NATIONWIDE SEPARATE ACCOUNT TRUST, 497, 2001-01-05

NATIONWIDE SEPARATE ACCOUNT TRUST
497, 2001-01-05

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<PAGE> 1

NATIONWIDE(R) SEPARATE ACCOUNT TRUST

- Gartmore NSAT OTC Fund

January 5, 2001

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

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<S> <C>
FUND SUMMARY............................. 2

MORE ABOUT THE FUND...................... 5
Principal Investments and Techniques..... 5
Principal Risks.......................... 6
Temporary Defensive Positions............ 7

MANAGEMENT............................... 8
Investment Adviser....................... 8
Subadviser............................... 8
Portfolio Management Team................ 8

BUYING AND SELLING FUND SHARES........... 9
Who Can Buy Shares of the Fund........... 9
Purchase Price........................... 9
Selling Shares........................... 9
Restrictions on Sales.................... 10

DISTRIBUTION AND TAXES................... 11
Dividends and Distributions.............. 11
Tax Status............................... 11

ADDITIONAL INFORMATION................... BACK COVER
</TABLE>

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FUND SUMMARY

This prospectus provides information about the Gartmore NSAT OTC Fund (the
Fund).

A QUICK NOTE ABOUT THE FUND

This prospectus is designed to help you make informed decisions about one of the
investments available under your variable annuity contract or variable life
insurance policy. You'll find details about how your annuity contract or life
insurance policy works in the accompanying prospectus.

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FUND SUMMARY -- GARTMORE NSAT OTC FUND

This section summarizes key information about the Fund. Use this summary to
compare the Fund with other mutual funds. More detailed information about the
risks and investment techniques of the Fund can be found in "More About the
Fund" beginning on page five.

OBJECTIVE

The Gartmore NSAT OTC Fund seeks long term capital growth by investing primarily
in equity securities of U.S. and foreign companies that are traded in
over-the-counter (OTC) markets. The Fund's investment objective may be changed
without shareholder approval.

PRINCIPAL STRATEGIES

Villanova Global Asset Management Trust (VGAMT), the Fund's investment adviser,
has chosen Gartmore Global Partners (Gartmore) as a subadviser to manage the
Fund's portfolio. To achieve its objective, the Fund invests at least 65% of its
total assets in equity securities of U.S. and foreign companies that are traded
in the OTC market. The Fund also invests in U.S. and foreign emerging growth
companies whose securities are traded on a securities exchange. The Fund may
also invest 25% or more of its assets in companies in any one industry,
including technology and communications related industries. Companies in the
technology and communications related industries may include, for example,
companies that develop, produce and distribute products or services in the
computer, semi-conductor, electronic, communications, health-care and
bio-technology sectors. Regions or countries and companies are selected that are
believed to have the potential to exceed market growth expectations.

The Fund invests primarily in equity securities which may include common stocks,
preferred stocks, equity interests in foreign investment funds or trusts,
convertible securities, and depositary receipts. The Fund will invest primarily
in OTC companies across the market spectrum and small and mid-sized emerging
growth companies. The Fund may invest in foreign currency exchange contracts to
convert foreign currencies to and from the U.S. dollar, and to hedge against
changes in foreign currency exchange rates.

THE OTC MARKET. The OTC market is a network of telephone lines and a
computerized quotation system through which securities trades can be made. OTC
securities are securities which are principally traded on the OTC market;
however, OTC securities can also be listed for trading on a domestic or foreign
exchange. Currently the four OTC markets are the NASDAQ (U.S.), JASDAQ (Japan),
EASDAQ (Europe) and KOSDAQ (Korea).

EMERGING GROWTH COMPANIES. Gartmore believes emerging growth companies are those
companies that have a strong franchise in a dynamic industry.

Gartmore is a growth stock adviser and its investment philosophy rests on two
fundamental principles:

- Growth investing can produce superior returns over the longer term, but
consensus growth (or the market's expectations for earnings forecasts) tends
to produce average returns. Therefore, Gartmore focuses on identifying
companies that it believes offer earnings growth that exceeds market
expectations.

- Gartmore looks to sell companies where there is significant risk that earnings
growth will not meet market expectations.

PRINCIPAL RISKS

Because the value of your investment in the Fund will fluctuate, there is the
risk that you will lose money. Your investment will decline in value if the
value of the Fund's investment decreases. The value of your shares will also be
impacted in part by Gartmore's ability asses economic conditions and investment
opportunities.

FOREIGN RISK. Investments in foreign securities involve risks that are different
in degree and kind than those presented by U.S. investments. These risks include
political and economic risks, currency fluctuations, higher transaction costs,
and delayed settlement. To the extent that the Fund invests in countries with
emerging markets, the foreign securities risks are magnified since these
countries may have unstable governments, more volatile currencies and less
established markets.

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
markets in which they trade go down. Individual stocks and the overall stock
markets 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. Stock
markets are 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.

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Fund Summary -- Gartmore NSAT OTC Fund

SMALL CAP RISK. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more-established companies. The stocks of
smaller companies are usually less stable in price and less liquid than the
stocks of larger companies.

CONCENTRATION RISK. The Fund may invest 25% or more of its assets in companies
in any one industry. This ability to invest in a more concentrated range of
securities fewer stocks than other mutual funds, increases the risk and
potential of the Fund. With a concentrated portfolio of securities, it is
possible that the Fund could have returns that are significantly more volatile
than relevant market indices and other more diversified mutual funds due to the
market movement of the particular industry of concentration.

DERIVATIVES RISK. An investment in derivative contracts can have an impact on
market, currency and interest rate exposure. Using derivatives can
disproportionately increase losses and reduce opportunities for gains when
security prices, currency rates or interest rates are changing in unexpected
ways. Derivatives can also make the Fund less liquid and harder to value,
especially in declining markets. Also, the Fund may suffer disproportionately
heavy losses relative to the amount of its investments in derivative contracts.
Lastly, changes in the value of derivative contracts or other hedging
instruments may not match or fully offset changes on the value of the hedged
portfolio securities.

MARKET TRENDS RISK. Different types of stocks tend to shift into and out of
favor with stock market investors depending on market and economic conditions.
For instance, from time to time the stock market may not favor growth-oriented
stocks. Rather, the market could favor value securities or may not favor equity
securities at all. Accordingly, since the Fund focuses on growth-style stocks,
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" beginning on page nine.

PERFORMANCE

No performance information is provided because the Fund did had not begun
operations as of the date of this Prospectus.

FEES AND EXPENSES

Shares of the Fund are available as investment options for variable annuity
contracts and variable life insurance policies (collectively "variable insurance
contracts"). As such, contract holders of variable insurance contracts are
subject to Fund fees, as well as expenses and charges imposed by the variable
insurance contracts. Please see the variable insurance contracts prospectus for
a description of the applicable expenses and charges.

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MORE ABOUT THE FUND

PRINCIPAL INVESTMENTS AND TECHNIQUES

The Fund may use the principal investments and techniques described below to
increase returns, protect assets or diversify investments. As with any mutual
fund, there can be no guarantee that the Fund will meet its goals or that its
performance will be positive for any period of time.

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

PREFERRED STOCK. Holders 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 generally
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.

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.

DEPOSITARY RECEIPTS. The Fund may invest indirectly in securities of foreign
issuers through sponsored or unsponsored American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs) and International Depositary Receipts (IDRs)
(collectively, depositary receipts). Depositary receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock of unsponsored
depositary receipts are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of the depositary receipts. This, along with
other factors, may cause unsponsored depositary receipts to be less liquid than
sponsored depositary receipts. ADRs are typically issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a

5
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More About the Fund

foreign corporation. GDRs, IDRs, and other types of depositary receipts are
typically issued by foreign banks or trust companies and evidence ownership of
underlying securities issued by either a foreign or United States corporation.
Depositary receipts which are not denominated in U.S. dollars will be subject to
foreign currency exchange rate risks. Certain depositary receipts may not be
listed on an exchange and therefore may be considered illiquid securities.

PRINCIPAL RISKS

This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that its performance will be positive for any period of time.

FOREIGN RISK -- Foreign security investing involves special risks not presented
by U.S. investing that can increase the chances that the Fund will lose money.

- 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 the 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 devaluation, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and
settlement risks.

- FOREIGN MARKETS -- Because there are generally fewer investors in foreign
markets and a smaller number of securities traded each day, it may make it
difficult for the Fund to buy and sell certain securities. In addition,
prices of foreign securities may go up and down more than prices of
securities traded in the U.S. Also, brokerage commissions and other costs
of buying and selling securities often are higher in foreign countries than
they are in the United States. This reduces the amount the Fund can earn on
its investments.

- GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Foreign
companies are not subject to the same disclosure, accounting, auditing and
financial reporting standards and practices as U.S. companies. The 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. Many foreign governments supervise and regulate stock exchanges,
brokers and the sale of securities less than the U.S. does. Other countries
may not have laws to protect investors the way that the U.S. securities
laws do. Accounting standards in other countries are not necessarily the
same as in the U.S. If the accounting standards in another country do not
require as much detail as U.S. accounting standards, it may be harder for
the Fund's portfolio manager to completely and accurately determine a
company's financial condition.

- CURRENCY -- A significant portion of the Fund's investments will generally
be 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.

- EUROPEAN ECONOMIC AND MONETARY UNION (EMU) -- A number of European
countries have entered into EMU in an effort to reduce trade barriers
between themselves and eliminate fluctuations in their currencies. EMU has
established a single European currency (the euro), which was introduced in
January 1, 1999 and is expected to replace the existing national currencies
of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the
euro. These securities trade and make dividend and other payments only in
euros. Like other investment companies and business organizations,
including the companies in which the Fund invests, the Fund could be
adversely affected:

- If the transition to euro, or EMU as a whole, does not proceed as
planned.

- If a participating country withdraws from EMU.

- If the computing, accounting and trading systems used by the Funds'
service providers, or by other entities with which the Funds or their
service

6
<PAGE> 8

providers do business, are not capable of recognizing the euro as a
distinct currency.

SMALL CAP RISK. Historically, the securities of small capitalization companies
have been more volatile in price than the securities of larger capitalization
companies, 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
- lack a proven track record
- 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.

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.

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MANAGEMENT

INVESTMENT ADVISER

Villanova Global Asset Management Trust (VGAMT), 1200 River Road, Conshohocken,
Pennsylvania 19428, manages the investment of the assets and supervises the
daily business affairs of the Fund. Subject to the supervision and direction of
the Trustees, VGAMT also evaluates and monitors the performance of the Fund's
subadviser. VGAMT is also authorized to select and place portfolio investments
on behalf of the Fund. VGAMT was organized in July 2000, and advises mutual
funds and other institutional separate accounts.

The Fund pays VGAMT a management fee, which is based on the Fund's average daily
net assets.

<TABLE>
<CAPTION>
Fund Fee
-----------------------------------------------------
<S> <C>
Gartmore NSAT OTC Fund 1.00%
</TABLE>

SUBADVISER

Gartmore Global Partners (Gartmore), 121 W. Trade Street, Suite 3030, Charlotte,
NC is the subadviser to the Fund. Subject to the supervision of VGAMT and the
Trustees, Gartmore will manage the Fund's assets in accordance with the Fund's
investment objective and strategies. Gartmore makes investment decisions for the
Fund and, in connection with such investment decisions, places purchase and sell
orders for securities.

Gartmore is a global asset manager dedicated to serving the needs of U.S. based
investors and is a subsidiary of Gartmore Investment Ltd., an investment
management firm based in the United Kingdom. Gartmore was formed in 1995 as a
registered investment adviser and manages more than $1 billion in assets.

Gartmore takes a team approach to portfolio construction, allowing investors to
benefit from the skills of all the members of the team, not just one investment
manager.

PORTFOLIO MANAGEMENT TEAM

Nicholas Ford of Gartmore's U.S. Equity Team manages for the Gartmore NSAT OTC
Fund with support from the International Equities Team. He is responsible for
day-to-day management of the Fund, including the selection of the Fund's
investments. Mr. Ford joined Gartmore as an investment manager on the Gartmore
U.S. Equities Team in 1998. Mr. Ford served as an investment manager for
Clerical Medical in London from November 1996 to December 1997 and also as an
investment manager for Sun Alliance from 1995 to 1996.

8
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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.

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.

Please check with your insurance company to determine if the Fund is available
under your variable annuity contract or variable life insurance policy. This
prospectus should be read in conjunction with the prospectus of the separate
account of your specific insurance product.

The Fund sells its shares to separate accounts of both Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company and may sell its
shares to separate accounts of other unaffiliated insurance companies. The Fund
currently does not foresee any disadvantages to the owners of variable annuity
contracts or variable life insurance products arising out of the fact that the
Fund may offer its shares to the separate accounts of various insurance
companies to fund benefits of these variable insurance products. Nevertheless,
the Trustees intend to monitor events in order to identify any material
irreconcilable conflicts which may arise, and to determine what action, if any,
should be taken in response to such conflicts. If such a conflict were to occur,
one or more insurance companies' separate accounts might be required to withdraw
their investments in the Fund and shares of another Fund may be substituted.
This might force the Fund to sell its securities at disadvantageous prices.

PURCHASE PRICE

The purchase or "offering" price of each share of the Fund is its "net asset
value" (NAV) next determined after the order is received. No sales charge is
imposed on the purchase of the Fund's shares. Generally, NAV of the Fund's
shares 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.

The Fund does not calculate NAV on the following days:

- New Year's Day

- Martin Luther King, Jr. Day
- Presidents' Day
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day

- Christmas Day

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

The Fund reserves the right not to determine its NAV when:

- It has not received any orders to purchase, sell or exchange shares
- Changes in the value of the Fund's portfolio do not affect its NAV.

If current prices are not available, or if Villanova SA Capital Trust (VSA) as
the Fund's administrator, or its agent, determines a price does not represent
fair value, the Fund's investments 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

You can sell -- also known as redeeming -- at any time, subject to certain
restrictions described below. The redemption price will be 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

9
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Buying and Selling Fund Shares

upon the market value of the Fund's investments at the time of sale.

RESTRICTIONS ON SALES

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

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DISTRIBUTIONS AND TAXES

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

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 advisers for
more information on their own tax situation, including possible state or local
taxes.

Please refer to the SAI for more information regarding the tax treatment of the
Fund.

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INFORMATION FROM NATIONWIDE

Please read this Prospectus before you invest, and keep it with your records.
The following documents -- which may be obtained free of charge -- contain
additional information about the Fund. To obtain a document free of charge,
contact us at the address or number listed below.

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

- Annual Report (which contains a discussion of the market conditions and
investment strategies that have significantly affected this Fund's
performance) (as available)

- Semi-Annual Report (as available)

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 (SEC)

You can obtain copies of the Fund's documents from the SEC as follows:

IN PERSON:

Public Reference Room in Washington, D.C. (for their hours of operation, call
1-202-942-8090)

BY MAIL:

Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)

ON THE EDGAR DATABASE VIA THE INTERNET:

www.sec.gov

BY ELECTRONIC REQUEST:

[email protected]

INVESTMENT COMPANY ACT FILE NO. 811-3213

<PAGE> 14

Nationwide(R) Separate Account Trust

- Nationwide(R) Small Company Fund

May 1, 2000 (as revised January 5, 2001)

<PAGE> 15

TABLE OF CONTENTS

FUND SUMMARY

NATIONWIDE SMALL COMPANY FUND..................................................2

Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses

MORE ABOUT THE FUND............................................................5

Investment Strategies of Villanova Mutual Fund
Capital Trust and the Subadvisers
Principal Risks
Other Investment Techniques
Temporary Defensive Positions

MANAGEMENT.....................................................................8

Management's Discussion of Fund Performance
Investment Manager
Multi-Manager Structure
Subadvisers

BUYING AND SELLING FUND SHARES................................................11

Who Can Buy Shares of the Fund
Purchase Price
Selling Shares
Restrictions on Sales
Dividends and Distributions
Tax Status

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

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

1
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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 December 31, 1999, the market capitalizations for
companies in the Russell 2000 range from approximately $100 million to $13
billion. The market capitalization range for companies in the Russell 2000 Index
is updated annually.

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.

The investment adviser and 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, and in addition to managing a
portion of the Fund itself, Villanova Mutual Fund Capital Trust (VMF), the
Fund's investment adviser, initially selects the Fund's subadvisers and
monitors their performance on an ongoing basis. VMF has selected the following
subadvisers for the Fund: The Dreyfus Corporation, Lazard Asset Management,
Neuberger Berman, LLC, Strong Capital Management, Inc., and Waddell & Reed
Investment Management Company. Each subadviser and VMF manages a portion of
the Fund's investment portfolio. The subadvisers have been chosen because they
approach investing in small cap securities in different ways from VMF and from
each other, and VMF 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 and VMF, see "Investment Strategies of
Villanova Mutual Fund Capital Trust and the 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. The value of shares will also be
impacted in part by VMF's and each subadviser's ability to assess economic
conditions and investment opportunities.

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.

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

(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.
2
<PAGE> 17

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.

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

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: 31.31%, 4th qtr. of 1999
Worst quarter: -19.32%, 3rd qtr. of 1998

AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999:

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION(1)
------ ------------
<S> <C> <C>
The Fund 44.02% 23.22%
The Russell 2000(R) Index(2) 21.26% 15.17%
</TABLE>

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

(1) The Fund commenced operations on October 23, 1995.

(2) 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.

3
<PAGE> 18

Fund Summary

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 0.95%
Other Expenses 0.20%
-------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.15%
</TABLE>

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

(1) Sales charges and other expenses 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.

(2) VMF has agreed to waive management fees and, if necessary, to reimburse
"Other Expenses" so that Total Annual Fund Operating Expenses will not
exceed 1.25%. These waivers and reimbursements are voluntary and can be
discontinued after prior notice to shareholders.

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>
$117 $365 $633 $1,398
</TABLE>

4
<PAGE> 19

MORE ABOUT THE FUND

INVESTMENT STRATEGIES OF VILLANOVA MUTUAL FUND CAPITAL TRUST AND THE SUBADVISERS

The following is a description of the investment strategies used by VMF and each
subadviser for the Fund. VMF and each subadviser manages a portion of the Fund's
assets in accordance with the investment objective and principal strategies
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 insist in making 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, poor
relative performance, or excessive valuation.

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.

The subadviser 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.

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.

5
<PAGE> 20

More About the Fund

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.

VILLANOVA MUTUAL FUND CAPITAL TRUST (VMF) invests primarily in stocks of U.S.
and foreign companies, which it considers to be "value" companies. These
companies have good earnings growth potential and VMF believes that the market
has undervalued them. VMF will also invest in unrecognized stocks and stocks of
special situation companies and turnarounds (companies that have experienced
significant business problems but which VMF believes have favorable prospects
for recovery).

VMF believes that smaller capitalization companies are often undervalued 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.

WADDELL & REED INVESTMENT MANAGEMENT COMPANY (WRIMCO) seeks companies whose
earnings it believes are likely to grow faster than the economy. WRIMCO
emphasizes relatively new or unseasoned companies in their early stages of
development or smaller companies positioned in new or emerging industries where
there is opportunity for rapid growth. WRIMCO may look at a number of factors
relating to a company, such as:

- aggressive or creative management;

- technological or specialized expertise;

- new or unique products or services; and;

- entry into new or emerging industries.

In general, WRIMCO may sell a security if it determines that the stock no longer
offers significant growth potential, which may be due to a change in the
business or management of the company or a change in the industry of the
company. As well, WRIMCO may sell a security to take advantage of more
attractive investment opportunities or to raise cash.

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

- lack of a proven track record

- 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.

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.

Foreign security investment involves special risks not present in U.S.
investments that can increase the chances that the Fund will lose money.

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 the 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, expropriation,

6
<PAGE> 21

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

FOREIGN MARKETS -- The Fund is subject to the risk that because there are
generally fewer investors in foreign markets and a smaller number of securities
traded each day, it may make it difficult for the Fund to buy and sell certain
securities. In addition, prices of foreign securities may go up and down more
than prices of securities traded in the U.S. Also, brokerage commissions and
other costs of buying and selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount the Fund
can earn on its investments.

GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Foreign
companies are not subject to the same disclosure, accounting, auditing and
financial reporting standards and practices as U.S. companies. The 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. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. does. Other countries may not have laws to protect
investors the way that the U.S. securities laws do. Accounting standards in
other countries are not necessarily the same as in the U.S. If the accounting
standards in another country do not require as much detail as U.S. accounting
standards, it may be harder for the Fund's portfolio managers to completely and
accurately determine a company's financial condition.

CURRENCY -- Some of the Fund's investments may be 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. In addition, if the
currency in which the Fund receives dividends, interest or other payments
declines in value against the U.S. dollar before such income is distributed as
dividends to shareholders or converted to U.S. dollars, the Fund may have to
sell portfolio securities to obtain sufficient cash to pay such dividends out to
its shareholders.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU) -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU has established a single
European currency (the euro), which was introduced in January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and make
dividend and other payments only in euros. Like other investment companies and
business organizations, including the companies in which the Fund invests, the
Fund could be adversely affected:

- If the transition to euro, or EMU as a whole, does not proceed as planned.

- If a participating country withdraws from EMU.

- If the computing, accounting and trading systems used by the Fund's service
providers, or by other entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct 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

7
<PAGE> 22

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, 1999. 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.

In 1999, the Small Company Fund was up 44.02%. This compares to the Russell 2000
Index, which advanced 21.26%. The broader, large-cap S&P 500 rose 21.04%.

After five years of underperformance versus their large cap brethren, small cap
stocks outperformed large caps in 1999. This outperformance was propelled by
technology and other growth stocks in the Russell 2000 Index. The biggest story
within the small cap universe was the differential returns between small cap
growth stocks and small cap value stocks. As measured by the Russell 2000 style
indices, small cap growth stocks gained 42.5% in 1999, whereas small cap value
stocks actually declined 4.0% - a 46.5% relative outperformance by growth
stocks. Underlying sector performance was quite phenomenal as differences among
sectors easily exceeded 100%. The strongest performing sector was the technology
sector which returned over 110%. In fact, 10 stocks in the Russell 2000 Index
returned over 1,000% (the next 10 top performers all returned over 750%). Other
sectors exhibiting strong performance were the Utilities/Telecom sector which
returned nearly 25%, Energy, which returned 24% and Healthcare, which returned
over 15%. Conversely, the Consumer Durable sector returned -22% Consumer
Noncyclicals were down over 15%, and Financials were down over 12%. On a stock
by stock basis, however, less than 50% of the stocks in the Russell 2000 Index
had positive returns and the median performance of stock in the Russell 2000 was
-4.9%.

COMPARISON OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SMALL COMPANY FUND AND
THE RUSSELL 2000 INDEX(1,2)

<TABLE>
<S> <C> <C>
Small Company Fund Russell 2000 Index
11/1/95 10.000 10.000
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
12/31/99 23.982 18.015
</TABLE>

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

(1) The calculations in the graph assume the reinvestment of all dividends and
distributions.

SMALL COMPANY FUND
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED DECEMBER 31, 1999

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

(1) The Fund commenced operations October 23, 1995.

Past performance is not predictive of future performance.

8
<PAGE> 23

INVESTMENT MANAGER

VMF, 1200 River Road, Conshohocken, Pennsylvania 19428, manages the investment
of the assets and supervises the daily business affairs of the Fund. Subject to
the supervision and direction of the Trustees, VMF also monitors the performance
of the subadvisers. VMF also selects and places portfolio investments on behalf
of a portion of the Fund. VMF was organized in 1999 and manages mutual fund
assets. As of August 31, 2000, VMF and its affiliates had approximately $24.2
billion in assets under management.

The Fund pays VMF 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, 1999 -- expressed as a percentage of the Fund's average daily net
assets -- was 0.98%.

Portfolio Managers: Jeffrey C. Petherick and Mary C. Champagne are co-portfolio
managers of the portion of the Fund managed by VMF. Mr. Petherick and Ms.
Champagne joined VMF in January 2000, and prior to joining VMF, they co-managed
institutional and retail small cap value equity investments at Loomis, Sayles &
Company, L.P., since June 1995, including the Loomis Sayles Small Cap Value
Fund. Mr. Petherick joined Loomis, Sayles in 1990. Ms. Champagne joined Loomis,
Sayles in 1993.

MULTI-MANAGER STRUCTURE

VMF and the Trust have received from the Securities and Exchange Commission an
exemptive order for a multi-manager structure that allows VMF to hire, replace
or terminate subadvisers without the approval of shareholders. The order also
allows VMF 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.

VMF 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.

VMF does not expect to recommend frequent changes of subadvisers. VMF will
periodically provide written reports to the Board of Trustees regarding the
results of its evaluation and monitoring functions. Although VMF 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.

SUBADVISERS

Subject to the supervision of VMF and the Trustees, a subadviser will manage 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 current subadvisers for the Fund:

THE DREYFUS CORPORATION (Dreyfus), located at 200 Park Avenue, New York, New
York 10166, was formed in 1947. As of December 31, 1999, Dreyfus managed or
administered approximately $128 billion in assets for approximately 1.8 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 $54.4 billion of assets as of December 31, 1999. 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

9
<PAGE> 24

Management

responsible for the day-to-day management of Neuberger Berman's subadvisory
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 $43 billion as of November 30, 2000.

Portfolio Managers: Ronald C. Ognar and Brandon M. Nelson are co-portfolio
managers for the Nationwide Small Company Fund. Together they are primarily
responsible for the day-to-day management of Strong's portion of the Fund's
portfolio.

Ronald C. Ognar, CFA, has over 30 years of investment experience. He joined
Strong as a portfolio manager in April 1993. Mr. Ognar also manages the Strong
Growth Fund and the Strong Growth 20 Fund; and he co-manages the Strong Advisor
Mid Cap Growth Fund, Strong Advisor Focus Fund, Strong Large Cap Growth Fund,
and the Strong Mid Cap Growth Fund II.

Brandon M. Nelson, CFA, has over four years of investment experience. Mr. Nelson
joined Strong as a research analyst in 1996. Mr. Nelson received an M.S. degree
in finance from the University of Wisconsin -- Madison and was selected to
participate in the Applied Security Analysis Program. Mr. Nelson also earned a
B.B.A. degree in finance from the University of Wisconsin -- Madison. Mr. Nelson
is also co-portfolio manager to two other small cap funds for which Strong acts
as sub-adviser.

LAZARD ASSET MANAGEMENT (Lazard) manages approximately $75 billion in
investments for corporations, endowments, public and private pension plans and
wealthy individuals as of December 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 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.

WADDELL & REED INVESTMENT MANAGEMENT COMPANY (WRIMCO) is located at 6300 Lamar,
P.O. Box 29217, Overland Park, KS 66201. WRIMCO acts as investment manager to
numerous investment companies and accounts. As of August 31, 2000, WRIMCO
managed over $39 billion in assets.

Portfolio Managers. Mark G. Seferovich is Senior Vice President of WRIMCO and
Vice President of certain other investment companies for which WRIMCO serves as
investment manager. Mr. Seferovich has served as portfolio manager of investment
companies managed by WRIMCO and its predecessor since February 1989. From March
1996 to March 1998, Mr. Seferovich was Vice President of, and a portfolio
manager for, Waddell & Reed Asset Management Company, a former affiliate of
WRIMCO.

Grant P. Sarris is Vice President of WRIMCO and Vice President of certain other
investment companies for which WRIMCO serves as investment manager. Mr. Sarris
served as an investment analyst with WRIMCO and its predecessor from October 1,
1991 to January 1, 1996. From January 1996 to May 1998, Mr. Sarris served as an
assistant portfolio manager for WRIMCO, and since May 1998, he has served as a
portfolio manager. Mr. Sarris has been an employee of WRIMCO since October 1,
1991.

10
<PAGE> 25

BUYING AND SELLING FUND SHARES

WHO CAN BUY SHARES OF THE FUND

Please check with your insurance company to determine whether this Fund is
available under your variable annuity contract or variable life insurance
policy. This prospectus should be read in conjunction with the prospectus of the
separate account of your specific insurance product.

The Fund sells its shares to separate accounts of both Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company and may sell its
shares to separate accounts of other unaffiliated insurance companies. The Fund
currently does not foresee any disadvantages to the owners of variable annuity
contracts or variable life insurance products arising out of the fact that the
Fund may offer its shares to the separate accounts of various insurance
companies to fund benefits of these variable insurance products. Nevertheless,
the Trustees intend to monitor events in order to identify any material
irreconcilable conflicts which may arise, and to determine what action, if any,
should be taken in response to such conflicts. If such a conflict were to occur,
one or more insurance companies' separate accounts might be required to withdraw
their investments in the Fund and shares of another fund may be substituted.
This might force the Fund to sell its securities at disadvantageous prices.

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.

The Fund 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.

The Fund 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 Villanova SA Capital
Trust (VSA), as the Fund's administrator or its agent 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

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 the Fund's investments at the
time of sale.

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.

11
<PAGE> 26

Buying and Selling Fund Shares

DIVIDENDS AND DISTRIBUTIONS

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 Fund.

12
<PAGE> 27

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 represents the rate that an investor would have earned (or
lost) on an investment in the Fund, assuming reinvestment of all dividends and
distributions. The information for the years ended December 31, 1999, 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 year ended December 31, 1996 and the
period ended December 31, 1995 were audited by other auditors.

<TABLE>
<CAPTION>
SMALL COMPANY FUND
----------------------------------------------------------------------------
PERIOD
OCTOBER 23, 1995
YEARS ENDED DECEMBER 31, (COMMENCEMENT OF
---------------------------------------------------- OPERATIONS) THROUGH
1999 1998 1997 1996 DECEMBER 31, 1995
-------- ---------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $ 16.01 $ 15.85 $ 13.89 $ 11.42 $ 10.00
Net investment income (0.03) 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 7.03 0.13 2.40 2.55 1.42
-------- -------- -------- -------- -------
Total from investment
operations 7.00 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 (0.89) -- (0.45) -- --
Dividends in excess of net
realized gain from investment
and foreign currency
transactions -- -- -- (0.08) --
-------- -------- -------- -------- -------
Total distributions (0.89) -- (0.45) (0.14) (0.02)
-------- -------- -------- -------- -------
Net increase in net asset
value 6.11 0.16 1.96 2.47 1.42
-------- -------- -------- -------- -------
NET ASSET VALUE -- END OF PERIOD $ 22.12 $ 16.01 $ 15.85 $ 13.89 $ 11.42
======== ======== ======== ======== =======
Total Return 44.02% 1.01% 17.35% 22.83% 14.38%
Ratios and supplemental data:
Net Assets, end of period (000) $542,537 $406,569 $343,808 $180,840 $17,155
Ratio of expenses to average net
assets 1.15% 1.07% 1.11% 1.20% 1.25%(1)
Ratio of expenses to average net
assets(2) 1.15% 1.07% 1.11% 1.20% 1.74%(1)
Ratio of net investment income to
average net assets (0.16)% 0.21% 0.05% 0.60% 1.32%(1)
Ratio of net investment income to
average net assets(2) (0.16)% 0.21% 0.05% 0.60% 0.83%(1)
Portfolio turnover 134.74% 141.27% 134.38% 136.74% 9.03%
</TABLE>

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

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

13
<PAGE> 28

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 (incorporated by reference into this
Prospectus)

- Annual Report (which contains a discussion of the market conditions and
investment strategies that have significantly affected the Fund's performance)

- 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 (SEC)

You can obtain copies of Fund documents from the SEC as follows:

IN PERSON:

Public Reference Room in Washington, D.C. (For their hours of operation, call
1-202-942-8090.)

BY MAIL:

Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-0102

(The SEC charges a fee to copy any documents)

ON THE EDGAR DATABASE VIA THE INTERNET:

www.sec.gov

BY ELECTRONIC REQUEST:

[email protected]

INVESTMENT COMPANY ACT FILE NO: 811-3213

APO-3018-1/01

<PAGE> 29
STATEMENT OF ADDITIONAL INFORMATION

January 5, 2001

NATIONWIDE SEPARATE ACCOUNT TRUST
Strong NSAT Mid Cap Growth Fund (formerly "Nationwide Strategic Growth Fund")
Nationwide Strategic Value Fund
Federated NSAT Equity Income Fund (formerly "Nationwide Equity Income Fund")
Federated NSAT High Income Bond Fund (formerly "Nationwide High Income
Bond Fund")
J.P. Morgan NSAT Balanced Fund (formerly "Nationwide Balanced Fund")
MAS NSAT Multi Sector Bond Fund (formerly "Nationwide Multi Sector Bond Fund")
Nationwide Small Cap Value Fund
Nationwide Small Cap Growth Fund (formerly "Nationwide Select Advisers
Small Cap Growth Fund")
Nationwide Global 50 Fund (formerly "Nationwide Global Equity Fund")
Dreyfus NSAT Mid Cap Index Fund (formerly "Nationwide Mid Cap Index Fund)
Nationwide Small Company Fund
Nationwide Income Fund
Total Return Fund
Capital Appreciation Fund
Government Bond Fund
Money Market Fund
Turner NSAT Growth Focus Fund (formerly "Nationwide Growth Focus Fund II")
Gartmore NSAT Global Technology and Communications Fund (formerly "Nationwide
Global Technology and Communications Fund II")
Nationwide Global Life Sciences Fund II
Gartmore NSAT Millennium Growth Fund
Gartmore NSAT Emerging Markets Fund
Gartmore NSAT International Growth Fund
Gartmore NSAT Global Leaders Fund
Gartmore NSAT European Growth Fund
Gartmore NSAT Global Small Companies Fund
Gartmore NSAT OTC Fund

Nationwide Separate Account Trust is a registered open-end investment
company currently consisting of 26 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 for each of the Strong NSAT Mid Cap Growth Fund (formerly

<PAGE> 30

"Nationwide Strategic Growth Fund"), Nationwide Strategic Value Fund, Federated
NSAT Equity Income Fund (formerly "Nationwide Equity Income Fund"), Federated
NSAT High Income Bond Fund (formerly "Nationwide High Income Bond Fund"), J.P.
Morgan NSAT Balanced Fund (formerly "Nationwide Balanced Fund"), MAS NSAT Multi
Sector Bond Fund (formerly "Nationwide Multi Sector Bond Fund"), Nationwide
Small Cap Value Fund, Nationwide Small Cap Growth Fund (formerly "Nationwide
Select Advisers Small Cap Growth Fund"), Nationwide Global 50 Fund (formerly
"Nationwide Global Equity Fund"), Dreyfus NSAT Mid Cap Index Fund (formerly
"Nationwide Mid Cap Index Fund") dated May 1, 2000 (as revised October 2, 2000);
the Prospectuses for each of the Nationwide Income Fund and Total Return Fund,
Capital Appreciation Fund, Government Bond Fund, Money Market Fund each dated
May 1, 2000; the Prospectus for the Nationwide Small Company Fund dated May 1,
2000 (as revised) January 5, 2001); the Prospectus for the Gartmore NSAT Global
Technology and Communications Fund and Turner NSAT Growth Focus Fund dated
October 2, 2000; the Prospectus for the Gartmore NSAT Emerging Markets Fund and
Gartmore NSAT International Growth Fund dated September 1, 2000; and/or the
Prospectus for the Gartmore NSAT OTC Fund dated January 5, 2001. 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.

<PAGE> 31

TABLE OF CONTENTS PAGE
----------------- ----

General Information and History........................................... 1
Additional Information on Portfolio Instruments and
Investment Policies..................................................... 1
Investment Restrictions...................................................43
Major Shareholders........................................................48
Trustees and Officers of the Trust........................................49
Calculating Yield and Total Return........................................53
Investment Advisory and Other Services....................................55
Brokerage Allocations.....................................................71
Purchases, Redemptions and Pricing of Shares..............................80
Additional Information....................................................81
Tax Status................................................................82
Other Tax Consequences....................................................83
Tax Consequences to Shareholders..........................................85
Financial Statements......................................................85
Appendix A - Bond Ratings.................................................86

<PAGE> 32

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 26
separate series, each with its own investment objective. Each of the Funds,
except for the Nationwide Small Company Fund, Strong NSAT Mid Cap Growth Fund
(formerly "Nationwide Strategic Growth Fund"), Nationwide Income Fund and the
Turner NSAT Growth Focus 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. This Statement of Additional Information (SAI) contains additional
information regarding both the principal and non-principal investment strategies
of the Funds. 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.

1
<PAGE> 33

<TABLE>
<CAPTION>
CAPITAL STRONG NSAT STRATEGIC DREYFUS NSAT SMALL SMALL CAP
TYPE OF INVESTMENT OR TECHNIQUE APPRECIATION MID CAP GROWTH VALUE MID CAP INDEX 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
Special situation companies Y Y Y Y Y
Illiquid securities Y Y Y Y Y Y
Restricted securities Y Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y Y
Limited liability companies
Investment companies Y Y Y Y Y Y
Real estate securities Y Y Y Y Y
Securities of foreign issuers Y Y Y Y
Depository receipts Y Y Y
Securities from developing countries/ Y Y
emerging markets
Convertible securities Y Y Y Y Y Y
Long-term debt Y Y Y Y Y Y
Short-term debt Y Y Y Y Y Y
Floating and variable rate securities
Zero coupon securities Y Y Y Y
Step-coupon securities
Pay-in-kind bonds Y Y Y
Deferred payment securities Y Y Y
Brady bonds
Non-investment grade debt Y Y Y Y Y
Loan participations and assignments
Sovereign debt (foreign) Y
Foreign commercial paper Y
Duration
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 CAP GLOBAL FEDERATED NSAT TOTAL J.P. MORGAN GOVERNMENT
TYPE OF INVESTMENT OR TECHNIQUE VALUE 50 EQUITY INCOME RETURN NSAT 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
Special situation companies Y Y Y
Illiquid securities Y Y Y Y Y Y
Restricted securities Y Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y Y
Limited liability companies Y
Investment companies Y Y Y Y Y Y
Real estate securities Y Y
Securities of foreign issuers Y Y Y Y
Depository receipts Y Y Y
Securities from developing countries/ Y Y
emerging markets
Convertible securities Y Y Y Y Y
Long-term debt Y Y Y Y Y
Short-term debt Y Y Y Y Y Y
Floating and variable rate securities Y Y Y
Zero coupon securities Y Y Y
Step-coupon securities Y
Pay-in-kind bonds Y Y
Deferred payment securities Y Y
Brady bonds Y
Non-investment grade debt Y Y
Loan participations and assignments Y
Sovereign debt (foreign) Y
Foreign commercial paper Y Y
Duration
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>
MAS NSAT MULTI FEDERATED NSAT MONEY TURNER NSAT
TYPE OF INVESTMENT OR TECHNIQUE INCOME SECTOR BOND HIGH INCOME BOND MARKET GROWTH FOCUS
<S> <C> <C> <C> <C> <C>
U.S. common stocks Y Y
Preferred stocks Y Y
Small company stocks Y Y
Special situation companies Y
Illiquid securities Y Y Y Y
Restricted securities Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y
Limited liability companies Y Y
Investment companies Y Y Y Y Y
Real estate securities Y Y Y
Securities of foreign issuers Y Y Y
Depository receipts Y Y Y
Securities from developing countries/ Y Y Y
emerging markets
Convertible securities Y Y Y
Long-term debt Y Y Y
Short-term debt Y Y Y Y Y
Floating and variable rate securities Y Y Y Y
Zero coupon securities Y Y Y
Step-coupon securities Y Y
Pay-in-kind bonds Y Y
Deferred payment securities Y Y
Brady bonds Y
Non-investment grade debt Y Y
Loan participations and assignments Y Y
Sovereign debt (foreign) Y Y
Foreign commercial paper Y Y
Duration Y Y Y
U.S. Government securities Y Y Y Y Y
Money market instruments Y Y Y Y Y
Mortgage-backed securities Y Y Y
</TABLE>

<TABLE>
<CAPTION>
GARTMORE NSAT
TYPE OF INVESTMENT OR TECHNIQUE MILLENNIUM GROWTH
<S> <C>
U.S. common stocks Y
Preferred stocks Y
Small company stocks Y
Special situation companies Y
Illiquid securities Y
Restricted securities Y
When-issued / delayed-delivery securities Y
Limited liability companies
Investment companies Y
Real estate securities Y
Securities of foreign issuers Y
Depository receipts Y
Securities from developing countries/ Y
emerging markets
Convertible securities Y
Long-term debt
Short-term debt Y
Floating and variable rate securities
Zero coupon securities
Step-coupon securities
Pay-in-kind bonds
Deferred payment securities
Brady bonds
Non-investment grade debt
Loan participations and assignments
Sovereign debt (foreign)
Foreign commercial paper
Duration
U.S. Government securities Y
Money market instruments Y
Mortgage-backed securities
</TABLE>

2
<PAGE> 34

<TABLE>
<CAPTION>
GLOBAL NSAT
TECHNOLOGY GLOBAL NSAT NSAT NSAT NSAT GLOBAL NSAT
AND LIFE EMERGING INTERNATIONAL GLOBAL EUROPEAN SMALL OTC
TYPE OF INVESTMENT OR TECHNIQUE COMMUNICATIONS SCIENCES II MARKETS GROWTH LEADERS GROWTH COMPANIES FUND
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. common stocks Y Y
Preferred stocks Y Y Y Y Y Y Y
Small company stocks Y Y Y Y Y Y Y Y
Special situation companies Y Y Y Y Y Y Y
Illiquid securities Y Y Y Y Y Y Y Y
Restricted securities Y Y Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y Y
Limited liability companies
Investment companies Y Y
Real estate securities Y Y Y Y Y Y
Securities of foreign issuers Y Y Y Y Y Y Y Y
Depository receipts Y Y Y Y Y Y Y
Securities from developing countries/
emerging markets Y Y Y Y Y Y Y Y
Convertible securities Y Y Y Y Y Y Y Y
Long-term debt
Short-term debt Y Y Y Y Y Y Y
Floating and variable rate securities
Zero coupon securities
Step-coupon securities
Pay-in-kind bonds
Deferred payment securities
Brady bonds
Non-investment grade debt
Loan participations and assignments
Sovereign debt (foreign) Y Y Y Y Y Y
Foreign commercial paper Y Y Y Y Y Y
Duration
U.S. Government securities Y Y Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y Y Y
Mortgage-backed securities
</TABLE>

3
<PAGE> 35

STRONG NSAT DREYFUS NSAT SMALL SMALL
CAPITAL MID CAP STRATEGIC MID CAP SMALL CAP CAP
TYPE OF INVESTMENT OR TECHNIQUE APPRECIATION GROWTH VALUE INDEX COMPANY GROWTH VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
Stripped mortgage-backed securities
Collateralized mortgage obligations
Mortgage dollar rolls Y Y Y
Asset-backed securities Y Y Y
Bank obligations Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements Y Y Y Y Y Y
Warrants Y Y Y Y Y Y
Futures Y Y
Options Y Y
Foreign currencies Y Y Y Y Y
Forward currency contracts Y Y
Borrowing money Y Y Y Y Y Y Y
Lending of portfolio securities Y Y Y Y Y Y
Short sales Y Y Y Y
</TABLE>

<TABLE>
<CAPTION>
FEDERATED J.P. MORGAN MAS NSAT
GLOBAL NSAT EQUITY TOTAL NSAT GOVERNMENT MULTI SECTOR
TYPE OF INVESTMENT OR TECHNIQUE 50 INCOME RETURN BALANCED BOND INCOME BOND
<S> <C> <C> <C> <C> <C> <C> <C>
Stripped mortgage-backed securities Y Y
Collateralized mortgage obligations Y Y Y Y
Mortgage dollar rolls Y Y Y
Asset-backed securities Y Y Y
Bank obligations Y Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements Y Y Y Y
Warrants Y Y Y Y
Futures Y Y Y Y
Options Y Y Y Y
Foreign currencies Y Y
Forward currency contracts Y
Borrowing money Y Y Y Y Y Y Y
Lending of portfolio securities Y Y Y Y Y
Short sales
</TABLE>

<TABLE>
<CAPTION>
FEDERATED GARTMORE
NSAT HIGH TURNER NSAT
INCOME MONEY NSAT GROWTH MILLENNIUM
TYPE OF INVESTMENT OR TECHNIQUE BOND MARKET FOCUS GROWTH
<S> <C> <C> <C> <C>
Stripped mortgage-backed securities Y
Collateralized mortgage obligations
Mortgage dollar rolls Y Y
Asset-backed securities Y Y
Bank obligations Y Y Y Y
Repurchase agreements Y Y Y Y
Reverse repurchase agreements Y Y Y
Warrants Y Y Y
Futures Y Y Y
Options Y Y Y
Foreign currencies Y Y
Forward currency contracts Y Y
Borrowing money Y Y Y Y
Lending of portfolio securities Y Y Y
Short sales Y Y
</TABLE>

4
<PAGE> 36

5
<PAGE> 37

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, a Fund's investment adviser or subadviser
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

6
<PAGE> 38

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. 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 a Fund's adviser or
subadviser(s) 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 adviser or
subadviser 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

7
<PAGE> 39

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 or lower
quality/rated securities (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.

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.

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<PAGE> 40

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.

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 and its agencies provide financial support to such
entities, no assurance can be given that they 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.

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<PAGE> 41

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.

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

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<PAGE> 42

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

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<PAGE> 43

United States. Fannie Maes are guaranteed as to 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. Other types of securities representing interests in a
pool of mortgage loans are known as real estate mortgage investment conduits
("REMICs").

Typically, CMOs are collateralized by GNMA, Fannie Mae or Freddie Mac
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. REMICs, which have elected to be treated as such under the
Internal Revenue Code, are private entities formed for the purpose of holding a
fixed pool of mortgages secured by an interest in real property. 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

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<PAGE> 44

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 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

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<PAGE> 45

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 the 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 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;

-- repurchase agreements;

-- bank obligations;

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<PAGE> 46

-- 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 or its
guarantor 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;

-- bank loan participation agreements representing obligations of
corporations and banks having a high quality short-term rating, at the date
of investment, and under which the Fund will look to the creditworthiness
of the lender bank, which is obligated to make payments of principal and
interest on the loan, as well as to creditworthiness of the borrower.

-- extendable commercial notes which are obligations underwritten by
Goldman Sachs, which differ from traditional commercial paper because the
issuer can extend the maturity of the note up to 390 days with the option
to call the note any time during the extension period. Because extension
will occur when the issuer does not have other viable options for lending,
these notes are considered illiquid and the Money Market Fund will be
limited to holding no more than 10% of its net assets in these and any
other illiquid securities.

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. A Fund's adviser or 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-

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<PAGE> 47

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
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

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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 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 adviser or
subadvisers of such Funds believe, however, that if the adviser or 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

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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 OR EMERGING MARKET COUNTRIES.
Investments may be made from time to time in companies in developing or emerging
market 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 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

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<PAGE> 50

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

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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 for 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.
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.

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 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.

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

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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. A
Fund's adviser or 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
the adviser 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 the Fund's adviser or 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 interest 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 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

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<PAGE> 54

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 residual
risk of the Brady Bonds and, among other factors, the history of default with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds are 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

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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. 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

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<PAGE> 56

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

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<PAGE> 57

holder to any periodic payments of interest prior to maturity. Rather, interest
earned on zero coupon convertible securities accretes 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 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 than 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.

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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 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.

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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.

Any such restricted securities will be considered to be illiquid for
purposes of a Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, the Fund's
adviser or subadviser has determined such securities to be liquid because such
securities are eligible for resale pursuant to Rule 144A and are readily
saleable. To the extent that qualified institutional buyers may become
uninterested in purchasing Rule 144A securities, the Fund's level of illiquidity
may increase.

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

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<PAGE> 60

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 the adviser 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. Regulation D in the Securities Act of 1933 lists registered
investment companies as accredited investors.

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 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 (generally, 331/3% 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; for the Total Return Fund, the Capital Appreciation Fund,
the Government Bond Fund and the Money Market Fund, this 5% limit is the only
borrowing permitted. 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

A Fund's adviser or subadviser may use a variety of derivative instruments,
including options, futures contracts (sometimes referred to as "futures"),
options on futures contracts, stock index

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<PAGE> 61

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.

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 a Fund's
adviser's or 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

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because a Fund's adviser 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 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.

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<PAGE> 63

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.

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

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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 a Fund's adviser
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

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<PAGE> 65

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 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

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<PAGE> 66

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.

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

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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 a Fund's adviser's or
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 a Fund's
adviser or 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.

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. 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 Fund's adviser or 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.

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<PAGE> 68

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 a Fund's adviser or 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 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

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<PAGE> 69

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 50 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.

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. 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 or adjustable rate securities
changes at preset times based upon an underlying index. 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.

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<PAGE> 70

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. A Fund's adviser or 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 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.

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

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<PAGE> 71

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. Bank obligations may be issued by domestic banks
(including their branches located outside the United States), domestic and
foreign branches of foreign banks and savings and loan associations.

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.

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

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<PAGE> 72

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 adviser or 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

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<PAGE> 73

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.

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

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<PAGE> 74

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, the Fund's adviser
or subadviser believes that such arbitrage transactions do not present the risks
to the Funds that are associated with other types of leverage.

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

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.

Each of the Funds:

- May not lend any security or make any other loan except that each Fund may,
in accordance with its investment objective and policies, (i) lend
portfolio securities, (ii) purchase and hold debt securities or other debt
instruments, including but not limited to loan participations and
subparticipations, assignments, and structured securities, (iii) make loans
secured by mortgages on real property, (iv) enter into repurchase
agreements, and (v) make time deposits with financial institutions and
invest in instruments issued by financial institutions, and enter into any
other lending arrangement as and to the extent permitted by the Investment
Company Act of 1940 or any rule, order or interpretation thereunder.

- May not purchase or sell real estate, except that each Fund may (i) acquire
real estate through ownership of securities or instruments and sell any
real estate acquired thereby, (ii) purchase or sell instruments secured by
real estate (including interests therein), and (iii) purchase or sell
securities issued by entities or investment vehicles that own or deal in
real estate (including interests therein).

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<PAGE> 75

- May not borrow money or issue senior securities, except that each Fund may
enter into reverse repurchase agreements and may otherwise borrow money and
issue senior securities as and to the extent permitted by the 1940 Act or
any rule, order or interpretation thereunder.

- May not purchase or sell commodities or commodities contracts, except to
the extent disclosed in the current Prospectus or Statement of Additional
Information of such Fund.

- May not act as an underwriter of another issuer's securities, except to the
extent that each Fund may be deemed an underwriter within the meaning of
the Securities Act in connection with the purchase and sale of portfolio
securities.

In addition, the Strategic Value Fund, Federated NSAT Equity Income Fund,
Federated NSAT High Income Bond Fund, J.P. Morgan NSAT Balanced Fund, MAS NSAT
Multi Sector Bond Fund, Small Cap Value Fund, Small Cap Growth Fund, Global 50
Fund and Dreyfus NSAT Mid Cap Index Fund, Gartmore NSAT Millennium Growth Fund,
Total Return Fund, Capital Appreciation Fund, Government Bond Fund and Money
Market 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.

Each Fund, except for Global Life Sciences Fund II and Gartmore NSAT OTC Fund:

- 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.

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The following are the NON-FUNDAMENTAL operating policies of the Strong NSAT
Mid Cap Growth Fund, Nationwide Strategic Value Fund, Federated NSAT Equity
Income Fund, Federated NSAT High Income Bond Fund, J.P. Morgan NSAT Balanced
Fund, MAS NSAT Multi Sector Bond Fund, Nationwide Small Cap Value Fund,
Nationwide Small Cap Growth Fund, Nationwide Global 50 Fund, Dreyfus NSAT Mid
Cap Index Fund, Nationwide Small Company Fund, Nationwide Income Fund, Turner
NSAT Growth Focus Fund, Gartmore NSAT Millennium Growth Fund, Gartmore NSAT
Emerging Markets Fund, Gartmore NSAT International Growth Fund, Gartmore NSAT
Global Leaders Fund, Gartmore NSAT European Growth Fund, and Gartmore NSAT
Global Small Companies 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 Dreyfus NSAT Mid Cap Index 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 Dreyfus NSAT Mid Cap Index 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 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. If any
percentage restriction or requirement described above is satisfied at the
time of investment, a later increase or decrease in such percentage
resulting from a change in net asset value will not constitute of such
restriction or requirement. However, should a change in net asset value or
other external events cause a Fund's investments in illiquid securities
including repurchase agreements with maturities in excess of seven days, to
exceed the limit set forth above for such Fund's investment in illiquid
securities, a Fund will act to cause the aggregate amount such securities
to come within such limit as soon as reasonably practicable. In such event,
however, such Fund would not be required to liquidate any portfolio
securities where a Fund would suffer a loss on the sale of such securities.

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- 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 331/3% 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. If any percentage
restriction or requirement described above is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from
a change in net asset value will not constitute of such restriction or
requirement. However, should a change in net asset value or other external
events cause a Fund's investments in illiquid securities including
repurchase agreements with maturities in excess of seven days, to exceed
the limit set forth above for such Fund's investment in illiquid
securities, a Fund will act to cause the aggregate amount such securities
to come within such limit as soon as reasonably practicable. In such event,
however, such Fund would not be required to liquidate any portfolio
securities where a Fund would suffer a loss on the sale of such securities.

- 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 are not fundamental and may
be changed by the Board of Trustees without shareholder approval.

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PORTFOLIO TURNOVER

The portfolio turnover rate for each Fund is calculated by dividing the lesser
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 years ended December 31, 1999 and 1998 were as follows:

FUND 1999 1998
<S> <C> <C>
Strong NSAT Mid Cap Growth(1) 637.83% 369.83%

Strategic Value 113.30% 68.65%

Federated NSAT Equity Income 45.16% 49.12%

Federated NSAT High Income Bond 22.04% 24.25%

J.P. Morgan NSAT Balanced 103.69% 137.35%

MAS NSAT Multi Sector Bond 242.89% 287.69%

Small Cap Value 270.26% 283.65%

Small Cap Growth 130.98% N/A

Global 50 79.22% 59.01%

Dreyfus NSAT Mid Cap Index(2) 275.04% 119.37%

Small Company 134.74% 141.27%

Income(3) 88.39% 157.21%

Total Return 29.95% 17.13%

Capital Appreciation 24.70% 10.67%

Government Bond 51.61% 32.03%

Turner NSAT Growth Focus(4) N/A N/A

Gartmore NSAT Millennium Growth(4) N/A N/A

Global Technology and Communications(5) N/A N/A

Global Life Sciences(5) N/A N/A

NSAT Emerging Markets(6) N/A N/A

NSAT International Growth(6) N/A N/A

NSAT Global Leaders(6) N/A N/A

NSAT European Growth(6) N/A N/A

NSAT Global Small Companies(6) N/A N/A

NSAT OTC(7) N/A N/A
</TABLE>

------------
(1) The portfolio turnover for the Strong NSAT Mid Cap Growth Fund increased
significantly during the fiscal year ended December 31, 1999 due to market
volatility and the Fund's decision to take advantage of investment
opportunities in Internet related companies consistent with the Fund's
principal investment strategies.

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<PAGE> 79

(2) The portfolio turnover for the Dreyfus NSAT Mid Cap Index Fund increased
significantly during the fiscal year ended December 31, 1999 due to its
change in strategies from an actively managed fund to an index fund and the
need to sell securities in order to purchase the securities in the index.

(3) The portfolio turnover for the Income Fund decreased significantly during
the fiscal year ended December 31, 1999. This can be attributed to the
Fund's rapid growth in 1999 which allowed the Fund to restructure itself by
using incoming periodic contributions, thereby alleviating the need to sell
existing portfolio assets to change the Fund's capital structure.

(4) The Turner NSAT Growth Focus Fund and Gartmore NSAT Millennium Growth Fund
commenced operations as of July 3, 2000.

(5) Global Technology and Communication Fund and Global Life Sciences Fund II
commenced operations as of July 3, 2000.

(6) NSAT Emerging Markets Fund, NSAT International Growth Fund, NSAT Global
Leaders Fund, NSAT European Growth Fund and NSAT Global Small Companies
Fund commenced operations on September 1, 2000.

(7) The NSAT OTC Fund expects to commence operations in December 2000.

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,
Villanova Mutual Fund Capital Trust ("VMF"), Villanova Global Asset Management
Trust ("VGAMT") (collectively, the "Advisers) and the insurance companies may
enter into agreements, required by certain state insurance departments, under
which the Advisers may agree to use their best efforts to assure and 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 December 15, 2000, separate accounts of Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company had shared voting and
investment power over 98.8% of the J.P. Morgan NSAT Balanced Fund shares, 97.2%
of the MAS NSAT Multi Sector Bond Fund shares, 92.2% of the Small Cap Value Fund
shares, 97.4% of the Global 50 Fund shares, 85.0% of the Dreyfus NSAT Mid Cap
Index Fund shares, 90.2% of the Small Cap Growth Fund, 97.4% of the Strong NSAT
Mid Cap Growth Fund shares, 91.9% of the Strategic Value Fund shares, 91.0% of
the Federated NSAT Equity Income Fund shares, 96.2% of the Federated NSAT High
Income Bond Fund shares, 89.2% of the Small Company Fund shares, 85.5% of the
Total Return Fund shares, 91.8% of the Government Bond Fund shares, 82.3% of the
Capital Appreciation Fund shares, 33.0% of the Income Fund, 95.2% of the
Gartmore NSAT Emerging Markets Fund, 95.0% of the Gartmore NSAT International
Growth Fund, 93.2% of the Gartmore NSAT Global Technology and Communications
Fund, 97.3% of the Turner NSAT Growth Focus Fund, 100% of the Gartmore NSAT
Millennium Growth Fund, and 87.5% of the Money Market Fund shares, respectively.
As of December 15, 2000, the following portfolios of Nationwide Asset Allocation
Trust had shared voting and investment power over shares of the Income Fund:
Moderately Aggressive Portfolio, 15.0%, Moderate Portfolio, 24.0%; Moderately
Conservative Portfolio, 12.8%; and Conservative Portfolio, 10.5%. Nationwide
Asset Allocation Trust is a registered investment company advised by Villanova
SA Capital Trust, an affiliate of VMF, and sold to separate accounts of
Nationwide Life Insurance Company.

48
<PAGE> 80
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance Company, One Nationwide Plaza, Columbus, Ohio 43215 are 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 (95.24%) and Nationwide Mutual Fire
Insurance Company (4.76%), each of which is a mutual company owned by its
policyholders.

As of December 15, 2000, 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

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:

CHARLES E. ALLEN, TRUSTEE, Age 52
300 River Place, Suite 2050, Detroit, Michigan
Mr. Allen is Chairman, Chief Executive Officer and President of the Graimark
family of companies (real estate development, investment and asset management).

PAULA H.J. CHOLMONDELEY, TRUSTEE, Age 50
225 Franklin Street, Boston, Massachusetts
Ms. Cholmondeley is Vice President and General Manager of Special Products at
Sappi Fire Paper North America. Prior to that, she has held various positions
with Owens Corning, including Vice President and Special Manager of the
Residential Insulation Division, President of the MIRAFLEX Fibers Division, and
Vice President of Business Development and Global Sourcing.

C. BRENT DEVORE, TRUSTEE, Age 58
111 N. West Street, Westerville, Ohio 43081
Dr. DeVore is President of Otterbein College.

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.

49
<PAGE> 81

JOSEPH J. GASPER, TRUSTEE AND 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.

BARBARA HENNIGAR, TRUSTEE, Age 64
6803 Tucson Way, Englewood, Colorado
Ms. Hennigar is Chairman of OppenheimerFunds Services and Shareholder Services
Inc. Prior to that, she served as President and Chief Executive Officer of
OppenheimerFunds Services.

PAUL J. HONDROS, TRUSTEE*, Age 51
1200 River Road, Conshohocken, Pennsylvania 19428
Mr. Hondros is President and Chief Executive Officer of Villanova Mutual Fund
Capital Trust, Villanova Capital, Inc. and Villanova SA Capital Trust. Prior to
that, Mr. Hondros served as President and Chief Operations Officer of Pilgrim
Baxter and Associates, Ltd., an investment management firm, and its affiliated
fixed income investment management arm, Pilgrim Baxter Value Investors, Inc. and
as Executive Vice President to the PBHG Funds, PBHG Insurance Series Funds and
PBHG Adviser Funds.

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
Mr. Kridler is President of Columbus Association for the Performing Arts.

DIMON R. MCFERSON*, TRUSTEE, Age 62
One Nationwide Plaza, Columbus, Ohio 43215
Mr. McFerson is Chairman and Chief Executive Officer of Nationwide Insurance,
Nationwide Advisory Services, Inc., and Villanova Capital, Inc.

ARDEN L. SHISLER, TRUSTEE*, Age 58
P.O. Box 267, Dalton, Ohio 44618
Mr. Shisler is President and Chief Executive Officer of K&B Transport, Inc., a
trucking firm.

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.

GERALD J. HOLLAND, TREASURER, Age 49
1200 River Road, Conshohocken, Pennsylvania 19428
Mr. Holland is Senior Vice President - Operations for Villanova Capital. He was
formerly Senior Vice President for First Data Investor Services, an investment
company service provider.

50
<PAGE> 82

KEVIN S. CROSSETT, SECRETARY, Age 40
1200 River Road, Conshohocken, Pennsylvania 19428
Mr. Crossett is Vice President, Associate General Counsel for Villanova Capital,
Inc. He was formerly Vice President, Senior Counsel and Director of Compliance
for Merrill Lynch, Pierce, Fenner & Smith

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

* A Trustee who is an "interested person" of the Trust as defined in the 1940
Act.

** All of the Trustees are also Trustees of Nationwide Mutual Funds. DeVore,
Duncan, Gasper, Kerr, Kridler, Shisler and Wetmore are also Trustees of and
Nationwide Asset Allocation Trust. Nationwide Mutual Funds and Nationwide Asset
Allocation Trust are registered investment companies in the Nationwide fund
complex. 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 Vice
Chairman of the Board of Directors of VMF, VGAMT and NFS. Mr. Arden L. Shisler,
Trustee of the Trust, is also a member of the Board of Directors of NFS and
other Nationwide Insurance entities.

The Trust does not pay any fees to Officers or to Trustees who are also
officers of VMF, VSA, VGAMT or their affiliates. The table below lists the
aggregate compensation paid by the Trust to each disinterested Trustee during
the fiscal year ended December 31, 1999, and the aggregate compensation paid to
each disinterested Trustee during the fiscal year ended December 31, 1999 by all
38 registered investment series to which VMF or its affiliates provide
investment advisory services or fund administration services (the "Nationwide
Fund Complex").

The Trust does not maintain any pension or retirement plans for the
Officers or Trustees of the Trust.

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<PAGE> 83

COMPENSATION TABLE

FISCAL YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE COMPENSATION FROM
TRUSTEES COMPENSATION THE NATIONWIDE
FROM THE TRUST INCLUDING THE TRUST FUND COMPLEX

<S> <C> <C>
Charles E. Allen(1) N/A N/A

John C. Bryant(2) $9,000 $28,000

Paula H.J. Cholmondeley(1) N/A N/A

C. Brent DeVore $9,000 $28,000

Sue A. Doody(2) $9,000 $28,000

Robert M. Duncan $9,000 $28,000

Joseph J. Gasper(3) N/A N/A

Barbara Hennigar(1) N/A N/A

Paul J. Hondros(1) N/A N/A

Thomas J. Kerr, IV $9,000 $28,000

Douglas F. Kridler $9,000 $28,000

Dimon R. McFerson(1) N/A N/A

Arden L. Shisler (2), (3) N/A N/A

David C. Wetmore $9,000 $28,000

Robert Woodward(2) N/A N/A
</TABLE>

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

(1) Mr. Allen, Ms. Cholmondeley, Ms. Hennigar, Mr. Hondros and Mr. McFerson
were elected as Trustees on July 26, 2000.
(2) Dr. Bryant, Ms. Doody and Mr. Woodward are no longer Trustees of the Trust.
(3) Mr. Shisler was elected as a Trustee on February 9, 2000.

52
<PAGE> 84

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, 1999, the
Fund's seven-day current yield was 5.40%. 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, 1999, was 5.55%.

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

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

53
<PAGE> 85

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 periods ended December 31, 1999, and the period from inception to
December 31, 1999, are shown below.

<TABLE>
<CAPTION>
10 YEARS
FUND 1 YEAR 5 YEARS OR LIFE
----- ------ ------- -------

<S> <C> <C> <C>
Strong NSAT Mid Cap Growth Fund(1) 84.75% N/A 42.97%
Strategic Value Fund(1) (3.07)% N/A (0.51)%
Federated NSAT Equity Income Fund(1) 18.49% N/A 16.37%
MAS NSAT Multi Sector Bond Fund(1) 1.56% N/A 2.41%
Federated NSAT High Income Bond Fund(1) 3.19% N/A 5.23%
J.P. Morgan NSAT Balanced Fund(1) 0.87% N/A 4.76%
Small Cap Value Fund(1) 27.84% N/A 9.59%
Global 50 Fund(1) 22.92% N/A 19.89%
Dreyfus NSAT Mid Cap Index Fund(1) 20.92% N/A 14.29%
Small Cap Growth Fund(2) N/A N/A 105.01%
Small Company Fund(3) 44.02% N/A 23.22%
Income Fund(4) (2.01)% N/A 2.53%
Total Return Fund 6.94% 20.78% 14.79%
Capital Appreciation Fund 4.28% 24.36% 17.27%
Money Market Fund 4.84% 5.22% 4.99%
Government Bond Fund (2.35%) 7.46% 7.67%
Turner NSAT Growth Focus Fund(5) N/A N/A N/A
Gartmore NSAT Millennium Growth Fund(5) N/A N/A N/A
Global Technology and Communications Fund(6) N/A N/A N/A
Global Life Sciences(6) N/A N/A N/A
NSAT Emerging Markets(7) N/A N/A N/A
NSAT International Growth(7) N/A N/A N/A
NSAT Global Leaders(7) N/A N/A N/A
NSAT European Growth(7) N/A N/A N/A
NSAT Global Small Companies(7) N/A N/A N/A
NSAT OTC(8) N/A N/A N/A
</TABLE>
------------

(1) These Funds commenced operations on October 31, 1997.
(2) This Fund commenced operations on May 1, 1999.
(3) This Fund commenced operations on October 23, 1995.
(4) This Fund commenced operations on January 20, 1998.
(5) These Funds commenced operations as of July 3, 2000.
(6) These Funds commenced operations on June 30, 2000.
(7) These Funds commenced operations on September 1, 2000.
(8) The Fund expects to commence operations in December 2000.

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

54
<PAGE> 86

includes a modified market value method for determining amortization. The yield
will fluctuate, and there is no assurance that the yield 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, 1999 were as follows:

FUND 30-DAY YIELD
----- -----------
Federated NSAT High Income Bond Fund 9.80%
J.P. Morgan NSAT Balanced Fund 3.45%
MAS NSAT Multi Sector Bond Fund 7.58%
Government Bond Fund 6.12%
Income Fund 5.19%

CODE OF ETHICS

Federal law requires the Trust, each of its investment advisers and
sub-advisers to adopt codes of ethics which govern the personal securities
transactions of their respective personnel. Accordingly, each such entity has
adopted a code of ethics pursuant to which their respective personnel may invest
securities for their personal accounts (including securities that may be
purchased or held by the Trust).

INVESTMENT ADVISORY AND OTHER SERVICES

Villanova Mutual Fund Capital Trust ("VMF") oversees the management of each
of the Funds, other than the Gartmore NSAT Emerging Markets, Gartmore NSAT
International Growth, Gartmore NSAT Global Leaders, Gartmore NSAT European
Growth, Gartmore NSAT Global Small Companies and Gartmore NSAT OTC Funds which
are managed by Villanova Global Asset Management Trust ("VGAMT") (VMF and VGAMT
referred to collectively as, the "Advisers"), pursuant to Investment Advisory
Agreements with the Trust (the "Investment Advisory Agreements"). Pursuant to
their respective Investment Advisory Agreements, the Advisers either provide
portfolio management for the Funds directly or hire and monitor the subadvisers
who are responsible for daily portfolio management. The Advisers pay the
compensation of the Trustees affiliated with VMF and VGAMT. The officers of the
Trust receive no compensation from the Trust. The Advisers also pay all expenses
incurred by each firm in providing service under their respective Investment
Advisory Agreements, other than the cost of investments.

The Investment Advisory Agreements also provide that the Advisers shall
not be liable for any act or omission in providing advisory services, or for any
loss arising out of any investment, unless the Adviser has acted with willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of the Adviser's 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 and 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.

VMF, a Delaware business trust, is a wholly owned subsidiary of Villanova
Capital, Inc., 97% of the common stock of which is owned by NFS. NFS, a holding
company, has two classes of common

55
<PAGE> 87

stock outstanding with different voting rights enabling Nationwide Corporation
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 (95.24%) and
Nationwide Mutual Fire Insurance Company (4.76%), each of which is a mutual
company owned by its policyholders.

VGAMT, a Delaware business trust, is a wholly owned subsidiary of
Nationwide Global Holdings, Inc. ("NGH"), a holding company. Nationwide
Corporation owns 100% of the common stock of NGH and as such may control NGH. As
stated previously, Nationwide Mutual Insurance Company and Nationwide Mutual
Fire Insurance Company together own all of the common stock of Nationwide
Corporation.

Subject to the supervision of the Advisers 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.

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.

Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the Funds (which were in existence at that
time) and paid fees to the subadvisers pursuant to the Funds' Subadvisory
Agreements. Effective September 1, 1999, the investment advisory services
previously performed for the Funds (effective September 27, 1999 for the Dreyfus
NSAT Mid Cap Index Fund) by NAS were transferred to Villanova Mutual Fund
Capital Trust ("VMF"), an affiliate of NAS and an indirect subsidiary of
Nationwide Financial Services, Inc. VMF assumed all rights and responsibilities
performed by NAS, including the supervision and monitoring of each Funds'
subadviser(s), and the Fund's subadviser(s) continued to manage the Fund after
the transfer to VMF. After the transfer, there were no changes in the fees
charged for investment advisory services to each of the Funds except for a
decrease in fees for the Dreyfus NSAT Mid Cap Index Fund.

The following is a summary of the investment advisory fees paid and the
subadvisory arrangements for each Fund.

56
<PAGE> 88

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 0.50% of the average daily net assets of each Fund. As
of November 1, 1997 (paid to VMF effective September 1, 1999), the following are
the advisory fees expressed as an annual percentage of average daily net assets:

FUND ADVISORY FEES
---- ------------
Total Return Fund and 0.60% on assets up to $1 billion

FUND ADVISORY FEES
---- ------------

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

For the years ended December 31, 1998 and 1997, NAS received fees in the
following amounts: Total Return Fund, $12,401,821 and $7,903,818, respectively;
Capital Appreciation Fund, $4,402,924 and $1,759,412, respectively; Government
Bond Fund, $3,015,171 and $2,231,930, respectively; and Money Market Fund,
$5,043,088 and $4,969,345, respectively. For the year ended December 31, 1999
NAS/VMF received fees in the following amounts: $14,084,011 for the Total Return
Fund, $6,579,545 for the Capital Appreciation Fund, $3,867,960 for the
Government Bond Fund and $6,844,464 for the Money Market Fund.

VMF has agreed to waive advisory fees and, if necessary, to reimburse
expenses in order to limit total annual Fund operating expenses to 0.78% on the
Total Return Fund, 0.80% on the Capital Appreciation Fund, 0.66% on the
Government Bond Fund and 0.55% on the Money Market Fund; however, this waiver
may be discontinued upon prior written notice to shareholders.

57
<PAGE> 89

GARTMORE NSAT MILLENNIUM GROWTH FUND

VMF receives an annual fee expressed as an annual percentage of the Fund's
average daily net assets:

1.03% on assets up to $250 million
1.00% on assets of $250 million and more
but less than $1 billion
0.97% on assets of $1 billion and more
but less than $2 billion
0.94% on assets of $2 billion and more
but less than $5 billion
0.91% for assets of $5 billion and more

VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 1.35% until
at least December 31, 2000. As of October 1, 2000, this Fund has not commenced
operations.

GLOBAL TECHNOLOGY AND COMMUNICATIONS FUND

Under the terms of its Investment Advisory Agreement, the Global
Technology and Communications Fund pays to VMF a fee at an annual rate of 0.98%
of the Fund's average daily net assets. VMF has agreed to waive advisory fees
and, if necessary, reimburse expenses in order to limit total annual Fund
operating expenses to 1.35%. Advisory fees paid under the agreement for the
fiscal year ended December 31, 1999 are not listed here because the Fund did not
commence operations until on or about July 3, 2000.

GLOBAL LIFE SCIENCES FUND II

For the services it provides to the Global Life Sciences Fund, VMF
receives an annual fee of 0.53% of the Fund's average daily net assets. VMF has
agreed to waive advisory fees and, if necessary, reimburse expenses in order to
limit total annual Fund operating expenses to 1.00%. As of October 1, 2000, this
Fund has not commenced operations.

FEDERATED NSAT EQUITY INCOME FUND

Under the terms of its Investment Advisory Agreement, the Federated NSAT
Equity Income Fund pays to VMF a fee at the annual rate of 0.80% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 0.95%; however, this waiver may be discontinued upon prior written
notice to shareholders. For the fiscal year ended December 31, 1998, NAS was
paid $46,531, net of waivers in the amount of $16,475. For the fiscal year ended
December 31, 1999, NAS/VMF was paid $139,401 net of waivers in the amount of
$28,960.

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 VMF 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. For the fiscal year ended December 31, 1999, NAS/VMF paid Federated
$84,180.

58
<PAGE> 90

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.

FEDERATED NSAT HIGH INCOME BOND FUND

Under the terms of its Investment Advisory Agreement, the Federated NSAT
High Income Bond Fund pays to VMF a fee at the annual rate of .80% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 0.95%; however, this waiver may be discontinued upon prior written
notice to shareholders. 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. For the fiscal year ended
December 31, 1999, NAS/VMF was paid $313,448, net of waivers in the amount of
$104,310.

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 VMF 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. For the fiscal year
ended December 31, 1999, NAS/VMF paid Federated $202,180.

GLOBAL 50 FUND

Under the terms of its Investment Advisory Agreement the Global 50 Fund
pays to VMF a fee at the annual rate of 1.00% of the Fund's average daily net
assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 1.20%;
however, this waiver may be discontinued upon prior written notice to
shareholders. 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. For the fiscal year ended December 31, 1999, NAS/VMF was
paid $239,904, net of waivers in the amount of $126,090.

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 VMF 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. For the fiscal year ended
December 31, 1999, NAS/VMF paid J.P. Morgan $219,596.

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<PAGE> 91

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, 1999, J.P. Morgan and its affiliates had assets
under management of approximately $349 billion, including approximately $3.2
billion in global equity portfolios.

DREYFUS NSAT MID CAP INDEX FUND

Under the terms of its Investment Advisory Agreement the Fund pays to VMF
a fee at the annual rate of 0.50% of the Fund's average daily net assets. VMF
has agreed to waive advisory fees and, if necessary, reimburse expenses in order
to limit total annual Fund operating expenses to 0.65%; however, this waiver may
be discontinued upon prior written notice to shareholders. Prior to September
27, 1999, advisory fees were paid under a different fee schedule. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, NAS
waived all advisory fees earned under the prior fee schedule 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, under the prior fee schedule. For the fiscal year ended
December 31, 1999, NAS/VMF was paid $23,009, net of waivers of $100,860 under
the combined fee schedules.

VMF has selected The Dreyfus Corporation ("Dreyfus"), as subadviser for
the Dreyfus NSAT Mid Cap Index Fund. For the investment management services it
provides to the Fund, Dreyfus receives an annual fee from VMF in an amount equal
to

- 0.10% on assets up to $250 million,
- 0.09% on assets of $250 million and more but less than $500 million,
- 0.08% on assets of $500 million and more but less than $750 million,
- 0.07% on assets of $750 million and more but less than $1 billion, and
- 0.05% on assets of $1 billion and more.

These fees are calculated at an annual rate based on the Fund's average
daily net assets. Prior to September 27, 1999, First Pacific Advisors, Inc.,
Pilgrim Baxter & Associates, Ltd and Rice, Hall, Jones & Associates were the
subadvisers for the Fund. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS paid $3,325 in fees to the previous
subadvisers of the Fund under a different fee schedule. For the fiscal year
ended December 31, 1998, NAS paid the previous subadvisers $46,144. For the
fiscal year ended December 31, 1999, NAS/VMF paid the subadvisers $67,410 under
the combined fee schedules.

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<PAGE> 92

on total assets. Through its subsidiaries, including Dreyfus, Mellon managed
more than $488 billion in assets as of December 31, 1999, including
approximately $129 billion in mutual fund assets. As of December 31, 1999,
various subsidiaries of Mellon provided non-investment services, such as
custodial or administration services, for more than $2.2 trillion in assets.

J.P. MORGAN NSAT BALANCED FUND

Under the terms of its Investment Advisory Agreement, the J.P. Morgan NSAT
Balanced Fund pays to VMF a fee at the annual rate of 0.75% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 0.90%; however, this waiver may be discontinued upon prior written
notice to shareholders. 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. For the fiscal year ended December 31, 1999,
NAS/VMF was paid $411,834, net of waivers in the amount of $57,656.

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 VMF
in an amount equal to 0.35% on assets up to $100 million, and 0.30% on assets of
$100 million and more. These fees are calculated as an annual rate based upon
the Fund's average daily net assets. Prior to May 1, 2000, Salomon Brothers
Asset Management Inc. ("SBAM") was the Fund's subadviser. For the period October
31, 1997 (commencement of operations) through December 31, 1997, NAS paid $749
in fees to SBAM under a different fee schedule. For the fiscal year ended
December 31, 1998, NAS paid SBAM $66,872. For the fiscal year ended December 31,
1999, NAS/VMF paid SBAM $219,095.

MAS NSAT MULTI SECTOR BOND FUND

Under the terms of its Investment Advisory Agreement, the MAS NSAT Multi
Sector Bond Fund pays to VMF a fee at the annual rate of 0.75% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 0.90%; however, this waiver may be discontinued upon prior written
notice to shareholders. 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. For the fiscal year ended December 31, 1999,
NAS/VMF was paid $331,711, net of waivers in the amount of $64,933.

Miller Anderson & Sherrerd, LLP ("MAS") is the subadviser of the Fund. For
the investment management services it provides to the Fund, MAS receives an
annual fee from VMF in the amount of 0.30% on assets up to $200 million, and
0.25% on assets of $200 million and more. These fees are calculated at an annual
rate based upon the Fund's average daily net assets. Prior to May 1, 2000, SBAM
was the Fund's subadviser. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS paid $805 in fees to SBAM under a
different fee schedule. For the fiscal year ended December 31, 1998, NAS paid
SBAM $67,483. For the fiscal year ended December 31, 1999, NAS/VMF paid SBAM
$181,855.

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<PAGE> 93

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, 1999, MSDW Investment Management managed in excess of $145
billion in assets.

SMALL CAP VALUE FUND

Under the terms of its Investment Advisory Agreement, the Small Cap Value
Fund pays to VMF a fee at the annual rate of 0.90% of the Fund's average daily
net assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 1.05%;
however, this waiver may be discontinued upon prior written notice to
shareholders. 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. For the fiscal year ended December 31, 1999, NAS/VMF was
paid $647,442, net of waivers in the amount of $215,567.

The Dreyfus Corporation ("Dreyfus") is the subadviser of the Fund. For the
investment management services it provides to the Small Cap Value Fund, Dreyfus
receives an annual fee from VMF 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 Dreyfus. For the fiscal year ended December 31, 1998, NAS
paid Dreyfus $103,550. For the fiscal year ended December 31, 1999, NAS/VMF paid
Dreyfus $479,449.

Dreyfus, located at 200 Park Avenue, New York, New York 10166, was formed
in 1947. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of December
31, 1999, Dreyfus managed or administered approximately $129 billion in assets
for approximately 1.8 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 $488
billion in assets as of December 31, 1999, including approximately $129 billion
in mutual fund assets. As of December 31, 1999, various subsidiaries of Mellon
provided non-investment services, such as custodial or administration services,
for more than $2.2 trillion in assets.

SMALL CAP GROWTH FUND

Under the terms of its Investment Advisory Agreement, the Fund pays VMF 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 did not incur any investment
advisory fees prior to that date. NAS has agreed to waive advisory fees and, if
necessary, to reimburse expenses in order to limit total annual Fund operating
expenses to 1.30%; however, this waiver may be discontinued upon prior written
notice to

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<PAGE> 94

shareholders. For the period May 1, 1999 (commencement of operations) through
December 31, 1999, NAS/VMF waived all advisory fees in the amount of $47,647.

VMF has selected three subadvisers, each of whom will each manage part of
the Fund's portfolio. Each subadviser receives an annual fee from VMF in an
amount equal to 0.60% on assets managed by such subadviser. For the period May
1, 1999 (commencement of operations) through December 31, 1999, NAS/VMF paid
$25,989 to the subadvisers.

The Small Cap Growth Fund's subadvisers are:

Waddell & Reed Investment Management Company ("WRIMCO")
Miller Anderson & Sherrerd, LLP ("MAS")
Neuberger Berman, LLC ("Neuberger Berman")

Subject to the supervision of VMF 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 VMF
for investment management.

Effective October 1, 2000, WRIMCO replaced Franklin Advisers, Inc., which
is no longer a subadviser to the Fund. WRIMCO acts as investment manager to
numerous investment companies and accounts. As of December 31, 1999, WRIMCO
managed over $37.3 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 $54.4 billion of
assets as of December 31, 1999. Neuberger Berman is a member of the NYSE and
other principal exchanges and acts as a broker in the purchase and sale of their
securities for that portion of the Fund's portfolio managed by Neuberger Berman.

STRATEGIC VALUE FUND AND STRONG NSAT MID CAP GROWTH FUND

Under the terms of the Investment Advisory Agreement, each of the
Strategic Value Fund and Strong NSAT Mid Cap Growth Fund pays to VMF a fee at
the annual rate of 0.90% of that Fund's average daily net assets. VMF has agreed
to waive advisory fees and, if necessary, reimburse expenses in order to limit
total annual Fund operating expenses to 1.00%; however, this waiver may be
discontinued upon prior written notice to shareholders. For the period October
31, 1997 (commencement of operations) through December 31, 1997, NAS waived all
advisory fees for the Strategic Value and Strong NSAT Mid Cap 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
Strong NSAT Mid Cap Growth Fund net of waivers of $19,318 and $31,214,
respectively. For the fiscal year ended December 31, 1999, NAS/VMF was paid
$106,922 for the Strategic Value Fund and $34,683 for the Strong NSAT Mid Cap
Growth Fund, net of waivers of $211,042 and $72,875, respectively.

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<PAGE> 95

VMF has selected Strong Capital Management, Inc. ("Strong") to be the
subadviser to the Strategic Value Fund and the Strong NSAT Mid Cap 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 VMF 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 Strong
NSAT Mid Cap 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 Strong NSAT Mid Cap Growth Fund, respectively. For the fiscal year
ended December 31, 1999, Strong was paid $78,669 and $157,732 for the Strategic
Value Fund and the Strong NSAT Mid Cap 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, 1999,
Strong had over $38 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

On September 1, 1999, at the time of the transfer of investment advisory
services from NAS to VMF, the management fee payable by the Fund was split
between investment advisory and fund administration agreements Under these
agreements, the revised management fee for the Fund is 0.93% on the Fund's first
$250 million of average daily net assets, 0.95% on the next $750 million and
0.96% on assets of more than $1 billion, based on the Fund's average daily net
assets. Prior to September 1, 1999, the Fund paid NAS a fee at the annual rate
of 1.00% of the Fund's average daily net assets. VMF has agreed to waive
advisory fees and, if necessary, to reimburse expenses in order to limit total
annual Fund operating expenses to 1.25%; however, this waiver may be
discontinued upon prior written notice to shareholders. During the fiscal years
ended December 31, 1998 and 1997, NAS received advisory fees in the amount of
$3,598,194 and $2,520,540 respectively. For the fiscal year ended December 31,
1999, NAS/VMF received advisory fees of $3,805,726 under the combined fee
schedules.

VMF has selected five subadvisers, each of whom will each manage part of
the Fund's portfolio. In addition, VMF will manage a portion of the Fund's
portfolio itself. Each subadviser receives an annual fee from VMF in an amount
equal to 0.60% on assets managed by a subadviser. During the fiscal years ended
December 31, 1998 and 1997, the subadvisers were paid $2,119,688, $1,402,367 and
$483,472 by NAS and for the fiscal year ended December 31, 1999, the subadvisers
were paid $2,336,764 by NAS/VMF.

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<PAGE> 96
The Small Company Fund's subadvisers are:
The Dreyfus Company
Neuberger Berman LLC
Strong Capital Management, Inc.
Lazard Asset Management
Waddell & Reed Investment Management Company

Prior to May 1, 2000, Credit Suisse Asset Management, LLC also served as a
subadviser to the Small Company Fund.

Subject to the supervision of VMF 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 and VMF 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 VMF
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 December
31, 1999, Dreyfus managed or administered approximately $129 billion in assets
for approximately 1.8 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 $488
billion in assets as of December 31, 1999, including approximately $129 billion
in mutual fund assets. As of December 31, 1999, various subsidiaries of Mellon
provided non-investment services, such as custodial or administration services,
for more than $2.2 trillion in 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 $54.4 billion of
assets as of December 31, 1999. Neuberger Berman is a member firm of the NYSE
and other principal exchanges and acts as a 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, 1999, Strong had over $38 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.

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<PAGE> 97

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 $75 billion, as
of December 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.

WADDELL & REED INVESTMENT MANAGEMENT COMPANY. Effective January 1, 2001,
Waddell & Reed will begin serving as one of the subadvisers to the Fund. As of
August 31, 2000, Waddell & Reed manages approximately $39 billion and acts as
investment manager to numerous investment companies and accounts. Waddell and
Reed's address is 6300 Lamar, P.O. Box 29217, Overland Park, KS 66201-9217.

INCOME FUND

Under the terms of its Investment Advisory Agreement, the Fund pays VMF a
fee at the annual rate of 0.45% of the Fund's average daily net assets. VMF has
voluntarily agreed to waive advisory fees and, if necessary, to reimburse
expenses in order to limit total annual Fund operating expenses to 0.75% of the
Fund's average daily net assets; however, this waiver may be discontinued upon
prior written notice to shareholders. 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. For
the fiscal year ended December 31, 1999, NAS/VMF received $21,163 in fees, net
of waivers in the amount of $9,754.

VMF has selected two subadvisers, each of whom will manage part of the
Fund's portfolio. Each subadviser receives an annual fee from VMF based on the
average daily net assets of the portion of the Fund managed by that subadviser
as specified below:

SUBADVISORY FEES AVERAGE DAILY NET ASSETS
--------------- -------------------------
0.25% on the first $100 million
0.15% on assets in excess of $100 million

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. For the
fiscal year ended December 31, 1999, NAS paid $15,000 and $25,000 in fees to NCM
Capital and Smith Graham, respectively. For the fiscal year ended December 31,
1998, NAS paid $15,000 and $25,000 in fees to NCM Capital and Smith Graham,
respectively.

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, 1999, NCM Capital
had approximately $5.7 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 72% ; Justin F. Beckett, Executive Vice
President and director of NCM Capital, owns 28%.

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<PAGE> 98

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, 1999, Smith Graham managed approximately
$2.2 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.

TURNER NSAT GROWTH FOCUS FUND

As described in the prospectus, the Turner NSAT Growth Focus Fund is
subject to base investment advisory fees that may be adjusted if a Fund out- or
under-performs a stated benchmark. Set forth below is information about the
advisory fee arrangements of the Fund:

<TABLE>
<CAPTION>
FUND BENCHMARK REQUIRED EXCESS BASE ADVISORY HIGHEST POSSIBLE LOWEST POSSIBLE
PERFORMANCE FEE ADVISORY FEE AT ADVISORY FEE AT
EACH BREAK POINT EACH BREAK POINT

<S> <C> <C> <C> <C> <C>
Turner NSAT Russell 1000 12.0% 0.90% for assets 1.12% 0.68%
Growth Focus Growth up to $500 million,

0.80% for assets 0.98% 0.62%
of $500 million
and more but less
than $2 billion,

0.75% for assets of 0.91% 0.59%
$2 billion and more
</TABLE>

The performance adjustment works as follows: If the Turner NSAT Growth
Focus Fund outperforms the Russell 1000 Growth Index by more than 12.0% over a
36 month period, the advisory fees will increase from 0.90% to 1.12% for assets
under $500 million. If, however, the Fund underperforms its benchmark by 12.0%
over a 36 month period, the advisory fees would go down to 0.68%. These
performance-based fees will only be charged once a Fund has been in operation
for at least one year, will be implemented incrementally over the first three
years of the Fund's operations and will comply with all applicable Securities
and Exchange Commission ("SEC") rules.

VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 0.35% until
at least December 31, 2000.

Turner Investment Partners, Inc. ("Turner") is the subadviser of the Fund.
For the subadvisory services it provides to the Fund, Turner receives a base
subadvisory fee that may be adjusted if a Fund out- or under-performs a stated
benchmark. Set forth below is information about the subadvisory fee arrangements
of the Fund:

<TABLE>
<CAPTION>
FUND BENCHMARK REQUIRED EXCESS BASE ADVISORY HIGHEST POSSIBLE LOWEST POSSIBLE
PERFORMANCE FEE SUBADVISORY FEE AT SUBADVISORY FEE AT
EACH BREAK POINT EACH BREAK POINT

<S> <C> <C> <C> <C> <C>
Turner NSAT Russell 1000 12.0% 0.55% for assets 0.77% 0.33%
</TABLE>

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<PAGE> 99

<TABLE>
<S> <C> <C> <C> <C> <C>
Growth Focus Growth up to $500 million,

0.45% for assets 0.63% 0.27%
of $500 million
and more but less
than $2 billion,

0.40% for assets of 0.56% 0.24%
$2 billion and more
</TABLE>

These performance-based fees will be paid from the investment advisory
fees received by VMF and will be subject to the same conditions.

Turner was founded in 1990 and is located at 1235 Westlakes Drive, Berwyn,
Pennsylvania 19312. It is a registered investment adviser under the Investment
Advisers Act of 1940. Turner serves as investment adviser to other investment
companies, as well as separate investment portfolios. The Fund had not commenced
operations June 30, 2000.

GARTMORE NSAT EMERGING MARKETS FUND, GARTMORE NSAT INTERNATIONAL GROWTH FUND,
GARTMORE NSAT GLOBAL LEADERS FUND, GARTMORE NSAT EUROPEAN GROWTH FUND, GARTMORE
NSAT GLOBAL SMALL COMPANIES FUND AND GARTMORE NSAT OTC FUND

Under the terms of the Investment Advisory Agreement between the Trust and
VGAMT, each of the Gartmore NSAT Emerging Markets Fund, Gartmore NSAT
International Growth Fund, Gartmore NSAT Global Leaders Fund, Gartmore NSAT
European Growth Fund, Gartmore NSAT Global Small Companies Fund and Gartmore
NSAT OTC Fund pays VGAMT an annual fee equal to 1.15%, 1.00%, 1.00%, 1.00%,
1.15% and 1.10% respectively, of the Fund's average daily net assets. VGAMT has
agreed to waive advisory fees and, if necessary, reimburse expenses in order to
limit total annual Fund operating expenses for each of the Gartmore NSAT
Emerging Markets Fund, Gartmore NSAT International Growth Fund, Gartmore NSAT
Global Leaders Fund, Gartmore NSAT European Growth Fund, Gartmore NSAT Global
Small Companies Fund and Gartmore NSAT OTC Fund to 1.75%, 1.60%, 1.55%, 1.60%,
1.75%, and 1.60%, respectively. This waiver may be discontinued upon prior
written notice to shareholders.

VGAMT has selected Gartmore Global Partners ("Gartmore") to be the
subadviser to the Gartmore NSAT Emerging Markets Fund, Gartmore NSAT
International Growth Fund, Gartmore NSAT Global Leaders Fund, Gartmore NSAT
European Growth Fund, Gartmore NSAT Global Small Companies Fund and Gartmore
NSAT OTC Fund. For the investment management services provided to each Fund,
Gartmore receives an annual fee from VGAMT in an amount equal to 1.15%, 1.00%,
1.00%, 1.00%, 1.15% and 0.50% respectively on each Fund. These fees are
calculated at an annual rate based on each Fund's average daily net assets.

Gartmore is a global asset manager dedicated to serving the needs of U.S.
based investors. Gartmore was formed in 1995 as a registered investment adviser
and manages over $1 billion in assets.

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<PAGE> 100

FUND ADMINISTRATION SERVICES

Under the terms of a Fund Administration Agreement, VSA provides various
administration and accounting services, including daily valuation of the
remaining Fund's shares and preparation of financial statements, tax returns and
regulatory reports.

TOTAL RETURN FUND, CAPITAL APPRECIATION FUND, GOVERNMENT BOND FUND, AND
MONEY MARKET FUND. Villanova SA Capital Trust ("VSA") received 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 more. This fee was first implemented November 1, 1997.

ALL OTHER FUNDS. For these services, each of the remaining Funds pays VSA
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.

Effective September 1, 1999, the fund administration services previously
performed for the Funds by Nationwide Advisory Services, Inc. ("NAS") were
transferred to Villanova SA Capital Trust ("VSA"), an affiliate of NAS and an
indirect subsidiary of Nationwide Financial Services, Inc. In addition, BISYS
Fund Services Ohio, Inc. performs certain fund administration services pursuant
to a Sub-Administration Agreement also effective September 1, 1999. After these
changes were implemented, there was no change in the fees charged for fund
administration services for each of the Funds.

The fund administration fees are as follows:

<TABLE>
<CAPTION>
1999 1999 1998 1998 1997
FUND RECEIVED WAIVED RECEIVED WAIVED WAIVED
------ ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Strong NSAT Mid Cap Growth Fund $22,082 $ --- $3,959 $ --- $128
Strategic Value Fund 11,014 --- 5,962 --- 134
Federated NSAT Equity Income Fund 14,732 --- 5,513 --- 147
Federated NSAT High Income Bond Fund 36,554 --- 13,909 --- 645
J.P. Morgan NSAT Balanced Fund 43,819 --- 13,374 --- 150
MAS NSAT Multi Sector Bond Fund 37,020 --- 13,497 --- 161
Small Cap Value Fund 67,123 --- 14,497 --- 158
Small Cap Growth Fund(1) 49,932 43,393 N/A N/A N/A
Money Market Fund 799,936 --- 608,781 N/A 89,708
Small Company Fund(1) 88,960 --- N/A N/A N/A
Total Return Fund 1,068,669 --- 947,890 N/A 135,272
Capital Appreciation Fund 539,831 --- 366,788 N/A 37,284
Government Bond Fund 386,796 --- 301,517 N/A 39,441
Global 50 Fund 25,620 --- 9,361 --- 616
Dreyfus NSAT Mid Cap Index Fund 9,880 --- 4,969 --- 358
Income Fund(2) 4,809 --- 2,171 --- N/A
</TABLE>

69
<PAGE> 101

<TABLE>
<S> <C> <C> <C> <C> <C>
Turner NSAT Growth Focus Fund(3) N/A N/A N/A N/A N/A
Gartmore NSAT Millennium Growth Fund(3) N/A N/A N/A N/A N/A
Global Technology and Communications Fund(4) N/A N/A N/A N/A N/A
Global Life Sciences Fund II(4) N/A N/A N/A N/A N/A
NSAT Emerging Markets Fund(5) N/A N/A N/A N/A N/A
NSAT International Growth Fund(5) N/A N/A N/A N/A N/A
NSAT Global Leaders Fund(5) N/A N/A N/A N/A N/A
NSAT European Growth Fund(5) N/A N/A N/A N/A N/A
NSAT Global Small Companies Fund(5) N/A N/A N/A N/A N/A
NSAT OTC Fund(6) N/A N/A N/A N/A N/A
</TABLE>

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

(1) The Small Cap Growth Fund commenced operations on May 1, 1999.
(2) The Income Fund commenced operations on January 20, 1998.
(3) The Turner NSAT Growth Focus Fund and Gartmore NSAT Millennium Growth Fund
commenced operations as of July, 2000.
(4) The Global Technology and Communications Fund and Global Life Science Fund
II commenced operations as of July 3, 2000.
(5) The NSAT Emerging Markets, NSAT International Growth, NSAT Global Leaders,
NSAT European Growth, and NSAT Global Small Companies Funds commenced
operations as of September 1, 2000.
(6) The NSAT OTC Fund expects to commence operations in December 2000.

ADMINISTRATIVE SERVICE PLAN

Under the terms of an Administrative Services Plan, a Fund is permitted to
enter Servicing Agreements with servicing organizations who agree to provide
certain administrative support services for the Funds. Such administrative
support services include but are not limited to the following: establishing and
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for banks wires, performing shareholder sub-accounting,
answering inquiries regarding the Funds, providing periodic statements showing
the account balance for beneficial owners or for Plan participants or contract
holders of insurance company separate accounts, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating, and
forwarding to the Trust executed proxies and obtaining such other information
and performing such other services as may reasonably be required.

As authorized by the Administrative Services Plan, the Trust has entered
into a Servicing Agreement effective July 1, 1999 pursuant to which Nationwide
Financial Services, Inc. has agreed to provide certain administrative support
services to the Funds held beneficially by its customers. In consideration for
providing administrative support services, Nationwide Financial Services, Inc.
and other entities with which the Trust may enter into Servicing Agreements
(which may include NAS) will receive a fee, computed at the annual rate of up to
0.25% of the average daily net assets of the shares of the Funds held by
customers of Nationwide Financial Services, Inc. or such other entity.

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 Bank of New
York for foreign custody of the Funds' assets. The Custodian performs no
managerial or policy making functions for the Funds.

70
<PAGE> 102
As required by Rule 12b-1, the Plan was approved by the Board of Trustees,
including a majority of the Trustees who are not interested persons of the Funds
and who have no direct or indirect financial interest in the operation of the
Plan (the "Independent Trustees"). The Plan was initially approved by the Board
of Trustees on ____________, and is amended from time to time upon approval by
the Board of Trustees. The Plan may be by the Fund by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding shares of that
Fund. Any change in the Plan that would materially increase the distribution
cost to the Fund requires shareholder approval. The Trustees review quarterly a
written report of such costs and the purposes for which such costs have been
incurred. The Plan amy be amended by vote of the Trustees including a majority
of the Independent Trustees, cast in person at a meeting called for that
purpose. For so long as the Plan is in effect, selection and nomination of those
Trustees who are not interested persons of the Trust shall be committed to the
discretion of such disinterested persons. All agreements with any person
relating to the implementation of the Plan may be terminated at any time on 60
days' written notice without payment of any penalty, by vote of a majority of
the Independent Trustees or by a vote of the majority of the outstanding Shares
of the applicable Class. The Plan will continue in effect for successive
one-year periods, provided that each such continuance is specifically approved
(i) by the vote of a majority of the Independent Trustees, and (ii) by a vote of
a majority of the entire Board of Trustees cast in person at a meeting called
for that purpose. The Board of Trustees has a duty to request and evaluate such
information as may be reasonably necessary for them to make an informed
determination of whether the Plan should be implemented or continued. In
addition the Trustees in approving the Plan as to a Fund must determine that
there is a reasonable likelihood that the Plan will benefit such Fund and its
Shareholders.

The Board of Trustees of the Trust believes that the Plan is in the best
interests of the Funds since it encourages Fund growth and maintenance of Fund
assets. As the Funds grow in size, certain expenses, and therefore total
expenses per Share, may be reduced and overall performance per Share may be
improved.

NAS may enter into, from time to time, Rule 12b-1 Agreements with selected
dealers pursuant to which such dealers will provide certain services in
connection with the distribution of a Fund's Shares including, but not limited
to, those discussed above.

LEGAL COUNSEL

Stradley Ronon Stevens & Young, LLP, 2600 Commerce Square, Philadelphia,
PA 19103, serves as the Trust's legal counsel.

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 an affiliate of VMF. 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

VMF or VGAMT (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. VMF, VGAMT 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 price-best execution, securities may be bought from or sold to
broker-dealers who have furnished statistical, research, and other information
or services to VMF, VGAMT or a subadviser. In placing orders with such
broker-dealers, VMF, VGAMT or a subadviser will, where possible, take into
account the comparative usefulness of such information. Such information is
useful to VMF, VGAMT, 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 VMF's, VGAMT's or a subadviser's normal
research activities or expenses.

71
<PAGE> 103

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 VMF, VGAMT 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 VMF, VGAMT 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 VMF, VGAMT, 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.

VMF or VGAMT 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 VMF, VGAMT or a subadviser is considered to be in addition to and not in lieu
of services required to be performed by VMF or VGAMT under its investment
advisory agreement or by the subadviser under its subadvisory agreement with VMF
or VGAMT. The fees to VMF, VGAMT or to each of the subadvisers is not reduced by
reason of its receiving any brokerage and research services. The research
services provided by broker-dealers can be useful to VMF, VGAMT or a subadviser
in serving its other clients. Subject to the policy of VMF, VGAMT or the
subadvisers to obtain best execution at the most favorable prices through
responsible broker-dealers, VMF, VGAMT or a subadviser also may consider the
broker-dealer's sale of shares of any fund for which VMF, VGAMT or the
subadviser serves as investment adviser, subadviser or administrator.

72
<PAGE> 104

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, 1999

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
TRANSACTIONS RELATED TO
BROKERAGE OR RESEARCH SERVICES(1)
-------------------------------
FUND COMMISSION $ AMOUNT COMMISSION
---- ---------- ------ ----------

<S> <C> <C> <C>
Strong NSAT Mid Cap Growth Fund $348,253 $77,864,109 $98,375

Strategic Value Fund 66,667 5,013,018 7,859

Federated NSAT Equity Income Fund 27,780 8,088,262 8,659

Federated NSAT High Income Bond Fund 379 -- --

J.P. Morgan NSAT Balanced Fund 47,558 858,024 1,248

MAS NSAT Multi Sector Bond Fund -- -- --

Small Cap Value Fund 1,199,913 124,965,494 316,630

Global 50 Fund 102,624 -- --

Dreyfus NSAT Mid Cap Index Fund 60,773 -- --

Small Cap Growth Fund(2) 16,381 6,004,581 9,600

Small Company Fund(3) 996,995 141,963,141 282,969

Income Fund -- -- --

Total Return Fund 1,982,239 -- --

Capital Appreciation Fund 651,886 -- --

Government Bond Fund -- -- --

Turner NSAT Growth Focus Fund(4) N/A N/A N/A

Gartmore NSAT Millennium Growth Fund(4) N/A N/A N/A

Global Technology and Communications Fund(5)

Global Life Sciences Fund II(5)

NSAT International Growth Fund(6) N/A N/A N/A

NSAT Global Leaders Fund(6) N/A N/A N/A

NSAT European Growth Fund(6) N/A N/A N/A

NSAT Global Small Companies Fund(6) N/A N/A N/A

NSAT OTC Fund(7) N/A N/A N/A
</TABLE>

73
<PAGE> 105

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

(1) This information has been provided by the respective Fund's subadvisers,
and the information is believed to be reliable, however, the Funds have
not independently verified it.

(2) The Small Cap Growth Fund commenced operations on May 1, 1999.

(3) The information provided for `$ Amount' under Transactions Related to
Brokerage or Research Services for this Fund does not reflect the impact
of $15,200 of commissions because the former subadviser to which this
information pertains was unable to furnish the related transactions `$
Amount'.

(4) The Turner NSAT Growth Focus Fund and NSAT Millennium Growth Fund
commenced operations as of July 3, 2000.

(5) The Global Technology and Communication Fund and Global Life Science Fund
II commenced operations as of July 3, 2000.

(6) The NSAT Emerging Markets, NSAT International Growth, NSAT Global Leaders,
NSAT European Growth, and NSAT Global Small Companies Funds commenced
operations as of September 1, 2000.

(7) The NSAT OTC Fund expects to commence operations in December 2000.

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
TRANSACTIONS RELATED TO
BROKERAGE OR RESEARCH SERVICES
------------------------------
FUND COMMISSION $ AMOUNT COMMISSION
---- ---------- ------ ----------

<S> <C> <C> <C>
Strong NSAT Mid Cap Growth Fund $44,342 $ -- $ --

Strategic Value Fund 40,906 -- --

Federated NSAT Equity Income Fund 16,519 7,066,374 6,448

Federated NSAT High Income Bond Fund 72 -- --

J.P. Morgan NSAT Balanced Fund 20,024 641,284 1,224

MAS NSAT Multi Sector Bond Fund -- -- --

Small Cap Value Fund 249,877 -- --

Global 50 Fund 37,313 -- --

Dreyfus NSAT Mid Cap Index 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 -- --

Capital Appreciation Fund 699,978 -- --

Government Bond Fund -- -- --
</TABLE>

* The Small Cap Growth Fund commenced operations on May 1, 1999.

74
<PAGE> 106

FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
TRANSACTIONS RELATED TO
BROKERAGE OR RESEARCH SERVICES
------------------------------
FUND COMMISSION $ AMOUNT COMMISSION
---- ---------- ------ ----------

<S> <C> <C> <C>
Strong NSAT Mid Cap Growth Fund $2,117 $--0-- $ - 0 -

Strategic Value Fund 2,664 --0-- -- 0 --

Federated NSAT Equity Income Fund 1,319 1,018,166 910

Federated NSAT High Income Bond Fund --0-- --0-- --0--

J.P. Morgan NSAT Balanced Fund 1,038 315,101 420

MAS NSAT Multi Sector Bond Fund --0-- --0-- --0--

Small Cap Value Fund 2,317 3,045 30

Global 50 Fund 8,058 --0-- --0--

Dreyfus NSAT Mid Cap Index Fund 3,479 509,403 828

Small Company Fund 887,672 -- --

Total Return Fund 924,959 -- --

Capital Appreciation Fund 327,691 -- --

Government Bond Fund --0-- -- --

Money Market Fund --0-- -- --
</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 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

75
<PAGE> 107

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 1999 1998 1997
---- ------ ---- ---- ----
<S> <C> <C> <C> <C>
J.P. Morgan NSAT Salomon Smith Barney $3,220 $2,010 N/A
Balanced Fund

Small Company Fund Lazard Freres $290 $542 N/A

Small Company Fund Neuberger & Berman $42,706 $31,801 $35,069
</TABLE>

During the year ended December 31, 1999, commissions paid by the J.P.
Morgan NSAT Balanced Fund to Saloman Smith Barney represented 6.8% of total
commissions paid by the Fund or 0.004% of the aggregate dollar amount of
transactions involving the payment of commissions. During the year ended
December 31, 1999, commissions paid by the Small Company Fund to Lazard Freres
and Neuberger & Berman represented less than 0.03% and 4.3%, respectively, of
total commissions paid by the Fund or 0.000007% and 0.001%, respectively, of the
aggregate dollar amount of transactions involving the payment of commissions.

As of December 31, 1999, the following Funds held investments in their
regular broker/dealers as follows:

FUND
---- SHARES/ \
SECURITY PRINCIPAL VALUE
-------- --------- -----

Capital Appreciation Fund
Merrill Lynch & Co. 130,100 $10,863,350

Federated NSAT Equity Income Fund
Merrill Lynch & Co. 3,400 $283,900
Morgan Stanley Dean Witter & Co. 3,400 $485,350

Strong NSAT Mid Cap Growth Fund
Donaldson, Lufkin, Jenrette, Inc. 15,500 $749,813
Lehman Brother Holding, Inc. 18,500 $1,566,719
Paine Webber Group, Inc. 29,500 $1,144,969

Strategic Value Fund
Merrill Lynch & Co. 6,500 $542,750

Total Return Fund
Morgan Stanley Dean Witter & Co. 165,000 $23,553,750

76
<PAGE> 108

<TABLE>
<CAPTION>
FUND
---- SHARES/ \
SECURITY PRINCIPAL VALUE
-------- --------- --------

J.P. Morgan NSAT Balanced Fund
<S> <C> <C>
Donaldson, Lufkin, Jenrette, Inc. 5.875%, 4/01/02 $150,000 $145,605
Lehman Brother Holding, Inc., 7.25%, 4/15/03 $825,000 $819,244
Merrill Lynch & Co., 6.00%, 11/15/04 $425,000 $402,754
Paine Webber Group, Inc., 7.625%, 12/01/09 $600,000 $584,523

Income Fund
Morgan Stanley Dean Witter & Co., 6.875%, 3/01/07 $100,000 $96,237

Money Market Fund
Bear Stearns Co., 5.81%, 1/11/00 $10,000,000 $9,983,861
Bear Stearns Co., 5.83%, 1/12/00 $10,000,000 $9,982,186
Bear Stearns Co., 5.83%, 1/20/00 $8,000,000 $7,975,385
Bear Stearns Co., 4.83%, 1/28/00 $10,000,000 $10,000,000
Bear Stearns Co., 5.97%, 2/18/00 $10,000,000 $9,920,400
Bear Stearns Co., 5.86%, 2/22/00 $10,000,000 $9,915,356

Goldman Sachs Group, 5.98%, 1/13/00 $15,000,000 $14,970,100
Goldman Sachs Group, 5.98%, 1/28/00 $25,000,000 $24,887,875
Goldman Sachs Group, 5.97%, 2/14/00 $8,000,000 $7,941,627
Goldman Sachs Group, 5.95%, 2/25/00 $8,000,000 $7,927,278

Merrill Lynch & Co., 5.95%, 1/21/00 $10,000,000 $9,967,111
Merrill Lynch & Co., 5.95%, 1/28/00 $10,000,000 $9,955,375
Merrill Lynch & Co., 5.85%, 1/31/00 $16,000,000 $15,922,000
Merrill Lynch & Co., 5.86%, 1/31/00 $10,000,000 $9,951,167
Merrill Lynch & Co., 5.95%, 1/31/00 $8,118,000 $8,077,748
Merrill Lynch & Co., 5.84%, 2/04/00 $5,045,000 $5,017,174

Morgan Stanley Dean Witter & Co., 6.06%, 1/14/00 $5,000,000 $4,989,059
Morgan Stanley Dean Witter & Co., 6.10%, 1/14/00 $10,000,000 $9,977,972
Morgan Stanley Dean Witter & Co., 5.99%, 1/27/00 $25,000,000 $24,891,847
Morgan Stanley Dean Witter & Co., 5.95%, 2/15/00 $20,000,000 $19,851,250

MAS NSAT Multi Sector Bond Fund
Merrill Lynch & Co., 5.97%, 9/11/00 $800,000 $552,587
Merrill Lynch & Co., 6.00%, 11/15/04 $30,000 $28,430
Paine Webber Group, Inc., 7.75%, 9/01/02 $100,000 $100,440
Paine Webber Group, Inc., 7.625%, 12/01/09 $250,000 $243,551
</TABLE>

77
<PAGE> 109

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 quoted 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. U.S.
Government securities are valued at the quoted bid price as provided from an
independent pricing organization. Money market obligations with remaining
maturities of 10 days or less purchase by a non-money market fund are valued at
amortized cost in accordance with provisions contained in Rule 2a-7 of the 1940
Act. 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 VSA or its designee, are valued

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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
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.

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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 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
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

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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 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

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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

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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,
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, 1999 are incorporated by reference to
the Trust's Annual Report. Copies of the Annual Report and Semi-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:

1. 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.

2. Nature of and provisions of the obligation.

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.

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.

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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 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.

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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 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.

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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.

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.

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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.
DD Such bonds are extremely speculative, and should be valued on the
&D basis of their 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 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.

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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
BBB- investment. Considerable variability
in risk during economic cycles.

BB+ Below investment grade but deemed likely to
BB meet obligations when due. Present or
BB- prospective 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
B that obligations will not be met when due.
B- Financial 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.

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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 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.

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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.

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.

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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.

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.

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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.

TBW-4 the lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.