 17.47%
Equity Income Fund 15.13% 14.64%
Balanced Fund 8.07% 8.26%
Multi Sector Bond Fund 2.60% 3.16%
High Income Bond Fund 5.80% 7.04%
</TABLE>

Although the Funds have been operating for only a limited time, most of the
subadvisers have managed similar mutual funds or institutional accounts for a
longer period. These other mutual funds or institutional accounts have
investment objectives and strategies that are substantially similar, but not
necessarily identical, to those of the Funds. We have included performance
information about these other mutual funds or institutional accounts for
comparison purposes, BUT THESE OTHER MUTUAL FUNDS AND INSTITUTIONAL ACCOUNTS ARE
SEPARATE AND DISTINCT FROM EACH FUND. THEIR PERFORMANCE DOES NOT GUARANTEE
SIMILAR RESULTS FOR A FUND AND SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR A FUND'S
OWN PERFORMANCE.

If you purchase a Fund through a variable annuity contract or a variable life
insurance policy, you will also be subject to charges relating to these
contracts or policies. Both the performance for the Funds listed above and the
subadviser performance included below do not reflect these charges, which would
reduce the your total return. Therefore, these performance figures are only of
limited use for comparative purposes.

The performance of similar mutual funds or institutional accounts managed by the
subadvisers may not be comparable to the performance of a Fund because of the
following differences:

- - brokerage commissions and dealer spreads

- - expenses (including management fees)

42
<PAGE> 92

- - the size of the investment in a particular security in relation to the
portfolio size
- - the timing of purchases and sales (including the affect of market conditions
at that time)

- - the timing of cash flows into the portfolio

- - the availability of cash for new investments.

If the historical performance relates only to institutional accounts (including
institutional accounts that are included in composite performance), the
performance may not be comparable to the performance of the Funds because,
unlike the Funds, the institutional accounts may not be required to do the
following:

- - redeem shares upon request

- - meet the same diversification requirements as mutual funds

- - follow the same tax restrictions and investment limitations as mutual funds.

In some instances the performance of the institutional accounts is calculated by
combining the performance of all similarly managed accounts into a composite.
Depending on the subadviser, the composite may or may not also contain
registered mutual funds. If the accounts within each composite had been subject
to all Fund expenses, their performance may have been lower. As indicated below,
the composite performance may be prepared in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
("AIMR Standards"), which are different from the performance methodology used by
registered investment companies like the Funds. AIMR has not been involved with
the preparation or review of this information.

Average annual total return represents the average change over a specified
period of time in the value of an investment after reinvesting all income and
capital gains distributions.

The historical performance information has been provided by each Subadviser. The
Funds believe that it is reliable, but the Funds have not independently verified
it.

Strong Capital Management, Inc. Strong is the subadviser for the Strategic
Growth Fund. The following chart shows the average annual total returns of the
Strong Growth Fund. Strong manages this fund in a manner substantially similar
to the way it manages the Strategic Growth Fund. The historical investment
performance of the Strong Growth Fund reflects the deduction of total annual
operating expenses of 1.28% as of December 31, 1998, which are lower than the
total operating expenses of the Strategic Growth Fund before fee waivers.

AVERAGE ANNUAL TOTAL RETURN
STRONG GROWTH FUND

<TABLE>
<CAPTION>
FOR PERIODS ENDING DECEMBER 31, 1998
- -----------------------------------------------------
1 YEAR 5 YEARS*
------ --------
<S> <C>
26.98% 24.47%
</TABLE>

* The Strong Growth Fund commenced operations on 12/31/93.

Schafer Capital Management, Inc. Through a sub-contract with Strong, Schafer
manages the Strategic Value Fund. The following chart shows the average annual
total returns of the Strong Schafer Value Fund. Schafer manages this fund in a
manner substantially similar to the way it manages the Strategic Value Fund. The
historical investment performance of the Strong Schafer Value Fund reflects the
deduction of total annual operating expenses of 1.32% as of December 31, 1998,
which are higher than the total operating expenses of the Strategic Value Fund
before fee waivers.

AVERAGE ANNUAL TOTAL RETURN
STRONG SCHAFER VALUE FUND

<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31, 1998
- ---------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C>
-6.63% 13.81% 16.56%
</TABLE>

First Pacific Advisors, Inc., Pilgrim Baxter & Associates, Ltd. and Rice, Hall,
James & Associates. First Pacific, Pilgrim Baxter and Rice, Hall each manage a
portion of the Select Advisors Mid Cap Fund. Each subadviser's performance is
presented net of fees of the historical portfolio.

AVERAGE ANNUAL TOTAL RETURN

<TABLE>
<CAPTION>
FOR PERIODS ENDING DECEMBER 31, 1998
---------------------------------------
10 YEARS
1 YEAR 5 YEARS (OR SINCE INCEPTION)
------ ------- --------------------
<S> <C> <C> <C>
FPA Crescent
Portfolio -6.63% 13.81% 16.56%*
Pilgrim Baxter Mid
Cap Composite 9.38% 11.99% 14.92%
Rice, Hall, James
Small-Mid Composite 13.30% 19.47% 17.76%
</TABLE>

* The FPA Crescent Portfolio commenced operations on June 2, 1993

First Pacific. The information in the chart above shows the average annual total
returns of the FPA Crescent Portfolio, which First Pacific manages in a manner
substantially similar to the way it manages its portion of the Select Advisers
Mid Cap Fund. The historical investment performance of the FPA Crescent
Portfolio reflects the deduction of total annual operating expenses of 1.34% as
of September 30, 1998, which are lower than the total operating expenses of the
Select Advisers Mid Cap Fund before fee waivers.

43
<PAGE> 93
MANAGEMENT continued

Pilgrim Baxter. The information in the chart above shows the net average annual
total returns of Pilgrim Baxter Mid Cap Composite. Each of the accounts in this
composite is managed by Pilgrim Baxter in a manner substantially similar to the
way it manages its portion of the Select Advisers Mid Cap Fund. The historical
investment performance of the composite reflects the deduction of the total
annual operating expenses of the mutual funds that is included in the composite
and the advisory fees of the separate accounts. The maximum amount of expenses
that is deducted from any portfolio in the composite is 1.2%, which is the total
operating expenses of mutual fund in the composite. Therefore, all expenses
deducted from the composite are lower than the total operating expenses of the
Select Advisers Mid Cap Fund.
Rice Hall. The information in the chart above shows the average annual total
returns of Rice Hall Small-Mid Composite. Each of the accounts in this composite
is managed by Rice Hall in a manner substantially similar to the way it manages
its portion of the Select Advisers Mid Cap Fund. The historical investment
performance of the composite reflects the deduction of expenses of 1.25%
(representing the highest expenses of any portfolio in the composite). These
fees are lower than the total operating expenses of the Select Advisers Mid Cap
Fund before fee waivers. Since January 1, 1993, Rice Hall has prepared this
performance information in compliance with the AIMR Standards.

J.P. Morgan Investment Management Inc. J.P. Morgan is the subadviser for the
Global Equity Fund. The following chart shows the average annual total returns
of the J.P. Morgan Global Equity Composite. Each of the accounts in this
composite is managed by J.P. Morgan in a manner substantially similar to the way
it manages the Global Equity Fund. The historical investment performance of the
composite reflects the deduction of a .50% advisory fee, which is the maximum
fee charged by J.P. Morgan for accounts in the composite, but does not include
the deduction of custody fees, which vary by account. These fees are lower than
the total annual operating expenses of the Global Equity Fund before fee
waivers. J.P. Morgan prepared this performance in compliance with AIMR
Standards.

AVERAGE ANNUAL TOTAL RETURN
J.P. MORGAN GLOBAL EQUITY COMPOSITE

<TABLE>
<CAPTION>
FOR YEARS ENDING DECEMBER 31, 1998
- ---------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C>
19.89% 14.53% 11.89%
</TABLE>

Federated Investment Counseling. Federated Investment Counseling is the
subadviser for the Equity Income Fund. The following chart shows the average
annual total returns of the Class A Shares of the Federated Equity Income Fund,
Inc. This fund is managed by Federated Advisers, an affiliate of the subadviser,
in a manner substantially similar to the way the Equity Income Fund is managed.
The historical investment performance of the Class A Shares of the Federated
Equity Income Fund, Inc. reflects the deduction of total annual operating
expenses of 1.08% as of December 31, 1998, which are lower than the total
operating expenses of the Equity Income Fund before fee waivers.

AVERAGE ANNUAL TOTAL RETURN
FEDERATED EQUITY INCOME FUND, INC., CLASS A SHARES

Federated Investment Counseling is also the subadviser for the High Income Bond
Fund. The following chart shows the average annual total returns of the
Federated High Yield Composite. Each of the portfolios in the composite is a
mutual fund registered with the SEC and is managed by Federated and its
affiliates in a manner substantially similar to the way the High Income Bond
Fund is managed. The historical investment performance of the Federated High
Yield Composite reflects the deduction of the composite's average total
operating expenses of 1.23% as of December 31, 1998, which are higher than the
total operating expenses of the High Income Bond Fund before fee waivers.

AVERAGE ANNUAL TOTAL RETURN
FEDERATED HIGH YIELD COMPOSITE

Salomon Brothers Asset Management Inc. SBAM is the subadviser for the Balanced
Fund. The following chart shows the average annual total returns of the Salomon
Brother Total Return Fund - Class O shares. This fund is managed by SBAM in a
manner substantially similar to the way it manages the Balanced Fund. The
historical investment performance of the Salomon Brother Total Return Fund -
Class O shares reflects the deduction of total annual operating expenses of
0.60%* as of December 31, 1998, which are lower than the total operating
expenses of the Balanced Fund before fee waivers.

44
<PAGE> 94

AVERAGE ANNUAL TOTAL RETURN
SALOMON BROTHER TOTAL RETURN FUND - CLASS O SHARES

<TABLE>
<CAPTION>
FOR PERIODS ENDING DECEMBER 31, 1998
- -----------------------------------------------------
1 YEAR SINCE INCEPTION**
------ -----------------
<S> <C>
6.57% 13.64%
</TABLE>

* Reflects a waiver by SBAM of its management fee and reimbursement of certain
expenses.

** The Salomon Brothers Total Return Fund commenced operations on September 11,
1995.
SBAM is also the subadviser for the Multi Sector Bond Fund. The following chart
shows the average annual total returns of the Enhanced Core Fixed Income
Composite. Each of the portfolios in the composite is a mutual fund registered
with the SEC and managed by SBAM in a manner substantially similar to the way
SBAM manages the Multi Sector Bond Fund. The historical investment performance
of the Enhanced Core Fixed Income Composite reflects the deduction of the
composite's average total operating expenses of 1.01% as of December 31, 1998,
which are higher than the total operating expenses of the Multi Sector Bond Fund
before fee waivers.

AVERAGE ANNUAL TOTAL RETURN
ENHANCED CORE FIXED INCOME COMPOSITE

<TABLE>
<CAPTION>
FOR PERIODS ENDING DECEMBER 31, 1998
--------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------- --------- -----------------
<S> <C> <C>
1.60% 7.64% 8.09%
</TABLE>

* The Enhanced Core Fixed Income Composite commenced operations on April 1,
1993.

45
<PAGE> 95
BUYING AND SELLING FUND SHARES

WHO CAN BUY SHARES OF THE FUNDS

The separate accounts purchase shares of a Fund in accordance with variable
account allocation instructions received from owners of the variable annuity
contracts or variable life insurance policies. A Fund then uses the proceeds to
buy securities for its portfolio. Because variable annuity contracts or variable
life insurance policies may have different provisions with respect to the timing
and method of purchases, exchanges and redemptions, contract or policy owners
should contact their insurance company directly for details concerning these
transactions.

PURCHASE PRICE

NAS does not determine NAV on the following days:

- - Christmas Day

- - New Year's Day

- - Martin Luther King Jr. Day

- - Presidents' Day

- - Good Friday

- - Memorial Day

- - Independence Day

- - Labor Day
- - Thanksgiving Day

- - other days when the New York Stock Exchange is not open.

NAS reserves the right not to determine NAV when:

- - a Fund has not received any orders to purchase, sell, or exchange shares

- - changes in the value of a Fund's portfolio do not affect the NAV.

SELLING SHARES

RESTRICTIONS ON SALES

YEAR 2000

46
<PAGE> 96

DIVIDENDS AND DISTRIBUTIONS

TAX STATUS

Please refer to the Statement of Additional Information for more information
regarding the tax treatment of the Funds.

47
<PAGE> 97

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Funds'
financial performance for the period of the Funds' operations. Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate that an investor would have earned (or
lost) on an investment in the Funds, assuming reinvestment of all dividends and
distributions. This information has been audited by PricewaterhouseCoopers,
whose report, along with the Funds' financial statements, is included in the
annual report, which is available upon request.

<TABLE>
<CAPTION>
STRATEGIC GROWTH FUND STRATEGIC VALUE FUND
------------------------------- -------------------------------
PERIOD PERIOD
OCTOBER 31, 1997 OCTOBER 31, 1997
(COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) OF OPERATIONS)
YEAR ENDED THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 10.21 $10.00 $ 10.15 $10.00
Net investment income -- 0.01 0.07 0.01
Net realized gain (loss) and unrealized
appreciation (depreciation) on investments and
translation of assets and liabilities in
foreign currencies 1.49 0.21 (0.03) 0.15
------- ------ ------- ------
Total from investment operations 1.49 0.22 0.04 0.16
------- ------ ------- ------
Dividends from net investment income -- (0.01) (0.07) (0.01)
Dividends from net realized gain from investment
transactions -- -- -- --
------- ------ ------- ------
Total distributions -- (0.01) (0.07) (0.01)
------- ------ ------- ------
Net increase (decrease) in net asset value 1.49 0.21 (0.03) 0.15
------- ------ ------- ------
NET ASSET VALUE -- END OF PERIOD $ 11.70 $10.21 $ 10.12 $10.15
======= ====== ======= ======
Total Return 14.59% 2.20% 0.39% 1.63%
Ratios and supplemental data:
Net Assets, end of period (000) $10,342 $1,347 $15,279 $1,469
Ratio of expenses to average net assets 1.00% 1.00%* 1.00% 1.00%*
Ratio of expenses to average net assets** 1.55% 6.33%* 1.23% 5.54%*
Ratio of net investment income to average net
assets (0.04)% 0.68%* 0.86% 0.96%*
Ratio of net investment income to average net
assets** (0.59)% (4.65)%* 0.63% (3.58)%*
Portfolio turnover 369.83% 27.32% 68.65% 5.38%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

48
<PAGE> 98

<TABLE>
<CAPTION>
EQUITY INCOME FUND HIGH INCOME BOND FUND
---------------------------------------- ------------------------------------
PERIOD PERIOD
OCTOBER 31, 1997 OCTOBER 31, 1997
(COMMENCEMENT (COMMENCEMENT
YEAR ENDED OF OPERATIONS) YEAR ENDED OF OPERATIONS)
DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
1998 1997 1998 1997
------------ ------------------------- ------------ ---------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 10.16 $10.00 $ 10.12 $10.00
Net investment income 0.10 0.02 0.66 0.11
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments 1.44 0.16 (0.08) 0.12
------- ------ ------- ------
Total from investment operations 1.54 0.18 0.58 0.23
------- ------ ------- ------
Dividends from net investment income (0.10) (0.02) (0.66) (0.11)
Dividends from net realized gain from
investment transactions (0.13) -- -- --
------- ------ ------- ------
Total distributions (0.23) (0.02) (0.66) (0.11)
------- ------ ------- ------
Net increase (decrease) in net asset
value 1.31 0.16 (0.08) 0.12
------- ------ ------- ------
NET ASSET VALUE -- END OF PERIOD $ 11.47 $10.16 $ 10.04 $10.12
======= ====== ======= ======
Total Return 15.13% 1.77% 5.80% 2.28%
Ratios and supplemental data:
Net Assets, end of period (000) $14,194 $1,610 $36,630 $6,029
Ratio of expenses to average net assets 0.95% 0.95%* 0.95% 0.95%*
Ratio of expenses to average net
assets** 1.15% 5.63%* 1.12% 2.18%*
Ratio of net investment income to
average net assets 1.11% 1.34%* 7.88% 6.96%*
Ratio of net investment income to
average net assets** 0.91% (3.34)%* 7.71% 5.73%*
Portfolio turnover 49.12% 14.52% 24.25% 7.37%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

49
<PAGE> 99

FINANCIAL HIGHLIGHTS CONTINUED

<TABLE>
<CAPTION>
BALANCED FUND MULTI SECTOR BOND FUND
----------------------------------- -----------------------------------
PERIOD PERIOD
OCTOBER 31, 1997 OCTOBER 31, 1997
(COMMENCEMENT (COMMENCEMENT
YEAR ENDED OF OPERATIONS) YEAR ENDED OF OPERATIONS)
DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
1998 1997 1998 1997
------------ -------------------- ------------ --------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 10.10 $ 10.00 $ 10.05 $ 10.00
Net investment income 0.30 0.05 0.48 0.05
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments and translation of assets and
liabilities in foreign currencies 0.51 0.10 (0.22) 0.05
------- ------- ------- -------
Total from investment operations 0.81 0.15 0.26 0.10
------- ------- ------- -------
Dividends from net investment income (0.30) (0.05) (0.47) (0.05)
Dividends from net realized gain from
investment and foreign currency
transactions (0.03) -- (0.01) --
Tax return of capital -- -- (0.01) --
------- ------- ------- -------
Total distributions (0.33) (0.05) (0.49) (0.05)
------- ------- ------- -------
Net increase (decrease) in net asset
value 0.48 0.10 (0.23) 0.05
------- ------- ------- -------
NET ASSET VALUE -- END OF PERIOD $ 10.58 $ 10.10 $ 9.82 $ 10.05
======= ======= ======= =======
Total Return 8.07% 1.46% 2.60% 1.04%
Ratios and supplemental data:
Net Assets, end of period (000) $40,885 $ 1,886 $36,965 $ 2,032
Ratio of expenses to average net assets 0.90% 0.90%* 0.90% 0.90%*
Ratio of expenses to average net assets** 0.96% 4.90%* 0.96% 4.41%*
Ratio of net investment income to average
net assets 3.81% 4.08%* 6.42% 4.77%*
Ratio of net investment income to average
net assets** 3.75% 0.08%* 6.36% 1.26%*
Portfolio turnover 137.35% 0.19% 287.69% 48.90%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

50
<PAGE> 100

<TABLE>
<CAPTION>
SMALL CAP VALUE FUND GLOBAL EQUITY FUND
----------------------------------- -----------------------------------
PERIOD PERIOD
OCTOBER 31, 1997 OCTOBER 31, 1997
(COMMENCEMENT (COMMENCEMENT
YEAR ENDED OF OPERATIONS) YEAR ENDED OF OPERATIONS)
DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
1998 1997 1998 1997
------------ -------------------- ------------ --------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 9.79 $ 10.00 $ 10.10 $ 10.00
Net investment income(loss) (0.01) 0.01 0.11 0.02
Net realized gain (loss) and unrealized
appreciation (depreciation) on
investments and translation of assets and
liabilities in foreign currencies (0.29) (0.17) 1.81 0.10
------- ------- ------- -------
Total from investment operations (0.30) (0.16) 1.92 0.12
------- ------- ------- -------
Dividends from net investment income -- (0.01) (0.07) (0.02)
Dividends in excess net investment income -- -- (0.12) --
Dividends from net realized gain from
investment and foreign currency
transactions -- (0.04) (0.08) --
------- ------- ------- -------
Total distributions -- (0.05) (0.27) (0.02)
------- ------- ------- -------
Net increase (decrease) in net asset
value (0.30) (0.21) 1.65 0.10
------- ------- ------- -------
NET ASSET VALUE -- END OF PERIOD $ 9.49 $ 9.79 $ 11.75 $ 10.10
======= ======= ======= =======
Total Return (3.06)% (1.61)% 19.14% 1.18%
Ratios and supplemental data:
Net Assets, end of period (000) $50,439 $ 2,069 $21,527 $ 5,566
Ratio of expenses to average net assets 1.05% 1.05%* 1.20% 1.20%*
Ratio of expenses to average net assets** 1.33% 6.31%* 1.46% 2.84%*
Ratio of net investment income to average
net assets (0.21)% 0.50%* 0.66% 1.00%*
Ratio of net investment income to average
net assets** (0.49)% (4.76)%* 0.40% (0.64)%*
Portfolio turnover 283.65% 8.38% 59.01% 9.32%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

51
<PAGE> 101

FINANCIAL HIGHLIGHTS CONTINUED

<TABLE>
<CAPTION>
SELECT ADVISERS MID CAP FUND
-----------------------------------
PERIOD
OCTOBER 31, 1997
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
DECEMBER 31, THROUGH DECEMBER 31,
1998 1997
------------ --------------------
<S> <C> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 9.94 $ 10.00
Net investment income 0.09 0.02
Net realized loss and unrealized appreciation on
investments 0.98 (0.06)
------- -------
Total from investment operations 1.07 (0.04)
------- -------
Dividends from net investment income (0.08) (0.02)
Dividends from tax return of capital (0.01) --
------- -------
Total distributions (0.09) (0.02)
------- -------
Net increase (decrease) in net asset value 0.98 (0.06)
------- -------
NET ASSET VALUE -- END OF PERIOD $ 10.92 $ 9.94
======= =======
Total Return 10.81% (0.36)%
Ratios and supplemental data:
Net Assets, end of period (000) $10,849 $ 3,214
Ratio of expenses to average net assets 1.20% 1.20%*
Ratio of expenses to average net assets** 1.54% 3.31%*
Ratio of net investment income to average net assets 0.79% 1.55%*
Ratio of net investment income to average net assets** 0.45% (0.56)%*
Portfolio turnover 119.37% 7.81%
</TABLE>

* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.

52
<PAGE> 102

INFORMATION FROM NATIONWIDE

Please read this Prospectus before investing. The following documents -- which
may be obtained free of charge -- contain additional information about the
Funds:

- - Statement of Additional Information (SAI) (incorporated by reference into this
Prospectus)

- - Annual Report

- - Semi-Annual Report

FOR ADDITIONAL INFORMATION CONTACT:

Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215

FOR INFORMATION AND ASSISTANCE:

1-800-848-6331 (toll free, 8 a.m. - 5 p.m. Eastern Time)

INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION

Copies of Fund documents may be obtained from the Securities and Exchange
Commission as follows:

IN PERSON:

Public Reference Room in Washington, D.C. (for their hours of operation, call
1-800-SEC-0330)

BY MAIL:

Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009

(The Securities and Exchange Commission charges a fee to copy any documents.)

VIA THE INTERNET:

http://www.sec.gov

THE TRUST'S INVESTMENT COMPANY ACT FILE NO.: 811-3213

APO-4426
<PAGE> 103
STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1999

NATIONWIDE SEPARATE ACCOUNT TRUST

--NATIONWIDE STRATEGIC GROWTH FUND
--NATIONWIDE STRATEGIC VALUE FUND
--NATIONWIDE EQUITY INCOME FUND
--NATIONWIDE HIGH INCOME BOND FUND
--NATIONWIDE BALANCED FUND
--NATIONWIDE MULTI SECTOR BOND FUND
--NATIONWIDE SMALL CAP VALUE FUND
--NATIONWIDE SELECT ADVISERS SMALL CAP GROWTH FUND
--NATIONWIDE GLOBAL EQUITY FUND
--NATIONWIDE SELECT ADVISERS MID CAP FUND
--NATIONWIDE SMALL COMPANY FUND
--NATIONWIDE INCOME FUND
--TOTAL RETURN FUND
--CAPITAL APPRECIATION FUND
--GOVERNMENT BOND FUND
--MONEY MARKET FUND

Nationwide Separate Account Trust is a registered open-end investment
company consisting of 16 series. This Statement of Additional Information
relates to all series of the Trust (each, a "Fund" and collectively, the
"Funds").

This Statement of Additional Information is not a prospectus but the
Statement of Additional Information is incorporated by reference into the
Prospectuses. It contains information in addition to and more detailed than that
set forth in the Prospectuses for the Funds and should be read in conjunction
with the Prospectuses, dated May 1, 1999, for the Funds. Terms not defined in
this Statement of Additional Information have the meanings assigned to them in
the Prospectuses. The Prospectuses may be obtained from Nationwide Life
Insurance Company, One Nationwide Plaza, Columbus, Ohio 43215, or by calling
toll free 1 (800) 848-6331.

<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
General Information and History................................................................................2
Additional Information on Portfolio Instruments and Investment Policies........................................2
Investment Restrictions........................................................................................34
Major Shareholders.............................................................................................38
</TABLE>

<PAGE> 104

<TABLE>
<S> <C>
Trustees and Officers of the Trust.............................................................................39
Calculating Yield and Total Return.............................................................................41
Investment Advisory and Other Services.........................................................................43
Brokerage Allocations..........................................................................................53
Purchases, Redemptions and Pricing of Shares...................................................................58
Additional Information.........................................................................................59
Tax Status.....................................................................................................59
Other Tax Consequences.........................................................................................60
Tax Consequences to Shareholders...............................................................................62
Financial Statements...........................................................................................62
Appendix A - Bond Ratings......................................................................................63
</TABLE>

<PAGE> 105

GENERAL INFORMATION AND HISTORY

Nationwide Separate Account Trust is an open-end investment company
organized under the laws of Massachusetts by a Declaration of Trust, dated June
30, 1981, as subsequently amended. The Trust currently offers shares in sixteen
(16) separate series, each with its own investment objective. Each of the Funds
except for the Nationwide Small Company Fund is a diversified fund as defined in
the Investment Company Act of 1940.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

The Funds invest in a variety of securities and employ a number of
investment techniques, which involve certain risks. The Prospectuses for the
Funds highlight the principal investment strategies, investment techniques and
risks. The following table sets forth additional information concerning
permissible investments and techniques for each of the Funds. A "Y" in the table
indicates that the Fund may invest in or follow the corresponding instrument or
technique. An empty box indicates that the Fund does not intend to invest in or
follow the corresponding instrument or technique.

3
<PAGE> 106
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y Y Y Y

Preferred stocks Y Y Y Y Y Y

Small company stocks Y Y Y Y Y
</TABLE>

<TABLE>
<CAPTION>
Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y Y Y Y

Preferred stocks Y Y Y Y Y

Small company stocks Y Y Y Y
</TABLE>

<TABLE>
<CAPTION>
Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
U.S. common stocks Y

Preferred stocks Y

Small company stocks Y
</TABLE>

4
<PAGE> 107
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Special situation companies Y Y Y Y Y

Illiquid securities Y Y Y Y Y Y

Restricted securities Y Y Y Y Y Y
</TABLE>

<TABLE>
<CAPTION>
Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Special situation companies Y Y Y

Illiquid securities Y Y Y Y Y Y

Restricted securities Y Y Y Y Y Y
</TABLE>

<TABLE>
<CAPTION>
Select
Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Special situation companies

Illiquid securities Y Y Y

Restricted securities Y Y Y Y
</TABLE>

5
<PAGE> 108
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
When-issued / delayed-delivery securities Y Y Y Y Y Y

Limited liability companies

Investment companies Y Y Y Y Y Y
</TABLE>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
When-issued / delayed-delivery securities Y Y Y Y Y Y

Limited liability companies Y

Investment companies Y Y Y Y Y Y
</TABLE>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
When-issued / delayed-delivery securities Y Y Y Y

Limited liability companies Y

Investment companies Y Y Y Y
</TABLE>

6
<PAGE> 109

<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Real estate investment trusts (REITS) Y Y Y Y Y

Securities of foreign issuers Y Y Y Y

Depository receipts Y Y Y
</TABLE>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Real estate investment trusts (REITS) Y Y

Securities of foreign issuers Y Y Y Y

Depository receipts Y Y Y
</TABLE>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Real estate investment trusts (REITS) Y Y

Securities of foreign issuers Y Y

Depository receipts Y Y
</TABLE>

7
<PAGE> 110

Convertible securities Y Y Y Y Y Y

Long-term debt Y Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Securities from developing countries/emerging Y Y
markets securities

Convertible securities Y Y Y Y Y

Long-term debt Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Securities from developing countries/emerging Y Y
markets securities

Convertible securities Y

Long-term debt Y Y Y
</TABLE>

8
<PAGE> 111
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Short-term debt Y Y Y Y Y Y

Floating and variable rate securities

Zero coupon securities Y Y Y Y
</TABLE>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Short-term debt Y Y Y Y Y Y

Floating and variable rate securities Y Y Y

Zero coupon securities Y Y Y
</TABLE>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Short-term debt Y Y Y Y

Floating and variable rate securities Y Y Y Y

Zero coupon securities Y Y Y
</TABLE>

<PAGE> 112
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>

Step-coupon securities

Pay-in-Kind Bonds Y Y Y

Deferred payment securities Y Y Y
</TABLE>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>

Step-coupon securities Y

Pay-in-kind bonds Y Y

Deferred payment securities Y Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>

Step-coupon securities Y

Pay-in-kind bonds Y Y

Deferred payment securities Y Y
</TABLE>

10
<PAGE> 113
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Brady bonds

Non-investment grade debt Y Y Y Y Y

Loan participations and assignments
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Brady bonds Y

Non-investment grade debt Y Y

Loan participations and assignments Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Brady bonds Y

Non-investment grade debt Y Y

Loan participations and assignments Y Y
</TABLE>

<PAGE> 114

Foreign commercial paper Y

Duration
</TABLE>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Sovereign debt (foreign) Y

Foreign commercial paper Y Y

Duration
</TABLE>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Sovereign debt (foreign)

Foreign commercial paper Y Y

Duration Y Y
</TABLE>

<PAGE> 115
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>

U.S. Government securities Y Y Y Y Y Y

Money market instruments Y Y Y Y Y Y

Mortgage-backed securities Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>

U.S. Government securities Y Y Y Y Y Y

Money market instruments Y Y Y Y Y Y

Mortgage-backed securities Y Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>

U.S. Government securities Y Y Y Y

Money market instruments Y Y Y Y

Mortgage-backed securities Y Y Y
</TABLE>

<PAGE> 116
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Stripped mortgage-backed securities

Collateralized mortgage obligations

Mortgage dollar rolls Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Stripped mortgage-backed securities Y

Collateralized mortgage obligations Y Y

Mortgage dollar rolls Y
</TABLE>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Stripped mortgage-backed securities

Collateralized mortgage obligations Y Y

Mortgage dollar rolls Y Y
</TABLE>

14
<PAGE> 117
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Asset-backed securities Y Y Y

Bank obligations Y Y Y Y Y Y

Repurchase agreements Y Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Asset-backed securities Y

Bank obligations Y Y Y Y

Repurchase agreements Y Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Asset-backed securities Y Y Y Y

Bank obligations Y Y Y Y

Repurchase agreements Y Y Y Y
</TABLE>
15
<PAGE> 118
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>
Reverse repurchase agreements Y Y Y Y Y

Warrants Y Y Y Y Y

Futures Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Reverse repurchase agreements Y Y Y Y

Warrants Y Y Y Y

Futures Y Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Reverse repurchase agreements Y Y

Warrants Y

Futures Y Y
</TABLE>
16
<PAGE> 119

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Options Y Y

Foreign currencies Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Options Y Y

Foreign currencies Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Options Y Y

Foreign currencies
</TABLE>
17
<PAGE> 120

Borrowing money Y Y Y Y Y Y

Lending of portfolio securities Y Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>
Forward currency contracts

Borrowing money Y Y Y Y Y Y

Lending of portfolio securities Y Y Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>
Forward currency contracts

Borrowing money Y Y Y Y

Lending of portfolio securities Y Y Y Y
</TABLE>
18

<PAGE> 121
<TABLE>
<CAPTION>
Select
Select Advisers
Capital Strategic Strategic Advisers Small Small Cap
TYPE OF INVESTMENT OR TECHNIQUE Appreciation Growth Value Mid Cap Company Growth
<S> <C> <C> <C> <C> <C> <C>

Short sales Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>

Small Global Equity Total Government
TYPE OF INVESTMENT OR TECHNIQUE Cap Value Equity Income Return Balanced Bond
<S> <C> <C> <C> <C> <C> <C>

Short sales
</TABLE>
<TABLE>
<CAPTION>

Multi High
Sector Income Money
TYPE OF INVESTMENT OR TECHNIQUE Income Bond Bond Market
<S> <C> <C> <C> <C>

Short sales
</TABLE>

<PAGE> 122

DESCRIPTION OF PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES

INFORMATION CONCERNING DURATION. Duration is a measure of the average life of a
fixed-income security that was developed as a more precise alternative to the
concepts of "term to maturity" or "average dollar weighted maturity" as measures
of "volatility" or "risk" associated with changes in interest rates. Duration
incorporates a security's yield, coupon interest payments, final maturity and
call features into one measure.

Most debt obligations provide interest ("coupon") payments in addition
to final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments and the nature
of the call provisions, the market values of debt obligations may respond
differently to changes in interest rates.

Traditionally, a debt security's "term-to-maturity" has been used as a
measure of the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term-to-maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Average dollar weighted maturity is calculated by averaging the
terms of maturity of each debt security held with each maturity "weighted"
according to the percentage of assets that it represents. Duration is a measure
of the expected life of a debt security on a present value basis and reflects
both principal and interest payments. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable security, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any debt security with interest payments
occurring prior to the payment of principal, duration is ordinarily less than
maturity. In general, all other factors being the same, the lower the stated or
coupon rate of interest of a debt security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a debt
security, the shorter the duration of the security.

There are some situations where the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, NAS will use more sophisticated
analytical techniques to project the economic life of a security and estimate
its interest rate exposure. Since the computation of duration is based on
predictions of future events rather than known factors, there can be no
assurance that a Fund will at all times achieve its targeted portfolio duration.

The change in market value of U.S. Government fixed-income securities
is largely a function of changes in the prevailing level of interest rates. When
interest rates are falling, a portfolio with a shorter duration generally will
not generate as high a level of total return as a portfolio with a longer
duration. When interest rates are stable, shorter duration portfolios generally
will not generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case.) When interest rates are rising, a portfolio with a
shorter duration will generally outperform longer duration portfolios. With
respect to the composition of a fixed-income portfolio, the longer the duration
of the portfolio, generally, the greater the anticipated potential for total
return, with, however, greater attendant interest rate risk and price volatility
than for a portfolio with a shorter duration.

DEBT OBLIGATIONS. Debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on its obligations ("credit
risk") and are subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer, and
general market liquidity.

20
<PAGE> 123
Lower-rated securities are more likely to react to developments affecting these
risks than are more highly rated securities, which react primarily to movements
in the general level of interest rates. Although the fluctuation in the price of
debt securities is normally less than that of common stocks, in the past there
have been extended periods of cyclical increases in interest rates that have
caused significant declines in the price of debt securities in general and have
caused the effective maturity of securities with prepayment features to be
extended, thus effectively converting short or intermediate securities (which
tend to be less volatile in price) into long term securities (which tend to be
more volatile in price).

RATINGS AS INVESTMENT CRITERIA. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"),
such as Standard & Poor's Rating Group ("Standard & Poor's") or Moody's Investor
Services ("Moody's"). In general, the ratings of NRSROs represent the opinions
of these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings are
used by a Fund as initial criteria for the selection of portfolio securities,
but the Fund also relies upon the independent advice of NAS or the subadvisers
to evaluate potential investments. This is particularly important for
lower-quality securities. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends, as well as an issuer's capital structure, existing debt and
earnings history. The Appendix to this Statement of Additional Information
contains further information about the rating categories of NRSROs and their
significance.

Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by such Fund. In addition, it is possible that an NRSRO might not change its
rating of a particular issue to reflect subsequent events. None of these events
generally will require sale of such securities, but a Fund's subadviser or NAS
as a Fund's investment adviser will consider such events in its determination of
whether the Fund should continue to hold the securities. In addition, to the
extent that the ratings change as a result of changes in such organizations or
their rating systems, or due to a corporate reorganization, the Fund will
attempt to use comparable ratings as standards for its investments in accordance
with its investment objective and policies.

MEDIUM-QUALITY SECURITIES. Certain Funds anticipate investing in
medium-quality obligations, which are obligations rated in the fourth highest
rating category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than issues of higher-rated securities.

LOWER QUALITY (HIGH-RISK) SECURITIES. Non-investment grade debt
securities or lower quality/rated (hereinafter referred to as "lower-quality
securities") include (i) bonds rated as low as C by Moody's, Standard & Poor's,
or Fitch/IBCA Investors Service, Inc. ("Fitch"), or CCC by D&P; (ii) commercial
paper rated as low as C by Standard & Poor's, Not Prime by Moody's or Fitch 4 by
Fitch; and (iii) unrated debt securities of comparable quality. Lower-quality
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. There is more risk associated with these
investments because of reduced creditworthiness and increased risk of default.
Under NRSRO guidelines, lower quality securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighted by large uncertainties or major risk exposures to adverse
conditions. Lower quality securities are considered to have extremely poor
prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest payments and repay principal when
due in the event of adverse business, financial or economic conditions, or to be
in default or not current in the payment of interest or principal. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with investments in these securities are discussed below.

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EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-quality and
comparable unrated securities tend to reflect individual corporate developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable unrated
security defaulted, the Fund might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of these securities and thus in the
Fund's net asset value.

As previously stated, the value of a lower-quality or comparable
unrated security will generally decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount which would result in a lower rate of return to the Fund.

Payment Expectations. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities at a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, a Fund may have to
replace the securities with a lower yielding security, which would result in a
lower return for that Fund.

LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there may be no
established retail secondary market for many of these securities. The Funds
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. As a result, a Fund's asset
value and ability to dispose of particular securities, when necessary to meet
such Fund's liquidity needs or in response to a specific economic event, may be
impacted. The lack of a liquid secondary market for certain securities may also
make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing that Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.

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U.S. GOVERNMENT SECURITIES. U.S. government securities are issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
Securities issued by the U.S. government include U.S. Treasury obligations, such
as Treasury bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include obligations of the following:

- - the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;

- - the Federal Home Loan Banks whose securities are supported by the right
of the agency to borrow from the U.S. Treasury;

- - the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and

- - the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation ("FHLMC"), whose securities are supported only by
the credit of such agencies.

Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.

MORTGAGE AND ASSET-BACKED SECURITIES. Mortgage-backed securities
represent direct or indirect participation in, or are secured by and payable
from, mortgage loans secured by real property, and include single- and
multi-class pass-through securities and collateralized mortgage obligations.
Such securities may be issued or guaranteed by U.S. Government agencies or
instrumentalities by private issuers, generally originators in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers, and special purpose entities (collectively, "private
lenders"). The purchase of mortgage-backed securities from private lenders may
entail greater risk than mortgage-backed securities that are issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Mortgage-backed securities issued by private lenders maybe supported by pools of
mortgage loans or other mortgage-backed securities that are guaranteed, directly
or indirectly, by the U.S. Government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement. These credit enhancements may include letters of credit, reserve
funds, overcollateralization, or guarantees by third parties.

Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit enhancement
falls into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.

The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency loss
experience on the underlying pool of assets is better than expected. There can
be no assurance that the private issuers or credit enhancers of mortgage-backed
securities can meet their obligations under the relevant policies or other forms
of credit enhancement.

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Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.

Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.

The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full.

Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. A Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they cause the current coupon of the underlying adjustable
rate mortgages to exceed any maximum allowable annual or lifetime reset limits
(or "cap rates") for a particular mortgage. In this event, the value of the
adjustable rate mortgage-backed securities in a Fund would likely decrease.
Also, a Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage-backed securities are different than market yields
during interim periods between coupon reset dates or if the timing of changes to
the index upon which the rate for the underlying mortgage is based lags behind
changes in market rates. During periods of declining interest rates, income to a
Fund derived from adjustable rate mortgage securities which remain in a mortgage
pool will decrease in contrast to the income on fixed rate mortgage securities,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States. Fannie Maes are guaranteed as to

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timely payment of the principal and interest by FNMA. Mortgage-backed securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). The
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks and do
not constitute a debt or obligation of the United States or by any Federal Home
Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which
is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.

Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first-lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property and receivables from credit
card and other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities. The credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement of the securities.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. CMOs
are debt obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, Fannie Mae or Freddie
Mae Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as "Mortgage
Assets"). Multiclass pass-through securities are interests in a trust composed
of Mortgage Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities. Payments of principal
and interest on the Mortgage Assets, and any reinvestment income thereon,
provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.

In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specified fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In one structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of a
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. As market conditions change, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. Such
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.

A Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of

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CMO tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.

STRIPPED MORTGAGE SECURITIES. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.

Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.

In addition to the stripped mortgage securities described above, the
Fund may invest in similar securities such as Super POs and Levered IOs which
are more volatile than POs, IOs and IOettes. Risks associated with instruments
such as Super POs are similar in nature to those risks related to investments in
POs. IOettes represent the right to receive interest payments on an underlying
pool of mortgages with similar risks as those associated with IOs. Unlike IOs,
the owner also has the right to receive a very small portion of principal. Risks
connected with Levered IOs and IOettes are similar in nature to those associated
with IOs. The Fund may also invest in other similar instruments developed in the
future that are deemed consistent with its investment objective, policies and
restrictions. POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund. See "Tax Status" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.

A Fund may also purchase stripped mortgage-backed securities for
hedging purposes to protect that Fund against interest rate fluctuations. For
example, since an IO will tend to increase in value as interest rates rise, it
may be utilized to hedge against a decrease in value of other fixed-income
securities in a rising interest rate environment. With respect to IOs, if the
underlying mortgage securities experience greater than anticipated prepayments
of principal, the Fund may fail to recoup fully its initial investment in these
securities even if the securities are rated in the highest rating category by an
NRSRO. Stripped mortgage-backed securities may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The market value of the class consisting
entirely of principal payments can be extremely volatile in response to changes
in interest rates. The yields on stripped mortgage-backed securities that
receive all or most of the interest are generally higher than prevailing market
yields on other mortgage-backed obligations because their cash flow patterns are
also volatile and there is a greater risk that the initial investment will not
be fully recouped. The market for

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CMOs and other stripped mortgage-backed securities may be less liquid if these
securities lose their value as a result of changes in interest rates; in that
case, a Fund may have difficulty in selling such securities.

MONEY MARKET INSTRUMENTS. Money market instruments may include the following
types of instruments:

-- obligations issued or guaranteed as to interest and principal by the
U.S. Government, its agencies, or instrumentalities, or any federally
chartered corporation, with remaining maturities of 397 days or less;

-- obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions, with remaining maturities
of 397 days or less;

-- asset-backed commercial paper whose own rating or the rating of any
guarantor is in one of the two highest categories of any NRSRO;

-- repurchase agreements;

-- certificates of deposit, time deposits and bankers' acceptances
issued by domestic banks (including their branches located outside the
United States and subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar institutions,
and such obligations issued by foreign branches of foreign banks and
financial institutions;

-- commercial paper (including asset-backed commercial paper), which
are short-term unsecured promissory notes issued by corporations in
order to finance their current operations. Generally the commercial
paper will be rated within the top two rating categories by an NRSRO,
or if not rated, is issued and guaranteed as to payment of principal
and interest by companies which at the date of investment have a high
quality outstanding debt issue;

-- high quality short-term (maturity in 397 days or less) corporate
obligations, these obligations will be rated within the top two rating
categories by an NRSRO or if not rated, of comparable quality.

REPURCHASE AGREEMENTS. In connection with the purchase of a repurchase agreement
from member banks of the Federal Reserve System or certain non-bank dealers by a
Fund, the Fund's custodian, or a subcustodian, will have custody of, and will
hold in a segregated account, securities acquired by the Fund under a repurchase
agreement. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Repurchase agreements are considered by the staff of
the Securities and Exchange Commission (the "SEC") to be loans by the Fund.
Repurchase agreements may be entered into with respect to securities of the type
in which it may invest or government securities regardless of their remaining
maturities, and will require that additional securities be deposited with it if
the value of the securities purchased should decrease below resale price.
Repurchase agreements involve certain risks in the event of default or
insolvency by the other party, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities, the risk of a possible
decline in the value of the underlying securities during the period in which a
Fund seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or part of the
income from the repurchase agreement. NAS or applicable subadviser, acting under
the supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Funds enter into repurchase agreements
to evaluate these risks.

WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. When securities are
purchased on a "when-issued" basis or purchased for delayed delivery, then
payment and delivery occur beyond the normal settlement date at a stated price
and yield. When-issued transactions normally settle within 45 days. The payment
obligation and the interest rate that will be received on when-issued securities
are fixed at the time the buyer enters into the commitment. Due to fluctuations
in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments
are actually delivered to the buyers. The greater a Fund's outstanding
commitments for these securities, the greater the exposure to potential
fluctuations in the net asset value of a Fund. Purchasing when-issued or
delayed-delivery securities may

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involve the additional risk that the yield or market price available in the
market when the delivery occurs may be higher or the market price lower than
that obtained at the time of commitment.

When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of such Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When the Fund engages in when-issued or
delayed-delivery transactions, it relies on the other party to consummate the
trade. Failure of the seller to do so may result in a Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.

LENDING PORTFOLIO SECURITIES. A Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided it receives cash
collateral which at all times is maintained in an amount equal to at least 100%
of the current market value of the securities loaned. By lending its portfolio
securities, the Fund can increase its income through the investment of the cash
collateral. For the purposes of this policy, the Fund considers collateral
consisting of cash, U.S. Government securities or letters of credit issued by
banks whose securities meet the standards for investment by the Fund to be the
equivalent of cash. From time to time, the Fund may return to the borrower or a
third party which is unaffiliated with it, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.

The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) a Fund must receive at least 100%
cash collateral of the type discussed in the preceding paragraph from the
borrower; (2) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (3) a
Fund must be able to terminate the loan at any time; (4) a Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) a Fund may pay only reasonable custodian fees in connection with the
loan; and (6) while any voting rights on the loaned securities may pass to the
borrower, a Fund's board of trustees must be able to terminate the loan and
regain the right to vote the securities if a material event adversely affecting
the investment occurs. These conditions may be subject to future modification.
Loan agreements involve certain risks in the event of default or insolvency of
the other party including possible delays or restrictions upon the Fund's
ability to recover the loaned securities or dispose of the collateral for the
loan.

SMALL COMPANY AND EMERGING GROWTH STOCKS. Investing in securities of small-sized
and emerging growth companies may involve greater risks than investing in the
stocks of larger, more established companies since these securities may have
limited marketability and thus may be more volatile than securities of larger,
more established companies or the market averages in general. Because
small-sized and emerging growth companies normally have fewer shares outstanding
than larger companies, it may be more difficult for a Fund to buy or sell
significant numbers of such shares without an unfavorable impact on prevailing
prices. Small-sized and emerging growth companies may have limited product
lines, markets or financial resources and may lack management depth. In
addition, small-sized and emerging growth companies are typically subject to
wider variations in earnings and business prospects than are larger, more
established companies. There is typically less publicly available information
concerning small-sized and emerging growth companies than for larger, more
established ones.

SPECIAL SITUATION COMPANIES. "Special situation companies" include those
involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, would improve the
value of the company's stock. If the actual or prospective situation does not
materialize as anticipated, the market price of the securities of a "special

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situation company" may decline significantly. Therefore, an investment in a Fund
that invests a significant portion of its assets in these securities may involve
a greater degree of risk than an investment in other mutual funds that seek
long-term growth of capital by investing in better-known, larger companies. The
subadvisers of such Funds believe, however, that if a subadviser analyzes
"special situation companies" carefully and invests in the securities of these
companies at the appropriate time, the Fund may achieve capital growth. There
can be no assurance however, that a special situation that exists at the time
the Fund makes its investment will be consummated under the terms and within the
time period contemplated, if it is consummated at all.

FOREIGN SECURITIES Investing in foreign securities (including through the use of
depository receipts) involves certain special considerations which are not
typically associated with investing in United States securities. Since
investments in foreign companies will frequently involve currencies of foreign
countries, and since a Fund may hold securities and funds in foreign currencies,
a Fund may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, if any, and may incur costs in connection with
conversions between various currencies. Most foreign stock markets, while
growing in volume of trading activity, have less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and more
volatile than securities of comparable domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than in the United States and,
at times, volatility of price can be greater than in the United States. Fixed
commissions on foreign securities exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund endeavors to achieve
the most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of securities exchanges, brokers and
listed companies in foreign countries than in the United States. In addition,
with respect to certain foreign countries, there is the possibility of exchange
control restrictions, expropriation or confiscatory taxation, and political,
economic or social instability, which could affect investments in those
countries. Foreign securities, such as those purchased by a Fund, may be subject
to foreign government taxes, higher custodian fees, higher brokerage costs and
dividend collection fees which could reduce the yield on such securities.

Foreign economies may differ favorably or unfavorably from the U.S.
economy in various respects, including growth of gross domestic product, rates
of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities. From
time to time, foreign securities may be difficult to liquidate rapidly without
adverse price effects.

INVESTMENT IN COMPANIES IN DEVELOPING COUNTRIES. Investments may be
made from time to time in companies in developing countries as well as in
developed countries. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of industrialization. Shareholders should be aware that investing
in the equity and fixed income markets of developing countries involves exposure
to unstable governments, economies based on only a few industries, and
securities markets which trade a small number of securities. Securities markets
of developing countries tend to be more volatile than the markets of developed
countries; however, such markets have in the past provided the opportunity for
higher rates of return to investors.

The value and liquidity of investments in developing countries may be
affected favorably or unfavorably by political, economic, fiscal, regulatory or
other developments in the particular countries or neighboring regions. The
extent of economic development, political stability and market depth of
different countries varies widely. Certain countries in the Asia region,
including Cambodia, China, Laos, Indonesia, Malaysia, the Philippines, Thailand,
and Vietnam are either comparatively underdeveloped or are in the process of
becoming developed. Such investments typically involve greater potential for
gain or loss than investments in securities of issuers in developed countries.

The securities markets in developing countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares

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available for investment by a Fund. Similarly, volume and liquidity in the bond
markets in developing countries are less than in the United States and, at
times, price volatility can be greater than in the United States. A limited
number of issuers in developing countries' securities markets may represent a
disproportionately large percentage of market capitalization and trading volume.
The limited liquidity of securities markets in developing countries may also
affect the Fund's ability to acquire or dispose of securities at the price and
time it wishes to do so. Accordingly, during periods of rising securities prices
in the more illiquid securities markets, the Fund's ability to participate fully
in such price increases may be limited by its investment policy of investing not
more than 15% of its total net assets in illiquid securities. Conversely, the
Fund's inability to dispose fully and promptly of positions in declining markets
will cause the Fund's net asset value to decline as the value of the unsold
positions is marked to lower prices. In addition, securities markets in
developing countries are susceptible to being influenced by large investors
trading significant blocks of securities.

Political and economic structures in many such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of the United
States. Certain of such countries have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of the
Fund's investments in those countries and the availability to the Fund of
additional investments in those countries.

Economies of developing countries may differ favorably or unfavorably
from the United States' economy in such respects as rate of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As export-driven economies,
the economies of countries in the Asia Region are affected by developments in
the economies of their principal trading partners. Hong Kong, Japan and Taiwan
have limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of price
and supply.

Certain developing countries do not have comprehensive systems of laws,
although substantial changes have occurred in many such countries in this regard
in recent years. Laws regarding fiduciary duties of officers and directors and
the protection of shareholders may not be well developed. Even where adequate
law exists in such developing countries, it may be impossible to obtain swift
and equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction.

Trading in futures contracts on foreign commodity exchanges may be
subject to the same or similar risks as trading in foreign securities.

DEPOSITORY RECEIPTS. A Fund may invest in foreign securities by
purchasing depository receipts, including American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or
other securities convertible into securities of issuers based in foreign
countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets, GDRs, in bearer form, are issued and designed for use
outside the United States and EDRs (also referred to as Continental Depository
Receipts ("CDRs")), in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. Bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. GDRs
are receipts typically issued by non-United States banks and trust companies
that evidence ownership of either foreign or domestic securities. For purposes
of a Fund's investment policies, ADRs, GDRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, GDR
or EDR representing ownership of common stock will be treated as common stock.

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Each Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.

A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities. The
depository usually charges fees upon the deposit and withdrawal of the deposited
securities, the conversion of dividends into U.S. dollars, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and thus there may not be a
correlation between such information and the market value of the depository
receipts. Unsponsored ADRs tend to be less liquid than sponsored ADRs.

Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository, and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as dividend
payment fees of the depository), although ADR holders continue to bear certain
other costs (such as deposit and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and
other information to the ADR holders at the request of the issuer of the
deposited securities.

EURODOLLAR AND YANKEE OBLIGATIONS. Eurodollar bank obligations are
dollar-denominated certificates of deposit and time deposits issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign banks.
Yankee bank obligations are dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.

Eurodollar and Yankee bank obligations are subject to the same risks
that pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee) bank
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across their borders. Other risks include: adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign issues.
However, Eurodollar and Yankee bank obligations held in a Fund will undergo the
same credit analysis as domestic issues in which the Fund invests, and will have
at least the same financial strength as the domestic issuers approved for the
Fund.

FOREIGN SOVEREIGN DEBT. Certain Funds may invest in sovereign debt
obligations issued by foreign governments. To the extent that a Fund invests in
obligations issued by developing or emerging markets, these investments involve
additional risks. Sovereign obligors in developing and emerging market 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 negotiation new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit fo 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 foreign sovereign debt securities in which a Fund may invest
will not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect the Fund's holdings.

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Furthermore, certain participants in the secondary market for such debt may be
directly involved in negotiating the terms of these arrangements and may
therefore have access to information not available to other market participants.

BRADY BONDS. Brady Bonds are debt securities, generally denominated in U.S.
dollars, 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 known as
"Brady Bonds". Brady Bonds may also be issued in respect of 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. Under these arrangements with the World Bank and/or the IMF, debtor
nations have been required 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 also 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. NAS or a subadviser may believe that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds may make
the debt of countries which have issued or have announced plans to issue Brady
Bonds an attractive opportunity for investment. However, there can be no
assurance that NAS or the subadviser's expectations with respect to Brady Bonds
will be realized.

Investors should recognize that Brady Bonds have been issued only
recently, and accordingly, do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by Standard &
Poor's or "Ba" or "B" by Moody's or, in cases in which a rating by S&P or
Moody's has not been assigned, are generally considered by NAS or the subadviser
to be of comparable quality.

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 which 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
have generally borne interested computed semi-annually at a rate equal to 13/16
of 1% above the then current six month London Inter-Bank Offered Rate ("LIBOR")
rate. Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which 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 circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
date 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. 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. In
the event of a default with respect to collateralized Brady Bonds as a result of
which the payment obligations

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of the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the fact
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course. Based upon current market
conditions, the Fund would not intend to purchase Brady Bonds which, at the time
of investment, are in default as to payments. However, in light of the risidual
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 considered speculative. A
Fund may purchase Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily 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 are
generally maintained through European transnational securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which a Fund may invest are likely to be acquired at a discount, which involves
certain considerations discussed below under "Additional Information Concerning
Taxes."

REAL ESTATE SECURITIES - Although no Fund will invest in real estate directly, a
Fund may invest in securities of real estate investment trusts ("REITs") and
other real estate industry companies or companies with substantial real estate
investments and, as a result, such Fund may be subject to certain risks
associated with direct ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines in the
value of real estate; possible lack of availability of mortgage funds; extended
vacancies of properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.

REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Hybrid REITs combine the
investment strategies of Equity REITs and Mortgage REITs. REITs are not taxed on
income distributed to shareholders provided they comply with several
requirements of Internal Revenue Code, as amended (the "Code").

CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes,
preferred stocks, or other securities that may be converted into or exchanged
for a specified amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. Convertible
securities have general characteristics similar to both debt obligations and
equity securities.

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The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, the credit
standing of the issuer and other factors. The market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The conversion value of a convertible
security is determined by the market price of the underlying common stock. The
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. If the conversion value
is low relative to the investment value, the price of the convertible security
is governed principally by its investment value. Generally, the conversion value
decreases as the convertible security approaches maturity. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value. A convertible security generally will sell at a premium
over its conversion value by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.

A convertible security entitles the holder to receive interest normally
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.

A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption, a
Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.

Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, generally enjoy seniority in right of payment to all
equity securities, and convertible preferred stock is senior to common stock of
the same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.

Certain Funds may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as a Fund, with the opportunity to
earn higher dividend income than is available on a company's common stock.
PERCS are preferred stocks that generally feature a mandatory conversion date,
as well as a capital appreciation limit, which is usually expressed in terms of
a stated price. Most PERCS expire three years from the date of issue, at which
time they are convertible into common stock of the issuer. PERCS are generally
not convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is
trading at a price above that set by the capital appreciation limit. The amount
of that fractional share of common stock is determined by dividing the price
set by the capital appreciation limit by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. If called early, however, the issuer must pay a
call premium over the market price to the investor. This call premium declines
at a preset rate daily, up to the maturity date.

A Fund may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically Convertible
Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES
(Preferred Redeemable Increased Dividend Equity Securities), SAILS (Stock
Appreciation Income Linked Securities), TECONS (Term Convertible Notes), QICS
(Quarterly Income Cumulative Securities), and DECS (Dividend Enhanced
Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all
have the following features: they are issued by the company, the common stock of
which will be received in the event the convertible preferred stock is
converted; unlike PERCS they do not have a capital appreciation limit; they seek
to provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three or four-year
maturities; they typically have some built-in call protection for the first two
to three years; and, upon maturity, they will necessarily convert into either
cash or a specified number of shares of common stock.

Similarly, there may be enhanced convertible debt obligations issued by
the operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein, which may be similar to those
described above in which a Fund may invest, consistent with its goals and
policies.

An investment in an enhanced convertible security or any other security
may involve additional risks to the fund. A Fund may have difficulty disposing
of such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event such, as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the fund's portfolio. A Fund, however, intends to
acquire liquid securities, though there can be no assurances that it will always
be able to do so.

Certain Funds may also invest in zero coupon convertible securities.
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities acretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In

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addition, zero coupon convertible securities usually have put features that
provide the holder with the opportunity to sell the securities back to the
issuer at a stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations then conventional convertible securities. Federal income tax law
requires the holder of a zero coupon convertible security to recognize income
from the security prior to the receipt of cash payments. To maintain its
qualification as a regulated investment company and avoid liability of federal
income taxes, a Fund will be required to distribute income accrued from zero
coupon convertible securities which it owns, and may have to sell portfolio
securities (perhaps at disadvantageous times) in order to generate cash to
satisfy these distribution requirements.

WARRANTS. Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance), on a specified date,
during a specified period, or perpetually. Warrants may be acquired separately
or in connection with the acquisition of securities. Warrants acquired by a Fund
in units or attached to securities are not subject to these restrictions.
Warrants do not carry with them the right to dividends or voting rights with
respect to the securities that they entitle their holder to purchase, and they
do not represent any rights in the assets of the issuer. As a result, warrants
may be considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.

PREFERRED STOCK. Preferred stocks, like debt obligations, are generally
fixed-income securities. Shareholders of preferred stocks normally have the
right to receive dividends at a fixed rate when and as declared by the issuer's
board of directors, but do not participate in other amounts available for
distribution by the issuing corporation. Dividends on the preferred stock may be
cumulative, and all cumulative dividends usually must be paid prior to common
shareholders receiving any dividends. Because preferred stock dividends must be
paid before common stock dividends, preferred stocks generally entail less risk
than common stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment to common stock. Preferred
stocks are, however, equity securities in the sense that they do not represent a
liability of the issuer and, therefore, do not offer as great a degree of
protection of capital or assurance of continued income as investments in
corporate debt securities. Preferred stocks are generally subordinated in right
of payment to all debt obligations and creditors of the issuer, and convertible
preferred stocks may be subordinated to other preferred stock of the same
issuer.

SHORT SELLING OF SECURITIES. In a short sale of securities, a Fund sells stock
which it does not own, making delivery with securities "borrowed" from a broker.
The Fund is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. This price may or may not be less
than the price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay the lender any dividends or interest which
accrue during the period of the loan. In order to borrow the security, the Fund
may also have to pay a fee which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.

A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those two dates. The amount of any gain will
be decreased and the amount of any loss will be increased by any interest the
Fund may be required to pay in connection with the short sale.

In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. A Fund must deposit in a segregated account an amount of cash or liquid
assets equal to the difference between (a) the market value of securities sold
short at the time that they were sold short and (b) the value of the collateral
deposited with the broker in connection with the short sale (not including the
proceeds from the short sale). While the short position is open, the Fund must
maintain on a daily basis the segregated account at such a level that (1) the
amount deposited in it plus

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the amount deposited with the broker as collateral equals the current market
value of the securities sold short and (2) the amount deposited in it plus the
amount deposited with the broker as collateral is not less than the market value
of the securities at the time they were sold short.

A Fund may engage in short sales if at the time of the short sale the
Fund owns or has the right to obtain without additional cost an equal amount of
the security being sold short. This investment technique is known as a short
sale "against the box." The Funds do not intend to engage in short sales against
the box for investment purposes. A Fund may, however, make a short sale as a
hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Fund (or a security convertible
or exchangeable for such security), or when the Fund wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for U.S. federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such case,
any future losses in the Fund's long position should be offset by a gain in the
short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced will depend upon the amount of the security sold short relative to the
amount the Fund owns. There will be certain additional transaction costs
associated with short sales against the box, but the Fund will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.

RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. A Fund may not invest
more than 15% (10% for the Money Market Fund) of its net assets, in the
aggregate, in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days, time deposits maturing in more than seven
days and securities that are illiquid because of the absence of a readily
available market or legal or contractual restrictions on resale. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and an
investment company might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. An investment company might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

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

The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers.

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A Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC options
written by the Fund. The assets used as cover for OTC options written by a Fund
will be considered illiquid unless the 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.

The applicable subadviser or NAS (if there are no subadvisers) will
monitor the liquidity of restricted securities in the portion of a Fund it
manages. In reaching liquidity decisions, the following factors are considered:
(A) the unregistered nature of the security; (B) the frequency of trades and
quotes for the security; (C) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (D) dealer
undertakings to make a market in the security and (E) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).

PRIVATE PLACEMENT COMMERCIAL PAPER. Commercial paper eligible for resale under
Section 4(2) of the Securities Act is offered only to accredited investors. Rule
506 of Regulation D in the Securities Act of 1933 lists investment companies as
an accredited investor.

Section 4(2) paper not eligible for resale under Rule 144A under the
Securities Act shall be deemed liquid if (1) the Section 4(2) paper is not
traded flat or in default as to principal and interest; (2) the Section 4(2)
paper is rated in one of the two highest rating categories by at least two
NRSROs, or if only one NRSRO rates the security, it is rated in one of the two
highest categories by that NRSRO; and (3) the Adviser believes that, based on
the trading markets for such security, such security can be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the security.

BORROWING. A Fund may borrow money from banks, limited by each Fund's
fundamental investment restriction to 33-1/3% of its total assets (including the
amount borrowed), and may engage in mortgage dollar roll and reverse repurchase
agreements which may be considered a form of borrowing. In addition, a Fund may
borrow up to an additional 5% of its total assets from banks for temporary or
emergency purposes. A Fund will not purchase securities when bank borrowings
exceed 5% of such Fund's total assets. Each Fund expects that its borrowings
will be on a secured basis. In such situations, either the custodian will
segregate the pledged assets for the benefit of the lender or arrangements will
be made with a suitable subcustodian, which may include the lender. The Funds
have established a line-of-credit ("LOC") with their custodian by which they may
borrow for temporary or emergency purposes. The Funds intend to use the LOC to
meet large or unexpected redemptions that would otherwise force a Fund to
liquidate securities under circumstances which are unfavorable to a Fund's
remaining shareholders.

DERIVATIVE INSTRUMENTS. NAS and each of the subadvisers may use a variety of
derivative instruments, including options, futures contracts (sometimes referred
to as "futures"), options on futures contracts, stock index options and forward
currency contracts to hedge a Fund's portfolio or for risk management or for any
other permissible purposes consistent with that Fund's investment objective.
Derivative instruments are securities or agreements whose value is based on the
value of some underlying asset (e.g., a security, currency or index) or the
level of a reference index.

Derivatives generally have investment characteristics that are based
upon either forward contracts (under which one party is obligated to buy and the
other party is obligated to sell an underlying asset at a specific price on a
specified date) or option contracts (under which the holder of the option has
the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to the corresponding losses
that result from adverse movements in the value of the underlying asset. The
seller (writer) of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses resulting from changes in the value
of the underlying asset. Derivative transactions may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
transaction in relation to the underlying asset may be magnified.

The use of these instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they may be
traded, and the Commodity Futures Trading Commission ("CFTC"). In addition, a
Fund's ability to use these instruments will be limited by tax considerations.

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SPECIAL RISKS OF DERIVATIVE INSTRUMENTS. The use of derivative
instruments involves special considerations and risks as described below. Risks
pertaining to particular instruments are described in the sections that follow.

(1) Successful use of most of these instruments depends upon the NAS'
or a subadviser's ability to predict movements of the overall securities and
currency markets, which requires different skills than predicting changes in the
prices of individual securities. There can be no assurance that any particular
strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) 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 these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged, as well as, how similar the index is
to the portion of the Fund's assets being hedged in terms of securities
composition.

(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
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 NAS or subadviser projected a decline in the price of a security
in the Fund's 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 instrument. Moreover, if the price of the instrument declined by
more than the increase in the price of the security, a Fund could suffer a loss.

(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the 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. The Fund's ability to close out a position in an 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 ("counter party") 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.

For a discussion of the federal income tax treatment of a Fund's
derivative instruments, see "Tax Status" below.

OPTIONS. A Fund may purchase or write put and call options on
securities and indices, and may purchase options on foreign currencies, and
enter into closing transactions with respect to such options to terminate an
existing position. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing put or call options can
enable a Fund to enhance income by reason of the premiums paid by the purchaser
of such options. Writing call options serves 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
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 at less than its market value or will be obligated to purchase
the security at a price greater than that at which the security must be sold
under the option. All or a portion of any assets used as cover for OTC options
written by a Fund would be considered illiquid to the extent described under
"Restricted and Illiquid

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Securities" above. Writing put options serves 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
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 at more than its market value.

The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration of the
option, the relationship of the exercise price to the market price of the
underlying investment, and general market conditions. Options that expire
unexercised have no value. Options used by a Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.

A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.

A Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the Fund and the counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counter party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.

A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. A Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with counterparties that are expected to be
capable of entering into closing transactions with a Fund, there is no assurance
that such Fund will in fact be able to close out an OTC option at a favorable
price prior to expiration. In the event of insolvency of the counter party, a
Fund might be unable to close out an OTC option position at any time prior to
its expiration.

If a Fund is unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as a cover for the written option until the option
expires or is exercised.

A Fund may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except that index options
may serve as a hedge against overall fluctuations in the securities markets in
general.

The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.

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Transactions using OTC options (other than purchased options) expose a
Fund to counter party risk. To the extent required by SEC guidelines, a Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or (2)
cash and liquid obligations with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. A Fund
will also set aside cash and/or appropriate liquid assets in a segregated
custodial account if required to do so by the SEC and CFTC regulations. Assets
used as cover or held in a segregated account cannot be sold while the position
in the corresponding option or futures contract is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to segregated accounts as a cover could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.

SPREAD TRANSACTIONS. A Fund may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a Fund
the right to put, or sell, a security that it owns at a fixed dollar spread or
fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to a Fund in purchasing covered
spread options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing transactions
will be available. The purchase of spread options will be used to protect a Fund
against adverse changes in prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality securities. Such protection is
only provided during the life of the spread option.

FUTURES CONTRACTS. A Fund may enter into futures contracts, including
interest rate, index, and currency futures and purchase and write (sell) related
options. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve as
a limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for writing
covered options in securities. A Fund's hedging may include purchases of futures
as an offset against the effect of expected increases in securities prices or
currency exchange rates and sales of futures as an offset against the effect of
expected declines in securities prices or currency exchange rates. A Fund may
write put options on futures contracts while at the same time purchasing call
options on the same futures contracts in order to create synthetically a long
futures contract position. Such options would have the same strike prices and
expiration dates. A Fund will engage in this strategy only when NAS or a
subadviser believes it is more advantageous to a Fund than is purchasing the
futures contract.

To the extent required by regulatory authorities, a Fund will only
enter into futures contracts that are traded on U.S. or foreign exchanges or
boards of trade approved by the CFTC and are standardized as to maturity date
and underlying financial instrument. These transactions may be entered into for
"bona fide hedging" purposes as defined in CFTC regulations and other
permissible purposes including increasing return and hedging against changes in
the value of portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions. The ability of a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.

A Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of a Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could be
used to reduce a Fund's exposure to market, currency, or interest rate
fluctuations, such Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.

A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times the difference

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between the value of the index at the close of the last trading day of the
contract and the price at which the index futures contract was originally
written. Transactions costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures contract may be satisfied
by delivery or purchase, as the case may be, of the instrument, the currency, or
by payment of the change in the cash value of the index. More commonly, futures
contracts are closed out prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although the value of an index might
be a function of the value of certain specified securities, no physical delivery
of those securities is made. If the offsetting purchase price is less than the
original sale price, a Fund realizes a gain; if it is more, a Fund realizes a
loss. Conversely, if the offsetting sale price is more than the original
purchase price, a Fund realizes a gain; if it is less, a Fund realizes a loss.
The transaction costs must also be included in these calculations. There can be
no assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a Fund is not able to enter into an offsetting transaction, that Fund will
continue to be required to maintain the margin deposits on the futures contract.

No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid obligations, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to a Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If a Fund has insufficient cash to meet daily variation
margin requirements, it might need to sell securities at a time when such sales
are disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only on an exchange or
board of trade on which they were entered into (or through a linked exchange).
Although the Funds intend to enter into futures transactions only on exchanges
or boards of trade where there appears to be an active market, there can be no
assurance that such a market will exist for a particular contract at a
particular time.

Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.

If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.

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Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin calls
and might be compelled to liquidate futures or options on futures contracts
positions whose prices are moving unfavorably to avoid being subject to further
calls. These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.

SWAP AGREEMENTS. A Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any lawful
purpose consistent with such Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. A Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Swap
agreements may include interest rate caps, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap"; interest rate floors under which, in return
for a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor, or vice versa,
in an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.

The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid assets.

Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on NAS' or a
subadviser's ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Swap agreements
may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on a Fund by the Internal Revenue Code may limit a Fund's ability to use
swap agreements. The swaps market is largely unregulated.

A Fund will enter swap agreements only with counterparties that NAS or
a subadviser reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.

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FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES - SPECIAL
CONSIDERATIONS. A Fund may use options and futures and options on futures on
foreign currencies and forward currency contracts to hedge against movements in
the values of the foreign currencies in which a Fund's securities are
denominated. A Fund may engage in currency exchange transactions to protect
against uncertainty in the level of future exchange rates and may also engage in
currency transactions to increase income and total return. The Global Equity
Fund may engage in foreign currency exchange transactions to adjust its currency
exposure relative to its benchmark, the MSCI World Equity Index. Such currency
hedges can protect against price movements in a security the 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.

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 foreign currency
or a basket of currencies, the values of which a 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 derivative 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 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. To the extent the U.S. options or 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 derivative instruments until they reopen.

Settlement of derivative 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.

Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, a Fund will normally purchase OTC options on
foreign currency only when NAS or a subadviser believes a liquid secondary
market will exist for a particular option at any specific time.

FORWARD CURRENCY CONTRACTS. A Fund may enter into forward currency contracts. A
forward currency contract involves an obligation to purchase or sell a specific
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 entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers.

At or before the maturity of a forward contract, a Fund may either sell
a portfolio security and make delivery of the currency, or retain the security
and fully or partially offset its contractual obligation to deliver

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the currency by purchasing a second contract. If a Fund retains the portfolio
security and engages in an offsetting transaction, the Fund, at the time of
execution of the offsetting transaction, will incur a gain or a loss to the
extent that movement has occurred in forward contract prices.

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 foreign
currency contract has been established. Thus, the 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.

CURRENCY HEDGING. While the values of forward currency contracts,
currency options, currency futures and options on futures may be expected to
correlate with exchange rates, they will not reflect other factors that may
affect the value of a Fund's investments. A currency hedge, for example, should
protect a Yen-denominated bond against a decline in the Yen, but will not
protect a Fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of a Fund's investments denominated in foreign
currency will change in response to many factors other than exchange rates, a
currency hedge may not be entirely successful in mitigating changes in the value
of a Fund's investments denominated in that currency over time.

A decline in the dollar value of a foreign currency in which a Fund's
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. The use of currency
hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. In order to protect against such diminutions in the value of securities
it holds, a Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell the currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its securities that otherwise would have resulted. Conversely,
if a rise in the dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of the
securities, a Fund may purchase call options on the particular currency. The
purchase of these options could offset, at least partially, the effects of the
adverse movements in exchange rates. Although currency hedges limit the risk of
loss due to a decline in the value of a hedged currency, at the same time, they
also limit any potential gain that might result should the value of the currency
increase.

A Fund may enter into foreign currency exchange transactions to hedge
its currency exposure in specific transactions or portfolio positions or, in the
case of the Global Equity Fund, to adjust its currency exposure relative to its
benchmark, the MSCI World Equity Index. Transaction hedging is the purchase or
sale of forward currency with respect to specific receivables or payables of a
Fund generally accruing in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency with respect to
portfolio security positions. A Fund may not position hedge to an extent greater
than the aggregate market value (at the time of making such sale) of the hedged
securities.

FOREIGN COMMERCIAL PAPER. A Fund may invest in commercial paper which is indexed
to certain specific foreign currency exchange rates. The terms of such
commercial paper provide that its principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. A Fund will
purchase such commercial paper with the currency in which it is denominated and,
at maturity, will receive interest and principal payments thereon in that
currency, but the amount or principal payable by the issuer at maturity will
change in proportion to the change (if any) in the exchange rate between two
specified currencies between the date the instrument is issued and the date the
instrument matures. While such commercial paper entails the risk of loss of
principal, the potential for realizing gains as a result of changes in foreign
currency exchange rate enables a Fund to hedge or cross-hedge against a decline
in the U.S. dollar value of investments denominated in foreign currencies while
providing an attractive money market rate of return. A Fund will purchase such
commercial paper for hedging purposes only, not for speculation. The staff of
the SEC is currently

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considering whether the purchase of this type of commercial paper would result
in the issuance of a "senior security" within the meaning of the Investment
Company Act of 1940. The Funds believe that such investments do not involve the
creation of such a senior security, but nevertheless will establish a segregated
account with respect to its investments in this type of commercial paper and to
maintain in such account cash not available for investment or other liquid
assets having a value equal to the aggregate principal amount of outstanding
commercial paper of this type.

SECURITIES OF INVESTMENT COMPANIES. As permitted by the Investment Company Act
of 1940, a Fund may invest up to 10% of its total assets, calculated at the time
of investment, in the securities of other open-end or closed-end investment
companies. No more than 5% of a Fund's total assets may be invested in the
securities of any one investment company nor may it acquire more than 3% of the
voting securities of any other investment company. A Fund will indirectly bear
its proportionate share of any management fees paid by an investment company in
which it invests in addition to the advisory fee paid by the Fund. Some of the
countries in which a Fund may invest may not permit direct investment by outside
investors. Investments in such countries may only be permitted through foreign
government-approved or government-authorized investment vehicles, which may
include other investment companies.

BANK OBLIGATIONS. Bank obligations that may be purchased by a Fund include
certificates of deposit, banker's acceptances and fixed time deposits. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.

Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.

FLOATING AND VARIABLE RATE INSTRUMENTS. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, or at specified intervals.
Certain of the floating or variable rate obligations that may be purchased by
the Funds may carry a demand feature that would permit the holder to tender them
back to the issuer of the instrument or to a third party at par value prior to
maturity.

Some of the demand instruments purchased by a Fund may not be traded in
a secondary market and derive their liquidity solely from the ability of the
holder to demand repayment from the issuer or third party providing credit
support. If a demand instrument is not traded in a secondary market, the Fund
will nonetheless treat the instrument as "readily marketable" for the purposes
of its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days in which case the
instrument will be characterized as "not readily marketable" and therefore
illiquid.

Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and to provide for
periodic adjustments in the interest rate. A Fund will limit its purchases of
floating and variable rate obligations to those of the same quality as it is
otherwise allowed to purchase. NAS or any applicable subadviser will monitor on
an ongoing basis the ability of an issuer of a demand instrument to pay
principal and interest on demand.

A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date the Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day

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<PAGE> 148

demand instruments may be held in book entry form at a bank other than a Fund's
custodian subject to a subcustodian agreement approved by the Fund between that
bank and the Fund's custodian.

ZERO COUPON SECURITIES, STEP-COUPON SECURITIES, PAY-IN-KIND BONDS ("PIK BONDS")
AND DEFERRED PAYMENT SECURITIES. Zero coupon securities are debt securities that
pay no cash income but are sold at substantial discounts from their value at
maturity. Step-coupon securities are debt securities that do not make regular
cash interest payments and are sold at a deep discount to their face value. When
a zero coupon security is held to maturity, its entire return, which consists of
the amortization of discount, comes from the difference between its purchase
price and its maturity value. This difference is known at the time of purchase,
so that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be. Zero
coupon securities may have conversion features. PIK bonds pay all or a portion
of their interest in the form of debt or equity securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. Deferred payment securities are
often sold at substantial discounts from their maturity value.

Zero coupon securities, PIK bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of a Fund's limitation on investments in illiquid securities.

Current federal income tax law requires the holder of a zero coupon
security, certain PIK bonds, deferred payment securities 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. Accordingly,
to avoid liability for federal income and excise taxes, a Fund 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 satisfy these distribution requirements.

LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations typically will result
in a Fund having a contractual relationship only with the lender, not with the
borrower. A Fund 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 Loan Participations, a Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and a Fund may not benefit directly from any collateral supporting the
loan in which it has purchased the Participation. As a result, a 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, a Fund may be treated as a general creditor of the lender and may
not benefit from any set-off between the lender and the borrower. A Fund will
acquire Loan Participations only if the lender interpositioned between the Fund
and the borrower is determined by the applicable subadviser to be creditworthy.
When a Fund 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.

A Fund may have difficulty disposing of Assignments and Loan
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
Loan Participations in response to a specific economic event, such as
deterioration in the creditworthiness of the borrower.

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<PAGE> 149

In valuing a Loan Participation or Assignment held by a Fund for which
a secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, the Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Trustees,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the loan and the lender; (ii) the current interest rate; period
until next rate reset and maturity of the loan; (iii) recent prices in the
market for similar loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.

MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. A Fund may engage in
reverse repurchase agreements to facilitate portfolio liquidity, a practice
common in the mutual fund industry, or for arbitrage transactions discussed
below. In a reverse repurchase agreement, a Fund would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. A Fund generally retains the right to interest and principal payments on
the security. Since a Fund receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing (see "Borrowing"). When required by
guidelines of the SEC, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations to repurchase the security. 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
securities having a value not less than the repurchase price (including accrued
interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which the assets fall below the repurchase price (plus accrued
interest). A Fund's liquidity and ability to manage its assets might be affected
when it sets aside cash or portfolio securities to cover such commitments.
Reverse repurchase agreements involve the risk that the market value of the
securities retained in lieu of sale may decline below the price of the
securities the Fund has sold but is obligated to repurchase. In the event 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 the Fund's obligation to
repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such determination.
Reverse repurchase agreements are considered to be borrowings under the
Investment Company Act of 1940.

Mortgage dollar rolls are arrangements in which a Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the initial
sale. A Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time the Fund would enter into a
mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Funds. (See "Borrowing")

Mortgage dollar rolls and reverse repurchase agreements may be used as
arbitrage transactions in which a Fund will maintain an offsetting position in
investment grade debt obligations or repurchase agreements that mature on or
before the settlement date on the related mortgage dollar roll or reverse
repurchase agreements. Since a Fund will receive interest on the securities or
repurchase agreements in which it invests the transaction proceeds, such
transactions may involve leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or before the settlement date
of the mortgage dollar roll or reverse repurchase agreement, NAS or a subadviser
believes that such arbitrage transactions do not present the risks to the Funds
that are associated with other types of leverage.

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TEMPORARY DEFENSIVE POSITIONS. In response to economic, political or unusual
market conditions, each Fund may invest up to 100% of its assets in cash or
money market obligations. In addition, a Fund may have, from time to time,
significant cash positions until suitable investment opportunities are
available.

INVESTMENT RESTRICTIONS FOR THE FUNDS

THE FOLLOWING ARE FUNDAMENTAL INVESTMENT RESTRICTIONS FOR EACH OF THE FUNDS
WHICH CANNOT BE CHANGED WITHOUT THE AUTHORIZATION OF THE MAJORITY OF THE
OUTSTANDING SHARES OF THE FUND FOR WHICH A CHANGE IS PROPOSED. THE VOTE OF THE
MAJORITY OF THE OUTSTANDING SECURITIES MEANS THE VOTE OF (A) 67% OR MORE OF THE
VOTING SECURITIES PRESENT AT SUCH MEETING, IF THE HOLDERS OF MORE THAN 50% OF
THE OUTSTANDING VOTING SECURITIES ARE PRESENT OR REPRESENTED BY PROXY OR (B) A
MAJORITY OF THE OUTSTANDING SECURITIES, WHICHEVER IS LESS.

INVESTMENT RESTRICTIONS FOR: STRATEGIC VALUE FUND, EQUITY INCOME FUND, HIGH
INCOME BOND FUND, BALANCED FUND, MULTI SECTOR BOND FUND, SMALL CAP VALUE FUND,
SELECT ADVISERS SMALL CAP GROWTH FUND, GLOBAL EQUITY FUND, AND SELECT ADVISERS
MID CAP FUND

A Fund:

May not purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of
the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of the outstanding voting securities of the
issuer, except that 25% or less of the Fund's total assets may be
invested without regard to such limitations. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.

May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33-1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Fund may
also borrow money from other persons to the extent permitted by
applicable law. For purposes of this restriction, short sales, the
entry into currency transactions, options, futures contracts, options
on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the
segregation of assets in connection with any of the foregoing) shall
not constitute borrowing.

May not issue senior securities, except as permitted under the 1940
Act.

May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.

May not purchase or sell real estate unless acquired as a result of
ownership of securities or instruments, but this restriction shall not
prohibit the Fund from purchasing or selling securities issued by
entities or investment vehicles that own or deal in real estate or
interests therein or instruments secured by real estate or interests
therein.

May not purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus of such Fund.

May not lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets (taken at current value) would be lent
to other parties, except in accordance with its investment objective,
policies and limitations through (i) purchase of debt securities or
other debt instruments, including loan participations, assignments and
structured securities, or (ii) by engaging in repurchase agreements.

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May not purchase the securities of any issuer if, as a result, more
than 25% (taken at current value) of the Fund's total assets would be
invested in the securities of issuers, the principal activities of
which are in the same industry. This limitation does not apply to
securities issued by the U.S. Government or its agencies or
instrumentalities.

INVESTMENT RESTRICTIONS FOR: STRATEGIC GROWTH FUND, SMALL COMPANY FUND AND
INCOME FUND

A Fund:

May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the 1940 Act which may
involve a borrowing, provided that the combination of (i) and (ii)
shall not exceed 33-1/3% of the value of the Fund's total assets
(including the amount borrowed), less the Fund's liabilities (other
than borrowings), except that the Fund may borrow up to an additional
5% of its total assets (not including the amount borrowed) from a bank
for temporary or emergency purposes (but not for leverage or the
purchase of investments). A Fund may also borrow money from other
persons to the extent permitted by applicable law. For purposes of this
restriction, short sales, the entry into currency transactions,
options, futures contracts, options on futures contracts, forward
commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in
connection with any of the foregoing) shall not constitute borrowing.

May not issue senior securities, except as permitted under the 1940
Act.

May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities.

INVESTMENT RESTRICTIONS FOR: TOTAL RETURN FUND, CAPITAL APPRECIATION FUND,
GOVERNMENT BOND FUND, MONEY MARKET FUND

A Fund:

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May not borrow money, except an amount equal to no more than 5% of the
value of each of the Fund's total assets (calculated when the loan is
made) for temporary, emergency purposes or for the clearance of
transactions. This limited borrowing authority will not be used to
leverage the Funds or to borrow for extended periods of time. This
authority is intended to provide the investment manager additional
flexibility in the execution of routine daily transactions, and allow
for more efficient cash management.

May not purchase securities on margin, but the Trust may obtain such
credits as may be necessary for the clearance of purchases and sales of
securities and except as may be necessary to make margin payments in
connection with derivative securities transactions.

May not make loans to other persons, except by the purchase of
obligations in which the Trust is authorized to invest. The Trust may,
however, enter into repurchase agreements, but a Fund will not enter
into repurchase agreements if, as a result thereof, more than 10% of
the Fund's total assets (taken at current value) would be subject to
repurchase agreements maturing in more than 7 days.

May not purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus of such Fund.

May not issue securities except as permitted by the Investment Company
Act of 1940.

The following are the NON-FUNDAMENTAL operating policies of the Strategic Growth
Fund, Strategic Value Fund, Equity Income Fund, High Income Bond Fund, Balanced
Fund, Multi Sector Bond Fund, Small Cap Value Fund, Select Advisers Small Cap
Growth Fund, Global Equity Fund, Select Advisers Mid Cap Fund, Small Company
Fund and Income Fund, which MAY BE CHANGED by the Board of Trustees of the Trust
WITHOUT SHAREHOLDER APPROVAL:

Each Fund may not:

Sell securities short (except for the Mid Cap Fund), unless the Fund
owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short or unless it covers such short
sales as required by the current rules and positions of the SEC or its
staff, and provided that short positions in forward currency contracts,
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short. The Mid Cap Fund may only sell securities short in accordance
with the description contained in its Prospectus.

Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with

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options, futures contracts, options on futures contracts, transactions
in currencies or other derivative instruments shall not constitute
purchasing securities on margin.

Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid.

Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.

Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the time of the
borrowing or investment.

The following are the NON-FUNDAMENTAL operating policies of the Capital
Appreciation Fund, Total Return Fund, Government Bond Fund and Money Market Fund
which MAY BE CHANGED by the Board of Trustees of the Trust WITHOUT SHAREHOLDER
APPROVAL:

No Fund may:

Make short sales of securities.

Purchase or otherwise acquire any other securities if, as a result,
more than 15% (10% with respect to the Money Market Fund of its net
assets would be invested in securities that are illiquid.

Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization
and (b) to the extent permitted by the 1940 Act, or any rules or
regulations thereunder, or pursuant to any exemption therefrom.

The investment objectives of each of the Funds is not fundamental and may be
changed by the Board of Trustees without shareholder approval.

PORTFOLIO TURNOVER. The portfolio turnover rate for each Fund is calculated by
dividing the lessor of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities, excluding securities
whose maturities at the time of purchase were one year or less. The portfolio
turnover rate for the year ended December 31, 1998 and the period ended December
31, 1997 were as follows:

<TABLE>
<CAPTION>
FUND 1998 1997
<S> <C> <C>
Strategic Growth* 369.83% 27.32%
Strategic Value* 68.65% 5.38%
Equity Income* 49.12% 14.52%
High Income Bond* 24.25% 7.37%
Balanced* 137.35% 0.19%
Multi Sector Bond* 287.69% 48.90%
Small Cap Value* 283.65% 8.38%
Small Cap Growth** N/A N/A
Global Equity* 59.01% 9.32%
Select Advisers Mid Cap* 119.37% 7.81%
Small Company 141.27% 134.38%
Income*** 157.21% N/A
Total Return 17.13% 13.85%
Capital Appreciation 10.67% 10.88%
Government Bond 32.03% 68.61%
</TABLE>

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* Commenced operations on October 31,1997.
** Had no operations prior to May 1,1999.
*** Commenced operations on January 20, 1998.

High portfolio turnover rate will generally result in higher brokerage expenses.

INSURANCE LAW RESTRICTIONS - In connection with the Trust's agreement to sell
shares to the Accounts, NAS and the insurance companies may enter into
agreements, required by certain state insurance departments, under which NAS may
agree to use its best efforts to assure and to permit insurance companies to
monitor that each Fund of the Trust complies with the investment restrictions
and limitations prescribed by state insurance laws and regulations applicable to
the investment of separate account assets in shares of mutual funds. If a Fund
failed to comply with such restrictions or limitations, the separate accounts
would take appropriate action which might include ceasing to make investments in
the Fund or withdrawing from the state imposing the limitation. Such
restrictions and limitations are not expected to have a significant impact on
the Trust's operations.

MAJOR SHAREHOLDERS

As of April 19, 1999, separate accounts of Nationwide Life Insurance
Company had shared voting and investment power over 97.9% of the Balanced Fund
shares, 97.6% of the Multi Sector Bond Fund shares, 98.4% of the Small Cap Value
Fund shares, 76.7% of the Global Equity Fund shares, 72.8% of the Select
Advisors Mid Cap Fund shares, 91.2% of the Strategic Growth Fund shares, 93.2%
of the Strategic Value Fund shares, 93.2% of the Equity Income Fund shares,
88.4% of the High Income Bond Fund shares, 99.1% of the Small Company Fund
shares, 100% of the Total Return Fund shares, 100% of the Government Bond Fund
shares, 99.8% of the Capital Appreciation Fund shares, and 100% of the Money
Market Fund shares, respectively. As of April 19, 1999, Nationwide Life
Insurance Company owned beneficially 2.1% of the Balanced Fund shares, 2.4% of
the Multi Sector Bond Fund shares, 1.6% of the Small Cap Value Fund shares,
23.3% of the Global Equity Fund shares, 27.2% of the Select Advisors Mid Cap
Fund shares, 8.8% of the Strategic Growth Fund shares, 6.8% of the Strategic
Value Fund shares, 6.8% of the Equity Income Fund shares, 11.6% of the High
Income Bond Fund shares, and 32.3% of the Income Fund shares. As of April 19,
1999, the following portfolios of Nationwide Asset Allocation Trust had shared
voting and investment power over shares of the Income Fund: Moderately
Aggressive Portfolio, 9.9%, Moderate Portfolio, 19.8%; Moderately Conservative
Portfolio, 12.4%; and Conservative Portfolio, 23.9%. Nationwide Asset Allocation
Trust is a registered investment company advised by NAS and sold to separate
accounts of Nationwide Life Insurance Company.

Nationwide Life Insurance Company, One Nationwide Plaza, Columbus, Ohio
43215 is wholly owned by Nationwide Financial Services, Inc. ("NFS"). NFS, a
holding company, has two classes of common stock outstanding with different
voting rights enabling Nationwide Corporation (the holder of all outstanding
Class B Common Stock) to control NFS. Nationwide Corporation is also a holding
company in the Nationwide Insurance Enterprise. All of the common stock of
Nationwide Corporation is held by Nationwide Mutual Insurance Company (95.3%)
and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a mutual
company owned by its policyholders.

As of April 19, 1999, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the shares of the Trust.

TRUSTEES AND OFFICERS OF THE TRUST

TRUSTEES AND OFFICERS

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The business and affairs of the Trust are managed under the direction of its
board of Trustees. The Board of Trustees sets and reviews policies regarding the
operation of the Trust, and directs the officers to perform the daily functions
of the Trust.

The principal occupations of the Trustees and Officers during the last five
years and their affiliations are:

Dr. John C. Bryant, Trustee, Age 63
411 Oak Street - Suite 306
Cincinnati, Ohio 45219

Dr. Bryant is Executive Director of the Cincinnati Youth Collaborative,
a partnership of business, government, schools and social service
agencies to address the educational needs of students. He was formerly
Professor of Education, Wilmington College.

C. Brent DeVore, Trustee, Age 58
111 N. West Street, Westerville, Ohio 43081

Dr. DeVore is President of Otterbein College.

Sue Doody, Trustee, Age 64
169 East Beck Street
Columbus, Ohio 43206

Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is
an active member of the Greater Columbus Area Chamber of Commerce Board of
Trustees.

Robert M. Duncan, Trustee, Age 71
1397 Haddon Road
Columbus, Ohio 43209

Mr. Duncan is a member of the Ohio Elections Commission. He was
formerly Secretary to the Board of Trustees of the Ohio State
University. Prior to that, he was Vice President and General Counsel of
The Ohio State University.

Joseph J. Gasper, Trustee*, Chairman, Age 54
One Nationwide Plaza
Columbus, Ohio 43215

Mr. Gasper is Director, President and Chief Operating Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life
Insurance Company. Prior to that, he was Executive Vice President and
Senior Vice President for the Nationwide Insurance Enterprise.

Dr. Thomas J. Kerr, IV, Trustee, Age 65
4890 Smoketalk Lane
Westerville, Ohio 43081

Dr. Kerr is President Emeritus of Kendall College. He was formerly
President of Grant Hospital Development Foundation.

Douglas F. Kridler, Trustee, Age 43
55 East State Street
Columbus, Ohio 43215

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<PAGE> 156

Mr. Kridler is President of Columbus Association for the Performing
Arts.

Robert J. Woodward, Jr., Trustee*, Vice-Chairman, Age 56
One Nationwide Plaza
Columbus, Ohio 43215

Mr. Woodward is Executive Vice President - Chief Investment Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life
Insurance Company.

David C. Wetmore, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia 20190

Mr. Wetmore is the Managing Director of The Updata Capital, a venture
capital firm.

James F. Laird, Jr., Treasurer, Age 42
Three Nationwide Plaza
Columbus, Ohio 43215

Mr. Laird is Vice President and General Manager of Nationwide Advisory
Services, Inc., the Distributor and Investment Adviser. He was formerly
Treasurer of Nationwide Advisory Services, Inc.

Elizabeth A. Davin, Secretary, Age 34
One Nationwide Plaza
Columbus, Ohio 43215

Ms. Davin is a member of the Office of General Counsel of the
Nationwide Insurance Enterprise and a partner in Dietrich, Reynolds &
Koogler.

*A Trustee who is an "interested person" of the Trust as defined in the 1940
Act.

Bryant, DeVore, Doody, Duncan, Kerr, Kridler and Wetmore are also
Trustees of Nationwide Mutual Funds and Nationwide Asset Allocation Trust, which
are registered investment companies in the Nationwide fund complex. Gasper and
Wetmore are also Trustees of Nationwide Asset Allocation Trust. Laird and Davin
are also officers of Nationwide Mutual Funds and Nationwide Asset Allocation
Trust.

Affiliated Persons of the Trust and the Adviser

Mr. Joseph J. Gasper, Trustee and Chairman of the Trust, is also a
Director and President of NAS. Mr. Robert J. Woodward, Jr., Trustee and
Vice-Chairman of the Trust, is also a Director and Executive Vice
President-Chief Investment Officer of NAS. Mr. James F. Laird, Jr., Treasurer of
the Trust, is also Vice President-General Manager of NAS. Ms. Elizabeth A.
Davin, Secretary of the Trust, is also Assistant Secretary of NAS. Edwin P.
McCausland, Assistant Treasurer of the Trust, is also Vice President-Fixed
Income of NAS. Mr. Christopher A. Cray, Assistant Treasurer of the Trust is also
Treasurer of NAS. Ms. Patricia J. Smith, Assistant Secretary of the Trust is
also Assistant Secretary of NAS.

The Funds do not pay any fees to Officers or to Trustees who are
considered "interested persons" of the Trust. The table below lists the
aggregate compensation paid by the Trust to each disinterested Trustee during
the fiscal year ended December 31, 1998, and the aggregate compensation paid to
each disinterested Trustee during the fiscal year ended December 31, 1998 by all
thirty-six registered investment companies to which NAS provides investment
advisory services (the "Nationwide Fund Complex").

The Trust does not maintain any pension or retirement plans for the
Officers or Trustees of the Trust.

54
<PAGE> 157

COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
Total Compensation from
Aggregate the Nationwide
Compensation Fund Complex
DISINTERESTED TRUSTEES FROM THE TRUST INCLUDING THE TRUST
<S> <C> <C>
Dr. John C. Bryant $8,000 $24,000
C. Brent DeVore $4,500 $16,000
Sue Doody $8,000 $21,000
Robert M. Duncan $8,000 $24,000
Dr. Thomas J. Kerr, IV $8,000 $24,000
Douglas F. Kridler $8,000 $21,000
David C. Wetmore $4,500 $16,000
</TABLE>

PERFORMANCE ADVERTISING

The Funds may use past performance in advertisements, sales literature,
and their prospectuses, including calculations of average annual total return,
30-day yield, and seven-day yield., as described below.

CALCULATING YIELD AND TOTAL RETURN

CALCULATING YIELD - THE MONEY MARKET FUND

Any current yield quotations for the Money Market Fund, subject to Rule
482 under the Securities Act of 1933, shall consist of a seven calendar day
historical yield, carried at least to the nearest hundredth of a percent. The
yield shall be calculated by determining the net change, excluding realized and
unrealized gains and losses, in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period return
by 365/7 (or 366/7 during a leap year). For purposes of this calculation, the
net change in account value reflects the value of additional shares purchased
with dividends from the original share, and dividends declared on both the
original share and any such additional shares. As of December 31, 1998, the
Fund's seven-day current yield was 4.84%. The Fund's effective yield represents
an annualization of the current seven day return with all dividends reinvested,
and for the period ended December 31, 1998, was 4.96%.

The Fund's yield will fluctuate daily. Actual yields will depend on
factors such as the type of instruments in the Fund's portfolio, portfolio
quality and average maturity, changes in interest rates, and the Fund's
expenses. There is no assurance that the yield quoted on any given occasion will
remain in effect for any period of time and there is no guarantee that the net
asset value will remain constant. It should be noted that a shareholder's
investment in the Fund is not guaranteed or insured. Yields of other money
market funds may not be comparable if a different base period or another method
of calculation is used.

CALCULATING YIELD AND TOTAL RETURN - NON-MONEY MARKET FUNDS

55
<PAGE> 158

The Funds may from time to time advertise historical performance,
subject to Rule 482 under the Securities Act of 1933. An investor should keep in
mind that any return or yield quoted represents past performance and is not a
guarantee of future results. The investment return and principal value of
investments will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

All performance advertisements shall include average annual total
return quotations for the most recent one, five, and ten year periods (or life,
if a Fund has been in operation less than one of the prescribed periods).
Average annual total return represents the rate required each year for an
initial investment to equal the redeemable value at the end of the quoted
period. It is calculated in a uniform manner by dividing the ending redeemable
value of a hypothetical initial payment of $1,000 for a specified period of
time, by the amount of the initial payment, assuming reinvestment of all
dividends and distributions. The one, five, and ten year periods are calculated
based on periods that end on the last day of the calendar quarter preceding the
date on which an advertisement is submitted for publication.

The uniformly calculated average annual total returns for the one, five, and ten
year period ended December 31, 1998, and the period from inception to December
31, 1998, are shown below.

<TABLE>
<CAPTION>
10 Years
Fund 1 Year 5 Years or Life
---- ------ ------- -------
<S> <C> <C> <C>
Strategic Growth Fund* 14.59% N/A 14.53%

Strategic Value Fund* 0.39% N/A 1.74%

Equity Income Fund* 15.13% N/A 14.64%

High Income Bond Fund* 5.80% N/A 7.04%

Balanced Fund* 8.07% N/A 8.26%

Multi Sector Bond Fund* 2.60% N/A 3.16%

Small Cap Value Fund* -3.06% N/A -4.00%
</TABLE>

56
<PAGE> 159

<TABLE>
<S> <C> <C> <C>
Global Equity Fund* 19.14% N/A 17.47%

Select Advisers Mid Cap
Fund* 10.81% N/A 8.91%

Select Advisers Small Cap Growth -- --
Fund****

Small Company Fund** 1.01% N/A 17.34%

Income Fund*** N/A N/A 7.13%

Total Return Fund 18.07% 19.43% 15.44%

Capital Appreciation Fund 29.96% 23.10% 19.32%

Government Bond Fund 8.91% 7.27% 9.35%
</TABLE>

* These Funds commenced operations on October 31, 1997.
** This Fund commenced operations on October 23, 1995.
*** This Fund commenced operations on January 20, 1998.
****Operations for the Select Advisers Small Cap Growth Fund will commence on or
about May 1, 1999.

Certain Funds may also from time to time advertise a uniformly
calculated yield quotation. This yield is calculated by dividing the net
investment income per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period, and annualizing the
results, assuming reinvestment of all dividends and distributions. This yield
formula uses the average number of share entitled to receive dividends, provides
for semi-annual compounding of interest, and includes a modified market value
method for determining amortization. The yield will fluctuate, and there is no
assurance that the yield

57
<PAGE> 160

quoted on any given occasion will remain in effect for any period of time. The
uniformly calculated yields for the 30 day period ended December 31, 1998 were
as follows:

<TABLE>
<CAPTION>
FUND 30-DAY YIELD
<S> <C>
High Income Bond Fund 8.57%
Balanced Fund 3.71%
Multi Sector Bond Fund 6.58%
Government Bond Fund 5.00%
</TABLE>

INVESTMENT ADVISORY AND OTHER SERVICES

NAS oversees the management of each of the Funds pursuant to
Investment Advisory Agreements with the Trust (the "Investment Advisory
Agreements"). Pursuant to the Investment Advisory Agreements, NAS either
provides portfolio management for the Funds directly or hires and monitors the
subadvisers who are responsible for daily portfolio management. NAS pays the
compensation of the Trustees affiliated with NAS. The officers of the Trust
receive no compensation from the Trust. NAS also pays all expenses incurred by
it in providing service under the Investment Advisory Agreements, other than the
cost of investments (including brokerage commissions and other transaction
costs).

The Investment Advisory Agreements also provide that NAS shall not
be liable for any act or omission in providing advisory services, or for any
loss arising out of any investment, unless NAS has acted with willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of NAS' reckless disregard of its obligations and duties under the
Agreements. After an initial two-year period, the Investment Advisory Agreements
must be approved each year by the Trust's board of trustees or by shareholders
in order to continue. Each Investment Advisory Agreement terminates
automatically if it is assigned. They may be terminated without penalty by vote
of a majority of the outstanding voting securities, or by either party, on not
less than 60 days written notice.

NAS, an Ohio corporation, is a wholly owned subsidiary of
Nationwide Life Insurance Company, which is owned by Nationwide Financial
Services, Inc. ("NFS"). NFS, a holding company, has two classes of common stock
outstanding with different voting rights enabling Nationwide Corporation (the
holder of all of the outstanding Class B common stock) to control NFS.
Nationwide Corporation is also a holding company in the Nationwide Insurance
Enterprise. All of the common stock of Nationwide Corporation is held by
Nationwide Mutual Insurance Company (95.3%) and Nationwide Mutual Fire Insurance
Company (4.7%), each of which is a mutual company owned by its policyholders.

Subject to the supervision of NAS and the Trustees, each
subadviser manages a Fund's assets in accordance with such Fund's investment
objective and policies. Each subadviser shall make investment decisions for such
Fund, and in connection with such investment decisions, shall place purchase and
sell orders for securities.

58
<PAGE> 161

Each subadviser provides investment advisory services to one or
more Funds pursuant to a Subadvisory Agreement. Each of the Subadvisory
Agreements specifically provides that the subadviser shall not be liable for any
error of judgment, or mistake of law, or for any loss arising out of any
investment, or for any act or omission in the execution and management of the
Fund, except for willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of reckless disregard of its obligations
and duties under such Agreement. After an initial two-year period, each
Subadvisory Agreement must be approved each year by the Trust's board of
trustees or by shareholders in order to continue. Each Subadvisory Agreement
terminates automatically if it is assigned. It may also be terminated without
penalty by vote of a majority of the outstanding voting securities, or by either
party, on not less than 60 days written notice.

The following is a summary of the investment advisory fees paid
and the subadvisory arrangements for each Fund.

TOTAL RETURN FUND, CAPITAL APPRECIATION FUND, GOVERNMENT BOND FUND AND MONEY
MARKET FUND. Prior to November 1, 1997, NAS received a fee computed and paid
monthly at the annual rate equal to .50% of the average daily net assets of each
Fund.

As of November 1, 1997, the following are the advisory fees
expressed as an annual percentage of average daily net assets:

<TABLE>
<CAPTION>
Fund Advisory Fees
---- -------------
<S> <C>
Total Return Fund and 0.60% on assets up to $1 billion
Capital Appreciation Fund 0.575% on assets of $1 billion and more but less than $2 billion
0.55% on assets of $2 billion and more but less than $5 billion
0.50% for assets of $5 billion and more

Government Bond Fund 0.50% on assets up to $1 billion
0.475% on assets of $1 billion and more but less then $2 billion
0.45% on assets of $2 billion and more but less then $5 billion
0.40% for assets of $5 billion and more

Money Market Fund 0.40% on assets up to $1 billion
0.38% on assets of $1 billion and more but less than $2 billion
0.36% on assets of $2 billion and more but less then $5 billion
0.34% for assets of $5 billion and more
</TABLE>

For the years ended December 31, 1998, 1997 and 1996, NAS received
fees in the following amounts: Total Return Fund $12,401,821, $7,903,818 and
$4,851,676, respectively; Capital Appreciation Fund, $4,402,924, $1,759,412 and
$684,932, respectively; Government Bond Fund, $3,015,171, $2,231,930 and
$2,225,962, respectively; and Money Market Fund $5,043,088, $4,969,345 and
$4,518,925, respectively.

EQUITY INCOME FUND
- ------------------

Under the terms of its Investment Advisory Agreement, the Equity
Income Fund pays to NAS a fee at the annual rate of 0.80% of the Fund's average
daily net assets. NAS has agreed to waive advisory fees and, if necessary,
reimburse expenses in order to limit total Fund operating expenses to 0.95%
until further notice. For the fiscal year ended December 31, 1998, NAS was paid
$46,531 net of waivers in the amount of $16,475.

59
<PAGE> 162

Federated Investment Counseling ("Federated") is the subadviser of
the Fund. For the investment management services it provides to the Fund,
Federated receives an annual fee from NAS in the amount of 0.40% on assets up to
$50 million, 0.25% on assets of $50 million and more but less than $250 million,
0.20% on assets of $250 million and more but less than $500 million, and 0.15%
on assets of $500 million and more. These fees are calculated at an annual rate
based upon the Fund's average daily net assets. For the period October 31, 1997
(commencement of operations) through December 31, 1997, NAS paid $842 in fees to
Federated. For the fiscal year ended December 31, 1998, NAS paid Federated
$31,503.

Federated, a Delaware business trust organized on April 11, 1989
is a registered investment adviser under the Investment Advisers Act of 1940. It
is a subsidiary of Federated Investors, Inc. Federated and other subsidiaries of
Federated Investors, Inc. serve as investment advisers to an open number of
investment companies and private accounts. Certain other subsidiaries also
provide administrative services to a number of investment companies.

HIGH INCOME BOND FUND
- ---------------------

Under the terms of its Investment Advisory Agreement, the High
Income Bond Fund pays to NAS a fee at the annual rate of .80% of the Fund's
average daily net assets. NAS has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total Fund operating expenses to
0.95% until further notice. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $7,374. For the fiscal year ended December 31, 1998, NAS was paid
$126,140 net of waivers in the amount of $32,820.

Federated Investment Counseling is the subadviser of the Fund. For
the investment management services it provides to the Fund, Federated receives
an annual fee from NAS in the amount of 0.40% on assets up to $50 million, 0.25%
on assets of $50 million and more but less than $250 million, 0.20% on assets of
$250 million and more but less than $500 million, and 0.15% on assets of $500
million and more. These fees are calculated at an annual rate based upon the
Fund's average daily net assets. Additional information about Federated is
included above. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, NAS paid $3,687 in fees to Federated.
For the fiscal year ended December 31, 1998, NAS paid Federated $79,480.

GLOBAL EQUITY FUND
- ------------------

Under the terms of its Investment Advisory Agreement the Global
Equity Fund pays to NAS a fee at the annual rate of 1.00% of the Fund's average
daily net assets. NAS has agreed to waive advisory fees and, if necessary,
reimburse expenses in order to limit total Fund operating expenses to 1.20%
until further notice. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $8,799. For the fiscal year ended December 31, 1998, NAS was paid
$101,488 net of waivers of $32,240.

J.P. Morgan Investment Management Inc. ("J.P. Morgan") is the
subadviser of the Fund. For the investment management services it provides to
the Fund, J.P. Morgan receives an annual fee from NAS in an amount equal to
0.60% on assets up to $50 million and 0.55% on assets of $50 million and over.
These fees are calculated at an annual rate based on the Fund's average daily
net assets. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, NAS paid $5,279 in fees to, J. P. Morgan. For the fiscal year
ended December 31, 1998, NAS paid J.P. Morgan $80,237.

J.P. Morgan is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated, a bank holding company organized under the laws of Delaware. J.P.
Morgan offers a wide range of investment management services and acts as
investment adviser to corporate and institutional clients. J.P. Morgan uses a
sophisticated, disciplined, collaborative process for managing all asset
classes. As of December 31, 1998,

60
<PAGE> 163

J.P. Morgan and its affiliates had assets under management of approximately $308
billion, including approximately $11.6 billion in global equity portfolios.

SELECT ADVISERS MID CAP FUND
- ----------------------------

Under the terms of its Investment Advisory Agreement the Fund
pays to NAS a fee at the annual rate of 1.05% of the Fund's average daily net
assets. NAS has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total Fund operating expenses to 1.20% until further
notice. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, NAS waived all advisory fees in the amount of $5,371. For the
fiscal year ended December 31, 1998, NAS was paid $50,235 net of waivers of
$24,305.

NAS has selected three subadvisers, each of whom will each manage
part of the Fund's portfolio. Each subadviser receives an annual fee from NAS in
an amount equal to 0.65% on assets up to $50 million managed by such subadviser
and 0.50% on assets of $50 million and more managed by a subadviser. For the
period October 31, 1997 (commencement of operations) through December 31, 1997,
NAS paid $3,325 in fees to the subadvisers. For the fiscal year ended December
31, 1998, NAS paid the subadvisers $46,144.

The Select Advisers Mid Cap Fund's subadvisers are:
- First Pacific Advisors, Inc. ("First Pacific")
- Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter")
- Rice, Hall, James & Associates ("Rice Hall")

Subject to the supervision of NAS and the Trustees, the
subadvisers each manage separate portions of the Fund's assets in accordance
with the Fund's investment objective and policies. With regard to the portion of
the Fund's assets allocated to it, each subadviser shall make investment
decisions for the Fund, and in connection with such investment decisions shall
place purchase and sell orders for securities. No subadviser shall have any
investment responsibility for any portion of the Fund's assets not allocated to
it by NAS for investment management.

Each of First Pacific, Pilgrim Baxter and Rice Hall is wholly
owned by United Asset Management Corporation ("UAM"), a NYSE-listed holding
company organized to acquire and own firms that provide investment advisory
services primarily for institutional clients. First Pacific is an indirect
wholly-owned subsidiary of UAM. Pilgrim Baxter and Rice Hall are each direct
wholly-owned subsidiaries of UAM. UAM's corporate headquarters are located at
One International Place, Boston 02110.

BALANCED FUND
- -------------

Under the terms of its Investment Advisory Agreement, the Balanced
Fund pays to NAS a fee at the annual rate of 0.75% of the Fund's average daily
net assets. NAS has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total Fund operating expenses to 0.90% until further
notice. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, NAS waived all advisory fees in the amount of $1,605. For the
fiscal year ended December 31, 1998, NAS was paid $131,136 net of waivers of
$12,162.

Salomon Brothers Asset Management Inc. ("SBAM") is the subadviser
of the Fund. For the investment management services it provides to the Fund,
SBAM receives an annual fee from NAS in an amount equal to 0.35% on assets up to
$150 million, 0.30% on assets of $150 million and more but less than $500
million, and 0.25% on assets of $500 million and more. These fees are calculated
as an annual rate based upon the Fund's average daily net assets. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, NAS
paid $749 in fees to SBAM. For the fiscal year ended December 31, 1998, NAS paid
SBAM $66,872.

61
<PAGE> 164

SBAM is a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by Salomon Smith Barney Holdings,
Inc. which is, in turn, wholly owned by Citigroup, Inc. SBAM was incorporated in
1987 and together with affiliates in London, Frankfurt, Tokyo and Hong Kong,
provides a broad range of fixed-income and equity investment advisory services
to various individuals and institutional clients located throughout the world,
and serves as investment adviser to various investment companies. As of December
31, 1998, SBAM and its worldwide investment advisory affiliates managed
approximately $29 billion of assets.

MULTI SECTOR BOND FUND
- ----------------------

Under the terms of its Investment Advisory Agreement, the Multi
Sector Bond Fund pays to NAS a fee at the annual rate of 0.75% of the Fund's
average daily net assets. NAS has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total Fund operating expenses to
0.90% until further notice. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $1,724. For the fiscal year ended December 31, 1998, NAS was paid
$132,978 net of waivers of $11,628.

Salomon Brothers Asset Management is the subadviser of the Fund.
For the investment management services it provides to the Fund, SBAM receives an
annual fee from NAS in the amount of 0.35% on assets up to $50 million, 0.30% on
assets of $50 million and more but less than $200 million, 0.25% on assets of
$200 million and more but less than $500 million, and 0.20% on assets of $500
million and more. These fees are calculated at an annual rate based upon the
Fund's average daily net assets. For the period October 31, 1997 (commencement
of operations) through December 31, 1997, NAS paid $805 in fees to SBAM. For the
fiscal year ended December 31, 1998, NAS paid SBAM $67,483.

In connection with SBAM's service as investment manager to the
Multi Sector Bond Fund, SBAM has entered into a subadvisory agreement with its
London based affiliate Salomon Brothers Asset Management Limited ("SBAM
Limited") pursuant to which SBAM has delegated to SBAM Limited responsibility
for management of the Fund's investments in non dollar-denominated debt
securities and currency transactions. SBAM Limited is compensated by SBAM at no
additional expense to the Fund. Like SBAM, SBAM Limited is an indirect,
wholly-owned subsidiary of Citigroup, Inc.

SMALL CAP VALUE FUND
- --------------------

Under the terms of its Investment Advisory Agreement, the Small
Cap Value Fund pays to NAS a fee at the annual rate of 0.90% of the Fund's
average daily net assets. NAS has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total Fund operating expenses to
1.05% until further notice. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $2,029. For the fiscal year ended December 31, 1998, NAS was paid
$128,764 net of waivers of $57,626.

The Dreyfus Corporation ("Dreyfus"). For the investment management
services it provides to the Small Cap Value Fund, Dreyfus receives an annual fee
from NAS in an amount equal to 0.50% on assets up to $200 million and 0.45% on
assets of $200 million and more. These fees are calculated at an annual rate
based on each Fund's average daily net assets. For the period October 31, 1997
(commencement of operations) through December 31, 1997, NAS paid $1,127 in fees
to the subadviser. For the fiscal year ended December 31, 1998, NAS paid Dreyfus
$103,550.

Dreyfus, located at 200 Park Avenue, New York, New York 10166,
was formed in 1947 and serves as one of the Small Company Fund's subadvisers.
Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of January 31,
1999, Dreyfus managed or administered approximately $121 billion in assets for
approximately 1.7 million investor accounts nationwide. Mellon is a publicly
owned multibank holding company incorporated

62
<PAGE> 165
under Pennsylvania law in 1971 and registered under the Federal Bank Holding
Company act of 1956, as amended. Mellon provides a comprehensive range of
financial products and services in domestic and selected international markets.
Mellon is among the twenty-five largest bank holding companies in the United
States based on total assets. Through its subsidiaries, including Dreyfus,
Mellon managed more than $334 billion in assets as of September 30, 1998,
including approximately $125 billion in mutual fund assets. As of September 30,
1998, various subsidiaries of Mellon provided non-investment services, such as
custodial or administration services, for more than $1.6 trillion in assets,
including approximately $52 billion in mutual fund assets.

SELECT ADVISERS SMALL CAP GROWTH FUND
- -------------------------------------

Under the terms of its Investment Advisory Agreement, the Fund pays NAS
a fee at the annual rate of 1.10% of the Fund's average daily net assets. The
Fund commenced operations on or around May 1, 1999 and has not incurred any
investment advisory fees prior to this date.

NAS has selected three subadvisers, each of whom will each manage part
of the Fund's portfolio. Each subadviser receives an annual fee from NAS in an
amount equal to 0.60% on assets managed by such subadviser and has not incurred
any subadvisory fees prior to May 1, 1999.

The Select Advisers Small Cap Growth Fund's subadvisers are:
-Franklin Advisers, Inc. ("Franklin")

-Miller Anderson & Sherrerd, LLP ("MAS")

-Neuberger Berman, LLC ("Neuberger Berman")

Subject to the supervision of NAS and the Trustees, the subadvisers
each manage separate portions of the Fund's assets in accordance with the Fund's
investment objective and policies. With regard to the portion of the Fund's
assets allocated to it, each subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. No subadviser shall have any investment
responsibility for any portion of the Fund's assets not allocated to it by NAS
for investment management.

Franklin is a wholly owned subsidiary of Franklin Resources, Inc., one
of the oldest mutual fund organizations in the U.S. Franklin and its affiliates
act as investment manager to numerous other investment companies and accounts.
Together with its affiliates, Franklin manages over $220 billion in assets as of
December 31, 1998.

MAS is wholly owned by subsidiaries of Morgan Stanley Dean Witter & Co.
and is a division of Morgan Stanley Dean Witter Investment Management ("MSDW
Investment Management") and provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
As of December 31, 1998, MSDW Investment Management managed in excess of $163
billion in assets.

Neuberger Berman and its predecessor firms and affiliates have
specialized in the management of no-load mutual funds since 1950. Neuberger
Berman and its affiliates manage securities accounts that had approximately $55
billion of assets as of December 31, 1998. Neuberger Berman is a member of the
NYSE and other principal exchanges and acts as the Fund's principal broker in
the purchase and sale of their securities for that portion of the Fund's
portfolio managed by Neuberger Berman.

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<PAGE> 166

STRATEGIC VALUE FUND AND STRATEGIC GROWTH FUND
- ----------------------------------------------

Under the terms of the Investment Advisory Agreement, each of the
Strategic Value Fund and Strategic Growth Fund pays to NAS a fee at the annual
rate of 0.90% of that Fund's average daily net assets. NAS has agreed to waive
advisory fees and, if necessary, reimburse expenses in order to limit total Fund
operating expenses to 1.00% in each Fund until further notice.For the period
October 31, 1997 (commencement of operations) through December 31, 1997, NAS
waived all advisory fees for the Strategic Value and Strategic Growth Fund in
the amount of $1,715 and $1,645, respectively. For the fiscal year ended
December 31, 1998, NAS was paid $57,340 for the Strategic Value Fund and $19,683
for the Strategic Growth Fund net of waivers of $19,318 and $31,214,
respectively.

NAS has selected Strong Capital Management, Inc. ("Strong") to be the
subadviser to the Strategic Value Fund and the Strategic Growth Fund. Strong has
subcontracted with Schafer Capital Management, Inc. ("Schafer Capital") to
subadviser the Strategic Value Fund. For the investment management services
provided to each Fund, Strong receives an annual fee from NAS in an amount equal
to 0.50% on assets of each Fund up to $500 million and 0.45% on assets of each
Fund of $500 million and more. These fees are calculated at an annual rate based
on each Fund's average daily net assets. Pursuant to its subcontract with
Schafer Capital, Strong pays Schafer's subadvisory fees. For the period October
31, 1997 (commencement of operations) through December 31, 1997, NAS paid $953
and $914, respectively for the Strategic Value and Strategic Growth Funds, in
fees to the subadviser. For the fiscal year ended December 31, 1998, Strong was
paid $42,588 and $28,276 for the Strategic Value Fund and the Strategic Growth
Fund, respectively.

Strong began conducting business in 1974. Since then, its principal
business has been providing continuous investment supervision for individuals
and institutional accounts. Strong also acts as investment advisor for each of
the mutual funds within the Strong Family of Funds. As of December 31, 1998,
Strong had over $32 billion under management. Strong's principal mailing address
is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong is the
controlling shareholder of Strong.

Schafer Capital's controlling person and sole shareholder is David K.
Schafer. Mr. Schafer has been in the investment management business for more
than 25 years and founded Schafer Capital in 1981.

SMALL COMPANY FUND
- ------------------

Under the terms of its Investment Advisory Agreement the Fund pays NAS
a fee at the annual rate of 1.00% of the Fund's average daily net assets. During
the fiscal years ended December 31, 1998, 1997, and 1996, NAS received advisory
fees in the amount of $3,598,194, $2,520,540 and $851,352 respectively.

NAS has selected five subadvisers, each of whom will each manage part
of the Fund's portfolio. Each subadviser receives an annual fee from NAS in an
amount equal to 0.60% on assets managed by a subadviser. During the fiscal years
ended December 31, 1998, 1997 and 1996, the subadvisers were paid $2,119,688,
$1,402,367 and $483,472 by NAS.

The Small Company Fund's subadvisers are:
- The Dreyfus Company
- Neuberger Berman LLC
- Strong Capital Management, Inc.
- Lazard Asset Management
- Warburg Pincus Asset Management, Inc.

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<PAGE> 167

Subject to the supervision of NAS and the Trustees, the subadvisers
each manage separate portions of the Fund's assets in accordance with the Fund's
investment objective and policies. With regard to the portion of the Fund's
assets allocated to it, each subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. No subadviser shall have any investment
responsibility for any portion of the Fund's assets not allocated to it by NAS
for investment management.

Below is a brief description of each of the subadvisers.

The Dreyfus Corporation. Dreyfus, located at 200 Park Avenue, New York,
New York 10166, was formed in 1947 and serves as one of the Small Company Fund's
subadvisers. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is
a wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of March 31,
1999, Dreyfus managed or administered approximately $120 billion in assets for
approximately 1.7 million investor accounts nationwide. Mellon is a publicly
owned multibank holding company incorporated under Pennsylvania law in 1971 and
registered under the Federal Bank Holding Company act of 1956, as amended.
Mellon provides a comprehensive range of financial products and services in
domestic and selected international markets. Mellon is among the twenty-five
largest bank holding companies in the United States based on total assets.
Through its subsidiaries, including Dreyfus, Mellon managed more than $389
billion in assets as of December 31, 1998, including approximately $141 billion
in mutual fund assets. As of September 30, 1998, various subsidiaries of Mellon
provided non-investment services, such as custodial or administration services,
for more than $1.9 trillion in assets, including approximately $52 billion in
mutual fund assets.

Neuberger Berman L.L.C. Neuberger Berman also serves as a subadviser to
the Fund. Neuberger Berman and its predecessor firms have specialized in the
management of no-load mutual funds since 1950. Neuberger Berman and its
affiliates manage securities accounts that had approximately $55 billion of
assets as of December 31, 1998. Neuberger Berman is a member firm of the NYSE
and other principal exchanges and acts as the Fund's principal broker in the
purchase and sale of their securities for that portion of the Fund's portfolio
managed by Neuberger Berman.

Strong Capital Management, Inc. Strong, which also serves as one of the
subadvisers for the Fund, began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts. Strong also acts as investment adviser
for each of the mutual funds within the Strong Family of Funds. As of December
31, 1998, Strong had over $32 billion under management. Strong's principal
mailing address is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S.
Strong is the controlling shareholder of Strong.

Lazard Asset Management. Effective October 1, 1998, Lazard began
serving as one of the subadvisers to the Fund. Lazard, a division of Lazard
Freres & Co. LLC, a New York limited liability company, manages approximately
$62 billion, as of March 31, 1999, in investments for corporations, endowments,
public and private pension plans and wealthy individuals and is recognized as
one of the premier global investment advisory firms. Lazard has offices in New
York and San Francisco. In addition, Lazard provides asset management services
worldwide through its affiliates in London, Tokyo, Sydney, Frankfurt and Cairo.
Lazard's address is 30 Rockefeller Center, New York, New York 10112.

Warburg Pincus Asset Management, Inc. The Fund also employs Warburg as
a subadviser to the Fund. Warburg is a professional investment advisory firm
which provides investment services to investment companies, employee benefit
plans, endowment funds, foundations and other institutions and individuals. As
of December 31, 1998, Warburg managed approximately $22 billion of assets,
including approximately $11 billion of investment company assets. Incorporated
in 1970, Warburg is indirectly controlled by Warburg, Pincus & Co. ("WP&Co."),
which has no business other than being a holding company of Warburg and its
affiliates. Lionel I. Pincus, the managing partner of WP&Co., may be deemed to
control

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<PAGE> 168
both WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New York,
New York 10017-3147.

On February 15, 1999, the companies of Warburg and Credit Suisse Group
announced that they reached an agreement for Credit Suisse Group to acquire
Warburg. It is expected that Warburg will be combined with Credit Suisse Asset
Management (New York), the institutional asset management and mutual fund arm of
Credit Suisse Group. As of December 31, 1998. Credit Suisse Asset Management had
global assets under management of $210 billion. Under the terms of the
arrangement, no immediate changes are planned to Warburg's investment portfolio
managers and investment professionals.

INCOME FUND

Under the terms of its Investment Advisory Agreement, the Fund pays NAS
a fee at the annual rate of 0.45% of the Fund's average daily net assets. NAS
has voluntarily agreed to waive all or part of its fees in order to limit the
Fund's total operating expenses to not more than 0.75% of the Fund's average
daily net assets on an annual basis. These fee waivers are voluntary and may be
terminated at any time. The Fund commenced operations on January 20, 1998. For
the period from commencement of operations to December 31, 1998, NAS received
$5,839 in fees net of waivers and reimbursements of $8,115.

NAS has selected two subadvisers, each of whom will manage part of the
Fund's portfolio. Each subadviser receives an annual fee from NAS based on the
average daily net assets of the portion of the Fund managed by that subadviser
as specified below:

<TABLE>
<CAPTION>
Subadvisory Fees Average Daily Net Assets
---------------- ------------------------
<S> <C>
0.25% on the first $100 million
0.15% on assets in excess of $100 million
</TABLE>

The fees for each of the subadvisers are subject to the following
annual minimum fees: $15,000 for NCM Capital and $25,000 for Smith Graham.

Below is a brief description of each of the subadvisers.

NCM CAPITAL MANAGEMENT GROUP, INC. NCM Capital was founded in 1986 and
serves as one of the Fund's subadvisers. As of December 31, 1998, NCM Capital
had approximately $4.4 billion in assets under management.

NCM Capital is a wholly-owned subsidiary of Sloan Financial Group, Inc.
Both NCM Capital and Sloan Financial Group, Inc. are located at 103 West Main
Street, 4th Floor, Durham, North Carolina 27701. Sloan Financial Group, Inc. is
a corporation of which Maceo K. Sloan, CFA, Chairman, President and Chief
Executive Officer of NCM Capital, owns 53.8% ; Justin F. Beckett, Executive Vice
President and director of NCM Capital, owns 21.1%; and American Express Asset
Management owns 25.1% as of May 1, 1999. On or around July 1, 1999, Sloan
Financial Group, Inc. will repurchase the shares owned by American Express Asset
Management; after this transaction is completed, Maceo K. Sloan will own 72% and
Justin F. Beckett will own 28% of Sloan Financial Group, Inc.

SMITH GRAHAM & CO. ASSET MANAGERS, L.P. Smith Graham also services as a
subadviser to the Fund. Its corporate offices are located at 6900 Chase Tower,
600 Travis Street, Houston, Texas 77002-3007. Smith Graham serves as an
investment adviser to a variety of corporate, foundation, public, Taft Hartley
and mutual fund clients. The firm provides domestic, global and international
money management. As of December 31, 1998, Smith Graham managed approximately
$2.3 billion of assets.

Smith Graham is 60% owned by its Managing General Partner, Smith Graham
& Co., Inc., while 40% of the firm is owned by the Dutch based Robecco Group.
Smith Graham & Co., Inc. is wholly owned by Gerald B. Smith and Jamie G. House.

FUND ADMINISTRATION SERVICES

TOTAL RETURN FUND, CAPITAL APPRECIATION FUND, GOVERNMENT BOND FUND, MONEY MARKET
FUND. Effective November 1, 1997, NAS also provides various administration and
accounting services for these Funds. For these services, NAS receives a fee,
calculated daily and paid monthly at an annual rate of 0.05% for each Fund's
average net assets on the first $1 billion of assets and 0.04% on the assets of
$1 billion and

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<PAGE> 169

more. During the years ended December 31, 1998 and 1997, NAS received
administration fees in the following amounts: Total Return Fund $947,890 and
$135,272, Capital Appreciation Fund $366,788 and $37,284, Government Bond Fund
$301,517 and $39,441 and Money Market Fund $608,781 and $89,708, respectively.
These services include daily valuation of each Fund's shares and preparation of
financial statements, tax returns and regulatory reports.

ALL OTHER FUNDS (EXCEPT SMALL COMPANY FUND). Under the terms of a Fund
Administration Agreement, NAS also provides various administration and
accounting services, including daily valuation of each Fund's shares and
preparation of financial statements, tax returns and regulatory reports. For
these services, each Fund pays NAS an annual fee in the amount of 0.07% of the
Fund's first $250 million of average daily net assets, 0.05% on the next $750
million and 0.04% on assets of more than $1 billion.

For the period from commencement of operations to December 31, 1997 and
the year ended December 31, 1998, NAS received and/or waived all administration
fees as follows:

<TABLE>
<CAPTION>
1997 Administration FEES 1998 1998
Fund Waived Received Waived
---- ------ -------- ------
<S> <C> <C> <C>
Strategic Growth Fund $128 $3,959 $ ---

Strategic Value Fund $134 $5,962 $ ---

Equity Income Fund $147 $5,513 $ ---

High Income Bond Fund $645 $13,909 $ ---

Balanced Fund $150 $13,374 $ ---

Multi Sector Bond Fund $161 $13,497 $ ---

Small Cap Value Fund $158 $14,497 $ ---

Global Equity Fund $616 $9,361 $ ---

Select Advisers Mid Cap Fund $358 $4,969 $ ---

Income Fund* N/A $2,171 $ ---
</TABLE>

*The Income Fund commenced operations on January 20, 1998 and did not incur
administration fees in 1997.

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<PAGE> 170

The Select Advisers Small Cap Growth Fund had not commenced operations as of
December 31, 1998 and had not incurred any administration fees as of that date.

CUSTODIAN

The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza,
Cincinnati, OH 45263, is the Custodian for the Funds and makes all receipts and
disbursements under a Custodian Agreement. Pursuant to the Custodian Agreement,
Fifth Third utilizes the services of the global custody network of State Street
Bank and Trust for foreign custody of the Funds' assets. The Custodian performs
no managerial or policy making functions for the Funds.

INDEPENDENT ACCOUNTANTS

PriceWaterhouseCoopers, LLP, 100 E. Broad Street, Columbus, Ohio 43215
serves as independent accountants for the Trust.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Nationwide Investors Services, Inc. (NIS), Three Nationwide Plaza,
Columbus, Ohio 43215 is the Transfer Agent and Dividend Disbursing Agent for the
Funds. NIS is a wholly-owned subsidiary of Nationwide Advisory Services, Inc.
For these services, NIS is paid a fee by each Fund at the annual rate of 0.01%
of that Fund's average daily net assets. Management believes the charges for the
services performed are comparable to fees charged by other companies performing
similar services.

BROKERAGE ALLOCATIONS

NAS (or a subadviser) is responsible for decisions to buy and sell
securities and other investments for the Funds and the selection of brokers and
dealers to effect the transactions and the negotiation of brokerage commissions,
if any. In transactions on stock and commodity exchanges in the United States,
these commissions are negotiated, whereas on foreign stock and commodity
exchanges these commissions are generally fixed and are generally higher than
brokerage commissions in the United States. In the case of securities traded on
the OTC markets, there is generally no commission, but the price includes a
spread between the dealer's purchase and sale price which makes up the dealer's
profit. In underwritten offerings, the price includes a disclosed, fixed
commission or discount. Most short term obligations and other debt obligations
are normally traded on a "principal" rather than agency basis. This may be done
through a dealer (e.g. securities firm or bank) who buys or sells for its own
account rather than as an agent for another client, or directly with the issuer.
A dealer's profit, if any, is the difference, or spread, between the dealer's
purchase and sale price for the obligation.

The primary consideration in portfolio security transactions is
"best price," "best execution," i.e., prompt and reliable execution at the most
favorable prices and in the most effective manner possible taking into account
all considerations discussed below. NAS or a subadviser always attempts to
achieve best execution, and it has complete freedom as to the markets in and the
broker-dealers through which it seeks this result. Subject to the requirement of
seeking best execution, securities may be bought from or sold to broker-dealers
who have furnished statistical, research, and other information or services to
NAS or a subadviser. In placing orders with such broker-dealers, NAS or a
subadviser will, where possible, take into account the comparative usefulness of
such information. Such information is useful to NAS or a subadviser even though
its dollar value may be indeterminable, it does not directly benefit a Fund and
its receipt or availability generally does not reduce NAS' or a subadviser's
normal research activities or expenses.

68
<PAGE> 171

Fund portfolio transactions may be effected with broker-dealers who
have assisted investors in the purchase of the variable life insurance policies
or variable annuity contracts. However, neither such assistance nor sale of
other investment company shares is a qualifying or disqualifying factor in a
broker-dealer's selection, nor is the selection of any broker-dealer based on
the volume of shares sold.

There may be occasions when portfolio transactions for a Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts served by affiliated companies of NAS or a
subadviser and their affiliates. Although such concurrent authorizations
potentially could be either advantageous or disadvantageous to a Fund, they are
effected for a Fund only when NAS or a subadviser believes that to do so is in
the best interest of the Fund. When such concurrent authorizations occur, the
executions will be allocated in an equitable manner.

In purchasing and selling investments for the Funds, it is the policy
of each of the subadvisers to obtain best execution at the most favorable prices
through responsible broker-dealers. The determination of what may constitute
best execution in a securities transaction by a broker involves a number of
considerations, including the overall direct net economic result to the Fund
(involving both price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is effected, the ability to
effect the transaction at all when a large block is involved, the availability
of the broker to stand ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the broker. These
considerations are judgmental and are weighed by NAS or subadviser in
determining the overall reasonableness of securities executions and commissions
paid. In selecting broker-dealers, each subadviser will consider various
relevant factors, including, but not limited to, the size and type of the
transaction; the nature and character of the markets for the security or asset
to be purchased or sold; the execution efficiency, settlement capability, and
financial condition of the broker-dealer's firm; the broker-dealer's execution
services, rendered on a continuing basis; and the reasonableness of any
commissions.

NAS and each subadviser may cause a Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission that is in excess of
the commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services as defined in Section
28(e) of the Securities Exchange Act of 1934 which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to a subadviser is considered to be in addition to and not in lieu of services
required to be performed by the subadviser under its subadvisory agreement with
NAS. The fees to each of the subadvisers pursuant to its subadvisory agreement
with NAS is not reduced by reason of its receiving any brokerage and research
services. The research services provided by broker-dealers can be useful to a
subadviser in serving its other clients or clients of the subadviser's
affiliates. Subject to the policy of the subadvisers to obtain best execution at
the most favorable prices through responsible broker-dealers, a subadviser also
may consider the broker-dealer's sale of shares of any fund for which the
subadviser serves as investment adviser, subadviser or administrator.

The following tables list the amount of brokerage commissions
(excluding directed brokerage) and the amount of transactions and related
commissions paid to brokers providing research and other services to the
subadvisers for the following periods:

For the year ended December 31, 1998

Transactions Related to
-----------------------
Brokerage Services
------------------

69
<PAGE> 172

<TABLE>
<CAPTION>
Fund Commission $ Amount Commission
---- ---------- -------- ----------
<S> <C> <C> <C>
Strategic Growth Fund $44,342 $ -- $ --

Strategic Value Fund 40,906 -- --

Equity Income Fund 16,519 7,066,374 6,448

High Income Bond Fund 72 -- --

Balanced Fund 20,024 641,284 1,224

Multi Sector Bond Fund -- -- --

Small Cap Value Fund 249,877 -- --

Global Equity Fund 37,313 -- --

Select Advisers Mid Cap Fund 23,405 -- --

Small Cap Growth Fund * -- -- --

Small Company Fund 1,252,284 3,155,796 13,596

Income Fund -- -- --

Total Return Fund 881,930 -- --
</TABLE>

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<PAGE> 173
For the year ended December 31, 1998

<TABLE>
<CAPTION>
Transactions Related to
-----------------------
Brokerage Services
------------------
Fund Commission $ Amount Commission
---- ---------- -------- ----------
<S> <C> <C> <C>
Capital Appreciation Fund 699,978 -- --

Government Bond Fund -- -- --
</TABLE>

* Operations for the Small Cap Growth Fund commenced on or around May 1, 1999.

For the year ended December 31, 1997

<TABLE>
<CAPTION>
Transactions Related to
-----------------------
Brokerage Services
------------------

Fund Commission $ Amount Commission
---- ---------- -------- ----------
<S> <C> <C> <C>
Strategic Growth Fund $2,117 $--0 -- $-- 0 -

Strategic Value Fund 2,664 --0 -- -- 0 --

Equity Income Fund 1,319 1,018,166 910

High Income Bond Fund -- 0 -- -- 0 -- -- 0 --

Balanced Fund 1,038 315,101 420

Multi Sector Bond Fund -- 0 -- -- 0 -- -- 0 --

Small Cap Value Fund 2,317 3,045 30

Global Equity Fund 8,058 -- 0 -- -- 0 --

Select Advisers Mid Cap Fund 3,479 509,403 828

Small Company Fund 887,672 -- --

Total Return Fund 924,959 -- --

Capital Appreciation Fund 327,691 -- --
</TABLE>

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<PAGE> 174

For the year ended December 31, 1997
<TABLE>
<CAPTION>
FUND Commission $ Amount Commission
- ---- ---------- -------- ----------
<S> <C> <C> <C>
Government Bond Fund -- 0 -- -- --

Money Market Fund -- 0 -- -- --
</TABLE>

For the year ended December 31, 1996

<TABLE>
<CAPTION>
Transactions Related to
-----------------------
Brokerage Services
------------------

Fund Commission $ Amount Commission
---- ---------- -------- ----------
<S> <C> <C> <C>
Small Company Fund 424,176 -- --

Total Return Fund 519,949 -- --

Capital Appreciation Fund 196,526 -- --

Government Bond Fund -- -- --
</TABLE>

Under the 1940 Act, "affiliated persons" of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each Fund may purchase securities from underwriting syndicates of which a
subadviser or any of its affiliates as defined in the 1940 Act, is a member
under certain conditions, in accordance with Rule 10f-3 under the 1940 Act.

Certain of the Funds contemplate that, consistent with the policy of
obtaining best results, brokerage transactions may be conducted through
"affiliated broker/dealers," as defined in the 1940 Act. Under the 1940 Act,
commissions paid by a Fund to an "affiliated broker/dealer" in connection with a
purchase or sale

72
<PAGE> 175

of securities offered on a securities exchange may not exceed the usual and
customary broker's commission. Accordingly, it is the Funds' policy that the
commissions to be paid to an affiliated broker-dealer must, in its judgment, be
(1) at least as favorable as those that would be charged by other brokers having
comparable execution capability and (2) at least as favorable as commissions
contemporaneously charged by such broker/dealer on comparable transactions for
its most favored unaffiliated customers, except for accounts for which the
affiliated broker/dealer acts as a clearing broker for another brokerage firm
and customers of an affiliated broker/dealer considered by a majority of the
independent trustees not to be comparable to the Fund. The Fund does not deem it
practicable and in its best interests to solicit competitive bids for
commissions on each transaction. However, consideration regularly is given to
information concerning the prevailing level of commissions charged on comparable
transactions by other brokers during comparable periods of time.

The following table lists the amount of brokerage commissions paid to
affiliated brokers:

<TABLE>
<CAPTION>
COMMISSIONS
FUND BROKER 1998 1997 1996
---- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Balanced Fund Salomon Smith Barney $2,010 --- ---
Small Company Fund Lazard Freres $542 -- --
Small Company Fund Neuberger & Berman $31,801 $35,069 $24,069
</TABLE>

During the year ended December 31, 1998, commissions paid by the
Balanced Fund to Saloman Smith Barney represented 10.0% of total commissions
paid by the Fund or 12.1% of the aggregate dollar amount of transactions
involving the payment of commissions.. During the year ended December 31, 1998,
commissions paid by the Small Company Fund to Lazard Freres and Neuberger &
Berman represented __% and 2.5%, respectively, of total commissions paid by the
Funds or 0.1% and 3.1%, respectively, of the aggregate dollar amount of
transactions involving the payment of commissions.

As of December 31, 1998, the following Funds held investments in their
regular broker/dealers as follows:

<TABLE>
<CAPTION>
Fund Security Shares/principal Value
---- -------- ---------------- -----
<S> <C> <C> <C>
Capital Appreciation Fund Merrill Lynch 137,500 $9,178,125

Money Market Fund Bear Stearns Co. $40,000,000 $39,702,886
Goldman Sachs Group $40,663,000 $40,487,782
Merrill Lynch & Co. $42,503,000 $42,318,610
Morgan Stanley Group $38,082.000 $37,915,542
Salomon Smith Barney $30,000,000 29,981,956

Income Fund Lehman Brothers Holdings $50,000 $50,525

Equity Income Fund Merrill Lynch STRYPES 1,900 $45,125
Morgan Stanley Dean Witter & 1,900 $134,900
Co.

Balanced Fund Morgan Stanley Dean Witter & 2,000 $82,500
Co. $50,789
Merrill Lynch & Co. $50,000

Multi Sector Bond Fund Merrill Lynch & Co. $30,000 $30,474
Donaldson, Lufkin, Jenrette $5,250,000 $278,649
</TABLE>

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<PAGE> 176

PURCHASES, REDEMPTIONS AND PRICING OF SHARES

An insurance company purchases shares of the Funds at their net asset
value using purchase payments received on variable annuity contracts and
variable life insurance policies issued by separate accounts. These separate
accounts are funded by shares of the Funds. For certain of the Funds, shares may
also be sold to affiliated Funds of Funds.

All investments in the Trust are credited to the shareholder's account
in the form of full and fractional shares of the designated Fund (rounded to the
nearest 1/1000 of a share). The Trust does not issue share certificates.

The net asset value per share of the Funds is determined once daily, as
of the close of regular trading on the New York Stock Exchange (generally 4 P.M.
Eastern Time) on each business day the New York Stock Exchange is open for
regular trading (and on such other days as the Board determines) and on any
other day during which there is a sufficient degree of trading in each Fund's
portfolio securities that the net asset value of the Fund is materially affected
by changes in the value of portfolio securities. The Trust will not compute net
asset value for the Funds on customary national business holidays, including the
following: Christmas Day, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day and
Thanksgiving Day. The net asset value per share is calculated by adding the
value of all securities and other assets of a Fund, deducting its liabilities,
and dividing by the number of shares outstanding.

The offering price for orders placed before the close of the New York
Stock Exchange, on each business day the Exchange is open for trading, will be
based upon calculation of the net asset value at the close of regular trading on
the Exchange. For orders placed after the close of regular trading on the
Exchange, or on a day on which the Exchange is not open for trading, the
offering price is based upon net asset value at the close of the Exchange on the
next day thereafter on which the Exchange is open for trading. The net asset
value of a share of each Fund on which offering and redemption prices are based
is the net asset value of that Fund, divided by the number of shares
outstanding, the result being adjusted to the nearer cent. The net asset value
of each Fund is determined by subtracting the liabilities of the Fund from the
value of its assets (chiefly composed of investment securities). Securities of
the Funds listed on national exchanges are valued at the last sales price on the
principal exchange, or if there is no sale on that day, the securities are
valued at the prior day's closing prices as provided by an independent pricing
organization. Securities traded in the over-the-counter market are valued at the
last quoted sale price, or if there is no sale on that day, the quoted bid price
as provided by an independent pricing organization. Other portfolio securities
are valued at the quoted prices obtained from an independent pricing
organization which employs a combination of methods, including among others, the
obtaining and comparison of market valuations from dealers who make markets and
deal in such securities and the comparison of valuations with those of other
comparable securities in a matrix of such securities. The pricing service
activities and results are reviewed by an officer of the Trust. Securities and
other assets, for which such market prices are unavailable or for which an
independent pricing organization does not provide a value or provides a value
that does not represent fair value in the judgement of NAS, are valued at fair
value in accordance with procedures authorized by the Trustees. For the Money
Market Fund, all securities are valued at amortized cost, which approximates
market value, in accordance with Rule 2a-7 under The Investment Company Act of
1940.

A separate account redeems shares to make benefit or surrender payments
under the terms of its variable annuity contracts or variable life insurance
policies. Redemptions are processed on any day on which the Trust is open for
business and are effected at net asset value next determined after the
redemption order, in proper form, is received by the Trust's transfer agent,
NIS.

The Trust may suspend the right of redemption for such periods as are
permitted under the 1940 Act and under the following unusual circumstances: (a)
when the New York Stock Exchange is closed (other than weekends and holidays) or
trading is restricted; (b) when an emergency exists, making disposal of

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portfolio securities or the valuation of net assets not reasonably practicable;
or (c) during any period when the SEC has by order permitted a suspension of
redemption for the protection of shareholders.

ADDITIONAL INFORMATION

DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest of each Fund and to divide or combine such shares into a greater or
lesser number of shares without thereby exchanging the proportionate beneficial
interests in the Trust. Each share of a Fund represents an equal proportionate
interest in that Fund with each other share. The Trust reserves the right to
create and issue a number of different funds and currently has authorized 16
separate funds. Shares of each fund would participate equally in the earnings,
dividends, and assets of that particular fund. Upon liquidation of a Fund,
shareholders are entitled to share pro rata in the net assets of such Fund
available for distribution to shareholders.

VOTING RIGHTS - Shareholders are entitled to one vote for each share
held. Shareholders may vote in the election of Trustees and on other matters
submitted to meetings of shareholders. Generally, amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities of the Trust. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:

(1) designate series of the Trust; or

(2) change the name of the Trust; or

(3) apply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of Trust to the
requirements of applicable federal laws or regulations if they deem it
necessary.

Shares have no pre-emptive or conversion rights. Shares, when issued,
are fully paid and nonassessable. In regard to termination, sale of assets, or
change of investment restrictions, the right to vote is limited to the holders
of shares of the particular Fund affected by the proposal. However, shares of
all funds vote together, and not by fund, in the election of Trustees. If an
issue must be approved by a majority as defined in the 1940 Act., a "majority of
the outstanding voting securities" means the lesser of (i) 67% or more of the
shares present at a meeting when the holders of more than 50% of the outstanding
shares are present or represented by proxy, or (ii) more than 50% of the
outstanding shares. For the election of Trustees only a plurality is required.

SHAREHOLDER INQUIRIES - All inquiries regarding the Trust should be
directed to the Trust at the telephone number or address shown on the cover page
of this Prospectus.

TAX STATUS

Each Fund is treated as a separate entity for purpose of the regulated
investment company provisions of the Internal Revenue Code (the "Code"), and,
therefore, the assets, income, and distributions of each Fund are considered
separately for purposes of determining whether or not the Fund qualifies as a
regulated investment company.

Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code. If it qualifies as a regulated investment company, a
Fund will pay no federal income taxes on its taxable net investment income (that
is, taxable income other than net realized capital gains) and its net realized
capital gains that are distributed to shareholders. To qualify under Subchapter
M, a Fund must, among other things: (I) distribute to its shareholders at least
90% of its taxable net investment income (for this purpose consisting of taxable
net investment income and net realized short-term capital gains); (ii) derive at
least 90% of its gross income from dividends, interest, payments with respect to
loans of securities, gains from the sale or

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other disposition of securities, or other income (including, but not limited to,
gains from options, futures, and forward contracts) derived with respect to its
business of investing in securities, and (iii) diversify its holdings so that,
at the end of each fiscal quarter of the Fund (a) at least 50% of the market
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities, with those other securities limited, with respect to any
one issuer, to an amount no greater in value than 5% of the Fund's total assets
and to not more than 10% of the outstanding voting securities of the issuer, and
(b) not more than 25% of the market value of the Fund's assets is invested in
the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies) or of two or more issuers
that the Fund controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses. In meeting these
requirements, a Fund may be restricted in the selling of securities held by the
Fund for less than three months and in the utilization of certain of the
investment techniques described above and in the respective Fund's Prospectus.
As a regulated investment company, a Fund will be subject to a 4% non-deductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gain required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year, together with any undistributed, untaxed amounts of ordinary income and
capital gains from the previous calendar year. The Funds expect to pay the
dividends and make the distributions necessary to avoid the application of this
excise tax.

In addition, each Fund intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status of
insurance company separate accounts. To comply with regulations under Section
817(h) of the code, each Fund will be required to diversify its investments so
that on the last day of each calendar quarter no more than 55% of the value of
its assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three investments
and no more than 90% is represented by any four investments. Generally, all
securities of the same issuer are treated as a single investment. For the
purposes of Section 817(h), obligations of the United States Treasury and each
U.S. Government instrumentality are treated as securities of separate issuers.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a Policy owner's control of the
investments of a separate account may cause the Policy owner, rather than the
participating insurance company, to be treated as the owner of the assets held
by the separate account. If the Policy owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the Policy owner's gross income. It is
not known what standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued. In the event that rules or regulations
are adopted, there can be no assurance that the Funds will be able to operate as
currently described, or that the Trust will not have to change the investment
goal or investment policies of a Fund. The Board of Trustees reserves the right
to modify the investment policies of a Fund as necessary to prevent any such
prospective rules and regulations from causing a Policy owner to be considered
the owner of the shares of the Fund underlying the separate account.

OTHER TAX CONSEQUENCES

Foreign Transactions. Dividends and interest received by a Fund may be
subject to income, withholding, or other taxes imposed by foreign countries and
U.S. possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors. Policy holders
will bear the cost of foreign tax withholding in the form of increased expenses
to the Fund but generally will not be able to claim a foreign tax credit or
deduction for foreign taxes paid by the Fund by reason of the tax-deferred
status of the policies.

A Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the

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Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses and
cause the Fund to be subject to hyper inflationary currency rules. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require a Fund to mark-to-market
certain types of its positions (i.e., treat them as if they were closed out) and
(b) may cause the Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. A Fund will
monitor its transactions, will make the appropriate tax elections and will make
the appropriate entries in its books and records when it acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (I) neither the Fund nor its shareholders will be treated as receiving a
materially greater amount of capital gains or distributions than actually
realized or received, (ii) the Fund will be able to use substantially all of its
losses for the fiscal years in which the losses actually occur, and (iii) the
Fund will continue to qualify as a regulated investment company.

Investment in Passive Foreign Investment Companies. If a Fund purchases
shares in certain foreign entities classified under the Code as "passive foreign
investment companies" ("PFICs"), such Fund may be subject to federal income tax
on a portion of an "excess distribution" or gain from the disposition of the
shares, even though the income may have to be distributed by the Fund to its
shareholders, the Contracts. In addition, gain on the disposition of shares in a
PFIC generally is treated as ordinary income even though the shares are capital
assets in the hands of the Fund. Certain interest charges may be imposed on the
Fund with respect to any taxes arising from excess distributions or gains on the
disposition of shares in a PFIC.

The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did not
make the election. In addition, information required to make such an election
may not be available to the Fund.

On April 1, 1992 proposed regulations of the Internal Revenue Service
were published providing a mark-to-market election for shares in certain PFICs
held by regulated investment companies. If the Fund is able to make the
foregoing election in the first year in which it is permitted to do so, it may
be able to avoid the interest charge (but not the ordinary income treatment) on
disposition of the PFIC stock by each year marking-to-market the stock (that is,
by treating it as if it were sold for fair market value on the last day of the
year). Such an election could also result in acceleration of income to the Fund.

Derivative Instruments. The use of derivatives strategies, such as
purchasing and selling (writing) options and futures and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the 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 therefrom that may be excluded by future
regulations), and income from transactions in options, futures, and forward
currency contracts derived by a Fund with respect to its business of investing
in securities or foreign currencies, will qualify as permissible income.
However, income from the disposition of options and futures (other than those on
foreign currencies) will be subject to a 30% limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures, and forward contracts on foreign currencies, that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) also will be subject to a 30%
limitation if they are held for less than three months.

If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) for the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% limitation on the gross income that can be derived from the sale or other
disposition of securities or derivative instruments that were held for less than
three months. Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that limitation. The Fund intends that,

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when it engages in hedging strategies, the hedging transactions will qualify for
this treatment, but at the present time it is not clear whether this treatment
will be available for all of the Fund's hedging transactions. To the extent this
treatment is not available or is not elected by the Fund, it may be forced to
defer the closing out of certain options, futures, or forward currency contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to continue to qualify as a regulated investment company.

TAX CONSEQUENCES TO SHAREHOLDERS

Since shareholders of the Funds will be the Accounts, no discussion is
included herein as to the Federal income tax consequences at the level of the
holders of the Contracts. For information concerning the Federal income tax
consequences to such holders, see the Prospectuses for such Contracts.

FINANCIAL STATEMENTS

The Report of Independent Accountants and Financial Statements of the
Funds for the period ended December 31, 1998 are incorporated by reference to
the Trust's Annual Report. Copies of the Annual Report are available without
charge upon request by writing the Trust or by calling toll free 1 (800)
848-6331.

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APPENDIX A

BOND RATINGS

STANDARD & POOR'S DEBT RATINGS

A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.

The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.

The ratings are based, in varying degrees, on the following
considerations:

Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.

Nature of and provisions of the obligation.

Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.

INVESTMENT GRADE

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 highest 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 in higher rated categories.

SPECULATIVE GRADE

Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. 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 which could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is

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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 - Debt rated 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.

C - Debt rated 'C' typically is applied to debt subordinated to senior
debt which 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 Standard & Poor's
believes that such payments will be made during such grade period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.

MOODY'S LONG-TERM DEBT RATINGS

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

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

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

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

Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered 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

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characterizes bonds in this class.

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

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

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

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

FITCH/IBCA INVESTORS SERVICE, INC. BOND RATINGS

Fitch/IBCA investment grade bond ratings provide a guide to investors
in determining the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.

Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

Fitch ratings are not recommendations to buy, sell, or hold any
security. ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.

Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.

AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.

AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of the
issuers is generally rated 'F-1+'.

A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

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BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.

Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.

Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk.

BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.

B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.

CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C Bonds are in imminent default in payment of interest or principal.

DDD, Bonds are in default on interest and/or principal payments. Such bonds
DD are extremely speculative, and should be valued on the basis of their
&D ultimate recovery value in liquidation or reorganization of the
obligor. `DDD' represents the highest potential for recovery of these
bonds, and 'D' represents the lowest potential for recovery.

DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS

These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.

Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities

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is determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture restrictions
is important to the analysis of a company's operating and financial constraints.

The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.

RATING
SCALE DEFINITION
- ----- ----------

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

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

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

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

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

B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent Changes in the rating within
this category or into a higher or lower rating grade.

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

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

DP Preferred stock with dividend arrearages.

SHORT-TERM RATINGS

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.

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Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:

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

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

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.

B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.

C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.

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
Standard & Poor's believes that such payments will be made during such
grade period.

STANDARD & POOR'S NOTE RATINGS

An S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.

The following criteria will be used in making the assessment:

. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.

. Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be considered a note.

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.

SP-3 Speculative capacity to pay principal and interest.

MOODY'S SHORT-TERM RATINGS

Moody's short-term debt ratings are opinions on the ability of issuers
to repay punctually senior debt

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obligations. These obligations have an original maturity not exceeding one year,
unless explicitly noted. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term debt obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (I)
leading market positions in well established industries, (II) high rates of
return on funds employed, (III) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (IV) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (V) well established access to a range of financial markets and assured
sources of alternative liquidity.

Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of short-term promissory 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, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

Issuers rated Prime-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the prime rating
categories.

MOODY'S NOTE RATINGS

MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.

MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.

MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.

MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.

SG This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.

FITCH/IBCA SHORT-TERM RATINGS

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

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The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1 Very strong credit quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated 'F-1+'.

F-2 Good credit quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment but the margin of safety is not as great as for
issues assigned 'F-1+' and 'F-1' ratings.

F-3 Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.

B Speculative. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.

C High default risk. Default is a real possibility, Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

D Default. Issues assigned this rating are in actual or imminent payment
default.

DUFF & PHELPS SHORT-TERM DEBT RATINGS

Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.

Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.

RATING SCALE DEFINITION
- ------------ ----------

High Grade
- ----------

D-1+ Highest certainty of timely payment. short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.

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D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.

D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.

Good Grade

D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.

Satisfactory Grade

D-3 Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.

Non-investment Grade

D-4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.

Default

D-5 Issuer failed to meet scheduled principal and/or interest payments.

THOMSON'S SHORT-TERM RATINGS

The Thomson Short-Term Ratings apply, unless otherwise noted, to
specific debt instruments of the rated entities with a maturity of one year or
less. Thomson short-term ratings are intended to assess the likelihood of an
untimely or incomplete payments of principal or interest.

TBW-1 the highest category, indicates a very high likelihood that
principal and interest will be paid on a timely basis.

TBW-2 the second highest category, while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".

TBW-3 the lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.

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TBW-4 the lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.